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Bulletin No. 2008-32August 11, 2008

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

T.D. 9403, page 285.Final regulations under section 664(c) of the Code provide thatcharitable remainder trusts with unrelated business taxable in-come (UBTI) in taxable years beginning after December 31,2006, are exempt from federal income tax but are subject toa 100 percent excise tax on the UBTI of the charitable remain-der trust pursuant to section 424 of the Tax Relief and HealthCare Act of 2006. The regulations provide that the excise taxis reported and payable in accordance with appropriate forms.The regulations clarify that, consistent with regulations section1.664–1(d)(2), the excise tax imposed upon the charitable re-mainder trust with UBTI is treated as paid from corpus, and thetrust income that is UBTI is income of the trust for purposes ofdetermining the character of the distribution made to the ben-eficiary.

T.D. 9404, page 280.REG–143453–05, page 310.Section 179B of the Code allows small business refiners tomake an election to deduct as an expense 75 percent of thequalified costs paid or incurred to comply with the highwaydiesel fuel sulfur control requirements of the Environmental Pro-tection Agency (EPA). Temporary and proposed regulations un-der Section 179B provide guidance relating to the deductionfor qualified capital costs paid or incurred by a small businessrefiner to comply with the highway diesel fuel sulfur control re-quirements of the EPA and provide guidance for making theelection. A public hearing on the proposed regulations is sched-uled for October 28, 2008.

T.D. 9406, page 287.REG–138355–07, page 311.Final, temporary, and proposed regulations under section 956of the Code determine the basis in property acquired by a con-trolled foreign corporation as a result of certain transactionsthat otherwise qualify for nonrecognition treatment.

Notice 2008–67, page 307.This notice explains how to claim the 50% additional first yeardepreciation provided by sections 15345(a)(1) and (d)(1) of theFood, Conservation, and Energy Act of 2008 for qualified Re-covery Assistance property placed in service by the taxpayerin the Kansas disaster area on or after May 5, 2007, duringthe taxable year that includes May 5, 2007. The notice alsoexplains how to elect not to claim that 50% additional first yeardepreciation if a taxpayer so chooses.

EMPLOYEE PLANS

REG–100464–08, page 313.Proposed regulations under section 411(b)(1) of the Code pro-vide guidance on the application of the accrual rule for definedbenefit plans under section 411(b)(1)(B) in cases where planbenefits are determined on the basis of the greatest of two ormore separate formulas. A public hearing is scheduled for Oc-tober 15, 2008.

(Continued on the next page)

Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 321.Finding Lists begin on page ii.

EXEMPT ORGANIZATIONS

T.D. 9403, page 285.Final regulations under section 664(c) of the Code provide thatcharitable remainder trusts with unrelated business taxable in-come (UBTI) in taxable years beginning after December 31,2006, are exempt from federal income tax but are subject toa 100 percent excise tax on the UBTI of the charitable remain-der trust pursuant to section 424 of the Tax Relief and HealthCare Act of 2006. The regulations provide that the excise taxis reported and payable in accordance with appropriate forms.The regulations clarify that, consistent with regulations section1.664–1(d)(2), the excise tax imposed upon the charitable re-mainder trust with UBTI is treated as paid from corpus, and thetrust income that is UBTI is income of the trust for purposes ofdetermining the character of the distribution made to the ben-eficiary.

Announcement 2008–69, page 318.The IRS has revoked its determination that Homes for All,Inc., of Fort Myers, FL; H & H Housing, Inc., of Los Angeles,CA; Family Home Providers, Inc., of Cumming, GA; MillerCounty New Vision Coalition, Inc., of Colquitt, GA; Buyer’sDream Fund of Cleveland Heights, OH; American BowlingCongress of Wyoming, MI; Accelerated Trust, Inc., of BocaRaton, FL; National Home Charities, Inc., of Westminster, CO;Independent Group, Inc., of Covington, KY; and ShepherdHills Development Corporation of Las Vegas, NV, qualify asorganizations described in sections 501(c)(3) and 170(c)(2) ofthe Code.

Announcement 2008–70, page 318.A list is provided of organizations now classified as private foun-dations.

ESTATE TAX

Rev. Rul. 2008–44, page 292.Special use value; farms; interest rates. The 2008 interestrates to be used in computing the special use value of farm realproperty for which an election is made under section 2032A ofthe Code are listed for estates of decedents.

EMPLOYMENT TAX

T.D. 9405, page 293.Final regulations under sections 6205 and 6413 of the Codeamend the process for making interest-free adjustments of un-derpayments and overpayments of employment taxes. Theregulations also clarify the process for filing claims for refundof overpayments of employment taxes under sections 6402and 6414. The regulations will continue to permit taxpayersto file a claim for refund in lieu of making an interest-free ad-justment for an overpayment of employment taxes. The regu-

lations also amend the regulations under section 6011 to re-flect the changes to the adjustment and refund processes andamend the regulations under section 6302 to clarify depositobligations with respect to interest-free adjustments.

ADMINISTRATIVE

Announcement 2008–71, page 321.This document contains a correction to a notice of public hear-ing (Announcement 2008–64, 2008–28 I.R.B. 114) on pro-posed regulations (REG–151135–07) providing additional rulesfor certain multiemployer defined benefit plans that are in effecton July 16, 2006. The regulations affect sponsors and admin-istrators of, and participants in multiemployer plans that are ineither endangered or critical status. The regulations are nec-essary to implement the new rules set forth in section 432 thatare effective for plan years beginning after 2007. The regula-tions reflect changes made by the Pension Protection Act of2006.

August 11, 2008 2008–32 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helping themunderstand 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 Secre-tary (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.

2008–32 I.R.B. August 11, 2008

August 11, 2008 2008–32 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 179B.—Deductionfor Capital Costs Incurredin Complying WithEnvironmental ProtectionAgency Sulfur Regulations26 CFR 1.179B–1T: Deduction for capital costs in-curred in complying with Environmental ProtectionAgency sulfur regulations (temporary).

T.D. 9404

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 1 and 602

Capital Costs Incurred toComply With EPA SulfurRegulations

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document containstemporary regulations relating to the de-duction provided under section 179B ofthe Internal Revenue Code (Code) forqualified capital costs paid or incurred bya small business refiner to comply with thehighway diesel fuel sulfur control require-ments of the Environmental ProtectionAgency (EPA). The regulations implementchanges to the law made by the AmericanJobs Creation Act of 2004, the EnergyPolicy Act of 2005, and the Tax Techni-cal Corrections Act of 2007. The text ofthese temporary regulations also servesas the text of the proposed regulations(REG–143453–05) set forth in the noticeof proposed rulemaking on this subject inthis issue of the Bulletin.

DATES: Effective Date: These regulationsare effective on June 27, 2008.

Applicability Date: For dates of appli-cability, see §1.179B–1T(f).

FOR FURTHER INFORMATIONCONTACT: Nicole Cimino, (202)622–3110 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These temporary regulations are beingissued without prior notice and public pro-cedure pursuant to the Administrative Pro-cedure Act (5 U.S.C. 553). For this reason,the collection of information contained inthese regulations has been reviewed andpending receipt and evaluation of publiccomments, approved by the Office of Man-agement and Budget under control number1545–2104. Responses to this collectionof information are required to obtain a taxbenefit.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless thecollection of information displays a validcontrol number.

For further information concerning thiscollection of information, and where tosubmit comments on the collection of in-formation and the accuracy of the esti-mated burden, and suggestions for reduc-ing this burden, please refer to the pream-ble to the cross-referencing notice of pro-posed rulemaking published in this issue ofthe Bulletin.

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally, tax returns and tax returninformation are confidential, as requiredby 26 U.S.C. 6103.

Background

This document contains amendments to26 CFR part 1 providing temporary regula-tions under section 179B of the Code. Sec-tion 179B was added to the Code by sec-tion 338(a) of the American Jobs CreationAct of 2004, Public Law 108–357 (118Stat. 1418), and was modified by section1324(a) of the Energy Policy Act of 2005,Public Law 109–58 (119 Stat. 594), andthe Tax Technical Corrections Act of 2007,Public Law 110–172 (121 Stat. 2473).

In general, the cost of property used ina trade or business or held for the produc-tion of income must be capitalized and, in

the case of depreciable property, recoveredthrough depreciation. Section 167 allowsas a depreciation deduction a reasonableallowance for the exhaustion, wear, andtear of property used in a trade or businessor held for the production of income. Thedepreciation allowable for tangible, depre-ciable property placed in service after 1986generally is determined under section 168.

In lieu of deducting depreciation, sec-tion 179B(a) allows a small businessrefiner to deduct as an expense 75 percentof the qualified costs as defined in section45H(c)(2) that are paid or incurred duringthe taxable year and are properly charge-able to capital account (“qualified capitalcost”). Section 45H(c)(2) defines quali-fied costs as those costs paid or incurredduring the applicable period to complywith the highway diesel fuel sulfur controlrequirements of the EPA (the “applica-ble EPA regulations”). The deduction isphased out for refiners whose productionin calendar year 2002 exceeded a speci-fied threshold. Section 179B applies toexpenses paid or incurred after December31, 2002, in taxable years ending afterDecember 31, 2002.

In addition, section 45H allows a pro-duction credit of five cents per gallon forlow sulfur diesel fuel produced by a smallbusiness refiner. The aggregate creditclaimed by a small business refiner for alltaxable years may not exceed 25 percentof the qualified costs paid or incurred bythe small business refiner. The aggre-gate allowable credit is also phased outfor refiners whose production in calendaryear 2002 exceeded a specified threshold.The credit is not allowed unless Treasurycertifies, after consultation with EPA, thatthe refiner’s qualified costs will result incompliance with the applicable EPA reg-ulations. Section 280C(d) provides forthe reduction, by the amount of the creditdetermined under section 45H(a) for thetaxable year, in deductions otherwise al-lowable for the taxable year under subtitleA, Chapter 1 of the Internal Revenue Code(sections 1 through 1400T). Section 45Happlies to expenses paid or incurred afterDecember 31, 2002, in taxable years end-ing after December 31, 2002.

2008–32 I.R.B. 280 August 11, 2008

Section 45H(c) provides definitionsof terms for purposes of both the sec-tion 179B deduction and the section 45Hcredit. Under section 45H(c)(1), a tax-payer is a small business refiner for ataxable year if (i) the taxpayer is a refinerof crude oil with respect to which not morethan 1,500 individuals are engaged in therefinery operations of the business on anyday during the taxable year, and (ii) thetaxpayer’s average daily domestic refineryrun or average retained production for allfacilities of the taxpayer for the 1-yearperiod ending on December 31, 2002, didnot exceed 205,000 barrels. Under sec-tion 45H(c)(2), the qualified costs withrespect to any facility of a small businessrefiner are, in general, costs that are paidor incurred by the small business refinerto comply with the applicable EPA regu-lations with respect to the facility duringthe period beginning on January 1, 2003,and ending on the earlier of the date that isone year after the date on which the smallbusiness refiner must comply with the ap-plicable EPA regulations for that facility,or December 31, 2009.

The applicable EPA regulations arethe regulations establishing the highwaydiesel fuel sulfur control program and ap-ply to, among others, petroleum refinersthat produce diesel fuel for heavy-dutyhighway vehicles. The regulations providethat these vehicles for the 2007 and latermodel years must be fueled with highwaydiesel fuel that meets a maximum sulfurstandard of 15 parts per million (ppm).The regulations also require refiners toproduce this new low sulfur diesel fuelbeginning on June 1, 2006, but includeseveral transition rules under which refin-ers are given additional time to complywith the 15 ppm sulfur standard (for ex-ample, the small refiner credit option for arefiner that is granted small refiner statusby the EPA).

Explanation of Provisions

Scope

The temporary regulations providerules prescribing how a small businessrefiner must determine the deduction al-lowable under section 179B(a) for anytaxable year. The regulations also provideguidance for making the elections undersection 179B.

Computation of Deduction Allowableunder Section 179B

The deduction under section 179B is al-lowable with respect to the qualified capi-tal costs paid or incurred by a small busi-ness refiner during the taxable year. Thetemporary regulations make it clear thatthe deduction is allowable with respect tocosts paid or incurred during a taxable yeareven if the property to which the costs re-late is not placed in service until a subse-quent taxable year. The temporary regula-tions also make it clear that the deductionis allowable even if the small business re-finer is not eligible for the credit under sec-tion 45H because of a failure to obtain thecertification required by section 45H(e).

Elections

Section 179B provides two elections.The first election is provided under section179B(a), which allows a small business re-finer to elect to deduct an amount equalto 75 percent of the qualified capital costspaid or incurred by the small business re-finer during the taxable year. These tem-porary regulations provide that this elec-tion is made for each taxable year in whichthe taxpayer seeks to deduct qualified cap-ital costs under section 179B. The elec-tion for a taxable year applies to all qual-ified capital costs paid or incurred by thesmall business refiner during the taxableyear. The election for a taxable year mustbe made by the due date (including exten-sions) for filing the small business refiner’sFederal income tax return for the taxableyear.

The second election is provided undersection 179B(e). Section 179B(e) pro-vides that if a small business refiner isa cooperative and makes an election un-der section 179B(a), the small businessrefiner may elect to allocate part or allof the deduction allowable under section179B(a) for the taxable year to its own-ers that are themselves cooperatives. If acooperative small business refiner makesthe section 179B(e) election, the tempo-rary regulations provide that the deductionamount allocated to an owner is equal tothe owner’s ratable share of the total de-duction amount allocated, determined onthe basis of ownership interests in the co-operative small business refiner. The tem-porary regulations provide that in cases in

which ownership interests vary during theyear, the small business refiner must de-termine ratable shares under a consistentlyapplied method that reasonably takes intoaccount the varying interests during thetaxable year. Further, the temporary reg-ulations clarify that, in computing its tax-able income under section 1382, the coop-erative small business refiner must reduceits section 179B deduction by the deduc-tion amount allocated to its owners.

The section 179B(e) election for a tax-able year is made by the due date (includ-ing extensions) for filing the cooperativesmall business refiner’s Federal incometax return for the taxable year. In addi-tion, section 179B(e)(3) requires the elect-ing cooperative small business refiner tonotify, in writing, each cooperative ownerof the amount of the section 179B(a) de-duction that is allocated to that coopera-tive owner. This written notice must bemailed to the cooperative owner before thedue date (including extensions) of the co-operative small business refiner’s Federalincome tax return.

Effective/Applicability Date

These temporary regulations applyto taxable years ending on or after June26, 2008. However, a taxpayer may ap-ply the temporary regulations to taxableyears ending after December 31, 2002,and before June 26, 2008, provided thatthe taxpayer applies all provisions inthese regulations (other than those re-lating to elections) to the taxable year.A taxpayer applying the regulations tothose years may make the election un-der section 179B(a) for such years underthe rules provided in Notice 2006–47,2006–1 C.B. 892. In addition, the tax-payer’s election under section 179B(e) forthose years will be accepted if made usingany reasonable method consistent withthe principles of section 179B(e). See§601.601(d)(2)(ii)(b) of this chapter.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) does

August 11, 2008 281 2008–32 I.R.B.

not apply to these regulations. For appli-cability of the Regulatory Flexibility Act(5 U.S.C. chapter 6), please refer to theSpecial Analyses section of the preambleto the cross-reference notice of proposedrulemaking published in this issue of theBulletin. Pursuant to section 7805(f) ofthe Code, these regulations have been sub-mitted to the Chief Counsel for Advocacyof Small Business Administration for com-ment on their impact on small business.

Drafting Information

The principal author of these regu-lations is Nicole R. Cimino, Office ofAssociate Chief Counsel (Passthroughsand Special Industries). However, otherpersonnel from the IRS and the TreasuryDepartment participated in their develop-ment.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.179B–1T is added to

read as follows:

§1.179B–1T Deduction for capital costsincurred in complying with EnvironmentalProtection Agency sulfur regulations(temporary).

(a) Scope and definitions—(1) Scope.This section provides the rules for deter-mining the amount of the deduction allow-able under section 179B(a) for qualifiedcapital costs paid or incurred by a smallbusiness refiner to comply with the high-way diesel fuel sulfur control requirementsof the Environmental Protection Agency(EPA). This section also provides rules formaking elections under section 179B.

(2) Definitions. For purposes of section179B and this section, the following defi-nitions apply:

(i) The applicable EPA regulations arethe EPA regulations establishing the high-way diesel fuel sulfur control program(40 CFR part 80, subpart I).

(ii) The average daily domestic refineryrun for a refinery is the lesser of—

(A) The total amount of crude oil input(in barrels) to the refinery’s domestic pro-cessing units during the 1-year period end-ing on December 31, 2002, divided by 365;or

(B) The total amount of refined petro-leum product (in barrels) produced by therefinery’s domestic processing units dur-ing such 1-year period divided by 365.

(iii) The aggregate average domesticdaily refinery run for a refiner is the sumof the average daily domestic refinery runsfor all refineries that were owned by the re-finer or a related person on April 1, 2003.

(iv) Cooperative owner is a personthat—

(A) Directly holds an ownership inter-est in a cooperative small business refiner,as defined in paragraph (a)(2)(v) of thissection; and

(B) Is a cooperative to which part 1 ofsubchapter T of the Internal Revenue Code(Code) applies.

(v) Cooperative small business refineris a small business refiner that is a cooper-ative to which part 1 of subchapter T of theCode applies.

(vi) Low sulfur diesel fuel has the mean-ing prescribed in section 45H(c)(5).

(vii) Qualified capital costs are quali-fied costs as defined in section 45H(c)(2)that are properly chargeable to capital ac-count.

(viii) Related person has the meaningprescribed in section 613A(d)(3) and theregulations under section 613A(d)(3).

(ix) Small business refiner has themeaning prescribed in section 45H(c)(1).

(b) Section 179B deduction—(1) Ingeneral. Section 179B(a) allows a deduc-tion with respect to the qualified capitalcosts paid or incurred by a small businessrefiner (the section 179B deduction). Thededuction is allowable with respect to thequalified capital costs paid or incurredduring a taxable year only if the smallbusiness refiner makes an election underparagraph (d) of this section for the tax-able year. The certification requirement insection 45H(e) (relating to the certificationrequired to support a credit under section45H) does not apply for purposes of thesection 179B deduction. Accordingly, thesection 179B deduction is allowable withrespect to the qualified capital costs of anelecting small business refiner even if the

refiner never obtains a certification undersection 45H(e) with respect to those costs.

(2) Computation of section 179B deduc-tion—(i) In general. Except as provided inparagraphs (b)(2)(ii) and (c)(3) of this sec-tion, a small business refiner that makes anelection under paragraph (d) of this sectionfor a taxable year is allowed a section 179Bdeduction in an amount equal to 75 percentof qualified capital costs that are paid or in-curred by the small business refiner duringthe taxable year.

(ii) Reduced percentage. A small busi-ness refiner’s section 179B deduction isreduced if the refiner’s aggregate averagedaily domestic refinery run is in excess of155,000 barrels. In that case, the numberof percentage points used in computing thededuction under paragraph (b)(2)(i) of thissection (75) is reduced (not below zero) bythe product of 75 and the ratio of the excessbarrels to 50,000 barrels.

(3) Example. The application of thisparagraph (b) is illustrated by the follow-ing example:

Example. (i) A, an accrual method taxpayer, is asmall business refiner with a taxable year ending De-cember 31. On April 1, 2003, A owns a refinery withan average daily domestic refinery run (that is, an av-erage daily run during calendar year 2002) of 100,000barrels and a person related to A owns a refinery withan average daily domestic refinery run of 85,000 bar-rels. These are the only domestic refineries ownedby A and persons related to A. A’s aggregate averagedaily domestic refinery run for the two refineries is185,000 barrels. A incurs qualified capital costs of$10 million in the taxable year ended December 31,2007. The costs are incurred with respect to prop-erty that is placed in service in year 2008. A makesthe election under paragraph (d) of this section for the2007 taxable year.

(ii) Because A’s aggregate average daily domes-tic refinery run is 185,000 barrels, the percentage ofthe qualified capital costs that is deductible under sec-tion 179B(a) is reduced from 75 percent to 30 percent(75 percent reduced by 75 percent multiplied by 0.6((185,000 barrels minus 155,000 barrels)/50,000 bar-rels)). Thus, for 2007, A’s deduction under section179B(a) is $3,000,000 ($10,000,000 qualified capitalcosts multiplied by .30).

(c) Effect on basis—(1) In general. Ifqualified capital costs are included in thebasis of property, the basis of the propertyis reduced by the amount of the section179B deduction allowed with respect tosuch costs.

(2) Treatment as depreciation. If qual-ified capital costs are included in the ba-sis of depreciable property, the amount ofthe section 179B deduction allowed withrespect to such costs is treated as a depre-

2008–32 I.R.B. 282 August 11, 2008

ciation deduction for purposes of section1245.

(d) Election to deduct qualified capitalcosts—(1) In general—(i) Section 179Belection. This paragraph (d) prescribesrules for the election to deduct the qual-ified capital costs paid or incurred by asmall business refiner during a taxableyear (the section 179B election). A smallbusiness refiner making the section 179Belection for a taxable year consents to, andagrees to apply, all of the provisions ofsection 179B and this section to qualifiedcapital costs paid or incurred by the refinerduring the taxable year. The section 179Belection for a taxable year applies withrespect to all qualified capital costs paidor incurred by the small business refinerduring that taxable year.

(ii) Year-by-year election. A separatesection 179B election must be made foreach taxable year in which the taxpayerseeks to deduct qualified capital costs un-der section 179B. A small business refinermay make the section 179B election forsome taxable years and not for other tax-able years.

(iii) Elections for cooperative smallbusiness refiners. See paragraph (e) ofthis section for the rules applicable to theelection provided under section 179B(e),relating to the election to allocate thesection 179B deduction to cooperativeowners of a cooperative small businessrefiner (the section 179B(e) election).

(2) Time and manner for making sec-tion 179B election—(i) Time for makingelection. Except as provided in paragraph(d)(2)(iii) of this section, a taxpayer’s sec-tion 179B election for a taxable year mustbe made by the due date (including exten-sions) for filing the taxpayer’s Federal in-come tax return for the taxable year.

(ii) Manner of making election—(A)In general. Except as provided in para-graph (d)(2)(iii) of this section, the section179B election for a taxable year is madeby claiming a section 179B deductionon the taxpayer’s original Federal in-come tax return for the taxable year andattaching the statement described in para-graph (d)(2)(ii)(B) of this section to thereturn. The section 179B election withrespect to qualified capital costs paid orincurred by a partnership is made by thepartnership and the section 179B elec-tion with respect to qualified capital costspaid or incurred by an S corporation is

made by the S corporation. In the caseof qualified capital costs paid or incurredby the members of a consolidated group(within the meaning of §1.1502–1(h)), thesection 179B election with respect to suchcosts is made for each member by thecommon parent of the group.

(B) Information required in electionstatement. The election statement attachedto the taxpayer’s return must contain thefollowing information:

(1) The name and identification numberof the small business refiner.

(2) The amount of the qualified capitalcosts paid or incurred during the taxableyear for which the election is made.

(3) The aggregate average daily domes-tic refinery run (as determined under para-graph (a)(2)(iii) of this section).

(4) The date by which the small busi-ness refiner must comply with the applica-ble EPA regulations. If this date is not June1, 2006, the statement also must explainwhy compliance is not required by June 1,2006.

(5) The calculation of the section 179Bdeduction for the taxable year.

(6) For each property that will haveits basis reduced on account of the sec-tion 179B deduction for the taxable year,a description of the property, the amountincluded in the basis of the property onaccount of qualified capital costs paid orincurred during the taxable year, and theamount of the basis reduction to that prop-erty on account of the section 179B deduc-tion for the taxable year.

(iii) Except as otherwise expressly pro-vided by the Code, the regulations underthe Code, or other guidance published inthe Internal Revenue Bulletin, a section179B election is valid only if made at thetime and in the manner prescribed in thisparagraph (d)(2). For example, except asotherwise expressly provided, the 179Belection cannot be made for a taxable yearto which this section applies through a re-quest under section 446(e) to change thetaxpayer’s method of accounting.

(3) Revocation of election. An electionmade under this paragraph (d) may not berevoked without the prior written consentof the Commissioner of Internal Revenue.To seek the Commissioner’s consent, thetaxpayer must submit a request for a pri-vate letter ruling (for further guidance, see,for example, Rev. Proc. 2008–1, 2008–1

I.R.B. 1, and §601.601(d)(2)(ii)(b) of thischapter).

(4) Failure to make election. If a smallbusiness refiner does not make the sec-tion 179B election for a taxable year at thetime and in the manner prescribed in para-graph (d)(2) of this section, no deductionis allowed for the qualified capital coststhat the refiner paid or incurred during theyear. Instead these qualified capital costsare chargeable to a capital account in thattaxable year, the basis of the property towhich these costs are capitalized is not re-duced on account of section 179B, and theamount of depreciation allowable for theproperty attributable to these costs is de-termined by reference to these costs unre-duced by section 179B.

(5) Elections for taxable years end-ing before June 26, 2008. This sectiondoes not apply to section 179B electionsfor taxable years ending before June 26,2008. The rules for making the section179B election for a taxable year endingbefore June 26, 2008 are provided inNotice 2006–47, 2006–1 C.B. 892. See§601.601(d)(2)(ii)(b) of this chapter.

(e) Election under section 179B(e) toallocate section 179B deduction to coop-erative owners—(1) In general. A coop-erative small business refiner may elect toallocate part or all of its cooperative own-ers’ ratable shares of the section 179B de-duction for a taxable year to the coopera-tive owners (the section 179B(e) election).The section 179B deduction allocated to acooperative owner is equal to the coopera-tive owner’s ratable share of the total sec-tion 179B deduction allocated. A coopera-tive owner’s ratable share is determined forthis purpose on the basis of the cooperativeowner’s ownership interest in the cooper-ative small business refiner during the co-operative small business refiner’s taxableyear. If the cooperative owners’ interestsvary during the year, the cooperative smallbusiness refiner shall determine the own-ers’ ratable shares under a consistently ap-plied method that reasonably takes into ac-count the owners’ varying interests duringthe taxable year.

(2) Cooperative small business refinerdenied section 1382 deduction for allo-cated portion. In computing taxable in-come under section 1382, a cooperativesmall business refiner must reduce its sec-tion 179B deduction for the taxable yearby an amount equal to the section 179B de-

August 11, 2008 283 2008–32 I.R.B.

duction allocated under this paragraph (e)to the refiner’s cooperative owners for thetaxable year.

(3) Time and manner for making elec-tion—(i) Time for making election. Thesection 179B(e) election for a taxable yearmust be made by the due date (includingextensions) for filing the cooperative smallbusiness refiner’s Federal income tax re-turn for the taxable year.

(ii) Manner of making election. Thesection 179B(e) election for a taxable yearis made by attaching a statement to the co-operative small business refiner’s Federalincome tax return for the taxable year. Theelection statement must contain the fol-lowing information:

(A) The name and identification num-ber of the cooperative small business re-finer.

(B) The amount of the section 179B de-duction allowable to the cooperative smallbusiness refiner for the taxable year (de-termined before the application of section179B(e) and this paragraph (e)).

(C) The name and identification num-ber of each cooperative owner to which thecooperative small business refiner is allo-cating all or some of the section 179B de-duction.

(D) The amount of the section 179B de-duction that is allocated to each coopera-tive owner listed in response to paragraph(e)(3)(ii)(C) of this section.

(4) Irrevocable election. A section179B(e) election for a taxable year, oncemade, is irrevocable for that taxable year.

(5) Written notice to owners. A coop-erative small business refiner that makesa section 179B(e) election for a taxable

year must notify each cooperative ownerof the amount of the section 179B de-duction that is allocated to that coopera-tive owner. This notification must be pro-vided in a written notice that is mailed bythe cooperative small business refiner toits cooperative owner before the due date(including extensions) of the cooperativesmall business refiner’s Federal incometax return for the election year. In addi-tion, the cooperative small business refinermust report the amount of the cooperativeowner’s section 179B deduction on Form1099–PATR, “Taxable Distributions Re-ceived From Cooperatives,” issued to thecooperative owner. If Form 1099–PATRis revised or renumbered, the amount ofthe cooperative owner’s section 179B de-duction must be reported on the revised orrenumbered form.

(f) Effective/applicability date—(1) Ingeneral. This section applies to taxableyears ending on or after June 26, 2008.

(2) Application to taxable years end-ing before June 26, 2008. A small busi-ness refiner may apply this section to a tax-able year ending before June 26, 2008, pro-vided that the small business refiner ap-plies all provisions in this section, withthe modifications described in paragraph(f)(3) of this section, to the taxable year.

(3) Modifications applicable to taxableyears ending before June 26, 2008. Thefollowing modifications to the rules of thissection apply to a small business refinerthat applies those rules to a taxable yearending before June 26, 2008:

(i) Rules relating to section 179B elec-tion. The section 179B election for a tax-able year ending before June 26, 2008 may

be made under the rules provided in No-tice 2006–47, rather than under the rulesset forth in paragraph (d) of this section.

(ii) Rules relating to section 179B(e)election. A section 179B(e) election for ataxable year ending before June 26, 2008will be treated as satisfying the require-ments of paragraph (f) if the cooperativesmall business refiner has calculated itstax liability in a manner consistent withthe election and has used any reasonablemethod consistent with the principles ofsection 179B(e) to inform the InternalRevenue Service that an election has beenmade under section 179B(e) and to informcooperative owners of the amount of thesection 179B deduction they have beenallocated.

(4) Expiration date. The applicabilityof §179B–1T expires on June 24, 2011.

PART 602—OMB CONTROLNUMBERS UNDER THE PAPERWORKREDUCTION ACT

Par. 3. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805 * * *Par. 4. In §602.101, paragraph (b) is

amended by adding the following entry innumerical order to the table to read as fol-lows:

§602.101 OMB Control numbers.

* * * * *(b) * * *

CFR part or section whereidentified and described

Current OMBcontrol No.

* * * * *1.179B–1T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–2104

* * * * *

Kevin M. Brown,Deputy Commissioner forServices and Enforcement.

Approved June 15, 2007.

Eric Solomon,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on June 26, 2008,8:45 a.m., and published in the issue of the Federal Registerfor June 27, 2008, 73 F.R. 36420)

2008–32 I.R.B. 284 August 11, 2008

Section 664.—CharitableRemainder Trusts26 CFR 1.664–1: Charitable remainder trusts.

T.D. 9403


Guidance Under Section664 Regarding the Effectof Unrelated BusinessTaxable Income on CharitableRemainder Trusts


ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations that provide guidance un-der Internal Revenue Code (Code) section664 on the tax effect of unrelated businesstaxable income (UBTI) on charitable re-mainder trusts. The regulations reflect thechanges made to section 664(c) by section424(a) and (b) of the Tax Relief and HealthCare Act of 2006. The regulations affectcharitable remainder trusts that have UBTIin taxable years beginning after December31, 2006.

DATES: Effective Date: The regulationsare effective on June 24, 2008.

Applicability Date: For dates of appli-cability, see §1.664–1(c)(3).

FOR FURTHER INFORMATIONCONTACT: Cynthia Morton at (202)622–3060 (not a toll-free number).



The collections of information con-tained in these final regulations has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507(d)) under controlnumber 1545–2101. The collection ofinformation in these final regulations isin §1.664–1(c)(1). This information isrequired to enable a charitable remainder

trust to report and pay the excise tax dueon any UBTI of the trust.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless thecollection of information displays a validcontrol number.

Books or records relating to a collectionof information must be retained as longas their contents might become material inthe administration of any internal revenuelaw. Generally, tax returns and tax infor-mation are confidential, as required by 26U.S.C. 6103.

Background and Explanation ofProvisions

This document contains amendmentsto 26 CFR part 1 under section 664 of theCode. On March 7, 2008, proposed regu-lations (REG–127391–07, 2008–13 I.R.B.689) relating to the tax effect of UBTI oncharitable remainder trusts were publishedin the Federal Register (73 FR 12313).Although two comments were received inresponse to the proposed regulations, norequest to speak was submitted, so no pub-lic hearing was held (see 73 FR 18729).After consideration of the comments, theproposed regulations are adopted by thisTreasury decision without substantivechange.

For taxable years beginning beforeJanuary 1, 2007, section 664(c) providedthat a charitable remainder trust (whethera charitable remainder annuity trust or acharitable remainder unitrust) would notbe exempt from income tax for any yearin which the trust had any UBTI (withinthe meaning of section 512). Instead, suchtrust was taxed for each such year undersubchapter J as though it were a nonex-empt, complex trust. The final regulationsreflect the changes to section 664(c) madeby section 424 of the Tax Relief andHealth Care Act of 2006 (Act), Public Law109–432, 120 Stat. 2922. Section 424(a)of the Act, which applies to taxable yearsbeginning after December 31, 2006, pro-vides that charitable remainder trusts thathave UBTI remain exempt from Federalincome tax, but imposes a 100-percentexcise tax on their UBTI.

The regulations confirm that, for pur-poses of determining the character of thedistribution made to the beneficiary, thecharitable remainder trust income that is

UBTI is considered income of the trust.Specifically, income of the charitableremainder trust is allocated among thetrust income categories in Treasury Reg-ulation §1.664–1(d)(1) without regardto whether any part of that income con-stitutes UBTI under section 512. Theregulations also confirm that, consistentwith §1.664–1(d)(2), the excise tax im-posed upon a charitable remainder trustwith UBTI is treated as paid from corpus.

Summary of Comments

Comments Relating to Transitional Relief

The two commentators requested tran-sitional relief to allow time for charitableremainder trusts with investments produc-ing significant UBTI to restructure theseinvestments. The commentators noted thatthe Tax Relief and Health Care Act of 2006revising section 664(c) was signed into lawon December 20, 2006, and became effec-tive for tax years beginning after Decem-ber 31, 2006. Consequently, charitable re-mainder trusts had eleven days to makechanges in their investments in response tothe legislation.

The Treasury Department and the IRShave carefully considered the concernsof the commentators and the request fortransitional relief, but have not adoptedthis comment. The primary objective ofadopting the tax on UBTI was to eliminatea source of unfair competition by placingthe unrelated business activities of cer-tain exempt organizations on the same taxbasis as the nonexempt businesses withwhich they compete. See §1.513–1(b).The provision denying the income taxexemption for charitable remainder trustsin years in which the trust has UBTI wasenacted because Congress did “not believethat it is appropriate to allow the unrelatedbusiness income tax to be avoided by theuse of a charitable remainder trust ratherthan a tax-exempt organization”. See Pub-lic Law 91–172, Senate Report 91–552(H.R. 13270), C.B. 1969–3, P. 481–2.The sanction imposed under prior law ona charitable remainder trust investing inUBTI-producing asset(s), specifically theloss of tax-exempt status, was generallyviewed as particularly onerous. Section424 of the Act changed the sanction toalleviate its severity, but did not reflectany change in the long-standing policy

August 11, 2008 285 2008–32 I.R.B.

to sanction and thus to discourage suchinvestment by charitable remainder trusts.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It has also been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations. Itis hereby certified that the collection ofinformation in these regulations will nothave a significant economic impact on asubstantial number of small entities. Thisreporting burden flows directly from thestatute implemented by these regulations.Accordingly, a regulatory flexibility anal-ysis under the Regulatory Flexibility Act(5 U.S.C. chapter 6) (RFA) is not required.Pursuant to section 7805(f) of the Code,the notice of proposed rulemaking preced-ing these regulations was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.


The principal author of the regulationsis Cynthia Morton, Office of the AssociateChief Counsel (Passthroughs and SpecialIndustries).

* * * * *

Adoption of Amendments to theRegulations



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

Authority: 26 U.S.C. 7805. * * *Par. 2. Section 1.664–1 is amended as

follows:1. In paragraph (a)(1)(i), the last sen-

tence is revised and two sentences areadded to the end of the paragraph.

2. Paragraph (c) is revised.3. In paragraph (d)(2), the fourth sen-

tence is revised.The revisions and addition read as fol-

lows:

§1.664–1 Charitable remainder trusts.

(a)* * * (1)* * * (i) * * * A trust cre-ated after July 31, 1969, which is a char-itable remainder trust, is exempt from allof the taxes imposed by subtitle A of theCode for any taxable year of the trust, ex-cept for a taxable year beginning beforeJanuary 1, 2007, in which it has unrelatedbusiness taxable income. For taxable yearsbeginning after December 31, 2006, an ex-cise tax, treated as imposed by chapter 42,is imposed on charitable remainder truststhat have unrelated business taxable in-come. See paragraph (c) of this section.

* * * * *(c) Excise tax on charitable remain-

der trusts—(1) In general. For each tax-able year beginning after December 31,2006, in which a charitable remainder an-nuity trust or a charitable remainder uni-trust has any unrelated business taxable in-come, an excise tax is imposed on that trustin an amount equal to the amount of suchunrelated business taxable income. Forthis purpose, unrelated business taxable in-come is as defined in section 512, deter-mined as if part III, subchapter F, chap-ter 1, subtitle A of the Internal RevenueCode applied to such trust. Such excisetax is treated as imposed by chapter 42(other than subchapter E) and is reportedand payable in accordance with the appro-priate forms and instructions. Such excisetax shall be allocated to corpus and, there-fore, is not deductible in determining tax-able income distributed to a beneficiary.(See paragraph (d)(2) of this section.) Thecharitable remainder trust income that isunrelated business taxable income consti-tutes income of the trust for purposes ofdetermining the character of the distribu-tion made to the beneficiary. Income ofthe charitable remainder trust is allocatedamong the charitable remainder trust in-come categories in paragraph (d)(1) of thissection without regard to whether any partof that income constitutes unrelated busi-ness taxable income under section 512.

(2) Examples. The application of therules in this paragraph (c) may be illus-trated by the following examples:

Example 1. For 2007, a charitable remainder an-nuity trust with a taxable year beginning on January1, 2007, has $60,000 of ordinary income, includ-ing $10,000 of gross income from a partnership thatconstitutes unrelated business taxable income to thetrust. The trust has no deductions that are directlyconnected with that income. For that same year, the

trust has administration expenses (deductible in com-puting taxable income) of $16,000, resulting in netordinary income of $44,000. The amount of unre-lated business taxable income is computed by takinggross income from an unrelated trade or business anddeducting expenses directly connected with carryingon the trade or business, both computed with mod-ifications under section 512(b). Section 512(b)(12)provides a specific deduction of $1,000 in comput-ing the amount of unrelated business taxable income.Under the facts presented in this example, there are noother modifications under section 512(b). The trust,therefore, has unrelated business taxable income of$9,000 ($10,000 minus the $1,000 deduction undersection 512(b)(12)). Undistributed ordinary incomefrom prior years is $12,000 and undistributed capitalgains from prior years are $50,000. Under the termsof the trust agreement, the trust is required to pay anannuity of $100,000 for year 2007 to the noncharita-ble beneficiary. Because the trust has unrelated busi-ness taxable income of $9,000, the excise tax imposedunder section 664(c) is equal to the amount of suchunrelated business taxable income, $9,000. The char-acter of the $100,000 distribution to the noncharitablebeneficiary is as follows: $56,000 of ordinary income($44,000 from current year plus $12,000 from prioryears), and $44,000 of capital gains. The $9,000 ex-cise tax is allocated to corpus, and does not reducethe amount in any of the categories of income underparagraph (d)(1) of this section. At the beginning ofyear 2008, the amount of undistributed capital gainsis $6,000, and there is no undistributed ordinary in-come.

Example 2. During 2007, a charitable remainderannuity trust with a taxable year beginning on January1, 2007, sells real estate generating gain of $40,000.Because the trust had obtained a loan to finance partof the purchase price of the asset, some of the incomefrom the sale is treated as debt-financed income un-der section 514 and thus constitutes unrelated busi-ness taxable income under section 512. The unre-lated debt-financed income computed under section514 is $30,000. Assuming the trust receives no otherincome in 2007, the trust will have unrelated busi-ness taxable income under section 512 of $29,000($30,000 minus the $1,000 deduction under section512(b)(12)). Except for section 512(b)(12), no otherexceptions or modifications under sections 512–514apply when calculating unrelated business taxable in-come based on the facts presented in this example.Because the trust has unrelated business taxable in-come of $29,000, the excise tax imposed under sec-tion 664(c) is equal to the amount of such unrelatedbusiness taxable income, $29,000. The $29,000 ex-cise tax is allocated to corpus, and does not reducethe amount in any of the categories of income un-der paragraph (d)(1) of this section. Regardless ofhow the trust’s income might be treated under sec-tions 511–514, the entire $40,000 is capital gain forpurposes of section 664 and is allocated accordinglyto and within the second of the categories of incomeunder paragraph (d)(1) of this section.

(3) Effective/applicability date. Thisparagraph (c) is applicable for taxableyears beginning after December 31, 2006.The rules that apply with respect to taxableyears beginning before January 1, 2007,are contained in §1.664–1(c) as in effect

2008–32 I.R.B. 286 August 11, 2008

prior to June 24, 2008. (See 26 CFR part1, §1.664–1(c)(1) revised as of April 1,2007).

(d) * * *(2) * * * All taxes imposed by chapter

42 of the Code (including without limita-tion taxes treated under section 664(c)(2)as imposed by chapter 42) and, for taxableyears beginning prior to January 1, 2007,all taxes imposed by subtitle A of the Codefor which the trust is liable because it has

unrelated business taxable income, shall beallocated to corpus. * * *

* * * * *


Par. 3. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 4. In §602.101, paragraph (b) isamended by adding the following entry innumerical order to the table as follows:

§602.101 OMB Control numbers.

* * * * *(b) * * *



* * * * *1.664–1(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–2101

* * * * *

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.




(Filed by the Office of the Federal Register on June 19, 2008,1:29 p.m., and published in the issue of the Federal Registerfor June 24, 2008, 73 F.R. 35583)

Section 956.—Investmentof Earnings in UnitedStates Property

26 CFR 1.956–2: Definition of United States prop-erty.

T.D. 9406

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Modifications to Subpart FTreatment of Aircraft andVessel Leasing Income


ACTION: Final and temporary regula-tions.

SUMMARY: This document contains fi-nal and temporary regulations addressingthe treatment of certain income and assetsrelated to the leasing of aircraft or ves-sels in foreign commerce under sections367, 954, and 956 of the Internal Rev-enue Code (Code). The regulations re-flect statutory changes made by section415 of the American Jobs Creation Actof 2004 (AJCA). In general, the regula-tions will affect United States sharehold-ers of controlled foreign corporations thatderive income from the leasing of aircraftor vessels in foreign commerce and U.S.persons that transfer property subject tothese leases to a foreign corporation. Thetext of these temporary regulations alsoserves as the text of the proposed regula-tions (REG–138355–07) set forth in thisissue of the Bulletin.

DATES: Effective Date: These regulationsare effective on July 3, 2008.

Applicability Dates: For dates ofapplicability, see §§1.367–2T(e)(2),1.367–4T(c)(3)(i), 1.367–5T(f)(3)(ii),1.954–2T(i) and 1.956–2T(e).

FOR FURTHER INFORMATIONCONTACT: Concerning the tempo-rary regulations under section 367,John H. Seibert, at (202) 622–3860;concerning the temporary regulationsunder section 954 or 956, Paul J. Carlino at(202) 622–3840; concerning submissionsof comments, Richard A. Hurst [email protected](not toll-free numbers).


Background

In General

This document contains amendmentsto 26 CFR Part 1 under sections 367, 954and 956 of the Code. Section 415(a) ofthe AJCA, Public Law 108–357 (118 Stat.1418) repealed sections 954(a)(4) and(f), the foreign base company shippingincome provisions of subpart F. Follow-ing repeal of the foreign base companyshipping income provisions, rents derivedfrom leasing an aircraft or vessel in for-eign commerce may be included in subpartF income only if the rents are describedin another category of subpart F income,such as foreign personal holding companyincome (FPHCI) defined in section 954(c).Rents are included in FPHCI under sec-tion 954(c)(1)(A). Section 954(c)(2)(A)excludes from FPHCI rents received fromunrelated persons and derived in the activeconduct of a trade or business.

Rents derived by a controlled foreigncorporation (CFC) are considered to bederived in the active conduct of a tradeor business if the rents are derived underany one of four circumstances describedin the Treasury regulations under section954(c)(2)(A). One such circumstance, pro-vided in §1.954–2(c)(1)(iv), is when rentsare derived from property leased as a resultof the performance of marketing functionsby the lessor CFC. These rents are consid-ered to be derived in the active conductof a trade or business if the lessor CFC,

August 11, 2008 287 2008–32 I.R.B.

through its own officers or staff of em-ployees located in a foreign country, main-tains and operates an organization in theforeign country that is regularly engagedin the business of marketing, or of market-ing and servicing, the leased property andthat is substantial in relation to the amountof rents derived from leasing the property.

Section 1.954–2(c)(2)(ii) provides thatthe determination of whether the organiza-tion in the foreign country is substantial inrelation to the amount of rents derived isbased on all the facts and circumstances.However, under §1.954–2(c)(2)(ii), theorganization will be considered substan-tial in relation to the amount of rents ifactive leasing expenses, as defined in§1.954–2(c)(2)(iii), equal or exceed 25percent of the adjusted leasing profit, asdefined in §1.954–2(c)(2)(iv).

Section 415(b) of the AJCA amendedsection 954(c)(2)(A) to create a new mar-keting safe harbor for the exclusion fromFPHCI for rents derived from leasing anaircraft or vessel in foreign commerce.The amendment to section 954(c)(2)(A)provides:

[R]ents derived from leasing an aircraftor vessel in foreign commerce shall notfail to be treated as derived in the activeconduct of a trade or business if, as de-termined under regulations prescribedby the Secretary, the active leasing ex-penses are not less than 10 percent ofthe profit on the lease.

The legislative history of section 415(b) ofthe AJCA provides that the new safe har-bor for rents derived from leasing an air-craft or vessel in foreign commerce “is tobe applied in accordance with the exist-ing regulations under section 954(c)(2)(A)by comparing the lessor’s ‘active leasingexpenses’ for its pool of leased assets toits ‘adjusted leasing profit.’” H.R. Conf.Rep. No. 755, 108th Cong., 2d Sess. 389(2004) (hereinafter 2004 Conference Re-port). The 2004 Conference Report in-cludes in the definition of the term “air-craft or vessel” engines that are leased sep-arately from an aircraft or vessel. Id. at391.

An aircraft or vessel will qualifyfor the new safe harbor under section954(c)(2)(A) only if it is leased in “foreigncommerce.” The legislative history pro-vides that, for purposes of this safe harbor,

An aircraft or vessel will be consideredto be leased in foreign commerce if it

is used for the transportation of prop-erty or passengers between a port (orairport) in the United States and onein a foreign country or between foreignports (or airports), provided the aircraftor vessel is used predominantly outsidethe United States. An aircraft or ves-sel will be considered used predomi-nantly outside the United States if morethan 50 percent of the miles during thetaxable year are traversed outside theUnited States or the aircraft or vessel islocated outside the United States morethan 50 percent of the time during suchtaxable year.

Id. at 390.As an alternative to the new safe har-

bor, the legislative history makes clear thata lessor may qualify for the marketing ex-ception by satisfying a facts and circum-stances test. The report of the House ofRepresentatives provides that:

The safe harbor will not prevent alessor from otherwise showing that itactively carries on a trade or business.In this regard, the requirements of sec-tion 954(c)(2)(A) will be met if a lessorregularly and directly performs activeand substantial marketing, remarketing,management and operational functionswith respect to the leasing of an aircraftor vessel (or component engines).

H.R. Rep. No. 108–548, Part I, at 210(2004).

The 2004 Conference Report also clar-ifies that the marketing exception for air-craft and vessels will apply whether thelessor engages in the marketing of the leaseas a form of financing (versus marketingthe property as such) or whether the leaseis classified as a finance lease or oper-ating lease for financial accounting pur-poses. 2004 Conference Report at 390.The exception will also apply to an exist-ing lease acquired by a lessor, if, followingthe acquisition, the lessor performs activeand substantial management, operational,and remarketing functions with respect tothe leased property. Id. The 2004 Confer-ence Report makes clear that a taxpayer nolonger can claim FSC or ETI benefits foran existing FSC or ETI lease transferred toa CFC lessor. Id.

The legislative history directs the Sec-retary of the Treasury to make conformingchanges to the current regulations “includ-ing guidance that aircraft or vessel leasingactivity that satisfies the requirements of

section 954(c)(2)(A) shall also satisfy therequirements for avoiding income inclu-sion under section 956 and section 367(a).”Id. This legislative history indicates thatCongress anticipated that taxpayers mightrestructure their operations with minimaltax cost to take advantage of the new ben-efits under subpart F provided by section415 of the AJCA, namely the repeal ofthe foreign base company shipping incomeprovisions and a liberalized marketing safeharbor for excluding active leasing incomefrom aircraft or vessels engaged in foreigncommerce from FPHCI.

Notice 2006–48

Notice 2006–48, 2006–1 C.B. 922, re-leased on May 2, 2006, provided guidanceand announced the Treasury Department’sand IRS’ intention to amend the regula-tions under sections 367(a), 954, and 956in accord with section 415 of the AJCA,and the accompanying legislative history.The notice provided that the future regula-tions would generally be effective begin-ning on or after May 2, 2006. These tem-porary regulations incorporate the rules ofNotice 2006–48 with minor changes. See§601.601(d)(2)(ii)(b).


The temporary regulations provideguidance with respect to the treatment ofcertain income and assets related to theleasing of aircraft or vessels in foreigncommerce under sections 367, 954, and956 of the Code in light of section 415 ofthe AJCA.

Section 954 Regulations

The temporary regulations add a newmarketing safe harbor for purposes of de-termining whether rents derived from leas-ing aircraft or vessels (including compo-nent parts, such as engines, that are leasedseparately from an aircraft or vessel) in for-eign commerce qualify for the active rentsexclusion under section 954(c)(2)(A). Thisnew safe harbor provides that an organi-zation will be considered substantial un-der §1.954–2(c)(2)(ii) if active leasing ex-penses equal or exceed 10 percent of theadjusted leasing profit. The temporaryregulations retain the rules in the currentregulations regarding how to determine ac-tive leasing expenses and adjusted leas-

2008–32 I.R.B. 288 August 11, 2008

ing profit and that as an alternative to thesafe harbor test, a CFC can satisfy the sub-stantiality test based upon its facts and cir-cumstances. The temporary regulationsalso amend the current regulations to in-clude a definition of foreign commerce andpredominant use of an aircraft or vesseloutside the United States in accordancewith the definitions given such terms inthe legislative history to section 415(b) ofthe AJCA. The temporary regulations alsoclarify that rents derived from certain fi-nance leases and acquired leases are eligi-ble for the active rents exclusion.


Section 956(c)(1)(A) provides that theterm “United States property” generallyincludes tangible property located in theUnited States. Section 956(c)(2) providesexceptions to the general definition of U.S.property. Section 956(c)(2)(D) excludesfrom the term U.S. property any aircraft,railroad rolling stock, vessel, motor vehi-cle, or container used in the transporta-tion of persons or property in foreign com-merce and used predominantly outside theUnited States.

Section 1.956–2(b)(1)(vi) provides thatwhether an aircraft, railroad rolling stock,vessel, motor vehicle, or container is usedpredominantly outside the United Statesdepends on the facts and circumstancesin each case. The regulations also pro-vide that as a general rule, such trans-portation property will be considered usedpredominantly outside the United States if70 percent or more of the miles traversedin the use of such property are traversedoutside the United States or if such prop-erty is located outside the United States70 percent of the time during such taxableyear. The temporary regulations amend§1.956–2(b)(1)(vi) to provide that an air-craft or vessel is excluded from U.S. prop-erty if rents derived from leasing such air-craft or vessel are excluded from FPHCIunder section 954(c)(2)(A).


Section 367 provides that if a U.S. per-son transfers property to a foreign corpo-ration in an exchange described in sections332, 351, 354, 356, or 361 of the Code, theforeign corporation will not be considereda corporation for purposes of determining

the extent to which gain will be recog-nized on such transfer. However, section367(a)(3)(A) generally provides an excep-tion to this rule if the property is used bythe foreign corporation in the active con-duct of a trade or business outside of theUnited States. In general, this exceptiondoes not apply to property of which thetransferor is a lessor at the time of thetransfer, unless the transferee is the lesseeor the regulations provide otherwise.

Section 1.367(a)–2T(a) provides, inpart, that section 367(a)(1) does not applyto property transferred to a foreign corpo-ration if the property is transferred for useby that corporation in the active conductof a trade or business outside of the UnitedStates and certain reporting requirementsare met. Section 1.367(a)–2T(b)(3) pro-vides that the principles of §1.954–2(d)(1)are used to determine whether a tradeor business that produces rents or royal-ties is actively conducted, without regardto whether the rents or royalties are re-ceived from an unrelated person. Section1.367(a)–2T(b)(4) provides generally thata foreign corporation conducts a trade orbusiness outside of the United States if theprimary managerial and operational activ-ities of the trade or business are locatedoutside of the United States and if imme-diately after the transfer the transferredassets are located outside of the UnitedStates.

Section 1.367(a)–4T(c) through (f) con-tains rules for determining whether cer-tain types of property are transferred foruse in the active conduct of a trade orbusiness outside the United States. Sec-tion 1.367(a)–4T(c)(1) provides that if thetransferred property will be leased by thetransferee foreign corporation, the prop-erty generally is considered to be trans-ferred for use in the active conduct of atrade or business outside of the UnitedStates only if all three of the following con-ditions are met: (i) the transferee’s leasingconstitutes the active conduct of a leasingbusiness; (ii) the lessee does not use theproperty in the United States; and (iii) thetransferee has need for substantial invest-ment in assets of the type transferred.

Section 1.367(a)–4T(b)(1) providesthat even if property qualifies for the ac-tive trade or business exception, whena U.S. person transfers U.S. depreciatedproperty to a foreign corporation, that per-son must include as ordinary income in

the year of the transfer the gain realizedthat would have been included as ordinaryincome under section 617(d)(1), 1245(a),1250(a), 1252(a), or 1254(a) of the Codeif the taxpayer had sold the property atits fair market value on the date of thetransfer (section 367 recapture). Section1.367(a)–4T(b)(2)(ii) provides that, forthis purpose, U.S. depreciated propertyincludes property that has been used in theUnited States or has qualified as section 38property by virtue of section 48(a)(2)(B).

Section 1.367(a)–4T(b)(3) provides amethodology to compute the section 367recapture amount if the property has beenused partly outside the United States. Inthis circumstance, the amount of the sec-tion 367 depreciation recapture is deter-mined by multiplying the full section 367recapture amount by a fraction, the numer-ator of which is the U.S. use of the propertyand denominator of which is the total useof the property. For this purpose, U.S. useis the number of months that the propertyeither was used within the United States orqualified as section 38 property by virtueof section 48(a)(2)(B) and was subject todepreciation by the transferor or a relatedperson. Total use is the total number ofmonths that the property was used (or wasavailable for use), and subject to deprecia-tion, by the transferor or a related person.Property is not considered to be used out-side the United States during any periodin which the property was, for purposesof section 38 or 168, treated as propertynot used predominantly outside the UnitedStates pursuant to the provisions of section48(a)(2)(B).

Section 1.367(a)–5T(f) provides that,regardless of use in an active trade orbusiness, section 367(a)(1) applies to atransfer of tangible property with respectto which the transferor is a lessor at thetime of the transfer unless: (i) the trans-feree was the lessee and the transfereewill not lease to third persons; or (ii) thetransferee will lease to third persons andthe transferee satisfies the conditions of§1.367(a)–4T(c)(1) or (2).

The temporary regulations amend thesection 367(a) regulations to provide thatthe principles of section 954(c)(2)(A) andthe related regulations shall apply to de-termine whether a trade or business thatproduces rents or royalties is actively con-ducted under §1.367(a)–2T(b)(3). Forpurposes of applying §1.367(a)–2T(b)(4),

August 11, 2008 289 2008–32 I.R.B.

§1.367(a)–4T(c)(3) provides that the sub-stantial managerial and operational activ-ities of the trade or business of leasingan aircraft or vessel must be conductedoutside of the United States, and the air-craft or vessel must be used predominantlyoutside of the United States, as definedin section 954 and under the amendedregulation. A lessee that uses an aircraftor vessel predominantly outside of theUnited States will satisfy the requirementin §1.367(a)–4T(c)(1)(ii).

In addition, Notice 2006–48 states thatthe Treasury Department and IRS wereconsidering future guidance regardinghow to determine whether an aircraft orvessel was used predominantly outsidethe United States for a particular monthfor purposes of calculating section 367recapture. The notice also states that untilfurther guidance is issued, taxpayers arepermitted to use any reasonable methodto make this determination. The TreasuryDepartment and IRS continue to studythis issue and therefore taxpayers maycontinue to use any reasonable methodto make this determination until furtherguidance is issued.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It has also been determinedthat section 553(b) of the Administra-tive Procedure Act (5 U.S.C. chapter 5)does not apply to these regulations. Forapplicability of the Regulatory Flexibil-ity Act (5 U.S.C. Ch. 6) please refer tothe cross-reference notice of proposedrulemaking published elsewhere in thisBulletin. Pursuant to section 7805(f) of theCode, this regulation has been submittedto the Chief Counsel for Advocacy ofthe Small Business Administration forcomment on its impact on small business.


The principal authors of theseregulations are John H. Seibert andPaul J. Carlino, Office of AssociateChief Counsel (International). However,other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amendedas follows:



Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.367(a)–2T is amended

by adding paragraph (e) to read as follows:

§1.367(a)–2T Exception for transfers ofproperty for use in the active conduct of atrade or business (temporary).

* * * * *(e) Special rules for certain transfers

occurring on or after May 2, 2006—(1)General rule. Whether a trade or busi-ness that produces rents or royalties is ac-tively conducted shall be determined underthe principles of section 954(c)(2)(A) andthe accompanying regulations (but with-out regard to whether the rents or royaltiesare received from an unrelated party). See§1.954–2(c) and (d).

(2) Effective/applicability date. Therules of this paragraph (e) apply totransfers occurring on or after May 2,2006. However, if the transferor makesthe election to apply the provisions of§1.367(a)–4T(c)(3)(i) for transfers occur-ring on or after October 22, 2004, thenparagraph (e)(1) will also be applicable forthe transfers occurring on or after October22, 2004.

(3) Expiration date. The applicabilityof this paragraph (e) will expire on July 1,2011.

Par. 3. Section 1.367(a)–4T is amendedby adding paragraphs (c)(3) and (i) to readas follows:

§1.367(a)–4T Special rules applicableto specified transfers of property(temporary).

* * * * *(c) * * *(3) Aircraft and vessels leased in for-

eign commerce—(i) In general. For thepurposes of satisfying paragraph (c)(1) ofthis section, aircraft or vessels, includingcomponent parts such as engines leasedseparately from aircraft or vessels, trans-ferred to a foreign corporation and leased

to other persons by the foreign corpora-tion shall be considered to be transferredfor use in the active conduct of a trade orbusiness if—

(A) The employees of the foreign cor-poration perform substantial managerialand operational activities of leasing air-craft or vessels outside the United States;and

(B) The leased tangible personalproperty is predominantly used outsidethe United States, as determined under§1.954–2T(c)(2)(v).

* * * * *(i) Effective/applicability date. (1) The

rules of paragraph (c)(3) of this sectionapply for transfers of property occurringon or after May 2, 2006. Transferorsmay elect to apply these provisions totransfers occurring on or after October22, 2004, by citing the provisions ofparagraph (c)(3) of this section in the doc-umentation for such transfers required by§1.6038B–1T(c)(4)(i) and (iv).

(2) Expiration date. The applicabilityof paragraph (c)(3) of this section will ex-pire on July 1, 2011.

Par. 4. Section §1.367(a)–5T isamended by adding paragraph (f)(3) toread as follows:

§1.367(a)–5T Property subject to section367(a)(1) regardless of use in a trade orbusiness (temporary).

* * * * *(f) * * *(3)(i) With respect to vessels and air-

craft, including their component parts, thatwill be leased by the transferee to third per-sons, the transferee satisfies the conditionsset forth in §1.367(a)–4T(c).

(ii) Effective/applicability date. Therules of this paragraph (f)(3) apply fortransfers of property occurring on or af-ter May 2, 2006. If the transferor makesthe election to apply the provisions of§1.367(a)–4T(c)(3) to transfers occurringon or after October 22, 2004, then para-graph (f)(3)(i) of this section will also beapplicable for the transfers affected by thatelection.

(iii) Expiration date. The applicabilityof this paragraph (f)(3) will expire on July1, 2011.

Par. 5. Section 1.954–2 is amended asfollows:

1. Paragraph (c)(2)(ii) is revised.

2008–32 I.R.B. 290 August 11, 2008

2. Paragraphs (c)(2)(v), (c)(2)(vi),(c)(2)(vii) and (c)(3) Example 6, and (i)are added. The revision and additions readas follows:

§1.954–2 Foreign personal holdingcompany income.

* * * * *(c) * * *(2) * * *(ii) [Reserved]. For further guidance,

see §1.954–2T(c)(2)(ii).

* * * * *(v) [Reserved]. For further guidance,

see §1.954–2T(c)(2)(v).(vi) [Reserved]. For further guidance,

see §1.954–2T(c)(2)(vi).(vii) [Reserved]. For further guidance,

see §1.954–2T(c)(2)(vii).(3) * * *Example 6. [Reserved]. For further

guidance, see §1.954–2T(c)(3) Example 6.

* * * * *(i) [Reserved]. For further guidance,

see §1.954–2T(i).Par. 6. Section 1.954–2T is added to

read as follows:

§1.954–2T Foreign personal holdingcompany income (temporary).

(a) through (c)(2)(i) [Reserved]. Forfurther guidance, see §1.954–2(a) through(c)(2)(i).

(ii) Substantiality of foreign organiza-tion. For purposes of paragraph (c)(1)(iv)of this section, whether an organization ina foreign country is substantial in relationto the amount of rents is determined basedon all facts and circumstances. However,such an organization will be consideredsubstantial in relation to the amount ofrents if active leasing expenses, as definedin paragraph (c)(2)(iii) of this section,equal or exceed 25 percent of the adjustedleasing profit, as defined in paragraph(c)(2)(iv) of this section. In addition, forpurposes of aircraft or vessels leased inforeign commerce, an organization willbe considered substantial if active leas-ing expenses, as defined in paragraph(c)(2)(iii) of this section, equal or ex-ceed 10 percent of the adjusted leasingprofit, as defined in paragraph (c)(2)(iv)of this section. For purposes of paragraphs(c)(1)(iv) and (c)(2) of this section and

§1.956–2T(b)(1)(vi), the term aircraft orvessels includes component parts, such asengines that are leased separately from anaircraft or vessel.

(c)(2)(iii) through (c)(2)(iv) [Re-served]. For further guidance, see§1.954–2(c)(2)(iii) through (c)(2)(iv).

(v) Leased in foreign commerce. Forpurposes of paragraph (c)(1)(iv) and (2)(ii)of this section, an aircraft or vessel is con-sidered to be leased in foreign commerceif the aircraft or vessel is used in foreigncommerce and is used predominately out-side the United States. For purposes ofthis paragraph (c)(2)(v), an aircraft or ves-sel is considered to be leased in foreigncommerce if used for the transportation ofproperty or passengers between a port (orairport) in the United States and one in aforeign country or between foreign ports(or airports) provided the aircraft or vesselis used predominantly outside the UnitedStates. An aircraft or vessel will be consid-ered to be used predominantly outside theUnited States if more than 50 percent of themiles traversed during the taxable year inthe use of such property are traversed out-side the United States or if the aircraft orvessel is located outside the United Statesmore than 50 percent of the time during thetaxable year.

(vi) Leases acquired by the CFC lessor.Except as provided in this paragraph(c)(2)(vi), the exception in paragraph(c)(1)(iv) of this section will also applyto rents from leases acquired from anyperson, if following the acquisition thelessor performs active and substantialmanagement, operational, and remarket-ing functions with respect to the leasedproperty. However, if any person is claim-ing a benefit with respect to an acquiredlease pursuant to sections 921 or 114 ofthe Internal Revenue Code or section101(d) of the American Jobs Creation Actof 2004, Public Law No. 108–357 (118Stat. 1418) (2004), the rents from suchlease, notwithstanding §1.954–2(b)(6),(2)(c) and the remainder of this section,are ineligible for the exception in section954(c)(2)(A).

(vii) Finance leases. Paragraph(c)(1)(iv) of this section can apply to alessor engaged in the marketing of leasesthat are treated as finance leases for finan-cial accounting purposes but are treated asleases for Federal income tax purposes.

(3) Examples 1 through 5 [Reserved].For further guidance, see §1.954–2(c)(3)Examples 1 through 5.

Example 6. The facts are the same as in Example2, except that controlled foreign corporation D pur-chases aircraft which it leases to others. If Corpora-tion D incurs active leasing expenses, as defined inparagraph (c)(2)(iii) of this section, equal to or in ex-cess of 10 percent of its adjusted leasing profit, as de-fined in paragraph (c)(2)(iv) of this section, the rentalincome of Corporation D from its leases with the un-related foreign corporations is substantial and will beconsidered as derived in the active conduct of a tradeor business for purposes of section 954(c)(2)(A). If aparticular aircraft subject to lease was not used by thelessee corporation in foreign commerce, for example,because 50 percent or less of the miles during the tax-able year were traversed outside the United States andthe aircraft was located in the United States for 50percent or more of the taxable year, Corporation D isnot prevented from otherwise showing that it activelycarries on a trade or business with regard to the rentsderived from that aircraft, for example, based on itsfacts and circumstances, or as within the meaning ofparagraph (c)(1)(i) or (iii) of this section.

(d) through (h) [Reserved]. For furtherguidance, see §1.954–2(d) through (h).

(i)(1) Effective/applicability date. Para-graph (c) of this section applies to taxableyears of controlled foreign corporationsbeginning on or after May 2, 2006, andfor tax years of United States sharehold-ers with or within which such tax years ofthe controlled foreign corporations ends.Taxpayers may elect to apply paragraph(c) of this section to taxable years of con-trolled foreign corporations beginning af-ter December 31, 2004, and for tax years ofUnited States shareholders with or withinwhich such tax years of the controlled for-eign corporations end. If an election ismade to apply paragraph (b)(1)(vi) of thissection to taxable years beginning afterDecember 31, 2004, then the election mustalso be made for paragraph (c) of this sec-tion.

(2) Expiration date. The applicabil-ity of §1.954–2T(c) will expire on July 1,2011.

Par. 7. Section 1.956–2 is amended asfollows:

1. Paragraph (b)(1)(vi) is revised.2. Paragraph (e) is added.The revisions and addition read as fol-

lows:

§1.956–2 Definition of United Statesproperty.

* * * * *(b) * * *(1) * * *

August 11, 2008 291 2008–32 I.R.B.

(vi) [Reserved]. For further guidance,see §1.956–2T(b)(1)(vi).

* * * * *(e) [Reserved]. For further guidance,

see §1.956–2T(e).Par. 8. Section 1.956–2T is amended as

follows:1. Paragraphs (a), (b), (b)(1)(i),

(b)(1)(ii), (b)(1)(iii), (b)(1)(iv), (b)(1)(v),(b)(i)(vi), (c), (d) and (d)(1) are added.

2. Paragraph (e) is added.The revisions and addition read as fol-

lows:

§1.956–2T Definition of United Statesproperty (temporary).

(a) through (b)(1)(v) [Reserved]. Forfurther guidance, see §1.956–2(a) through(b)(1)(v).

(vi) Any aircraft, railroad rolling stock,vessel, motor vehicle, or container used inthe transportation of persons or property inforeign commerce and used predominantlyoutside the United States. Whether trans-portation property described in this sub-division is used in foreign commerce andpredominantly outside the United States isto be determined from all the facts andcircumstances of each case. As a gen-eral rule, such transportation property willbe considered to be used predominantlyoutside the United States if 70 percent ormore of the miles traversed (during the tax-able year at the close of which a deter-mination is made under section 956(a)(2))in the use of such property are traversedoutside the United States or if such prop-erty is located outside the United States70 percent of the time during such taxableyear. Notwithstanding the above, an air-craft or vessel (as the term is defined in§1.954–2T(c)(2)(ii)) is excluded from U.S.property if rents derived from leasing suchaircraft or vessel are excluded from foreignpersonal holding company income undersection 954(c)(2)(A). See paragraph (e) ofthis section for the effective/applicabilitydates of this paragraph (b)(1)(vi).

(c) through (d)(1) [Reserved]. Forfurther guidance, see §1.956–2(b)(1)(vii)through (d)(1).

* * * * *(e) Effective/applicability date. Para-

graph (b)(1)(vi) of this section applies totaxable years of controlled foreign cor-porations beginning on or after May 2,2006, and for tax years of United Statesshareholders with or within which suchtax years of the controlled foreign corpo-rations end. Taxpayers may elect to ap-ply the rule of this section to taxable yearsof controlled foreign corporations begin-ning after December 31, 2004, and for taxyears of United States shareholders withor within which such tax years of foreigncorporations end. If an election is madeto apply §1.954–2T(c) to taxable years ofa controlled foreign corporation beginningafter December 31, 2004, then the electionmust also be made for paragraph (b)(1)(vi)of this section.

(2) Expiration date. The applicabilityof paragraph (b)(1)(vi) of this section willexpire on July 1, 2011.





(Filed by the Office of the Federal Register on July 2, 2008,8:45 a.m., and published in the issue of the Federal Registerfor July 3, 2008, 73 F.R. 38113)

Section 2032A.—Valuationof Certain Farm, etc.,Real Property26 CFR 20.2032A–4: Method of valuing farm realproperty.

Special use value; farms; interestrates. The 2008 interest rates to be usedin computing the special use value of farmreal property for which an election is madeunder section 2032A of the Code are listedfor estates of decedents.

Rev. Rul. 2008–44

This revenue ruling contains a list of theaverage annual effective interest rates onnew loans under the Farm Credit System.This revenue ruling also contains a list ofthe states within each Farm Credit SystemBank Chartered Territory.

Under § 2032A(e)(7)(A)(ii) of the In-ternal Revenue Code, rates on new FarmCredit System Bank loans are used in com-puting the special use value of real prop-erty used as a farm for which an electionis made under § 2032A. The rates in thisrevenue ruling may be used by estates thatvalue farmland under § 2032A as of a datein 2008.

Average annual effective interestrates, calculated in accordance with§ 2032A(e)(7)(A) and § 20.2032A–4(e)of the Estate Tax Regulations, to be usedunder § 2032A(e)(7)(A)(ii), are set forth inthe accompanying Table of Interest Rates(Table 1). The states within each FarmCredit System Bank Chartered Territoryare set forth in the accompanying Tableof Farm Credit System Bank CharteredTerritories (Table 2).

Rev. Rul. 81–170, 1981–1 C.B. 454,contains an illustrative computation of anaverage annual effective interest rate. Therates applicable for valuation in 2007 arein Rev. Rul. 2007–45, 2007–28 I.R.B.49. For rate information for years priorto 2007, see Rev. Rul. 2006–32, 2006–1C.B. 1170, and other revenue rulings thatare referenced therein.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Lane Damazo of the Office of the As-sociate Chief Counsel (Passthroughs andSpecial Industries). For further informa-tion regarding this revenue ruling, contactLane Damazo at (202) 622–3090 (not atoll-free call).

2008–32 I.R.B. 292 August 11, 2008

REV. RUL. 2008–44 TABLE 1

TABLE OF INTEREST RATES(Year of Valuation 2008)

Farm Credit System Bank Servicing State inWhich Property is Located Rate

AgFirst, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.56

AgriBank, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.38

CoBank, ACB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11

Texas, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.47

U.S. AgBank, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09

REV. RUL. 2008–44 TABLE 2

TABLE OF FARM CREDIT SYSTEM BANK CHARTERED TERRITORIES

Farm Credit System Bank Location of Property

AgFirst, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware, District of Columbia, Florida, Georgia, Maryland,North Carolina, Pennsylvania, South Carolina, Virginia,West Virginia.

AgriBank, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arkansas, Illinois, Indiana, Iowa, Kentucky, Michigan,Minnesota, Missouri, Nebraska, North Dakota, Ohio,South Dakota, Tennessee, Wisconsin, Wyoming.

CoBank, ACB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alaska, Connecticut, Idaho, Maine, Massachusetts, Montana,New Hampshire, New Jersey, New York, Oregon,Rhode Island, Vermont, Washington.

Texas, FCB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alabama, Louisiana, Mississippi, Texas.

U.S. Agbank, FCB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arizona, California, Colorado, Hawaii, Kansas, New Mexico,Nevada, Oklahoma, Utah.

Section 6205.—SpecialRules Applicable to CertainEmployment Taxes26 CFR 31.6205–1: Adjustments of underpayments.

T.D. 9405


Employment Tax Adjustments


ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations relating to employmenttax adjustments and employment tax re-fund claims. The final regulations modifythe process for making interest-free ad-justments for both underpayments andoverpayments of Federal Insurance Con-tributions Act (FICA) and Railroad Retire-ment Tax Act (RRTA) taxes and Federalincome tax withholding (ITW) under sec-tions 6205(a) and 6413(a), respectively, ofthe Internal Revenue Code (Code). Theseregulations also modify the process forfiling claims for refund of overpaymentsof employment taxes under sections 6402and 6414.

This document contains final regula-tions relating to the return requirementsunder section 6011 to reflect the changes tothe adjustment and refund processes, andto reflect additional statutory and process

updates. This document also contains fi-nal regulations under section 6302 to clar-ify deposit obligations with respect to in-terest-free adjustments of underpaymentsand the effect of adjustments and refundson the deposit schedule of a Form 943 filer.

DATES: Effective Date: These final regu-lations are effective on January 1, 2009.

Applicability Date: With respect tothe regulations under Code sections 6205,6402, 6413, and 6414, these final regula-tions apply to any error ascertained on orafter January 1, 2009.

FOR FURTHER INFORMATIONCONTACT: Ligeia M. Donis, (202)622-0047 (not a toll-free number).

August 11, 2008 293 2008–32 I.R.B.



The collection of information con-tained in these final regulations has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507(d)) under controlnumber 1545–2097. The collection ofinformation in these proposed regula-tions is in §§31.6011(a)–1, 31.6011(a)–4,31.6011(a)–5, 31.6205–1, 31.6402(a)–2,31.6413(a)–1, 31.6413(a)–2, and31.6414–1. This information is requiredby the IRS to verify compliance withreturn requirements under section 6011,employment tax adjustments under sec-tions 6205 and 6413, and claims for refundof overpayments of employment taxesunder sections 6402 and 6414. This infor-mation will be used to determine whetherthe amount of tax has been reported andcalculated correctly.

An agency may not conduct or sponsor,and a person is not required to respond to, acollection of information unless it displaysa valid control number assigned by the Of-fice of Management and Budget.


Background

These final regulations are issued inconnection with the IRS’s development ofnew forms to report adjustments to em-ployment taxes which will replace the ex-isting process of reporting adjustments ofemployment taxes on regularly filed em-ployment tax returns. These regulationsaffect taxpayers that file employment taxreturns, including Form 941, “Employer’sQUARTERLY Federal Tax Return,” Form943, “Employer’s Annual Federal Tax Re-turn for Agricultural Employees,” Form944, “Employer’s ANNUAL Federal TaxReturn,” Form 945, “Annual Return ofWithheld Federal Income Tax,” and FormCT–1, “Employer’s Annual Railroad Re-tirement Tax Return,” and any relatedSpanish-language returns or returns forU.S. possessions.

These final regulations are part of theIRS’s effort to reduce taxpayer burden bypermitting employers to make employ-ment tax adjustments on a separately filedform as soon as an error is ascertained.These regulations amend the EmploymentTax Regulations (26 CFR part 31) undersection 6011 relating to the requirement tofile a return, under sections 6205(a) and6413(a) relating to the process for makingadjustments of underpayments and over-payments, respectively, of employmenttaxes, under section 6302 relating to de-posit obligations, and under sections 6402and 6414 relating to the process of filinga claim for refund for an overpaymentof employment taxes. For purposes ofthese regulations, the term employmenttaxes means the Federal Insurance Con-tributions Act (FICA) tax (both the socialsecurity and Medicare portions) imposedon both the employer and the employee,the Railroad Retirement Tax Act (RRTA)tax imposed on both the employer andemployee, and Federal income tax with-holding (ITW). To the extent that othertypes of withholding are treated as ITWunder section 3402(a) (that is, gamblingwithholding, pension withholding, andbackup withholding as set forth in sections3402(q)(7), 3405(f), and 3406(h)(10), re-spectively), these other types of withhold-ing are included in the term employmenttaxes.

Interest-free Adjustments

Generally, the Code requires that inter-est be paid to the IRS on any underpaymentof tax and that interest be allowed andpaid to the taxpayer on any overpaymentof tax. See sections 6601(a) and 6611(a),respectively. An exception to the generalrule, however, applies uniquely to em-ployment taxes. Where an amount otherthan the correct amount of tax imposed bysections 3101 (employee FICA tax), 3111(employer FICA tax), 3201 (employeeRRTA tax), 3221 (employer RRTA tax),or 3402 (ITW) is reported to the IRS withrespect to any payment of wages or com-pensation, sections 6205(a) and 6413(a)permit employers to make interest-freeadjustments for underpayments and over-payments, respectively. Where the correctamount of tax has been reported but notpaid, no adjustment to the amount reported

is necessary; accordingly, the interest-freeadjustment rules do not apply.

Claims for Refund

For overpayments of employmenttaxes, section 6413(b) permits the filingof a claim for refund when an interest-freeadjustment cannot be made. Under theregulatory authority in section 6413(b),the IRS has permitted taxpayers to choosebetween filing a claim for refund pursuantto section 6402(a) and making an inter-est-free adjustment pursuant to section6413(a) to correct an overpayment of em-ployment taxes.

Under section 6402(a), the IRS, withinthe applicable period of limitations oncredit or refund, may credit the amount ofan overpayment, including any interest,against any tax liability of the person whomade the overpayment and shall, subjectto certain offsets, refund any balance tosuch person. A claim for refund undersection 6402(a) must be filed within theperiod of limitations on credit or refund.Section 6414 permits refunds of ITW onlyto the extent the amount of the ITW over-payment was not actually deducted andwithheld from an employee.

Since 1960, the regulations under sec-tions 6205 and 6413 have provided thatemployment tax adjustments are made byreporting the adjustment on an employer’scurrent period employment tax return. Be-cause the adjustment was reported on acurrent period return, the amount of the ad-justment was treated as part of the currentperiod’s liability. Such a process for mak-ing adjustments of employment taxes pre-sented a number of problems for both em-ployers and the IRS, in large part becauseit required employers to make adjustmentsfor past periods in connection with the fil-ing of their current period returns.

The IRS, as part of the Form 94XProject initiated by the Office of TaxpayerBurden Reduction and in response to therequest of employers and the payroll com-munity, is developing new forms to beused when making adjustments of employ-ment taxes. The new forms will reduce theemployer’s burden in making and trackingadjustments and increase the IRS’s abilityto ensure employment tax compliance.The IRS is simultaneously revising theprocess for claiming refunds. These finalregulations are issued in connection with

2008–32 I.R.B. 294 August 11, 2008

the IRS’s development of such new formswhich will be used by employers to makeoverpayment and underpayment adjust-ments to employment taxes or to claimrefunds of overpaid employment taxes.

A notice of proposed rulemaking(REG–111583–07, 2008–4 I.R.B. 319 [72FR 74233]) was published in the Fed-eral Register on December 31, 2007.A correction to the notice of proposedrulemaking was published in the FederalRegister on January 28, 2008 (73 FR4765). No requests for a public hearingwere received, therefore, no public hear-ing was held. The IRS received writtenand electronic comments responding to thenotice of proposed rulemaking, but noneof them requested substantive changes tothe proposed regulations. The proposedregulations are adopted as amended bythis Treasury decision. The revisions arediscussed.

Summary of Comments andExplanation of Provisions

Several positive comments were re-ceived on the proposed regulations. Nosubstantive changes to the regulationswere requested. Several commentatorssuggested changes for the draft form,Form 941X, “Adjusted Employer’s QUAR-TERLY Federal Tax Return or Claim forRefund,” which was released to the pub-lic on the IRS website (www.irs.gov) onMarch 4, 2008, as a vision draft for com-ment. The Form 941X is the first of aseries of forms being developed by the IRSin conjunction with these regulations. Theseries of forms will correspond to Form941, Form 943, Form 944, Form 945, andForm CT–1 and will be used by employerswhen making adjustments of employmenttaxes or claiming refunds of employmenttaxes. The comments on the draft Form941X will be taken into account in prepar-ing the final version of the form.

As the IRS has continued to prepare forthe implementation of the new adjustmentand refund claim processes for employ-ment taxes, some necessary changes to theproposed regulations were identified andincorporated into these final regulations.These changes to the proposed regulationsare discussed below.

Overview of Final Regulations UnderSections 6205 and 6413

The final regulations under sections6205 and 6413 set forth the proceduresfor making interest-free adjustments forunderpayments and overpayments of em-ployment taxes, respectively. Like theproposed regulations, the final regulationsunder sections 6205 and 6413 have beendrafted to set up parallel structures accord-ing to the type of tax being adjusted andwhen the error is ascertained. Accord-ingly, the final regulations under sections6205 and 6413 are divided into provisionsdealing with FICA and RRTA taxes andprovisions dealing with ITW. The pro-visions are further broken down basedon when the error is ascertained, that is,whether the error is ascertained before orafter a return has been filed.

Interest-free Adjustments

The final regulations under section6205 set forth the procedures for makinginterest-free adjustments for underpay-ments of employment taxes. They providethat if a return is filed and less than thecorrect amount of employee or employerportions of FICA or RRTA tax is reported,and the employer discovers such errorafter filing the return, the employer shalladjust the resulting underpayment of taxby reporting the additional amount dueon an adjusted return for the return periodin which the wages or compensation waspaid. The adjustment must be made by thedue date of the return for the return pe-riod in which the error is ascertained andthe amount of the underpayment must bepaid by the time the adjustment is made,or interest will begin to accrue from thatdate. An underpayment adjustment mayonly be made within the period of limita-tions for assessment. For underpaymentsof ITW where the incorrect amount waswithheld, subject to limited exceptions, anadjustment may be made only for errorsascertained during the calendar year inwhich the wages were paid.

Under the final regulations interest-freeadjustments for underpayments of FICAtax, RRTA tax, and ITW are available un-der certain circumstances where the un-derpayment arises because the employerfailed to file an original return or failed toreport and pay the correct type of tax. The

final regulations revise the processes setforth in the proposed regulations to accom-modate the various possibilities of errors inthese situations and to ensure the IRS canprocess the adjustments.

Specifically, under the final regulations,if an employer filed a return reportingFICA tax when a return reporting RRTAtax should have been filed, the employercan make an interest-free adjustment byfiling an original return reporting the cor-rect amount of RRTA tax and attaching anadjusted return to correct the erroneouslyreported FICA tax. Conversely, if an em-ployer filed a return reporting RRTA taxwhen a return reporting FICA tax shouldhave been filed, the employer can make aninterest-free adjustment by filing an orig-inal return reporting the correct amountof FICA tax and attaching an adjustedreturn to correct the erroneously reportedRRTA tax. In the latter situation, if theemployer already filed a return that is usedto report FICA tax in order to report ITW,the employer can make an interest-freeadjustment by filing an adjusted returnto report the correct amount of FICA taxwith an adjusted return to correct the er-roneously reported RRTA tax. The finalregulations also add a cross-reference tothe regulations under section 3503 whichprovide that if an amount is paid under thewrong chapter, that is, an employer erro-neously pays FICA tax under chapter 21instead of RRTA tax under chapter 22, orRRTA tax instead of FICA tax, the amounterroneously paid shall be credited againstthe tax for which the employer is liableand any balance refunded.

In addition, the final regulations pro-vide the process by which an employer canmake an interest-free adjustment if the em-ployer failed to file a return for a returnperiod solely because the employer failedto treat any individuals as employees. Theemployer can make an interest-free adjust-ment to report the tax due with respect tothe reclassified workers by filing an origi-nal return and an attached adjusted returnreporting the correct amount of tax, in ac-cordance with the instructions for the ad-justed return.

Generally, such reporting will consti-tute an interest-free adjustment in each ofthese situations if the original return and/oradjusted return(s) are filed by the due dateof the correct return for the return period inwhich the error is ascertained. The amount

August 11, 2008 295 2008–32 I.R.B.

reported must be paid by the time the orig-inal return and/or adjusted return(s) arefiled or interest will accrue from that date.

The final regulations under section6413(a) set forth the procedures for mak-ing interest-free adjustments for overpay-ments of employment taxes. They providethat, if an employer ascertains an overpay-ment error within the applicable periodof limitations on credit or refund, the em-ployer is required to repay or reimburseits employees the amount of overcollectedemployee FICA tax or employee RRTAtax prior to the expiration of the applicableperiod of limitations on credit or refund.However, the requirement to repay orreimburse does not apply to the extentthat taxes were not withheld from theemployee or if, after reasonable efforts,the employer cannot locate the employee;in such case, the employer may make anadjustment for only the employer shareof FICA or RRTA tax. An interest-freeadjustment for an overpayment may notbe made once a claim for refund has beenfiled.

The final regulations under section6413(a) further provide that once an em-ployer repays or reimburses an employeeto the extent required, the employer mayreport both the employee and employerportions of FICA or RRTA tax as anoverpayment on an adjusted return. Theemployer must certify on the adjusted re-turn that it has repaid or reimbursed itsemployees to the extent required.

Under the final regulations, the report-ing of the overpayment constitutes an in-terest-free adjustment if the overpaymentis reported on an adjusted return filed be-fore the 90th day prior to expiration ofthe period of limitations on credit or re-fund. Similar rules apply for making in-terest-free adjustments for overpaymentsof ITW, except that an interest-free adjust-ment may only be made if the employerascertains the error and repays or reim-burses its employees within the same cal-endar year that the wages were paid and re-ports the adjustment on an adjusted return.

Unlike the proposed regulations, the fi-nal regulations do not require the employerto repay or reimburse the employee or toadjust the overpayment by the due date ofthe return for the return period followingthe return period in which the error is as-certained. Upon further consideration, theIRS determined there was insufficient rea-

son to impose a timing restriction otherthan the period of limitations on credit orrefund of taxes.

For both underpayments and overpay-ments, interest-free adjustments are madeby reporting the error on a separately filedadjusted return. The new adjusted returnwill not be filed as an attachment to a cur-rent return and will not affect the liabilityreported on the current return. In addition,the regulations provide that the forms usedto accept an assessment of employmenttaxes after an examination (that is, Form2504, “Agreement to Assessment and Col-lection of Additional Tax and Acceptanceof Overassessment (Excise or EmploymentTax)”, and Form 2504–WC, “Agreement toAssessment and Collection of AdditionalTax and Acceptance of Overassessment inWorker Classification Cases (EmploymentTax)”) constitute adjusted returns for pur-poses of permitting the assessment to betreated as an interest-free adjustment.

The IRS intends to issue guidance toprovide examples of how the final regula-tions under sections 6205, 6402, 6413, and6414 apply in different factual scenarios.

Deposits, Payments, and Credits

The final regulations under section6302 provide that an employer makingan interest-free adjustment must pay theamount of the adjustment by the time itfiles an adjusted return; such timely pay-ment will satisfy the employer’s depositobligations with respect to the adjustment.Conversely, if the amount of the adjust-ment is not paid by the time the adjustedreturn is filed, a penalty under section6656 for failure to deposit may apply be-cause the deposit obligation for such taxesis not deemed to be satisfied and the em-ployer may not have otherwise satisfiedits deposit obligations for accumulatedemployment taxes.

In addition, the final regulations gov-erning agricultural employers (Form 943filers) provide that for purposes of deter-mining the amount of accumulated taxesin the employer’s lookback period (whichdetermines the employer’s deposit sched-ule), adjustments to tax liability made pur-suant to the filing of adjusted returns orclaims for refund will not be taken intoaccount. This rule is consistent with therule already in effect with respect to Form941 and Form 944 filers that adjustments

to prior return periods are not taken into ac-count in determining the employment taxliability for such prior return period. See§31.6302–1T(b)(4). The final regulationsalso added language to clarify that newagricultural employers are treated as hav-ing employment tax liabilities of zero forany lookback period before the date theemployer started or acquired its business,which is consistent with the current rulegoverning the lookback period for Form941 and Form 944 filers.

The adjusted overpayment amount willbe applied as a credit toward payment ofthe employer’s liability for the calendarquarter (or calendar year for annual returnsbeing adjusted) in which the adjusted re-turn is filed, unless the IRS notifies the em-ployer that the employer is not entitled tothe adjustment (that is, because there is nooverpayment or because the requirementsfor making an adjustment were not satis-fied) or that the credit will be applied to adifferent return period.

Refunds for Overpayments

In lieu of making an interest-free ad-justment for an overpayment, employersmay file a claim for refund pursuant tosection 6402 or 6414 for the amount ofthe overpayment. Furthermore, if an em-ployer cannot make an interest-free adjust-ment with respect to an overpayment be-cause the period of limitations for claim-ing a credit or refund for such overpay-ment will expire within 90 days or be-cause the IRS has otherwise notified theemployer that it is not entitled to the adjust-ment, the employer may recover the over-payment only by filing a claim for refund.

The final regulations under section6402(a) set out the procedures for filinga claim for refund of overpaid FICA andRRTA taxes. The regulations permit anemployer to file a claim for refund of anoverpayment of FICA or RRTA tax, butrequire the employer to certify as part ofthe claim process that the employer hasrepaid or reimbursed the employee’s shareof FICA or RRTA tax to the employeeor has secured the written consent of theemployee to allowance of the refund orcredit. However, the employer is not re-quired to repay or reimburse the employeeor obtain the written consent of the em-ployee to the extent that the overpaymentdoes not include taxes withheld from the

2008–32 I.R.B. 296 August 11, 2008

employee or, after reasonable efforts, theemployer cannot locate the employee orthe employee, once contacted, will notprovide the requested consent.

The final regulations under section6414 set out the procedures for filing aclaim for refund of overpaid ITW whichare similar to the procedures for filinga claim for refund of overpaid FICA orRRTA tax, except that an employer maynot file a claim for refund of an overpay-ment of ITW for an amount the employerdeducted or withheld from an employee.

Tax Returns or Statements

The final regulations for reporting em-ployment taxes under section 6011 reflectthe changes to the adjustment and refundprocesses. The final regulations are up-dated to conform to current law due to theenactment of section 3510, added to theCode by section 2(b)(1) of the Social Secu-rity Domestic Employment Reform Act of1994 (Public Law 103–387), which man-dates annual returns for domestic serviceemployment taxes, and to reflect the cur-rent use of Schedule H (Form 1040) asthe generally prescribed form for report-ing wages for domestic service in a privatehome paid in calendar years beginning af-ter December 31, 1994.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It has also been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations.

In accordance with the RegulatoryFlexibility Act (5 U.S.C. chapter 6), thisregulation will not have a significant eco-nomic impact on a substantial number ofsmall entities.

The final regulations under sections6011, 6205, 6402, 6413, and 6414 affectall taxpayers that file employment tax re-turns. Therefore, the IRS has determinedthat these regulations will have an impacton a substantial number of small entities.

The IRS has determined, however, thatthe impact on entities affected by the fi-nal regulations will not be significant. Theregulations require taxpayers to provide

certain information if they file adjusted re-turns to make interest-free adjustments totheir employment taxes for either under-payments or overpayments or file claimsfor refund for an overpayment of employ-ment tax. The taxpayer must provide anexplanation setting forth the basis for thecorrection or the claim in detail, designat-ing the return period in which the errorwas ascertained and the return period be-ing corrected, and setting forth such otherinformation as may be required by the in-structions to the form. In addition, for ad-justments of overpayments and for claimsfor refund, taxpayers must also obtain andretain the written receipt of the employeeshowing the date and amount of the re-payment, evidence of reimbursement, orthe written consent of the employee. Forpurposes of overpayment adjustments andclaims for refund of employee FICA andRRTA tax overcollected in an earlier year,the employer must also obtain and retainthe employee’s written statement that theemployee has not claimed refund or creditof the amount of the overcollection, orif so, such claim has been rejected, andthat the employee will not claim refund orcredit of the amount.

This collection of information is notnew to the final regulations and has beenin existence since the 1960’s when the pre-vious regulations were promulgated. Inaddition, the amendments to the regula-tions are being made in conjunction witha project of the Office of Taxpayer Bur-den Reduction which seeks to revise theprocess for making corrections to employ-ment tax returns to make it less burden-some to taxpayers. The filing of a claim forrefund and the making of an interest-freeadjustment pursuant to the final regula-tions are voluntary on the part of taxpay-ers.

Based on these facts, the IRS herebycertifies that the collection of informationcontained in these regulations will nothave a significant economic impact on asubstantial number of small entities. Ac-cordingly, a regulatory flexibility analysisis not required.

Pursuant to section 7805(f) of the Code,the proposed regulations preceding theseregulations were submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.


The principal author of these regula-tions is Ligeia M. Donis of the Office of theDivision Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-ties). However, other personnel from theIRS and Treasury Department participatedin their development.

* * * * *

Adoption of Amendments to theRegulations


PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT THE SOURCE

Paragraph 1. The authority citation forpart 31 continues to read, in part, as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 31.6011(a)–1 is

amended by revising the text of paragraphs(a)(2), (a)(3), and the section heading andtext of paragraphs (a)(4) and (c) to read asfollows:

§31.6011(a)–1 Returns under FederalInsurance Contributions Act.

(a) * * *(2) Employers of agricultural workers.

Every employer who pays wages for agri-cultural labor with respect to taxes im-posed by the Federal Insurance Contribu-tions Act must make a return for the firstcalendar year in which the employer payssuch wages and for each subsequent cal-endar year (whether or not wages are paid)until the employer has filed a final returnin accordance with §31.6011(a)–6. Form943, “Employer’s Annual Federal Tax Re-turn for Agricultural Employees,” is theform prescribed for making the annual re-turn required by this section, except that,if the employer’s principal place of busi-ness is in Puerto Rico, or if the employerhas employees who are subject to incometax withholding for Puerto Rico, the returnmust be made on Form 943–PR, “Planillapara la Declaración ANUAL de la Con-tribución Federal del Patrono de Emplea-dos Agrícolas.” However, Form 943 is theform prescribed for making such return

August 11, 2008 297 2008–32 I.R.B.

in the case of every employer of agricul-tural workers who is required pursuant to§31.6011(a)–4 to make a return of incometax withheld from wages.

(3) Employers of domestic workers.Schedule H (Form 1040), “Household Em-ployment Taxes,” is the form prescribed foruse by every employer in making a returnas required under paragraph (a)(1) of thissection in respect of wages, as defined inthe Federal Insurance Contributions Act,paid by the employer in any calendar yearfor domestic service as defined in section3510. Schedule H (Form 1040) is gener-ally filed as an attachment to an incometax return; however, if the employer doesnot otherwise have an obligation to filean income tax return, Schedule H (Form1040) may be filed as a separate return. If,however, the employer is required underparagraph (a)(1) of this section to make areturn on Form 941, “Employer’s QUAR-TERLY Federal Tax Return,” or underparagraph (a)(2) of this section to makea return on Form 943, “Employer’s An-nual Federal Tax Return for AgriculturalEmployees,” or under paragraph (a)(5)of this section to make a return on Form944, “Employer’s ANNUAL Federal TaxReturn,” the employer may choose insteadto report wages with respect to domesticworkers on such Form 941, Form 943, orForm 944. If such wages are included onForm 941, Form 943, or Form 944, theemployer must also include Federal unem-ployment tax for the employee(s) on Form940, “Employer’s Annual Federal Unem-ployment (FUTA) Tax Return,” under theprovisions of §31.6011(a)–3.

(4) Employers in Puerto Rico, the U.S.Virgin Islands, Guam, American Samoa,or the Commonwealth of the NorthernMariana Islands. Form 941–PR, “Planillapara la Declaración Federal TRIMES-TRAL del Patrono,” (or Form 944–PR,“Planilla para la Declaración FederalANUAL del Patrono,” if the IRS noti-fied the employer that the Form 944–PRmust be filed in lieu of Form 941–PR)is the form prescribed for use in mak-ing the return required under paragraph(a)(1) (or (a)(5)) of this section in thecase of every employer whose princi-pal place of business is in Puerto Rico,or if the employer has employees whoare subject to income tax withholdingfor Puerto Rico. Form 941–SS, “Em-ployer’s QUARTERLY Federal Tax Return

(American Samoa, Guam, the Common-wealth of the Northern Mariana Islands,and the U.S. Virgin Islands),” (or Form944–SS, “Employer’s ANNUAL FederalTax Return (American Samoa, Guam, theCommonwealth of the Northern MarianaIslands, and the U.S. Virgin Islands),”if the IRS notified the employer thatForm 944–SS must be filed in lieu ofForm 941–SS) is the form prescribed foruse in making the return required underparagraph (a)(1) (or (a)(5)) of this sectionin the case of every employer whoseprincipal place of business is in the U.S.Virgin Islands, Guam, American Samoa,or the Commonwealth of the NorthernMariana Islands, or if the employer hasemployees who are subject to income taxwithholding for these U.S. possessions.However, Form 941 (or Form 944 if theIRS notified the employer that Form 944must be filed in lieu of Form 941) is theform prescribed for making such returnin the case of every such employer whois required pursuant to §31.6011(a)–4 tomake a return of income tax withheld fromwages.

* * * * *(c) Adjustments and refunds. For rules

applicable to adjustments and refundsof employment taxes, see sections 6205,6402, 6413, and 6414, and the applicableregulations.

* * * * *Par. 3. Section 31.6011(a)–4 is

amended by revising paragraph (a)(2) toread as follows:

§31.6011(a)–4 Returns of income taxwithheld.

(a) * * *(2) Wages paid for domestic service.

Schedule H (Form 1040), “Household Em-ployment Taxes,” is the form prescribedfor making the return required under para-graph (a)(1) of this section with respect toincome tax withheld, pursuant to an agree-ment under section 3402(p), from wagespaid for domestic service as defined in sec-tion 3510. Schedule H (Form 1040) is gen-erally filed as an attachment to an incometax return; however, if the employer doesnot otherwise have an obligation to filean income tax return, Schedule H (Form1040) may be filed as a separate return.The preceding sentence shall not apply in

the case of an employer who has cho-sen under §31.6011(a)–1(a)(3) to use Form941, “Employer’s QUARTERLY FederalTax Return,” Form 943, “Employer’s An-nual Tax Return for Agricultural Employ-ees,” or Form 944, “Employer’s ANNUALFederal Tax Return,” as the return withrespect to such payments for purposes ofthe Federal Insurance Contributions Act.For the requirements relating for Sched-ule H (Form 1040) with respect to qual-ified State individual income taxes, see§301.6361–1(d)(3)(iv).

* * * * *Par. 4. Section 31.6011(a)–5 is

amended by revising paragraph (a) to readas follows:

§31.6011(a)–5 Monthly returns.

(a) In general—(1) Requirement. Theprovisions of this section are applicablein respect of the taxes reportable on re-turns required pursuant to §31.6011(a)–1or §31.6011(a)–4. An employer (or otherperson) who is required by §31.6011(a)–1or §31.6011(a)–4 to make quarterly or an-nual returns on any such form shall, inlieu of making such quarterly or annual re-turns, make returns of such taxes in ac-cordance with the provisions of this sec-tion if the employer is so notified in writ-ing by the IRS. Every employer (or otherperson) notified by the IRS shall make areturn for the calendar month in which thenotice is received, for each of the prior cal-endar months in the return period, and foreach calendar month afterwards (whetheror not wages are paid in any such month)until the employer has filed a final return oris required to make quarterly or annual re-turns pursuant to notification as providedin paragraph (a)(2) of this section. Eachreturn required under this section shall bemade on the form prescribed for makingthe return which would otherwise be re-quired of the employer (or other person)under the provisions of §31.6011(a)–1 or§31.6011(a)–4, except that, if some otherform is furnished by the IRS for use in lieuof such prescribed form, the return shall bemade on such other prescribed form. TheIRS may notify any employer (or other per-son)—

(i) Who by reason of notification asprovided in §301.7512–1, is requiredto comply with the provisions of such§301.7512–1; or

2008–32 I.R.B. 298 August 11, 2008

(ii) Who failed to—(A) Make any return required pursuant

to §31.6011(a)–1 or §31.6011(a)–4;(B) Pay tax reportable on any such

form; or(C) Deposit any such tax as required

under the provisions of §31.6302–1.(2) Termination of requirement. The

IRS, in its discretion, may notify the em-ployer in writing that the employer shalldiscontinue the filing of monthly returnsunder this section. If the employer is sonotified, the IRS will provide the em-ployer with instructions for filing thefinal monthly return. Afterwards, theemployer shall make quarterly or annualreturns in accordance with the provisionsof §31.6011(a)–1 or §31.6011(a)–4.

* * * * *Par. 5. Section 31.6205–1 is amended

to read as follows:

§31.6205–1 Adjustments ofunderpayments.

(a) In general. (1) An employer whohas underreported and underpaid em-ployee Federal Insurance ContributionsAct (FICA) tax under section 3101 oremployer FICA tax under section 3111,employee Railroad Retirement Tax Act(RRTA) tax under section 3201 or em-ployer RRTA tax under section 3221, orincome tax required under section 3402 tobe withheld, with respect to any paymentof wages or compensation, shall correctsuch error as provided in this section. Suchcorrection may constitute an interest-freeadjustment as provided in paragraph (b) or(c) of this section.

(2) No correction will be eligible for in-terest-free adjustment treatment if the fail-ure to report relates to an issue that wasraised in an examination of a prior returnperiod or if the employer knowingly under-reported its employment tax liability.

(3) Every correction under this sectionof an underpayment of tax with respect toa payment of wages or compensation shallbe made on the form prescribed by the IRSthat corresponds to the return being cor-rected. The form, filed in accordance withthis section and the instructions, will con-stitute an adjusted return for the return pe-riod being corrected.

(4) Every adjusted return on which anunderpayment is corrected pursuant to thissection shall designate the return period in

which the error was ascertained and thereturn period being corrected, explain indetail the grounds and facts relied upon tosupport the correction, and set forth suchother information as may be required bythe regulations in this section and by theinstructions relating to the adjusted return.

(5) For purposes of this section, an erroris ascertained when the employer has suf-ficient knowledge of the error to be able tocorrect it.

(6) No correction will be eligible for in-terest-free adjustment treatment pursuantto this section after the earlier of the fol-lowing:

(i) Receipt from the IRS of notice anddemand for payment thereof based upon anassessment.

(ii) Receipt from the IRS of a Noticeof Determination of Worker Classification(Notice of Determination) in connectionwith such underpayment. Prior to receiptof a Notice of Determination, the taxpayermay, in lieu of making a payment, make acash bond deposit that would have the ef-fect of stopping the accrual of any interest,but would not deprive the taxpayer of itsright to receive a Notice of Determinationand to petition the Tax Court under section7436.

(7) Subject to the exceptions specifiedin paragraphs (a)(2) and (a)(6) of thissection, Form 2504, “Agreement to Assess-ment and Collection of Additional Tax andAcceptance of Overassessment (Exciseor Employment Tax),” Form 2504–WC,“Agreement to Assessment and Collec-tion of Additional Tax and Acceptance ofOverassessment in Worker ClassificationCases (Employment Tax),” and such otherforms as may be prescribed by the IRS,constitute adjusted returns for purposes ofthis section.

(8) For provisions related to furnish-ing employee statements and correctedemployee statements reporting wages andwithheld taxes, see sections 6041 and6051 and §§1.6041–2 and 31.6051–1. Forprovisions relating to filing informationreturns and corrected information returnsreporting wages and withheld taxes, seesections 6041 and 6051 and §§1.6041–2and 31.6051–2.

(9) For the period of limitations uponassessment and collection of taxes, see§301.6501(a)–1.

(b) Federal Insurance ContributionsAct and Railroad Retirement Tax Act—(1)

Undercollection ascertained before returnis filed. If an employer collects less thanthe correct amount of employee FICA orRRTA tax from an employee with respectto a payment of wages or compensation,and if the employer ascertains the errorbefore filing the return on which the em-ployee tax with respect to such wages orcompensation is required to be reported,the employer shall nevertheless report onthe return and pay to the IRS the correctamount of employee tax. If the employerdoes not report the correct amount of taxin these circumstances, the employer maynot later correct the error through an inter-est-free adjustment.

(2) Error ascertained after return isfiled. (i) If an employer files a return onwhich FICA tax or RRTA tax is required tobe reported, and reports on the return lessthan the correct amount of employee oremployer FICA or RRTA tax with respectto a payment of wages or compensation,and if the employer ascertains the errorafter filing the return, the employer shallcorrect the error through an interest-freeadjustment as provided in this section.The employer shall adjust the underpay-ment of tax by reporting the additionalamount due on an adjusted return for thereturn period in which the wages or com-pensation was paid, accompanied by adetailed explanation of the amount beingreported on the adjusted return and anyother information as may be required bythis section and by the instructions relatingto the adjusted return. The reporting of theunderpayment on an adjusted return con-stitutes an adjustment within the meaningof this section only if the adjusted returnis filed within the period of limitations forassessment for the return period being cor-rected, and by the due date for filing thereturn for the return period in which theerror is ascertained. For purposes of thepreceding sentence, the due date for filingthe adjusted return is determined by refer-ence to the return being corrected, withoutregard to the employer’s current filingrequirements. For example, an employerwith a current annual filing requirementwho is correcting an error on a previouslyfiled quarterly return must file the ad-justed return by the due date for filing aquarterly return for the quarter in whichthe error is ascertained. The amount ofthe underpayment adjusted in accordancewith this section must be paid to the IRS

August 11, 2008 299 2008–32 I.R.B.

by the time the adjusted return is filed. Ifan adjustment is reported pursuant to thissection, but the amount of the adjustmentis not paid when due, interest accrues fromthat date (see section 6601).

(ii) If an employer files a return report-ing FICA tax for a return period althoughthe employer was required to file a re-turn reporting RRTA tax, and if the em-ployer ascertains the error after filing thereturn, the employer shall correct the errorthrough an interest-free adjustment as pro-vided in this section. The employer shalladjust the underpayment of RRTA tax byreporting the correct amount of RRTA taxon an original return for reporting RRTAtax for the return period for which the in-correct return was filed, accompanied byan adjusted return corresponding to theincorrect return that was filed to correctthe erroneously reported and paid FICAtax. The adjusted return must include adetailed explanation of the amounts be-ing reported on the original return and theadjusted return and any other informationas may be required by the regulations inthis section and by the instructions relat-ing to the adjusted return. The reportingof the correct amounts for the period con-stitutes an adjustment within the meaningof this section only if the returns are filedby the due date of the return for report-ing the RRTA tax for the return period inwhich the error is ascertained. Pursuantto §31.3503–1, the amount of erroneouslypaid FICA tax will be credited against theunderpaid RRTA tax. Any remaining un-derpayment of RRTA tax adjusted in ac-cordance with this section must be paid tothe IRS by the time the returns are filed inaccordance with this paragraph. If an ad-justment is reported pursuant to this sec-tion, but the amount of the remaining un-derpayment is not paid when due, interestaccrues from that date (see section 6601).

(iii) If an employer files a return report-ing RRTA tax for a return period althoughthe employer was required to file a returnreporting FICA tax, and if the employer as-certains the error after filing the return, theemployer shall correct the error through aninterest-free adjustment as provided in thissection. The employer shall adjust the un-derpayment of FICA tax by reporting thecorrect amount of FICA tax on an origi-nal return for reporting FICA tax for thereturn period for which the incorrect re-turn was filed (or an adjusted return for

reporting the FICA tax if an original re-turn was already filed for such return pe-riod to report the income tax required tobe withheld under section 3402), accom-panied by an adjusted return correspond-ing to the incorrect return that was filed tocorrect the erroneously reported and paidRRTA tax. The adjusted return(s) must in-clude a detailed explanation of the amountbeing reported on the original return and/orthe adjusted return(s) and any other infor-mation as may be required by the regu-lations in this section and by the instruc-tions relating to the form. The reportingof the correct amounts for the period con-stitutes an adjustment within the meaningof this section only if the returns are filedby the due date of the return for report-ing the FICA tax for the return period inwhich the error is ascertained. Pursuantto §31.3503–1, the amount of erroneouslypaid RRTA tax will be credited against theunderpaid FICA tax. Any remaining un-derpayment of FICA tax adjusted in accor-dance with this section must be paid to theIRS by the time the returns are filed in ac-cordance with this paragraph (b)(2)(iii). Ifan adjustment is reported pursuant to thissection, but the amount of the remainingunderpayment is not paid when due, in-terest accrues from that date (see section6601).

(3) Return not filed because of failureto treat individual as employee. If an em-ployer fails to file a return for a return pe-riod solely because the employer failed totreat any individuals properly as employ-ees for the return period (and, therefore,failed to withhold and pay any employeror employee FICA or RRTA tax with re-spect to wages or compensation paid tothe employees) and if the employer ascer-tains the error after the due date of the re-turn, the employer shall correct the errorthrough an interest-free adjustment as pro-vided in this section. The employer shallreport the amount due by filing an origi-nal return required to be filed to report thetax for the return period for which the em-ployer failed to file a return, accompaniedby an adjusted return as provided in the in-structions to the adjusted return. The ad-justed return must include a detailed expla-nation of the amount being reported on theoriginal return and adjusted return and anyother information as may be required bythis section and by the instructions relatingto the adjusted return. The reporting of the

correct amount of tax for the return periodconstitutes an adjustment within the mean-ing of this section only if the original andadjusted returns are filed by the due dateof the return for reporting such tax for thereturn period in which the error is ascer-tained. For purposes of the preceding sen-tence, the due date for filing the adjustedreturn is determined by reference to thereturn being corrected, without regard tothe employer’s current filing requirements.For example, an employer with a currentannual filing requirement who is correct-ing an error on a previously filed quarterlyreturn must file the adjusted return by thedue date for filing a quarterly return for thequarter in which the error is ascertained.The amount of the underpayment adjustedin accordance with this section must bepaid to the IRS by the time the returns arefiled in accordance with this paragraph. Ifan adjustment is reported pursuant to thissection, but the amount of the adjustmentis not paid when due, interest accrues fromthat date (see section 6601).

(c) Income tax required to be withheldfrom wages—(1) Undercollection ascer-tained before return is filed. If an em-ployer collects less than the correct amountof income tax required to be withheld fromwages under section 3402, and if the em-ployer ascertains the error before filing thereturn on which the withheld tax is re-quired to be reported, the employer shallnevertheless report on the return and pay tothe IRS the correct amount of tax requiredto be withheld. If the employer does notreport the correct amount of tax in thesecircumstances, the employer may not cor-rect the error through an interest-free ad-justment.

(2) Error ascertained after return isfiled. If an employer files a return onwhich income tax required to be withheldfrom wages is required to be reported andreports on the return less than the cor-rect amount of income tax required to bewithheld, and if the employer ascertainsthe error after filing the return, the em-ployer shall correct the error through aninterest-free adjustment as provided inthis section. The employer shall adjust theunderpayment of tax by reporting the ad-ditional amount due on an adjusted returnfor the return period in which the wageswere paid, accompanied by a detailed ex-planation of the amount being reported onthe adjusted return and any other informa-

2008–32 I.R.B. 300 August 11, 2008

tion as may be required by this section andby the instructions relating to the adjustedreturn. The reporting of the underpaymenton an adjusted return constitutes an adjust-ment within the meaning of this sectiononly if the adjusted return is filed by thedue date for filing the return for the returnperiod in which the error is ascertained.For purposes of the preceding sentence,the due date for filing the adjusted returnis determined by reference to the returnbeing corrected, without regard to the em-ployer’s current filing requirements. Forexample, an employer with a current an-nual filing requirement who is correctingan error on a previously filed quarterlyreturn must file the adjusted return by thedue date for filing a quarterly return for thequarter in which the error is ascertained.However, an adjustment may only be re-ported pursuant to this section if the erroris ascertained within the same calendaryear that the wages to the employee werepaid, unless the underpayment is attrib-utable to an administrative error (that is,an error involving the inaccurate reportingof the amount actually withheld), section3509 applies to determine the amount ofthe underpayment, or the adjustment is re-ported on a Form 2504 or Form 2504–WC.The amount of the underpayment adjustedin accordance with this section must bepaid to the IRS by the time the adjustedreturn is filed. If an adjustment is reportedpursuant to this section, but the amountof the adjustment is not paid when due,interest accrues from that date (see section6601).

(3) Return not filed because of failureto treat individual as employee. If an em-ployer fails to file a return for a return pe-riod solely because the employer failed totreat any individuals properly as employ-ees for the return period (and, therefore,failed to withhold and pay any income taxrequired to be withheld from wages), theemployer shall correct the error throughan interest-free adjustment as provided inthis section. The employer shall report theamount due by filing an original return forthe return period for which the employerfailed to file a return, accompanied by anadjusted return as provided in the instruc-tions to the adjusted return. The adjustedreturn must include a detailed explanationof the amount being reported on the origi-nal and adjusted returns and any other in-formation as may be required by this sec-

tion and by the instructions relating to theadjusted return. The reporting of the cor-rect amount of tax for the return periodconstitutes an adjustment within the mean-ing of this section only if the original andadjusted returns are filed by the due dateof the return for reporting such tax for thereturn period in which the error is ascer-tained. For purposes of the preceding sen-tence, the due date for filing the adjustedreturn is determined by reference to thereturn being corrected, without regard tothe employer’s current filing requirements.For example, an employer with a currentannual filing requirement who is correct-ing an error on a previously filed quarterlyreturn must file the adjusted return by thedue date for filing a quarterly return for thequarter in which the error is ascertained.However, an adjustment may only be re-ported pursuant to this section if the er-ror is ascertained within the same calen-dar year that the wages to the employeewere paid, or if section 3509 applies to de-termine the amount of the underpayment,or if the adjustment is reported on a Form2504 or Form 2504–WC. The amount ofthe underpayment adjusted in accordancewith this section must be paid to the IRSby the time the returns are filed in accor-dance with this paragraph. If an adjust-ment is reported pursuant to this section,but the amount of the adjustment is notpaid when due, interest accrues from thatdate (see section 6601).

(d) Deductions from employee—(1)Federal Insurance Contributions Tax Actand Railroad Retirement Tax Act. If anemployer collects less than the correctamount of employee FICA or RRTAtax from an employee with respect to apayment of wages or compensation, theemployer must collect the amount of theundercollection by deducting the amountfrom remuneration of the employee, ifany, paid after the employer ascertains theerror. Such deductions may be made eventhough the remuneration, for any reason,does not constitute wages or compensa-tion. The correct amount of employee taxmust be reported and paid, as provided inparagraph (b) of this section, whether ornot the undercollection is corrected by adeduction made as prescribed in this para-graph (d)(1), and even if the deduction ismade after the return on which the em-ployee tax must be reported is due. If sucha deduction is not made, the obligation

of the employee to the employer with re-spect to the undercollection is a matter forsettlement between the employee and theemployer. If an employer makes an erro-neous collection of employee tax from twoor more of its employees, a separate set-tlement must be made with respect to eachemployee. An overcollection of employeetax from one employee may not be usedto offset an undercollection of such taxfrom another employee. For provisionsrelating to the employer’s liability for thetax, whether or not it collects the tax fromthe employee, see §31.3102–1(d). Thisparagraph (d)(1) does not apply if section3509 applies to determine the employer’sliability.

(2) Income tax required to be withheldfrom wages. If an employer collects lessthan the correct amount of income tax re-quired to be withheld from wages duringa calendar year, the employer must col-lect the amount of the undercollection onor before the last day of the year by de-ducting the amount from remuneration ofthe employee, if any, paid after the em-ployer ascertains the error. Such deduc-tions may be made even though the remu-neration, for any reason, does not consti-tute wages. The correct amount of incometax must be reported and paid, as providedin paragraph (c) of this section, whether ornot the undercollection is corrected by adeduction made as prescribed in this para-graph (d)(2), and even if the deduction ismade after the return on which the tax mustbe reported is due. If such a deduction isnot made, the obligation of the employee tothe employer with respect to the undercol-lection is a matter for settlement betweenthe employee and the employer within thecalendar year. If an employer makes an er-roneous collection of income tax from twoor more of its employees, a separate settle-ment must be made with respect to eachemployee. An overcollection of incometax from one employee may not be used tooffset an undercollection of such tax fromanother employee. For provisions relat-ing to the employer’s liability for the tax,whether or not it collects the tax from theemployee, see §31.3403–1. For provisionsrelating to the employer’s liability for anunderpayment of tax unless the employercan show that the income tax against whichthe tax under section 3402 may be creditedhas been paid, see §31.3402(d)–1. Thisparagraph (d)(2) does not apply if section

August 11, 2008 301 2008–32 I.R.B.

3509 applies to determine the employer’sliability.

Par. 6. Section 31.6302–0 is amendedby adding new entries for §31.6302–1paragraphs (c)(7) and (g)(4)(i) and (ii) toread as follows:

§31.6302–0 Table of contents.

* * * * *

§31.6302–1 Federal tax deposit rules forwithheld income taxes and taxes underthe Federal Insurance Contributions Act(FICA) attributable to payments madeafter December 31, 1992.

* * * * *(c) * * *(7) Exception to the monthly and semi-

weekly deposit rules for employers mak-ing interest-free adjustments.

* * * * *(g) * * *(4) * * *(i) In general.(ii) Adjustments and Claims for Re-

fund.

* * * * *Par. 7. Section 31.6302–1 is amended

by adding paragraph (c)(7) and revisingparagraph (g)(4) to read as follows:

§31.6302–1 Federal tax deposit rules forwithheld income taxes and taxes underthe Federal Insurance Contributions Act(FICA) attributable to payments madeafter December 31, 1992.

* * * * *(c) * * *(7) Exception to the monthly and semi-

weekly deposit rules for employers makinginterest-free adjustments. An employer fil-ing an adjusted return under §31.6205–1to report taxes that were accumulated in aprior return period shall pay the amount ofthe adjustment by the time it files the ad-justed return, and the amount timely paidwill be deemed to have been timely de-posited by the employer. The paymentmay be made by a check or money or-der with the adjusted return, by electronicfunds transfer, or by other methods of pay-ment as provided by the instructions relat-ing to the adjusted return.

* * * * *(g) * * *(4) Lookback period—(i) In general.

For purposes of this paragraph (g), thelookback period for Form 943 taxes is thesecond calendar year preceding the cur-rent calendar year. For example, the look-back period for calendar year 1993 is cal-endar year 1991. New employers shall betreated as having employment tax liabili-ties of zero for any lookback period beforethe date the employer started or acquiredits business.

(ii) Adjustments and Claims for Refund.The employment tax liability reported onthe original return for the return period isthe amount taken into account in deter-mining whether the amount of Form 943taxes accumulated in the lookback periodexceeds $50,000. Any amounts reportedon adjusted returns or claims for refundpursuant to sections 6205, 6402, 6413 and6414 filed after the due date of the origi-nal return are not taken into account whendetermining the amount of Form 943 taxesaccumulated in the lookback period. How-ever, prior period adjustments reported onForm 943 for 2008 and earlier years aretaken into account in determining the em-ployment tax liability for the return periodin which the adjustments are reported.

* * * * *Par. 8. Section 31.6402(a)–1 is

amended by revising paragraph (a) to readas follows:

§31.6402(a)–1 Credits or refunds.

(a) In general. For regulations un-der section 6402 of special application tocredits or refunds of employment taxes,see §§31.6402(a)–2, 31.6402(a)–3, and31.6414–1. For regulations under section6402 of general application to credits or re-funds, see §§301.6402–1 and 301.6402–2.For provisions relating to adjustmentswithout interest of overpayments of taxesunder the Federal Insurance Contribu-tions Act or the Railroad RetirementTax Act or income tax withholding, see§§31.6413(a)–1 and 31.6413(a)–2.

* * * * *Par. 9. Section 31.6402(a)–2 is

amended by revising paragraph headingand text of paragraph (a) and removingparagraph (c) to read as follows:

§31.6402(a)–2 Credit or refund of taxunder Federal Insurance ContributionsAct or Railroad Retirement Tax Act

(a) Claim by person who paid tax toIRS—(1) In general. (i) Any person mayfile a claim for credit or refund for anoverpayment (except to the extent that theoverpayment must be credited pursuantto §31.3503–1) if the person paid to theIRS more than the correct amount of em-ployee Federal Insurance ContributionsAct (FICA) tax under section 3101 oremployer FICA tax under section 3111,employee Railroad Retirement Tax Act(RRTA) tax under section 3201, employeerepresentative RRTA tax under section3211, or employer RRTA tax under sec-tion 3221, or interest, addition to the tax,additional amount, or penalty with respectto any such tax.

(ii) The claim for credit or refund mustbe made in the manner and subject to theconditions stated in this section. The claimfor credit or refund must be filed on theform prescribed by the IRS and must des-ignate the return period to which the claimrelates, explain in detail the grounds andfacts relied upon to support the claim, andset forth such other information as maybe required by this section and by the in-structions relating to the form used to makesuch claim. No refund or credit pursuantto this section for employer tax will beallowed unless the employer has first re-paid or reimbursed its employee or has se-cured the employee’s consent to the al-lowance of the claim for refund and in-cludes a claim for the refund of such em-ployee tax. However, this requirementdoes not apply to the extent that the taxeswere not withheld from the employee or,after the employer makes reasonable ef-forts to repay or reimburse the employeeor secure the employee’s consent, the em-ployer cannot locate the employee or theemployee will not provide consent. No re-fund or credit of employee FICA or RRTAtax overcollected in an earlier year will beallowed if the employee has claimed a re-fund or credit of the amount of the over-collection which has not been rejected orif the employee has taken the amount ofsuch tax into account in claiming a creditagainst or refund of the employee’s incometax, including instances in which the em-ployee has included an overcollection of

2008–32 I.R.B. 302 August 11, 2008

employee FICA or RRTA tax in comput-ing a special refund (see §31.6413(c)–1).

(iii) For adjustments without interest ofoverpayments of FICA or RRTA taxes, see§31.6413(a)–2.

(iv) For corrections of FICA andRRTA tax paid under the wrong chap-ter, see §31.6205–1(b)(2)(ii) and (iii) and§31.3503–1.

(v) For provisions related to furnish-ing employee statements and correctedemployee statements reporting wages andwithheld taxes, see sections 6041 and6051 and §§1.6041–2 and 31.6051–1. Forprovisions relating to filing informationreturns and corrected information returnsreporting wages and withheld taxes, seesections 6041 and 6051 and §§1.6041–2and 31.6051–2.

(vi) For the period of limitationson credit or refund of taxes, see§301.6511(a)–1.

(2) Statements supporting employer’sclaims for employee tax. (i) Every em-ployer who files a claim for refund orcredit of employee FICA tax under section3101 or employee RRTA tax under section3201 collected from an employee mustcertify as part of the claim process thatthe employer has repaid or reimbursed thetax to its employee or has secured the em-ployee’s written consent to allowance ofthe filing of the claim for refund except tothe extent that the taxes were not withheldfrom the employee. The employer mustretain as part of its records the writtenreceipt of the employee showing the dateand amount of the repayment, evidence ofreimbursement, or the written consent ofthe employee, whichever is used in sup-port of the claim.

(ii) Every employer who files a claimfor refund or credit of employee FICA taxunder section 3101 or employee RRTA taxunder section 3201 collected from an em-ployee in a calendar year prior to the yearin which the credit or refund is claimed,also must certify as part of the claimprocess that the employer has obtained theemployee’s written statement that the em-ployee has not claimed refund or credit ofthe amount of the overcollection, or if so,such claim has been rejected, and that theemployee will not claim refund or creditof the amount. The employer must retainthe employee’s written statement as partof the employer’s records.

* * * * *Par. 10. Section 31.6413(a)–1 is re-

vised to read as follows:

§31.6413(a)–1 Repayment orreimbursement by employer of taxerroneously collected from employee.

(a) Federal Insurance ContributionsAct and Railroad Retirement Tax Act—(1)Overcollection ascertained before returnis filed. (i) If an employer during anyreturn period collects from an employeemore than the correct amount of em-ployee Federal Insurance ContributionsAct (FICA) tax under section 3101 oremployee Railroad Retirement Tax Act(RRTA) tax under section 3201, and if theemployer ascertains the error before filingthe return on which the employee tax isrequired to be reported, repays or reim-burses the amount of the overcollectionto the employee before filing the returnfor such return period, and obtains andkeeps as part of its records the writtenreceipt of the employee showing the dateand amount of the repayment or evidenceof reimbursement, the employer shall notreport on any return or pay to the IRS theamount of the overcollection.

(ii) Any overcollection not repaid orreimbursed to the employee as provided inparagraph (a)(1)(i) of this section shall bereported and paid to the IRS on the returnfor reporting such tax for the return pe-riod in which the overcollection is made.However, the reporting and payment ofthe overcollection may subsequently betreated as an overpayment error ascer-tained after the return is filed for purposesof paragraph (a)(2) of this section.

(iii) For purposes of this paragraph(a)(1), an error is ascertained when theemployer has sufficient knowledge of theerror to be able to correct it.

(2) Error ascertained after return isfiled. (i) If an employer files a returnfor a return period on which FICA taxor RRTA tax is reported, collects froman employee and pays to the IRS morethan the correct amount of the employeeFICA or RRTA tax, and if the employerascertains the error after filing the returnand within the applicable period of limi-tations on credit or refund, the employershall repay or reimburse the employee inthe amount of the overcollection prior tothe expiration of such limitations period.

However, this paragraph (a)(2) does notapply to the extent that, after reasonableefforts, the employer cannot locate the em-ployee, or the employee does not providethe employer with the written statementrequired by §31.6413(a)–1(a)(2)(iv). Thisparagraph (a)(2) has no application in anycase in which an overcollection is madethe subject of a claim by the employerfor refund or credit under the procedureprovided in §31.6402(a)–2.

(ii) If the employer repays the amountof the overcollection to an employee, theemployer shall obtain and keep as part ofits records the written receipt of the em-ployee, showing the date and amount of therepayment.

(iii) If the employer reimburses theamount of the overcollection to an em-ployee, the employer shall keep as partof its records evidence of reimbursement.The employer shall reimburse the em-ployee by applying the amount of theovercollection against the employee FICAor RRTA tax which attaches to wages orcompensation paid by the employer to theemployee prior to the expiration of theapplicable period of limitations on creditor refund. If the amount of the overcollec-tion exceeds the amount so applied againstsuch employee tax, the excess amountshall be repaid to the employee as requiredby this section.

(iv) If, in any calendar year, an em-ployer repays or reimburses an employeein the amount of an overcollection ofemployee FICA or RRTA tax that wascollected from the employee in a priorcalendar year, the employer shall obtainfrom the employee and keep as part ofits records a written statement that theemployee has not claimed refund or creditof the amount of the overcollection, orif so, such claim has been rejected, andthat the employee will not claim refund orcredit of such amount. For this purpose, aclaim for refund or credit by the employeeincludes instances in which the employeehas included an overcollection of em-ployee FICA or RRTA tax in computing aspecial refund (see §31.6413(c)–1).

(v) For purposes of this paragraph(a)(2), an error is ascertained when theemployer has sufficient knowledge of theerror to be able to correct it.

(vi) For the period of limitationson credit or refund of taxes, see§301.6511(a)–1.

August 11, 2008 303 2008–32 I.R.B.

(vii) For corrections of FICA andRRTA tax paid under the wrong chap-ter, see §31.6205–1(b)(2)(ii) and (iii) and§31.3503–1.

(b) Income tax withheld fromwages—(1) Overcollection ascertainedbefore return is filed. (i) If an employerduring any return period collects from anemployee more than the correct amountof tax required to be withheld from wagesunder section 3402, and if the employerascertains the error before filing the re-turn on which such tax is required to bereported, repays or reimburses the amountof the overcollection to the employee be-fore filing the return for such return periodand before the end of the calendar year inwhich the overcollection was made, andobtains and keeps as part of its records thewritten receipt of the employee showingthe date and amount of the repayment orevidence of reimbursement, the employershall not report on any return or pay to theIRS the amount of the overcollection.

(ii) Any overcollection not repaid orreimbursed to the employee as provided inparagraph (b)(1)(i) of this section shall bereported and paid to the IRS on the returnfor reporting such tax for the return pe-riod in which the overcollection is made.However, the reporting and payment ofthe overcollection may subsequently betreated as an overpayment error ascer-tained after the return is filed for purposesof paragraph (b)(2) of this section.

(iii) For purposes of this paragraph(b)(1), an error is ascertained when theemployer has sufficient knowledge of theerror to be able to correct it.

(2) Error ascertained after return isfiled. (i) If an employer files a return fora return period on which tax required tobe withheld from wages is reported, col-lects from an employee and pays to theIRS more than the correct amount of thetax required to be withheld from wages,and if the employer ascertains the errorafter filing the return but before the endof the calendar year in which the wageswere paid, the employer shall repay orreimburse the employee in the amount ofthe overcollection prior to the end of thecalendar year. However, this paragraphdoes not apply to the extent that, afterreasonable efforts, the employer cannotlocate the employee.

(ii) If the employer repays the amountof the overcollection to an employee, the

employer shall obtain and keep as part ofits records the written receipt of the em-ployee, showing the date and amount of therepayment.

(iii) If the employer reimburses theamount of the overcollection to an em-ployee, the employer shall keep as partof its records evidence of reimbursement.The employer shall reimburse the em-ployee by applying the amount of the over-collection against the tax under section3402, which otherwise would be requiredto be withheld from wages paid by theemployer to the employee in the calendaryear in which the overcollection is made.If the amount of the overcollection ex-ceeds the amount so applied against suchtax, the excess amount shall be repaid tothe employee as required by this section.

(iv) For purposes of this paragraph(b)(2), an error is ascertained when theemployer has sufficient knowledge of theerror to be able to correct it.

Par. 11. Section 31.6413(a)–2 is re-vised to read as follows:

§31.6413(a)–2 Adjustments ofoverpayments.

(a) In general. (1) An employer whohas overcollected or overpaid employeeFederal Insurance Contributions Act(FICA) tax under section 3101 or em-ployer FICA tax under section 3111, em-ployee Railroad Retirement Tax (RRTA)tax under section 3201 or employer RRTAtax under section 3221, or income tax re-quired under section 3402 to be withheld,and has repaid or reimbursed the amountof the overcollection of such tax to theemployee, shall correct such error as pro-vided in this section. Such correction mayconstitute an interest-free adjustment asprovided in paragraph (b) or (c) of thissection.

(2) Every correction under this sectionof an overpayment of tax shall be made onthe form prescribed by the IRS that corre-sponds to the return being corrected. Theform, filed in accordance with this sectionand the instructions, will constitute an ad-justed return for the return period beingcorrected.

(3) Every adjusted return on which anoverpayment is corrected pursuant to thissection shall certify that the employer hasrepaid or reimbursed its employee, exceptwhere taxes were not withheld from the

employee or where, after reasonable ef-forts, the employer cannot locate the em-ployee. Every adjusted return shall desig-nate the return period in which the errorwas ascertained and the return period be-ing corrected, explain in detail the groundsand facts relied upon to support the cor-rection, and set forth such other informa-tion as may be required by this section and§31.6413(a)–1 and by the instructions re-lating to the adjusted return. Every ad-justed return, filed by an employer, foroverpayment of employee FICA tax un-der section 3101 or employee RRTA taxunder section 3201 collected from an em-ployee in a calendar year prior to the yearin which the adjusted return is filed, mustalso certify that the employer has obtainedthe employee’s written statement that theemployee has not claimed refund or creditof the amount of the overcollection, orif so, such claim has been rejected, andthat the employee will not claim refund orcredit of the amount.

(4) For purposes of this section, an erroris ascertained when the employer has suf-ficient knowledge of the error to be able tocorrect it.

(5) For provisions related to furnish-ing employee statements and correctedemployee statements reporting wages andwithheld taxes, see sections 6041 and6051 and §§1.6041–2 and 31.6051–1. Forprovisions relating to filing informationreturns and corrected information returnsreporting wages and withheld taxes, seesections 6041 and 6051 and §§1.6041–2and 31.6051–2.

(b) Federal Insurance ContributionsAct and Railroad Retirement Tax Act—(1)Overcollection ascertained before returnis filed. If an employer collects more thanthe correct amount of employee FICAor RRTA tax from an employee, and ifthe employer ascertains the error beforefiling the return on which the employeetax with respect to such wages or com-pensation is required to be reported, andrepays or reimburses the employee under§31.6413(a)–1(a)(1), the employer shallnot report on any return or pay to the IRSthe amount of the overcollection. If theemployer does not repay or reimbursethe amount of the overcollection under§31.6413(a)–1(a)(1) before filing the re-turn, the employer must report the amountof the overcollection on the return. How-ever, the payment of the overcollection

2008–32 I.R.B. 304 August 11, 2008

may subsequently be treated as an over-payment error ascertained after the returnis filed for purposes of paragraph (b)(2) ofthis section.

(2) Error ascertained after return isfiled—(i) Employee tax. If an employerfiles a return for a return period on whichFICA tax or RRTA tax is required to be re-ported and reports on the return more thanthe correct amount of employee FICA orRRTA tax, and if the employer ascertainsthe error after filing the return, and repaysor reimburses the employee the amountof the overcollection of employee tax,as provided in §31.6413(a)–1(a)(2), theemployer may correct the error throughan interest-free adjustment as providedin this section. The employer shall ad-just the overpayment of tax by reportingthe overpayment on an adjusted returnfor the return period in which the wagesor compensation was paid, accompaniedby a detailed explanation of the amountbeing reported on the adjusted return asrequired by paragraph (a)(3) of this sec-tion. Except as provided in paragraph (d)of this section, the reporting of the over-payment on an adjusted return constitutesan adjustment within the meaning of thissection only if the adjusted return is filedbefore the expiration of the period of limi-tations on credit or refund. The employershall take the adjusted amount as a credittowards payment of employment tax lia-bilities for the return period in which theadjusted return is filed unless the IRS no-tifies the employer that the adjustment isnot permitted under paragraph (d) of thissection.

(ii) Employer tax. If an employer filesa return for a return period on which FICAor RRTA tax is required to be reported andreports on the return more than the correctamount of employer FICA or RRTA tax,and if the employer ascertains the error af-ter filing the return, the employer may cor-rect the error through an interest-free ad-justment as provided in this section. Theemployer must first repay or reimburse theemployee the amount of any overcollec-tion of employee tax, if any, as requiredby §31.6413(a)–1(a)(2), before making theadjustment for the employer tax. The em-ployer shall adjust the overpayment of taxby reporting the overpayment on an ad-justed return for the return period in whichthe wages or compensation was paid, ac-companied by a detailed explanation of the

amount being reported on the adjusted re-turn as required by paragraph (a)(3) of thissection. Except as provided in paragraph(d) of this section, the reporting of theoverpayment on an adjusted return consti-tutes an adjustment within the meaning ofthis section only if the adjusted return isfiled before the expiration of the period oflimitations on credit or refund. The em-ployer shall take the adjusted amount as acredit towards payment of employment taxliabilities for the return period in which theadjusted return is filed unless the IRS noti-fies the employer that the adjustment is notpermitted under paragraph (d) of this sec-tion.

(c) Income tax withheld fromwages—(1) Overcollection ascertainedbefore return is filed. If an employercollects more than the correct amount ofincome tax required to be withheld fromwages, and if the employer ascertains theerror before filing the return on whichthe tax is required to be reported, andrepays or reimburses the employee un-der §31.6413(a)–1(b)(1), the employershall not report on any return or pay tothe IRS the amount of the overcollection.If the employer does not repay or reim-burse the amount of the overcollectionunder §31.6413(a)–1(b)(1) before filingthe return, the employer must report theamount of the overcollection on the re-turn. However, the reporting and paymentof the overcollection may subsequentlybe treated as an overpayment error ascer-tained after the return is filed for purposesof paragraph (c)(2) of this section.

(2) Error ascertained after return isfiled. If an employer files a return for a re-turn period on which income tax requiredto be withheld from wages is requiredto be reported and reports on the returnmore than the correct amount of incometax required to be withheld, and if the em-ployer ascertains the error after filing thereturn, and repays or reimburses the em-ployee in the amount of the overcollectionas provided in §31.6413(a)–1(b)(2), theemployer may correct the error throughan interest-free adjustment as provided inthis section. The employer shall adjustthe overpayment of tax by reporting theoverpayment on an adjusted return for thereturn period in which the wages werepaid, accompanied by a detailed expla-nation of the amount being reported onthe adjusted return as required in para-

graph (a)(3) of this section. Except asprovided in paragraph (d) of this section,the reporting of the overpayment on anadjusted return constitutes an adjustmentwithin the meaning of this section. Ifthe amount of the overcollection is notrepaid or reimbursed to the employeeunder §31.6413(a)–1(b)(2), there is nooverpayment to be adjusted under thissection. However, the employer may ad-just an overpayment of tax attributable toan administrative error, that is, an errorinvolving the inaccurate reporting of theamount withheld, pursuant to this sec-tion. The employer shall take the adjustedamount as a credit towards payment ofemployment tax liabilities for the returnperiod in which the adjusted return isfiled unless the IRS notifies the employerthat the adjustment is not permitted underparagraph (d) of this section.

(d) Adjustments not permitted—(1)In general. If an adjustment cannot bemade, a claim for refund or credit may befiled in accordance with §31.6402(a)–2 or§31.6414–1.

(2) 90-day exception. No adjustment inrespect of an overpayment may be madeif the overpayment relates to a return pe-riod for which the period of limitations oncredit or refund of such overpayment willexpire within 90 days of filing the adjustedreturn.

(3) No adjustment after claim for refundfiled. No adjustment in respect of an over-payment may be made after the filing of aclaim for credit or refund of such overpay-ment under §31.6402(a)–2.

(4) No adjustment after IRS notifica-tion. No adjustment may be made uponnotification by the IRS that the adjustmentis not permitted.

Par. 12. Section 31.6414–1 is amendedby revising paragraph (a) to read as fol-lows:

§31.6414–1 Credit or refund of incometax withheld from wages.

(a) In general. (1) Any employer whopays to the IRS more than the correctamount of income tax required to be with-held from wages under section 3402 orinterest, addition to the tax, additionalamount, or penalty with respect to suchtax, may file a claim for refund of theoverpayment in the manner and subjectto the conditions stated in this section on

August 11, 2008 305 2008–32 I.R.B.

the form prescribed by the IRS. The claimfor refund must designate the return pe-riod to which the claim relates, explain indetail the grounds and facts relied uponto support the claim, and set forth suchother information as may be required bythe regulations in this section and by theinstructions relating to the form used tomake such claim. No refund to the em-ployer will be allowed under this sectionfor the amount of any overpayment of taxwhich the employer deducted or withheldfrom an employee.

(2) For provisions related to furnish-ing employee statements and correctedemployee statements reporting wages andwithheld taxes, see sections 6041 and

6051 and §§1.6041–2 and 31.6051–1. Forprovisions relating to filing informationreturns and corrected information returnsreporting wages and withheld taxes, seesections 6041 and 6051 and §§1.6041–2and 31.6051–2.

(3) For interest-free adjustments ofoverpayments of income tax withheldfrom wages, see §31.6413(a)–2.

* * * * *


Par. 13. The authority citation for part602 continues to read in part as follows:

Authority: 26 U.S.C. 7805.Par. 14. In §602.101, paragraph (b)

is amended by adding the following entryin numerical order to the table to read asfollows:

§602.101 OMB Control numbers

* * * * *(b) * * *



* * * * *31.6011(a)–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–209731.6011(a)–4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–209731.6011(a)–5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–209731.6205–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–209731.6402(a)–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–209731.6413(a)–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–209731.6413(a)–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–209731.6414–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–2097

* * * * *



Eric Solomon,Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on June 30, 2008,8:45 a.m., and published in the issue of the Federal Registerfor July 1, 2008, 73 F.R. 37371)

Section 6402.—Authority toMake Credits or Refunds

Final regulations modify the process for makingclaims for refund of overpayments of Federal Insur-ance Contribution Act (FICA) and Railroad Retire-ment Tax Act (RRTA) taxes under section 6402 of theCode. See T.D. 9405, page 293.

Section 6413.—SpecialRules Applicable to CertainEmployment Taxes

Final regulations modify the process for makinginterest-free adjustments for overpayments of Federal

Insurance Contribution Act (FICA) and Railroad Re-tirement Tax Act (RRTA) taxes and Federal incometax withholding (ITW) under section 6413(a) of theCode. See T.D. 9405, page 293.

Section 6414.—IncomeTax Withheld

Final regulations modify the process for makingclaims for refund of overpayments of Federal incometax withholding (ITW) under section 6414 of theCode. See T.D. 9405, page 293.

2008–32 I.R.B. 306 August 11, 2008

Part III. Administrative, Procedural, and MiscellaneousBonus Depreciation for theKansas Disaster Area

Notice 2008–67

SECTION 1. PURPOSE

This notice provides procedures fora taxpayer to claim the 50-percent ad-ditional first year depreciation (Kansasadditional first year depreciation) pro-vided by § 15345(a)(1) and (d)(1) of theFood, Conservation, and Energy Act of2008 (the Act), Pub. L. No. 110–246, 122Stat. 1651 (June 18, 2008), for qualifiedRecovery Assistance property (RA prop-erty) placed in service by the taxpayer onor after May 5, 2007, during the taxableyear that includes May 5, 2007. Thisnotice also explains how a taxpayer mayelect not to deduct the Kansas additionalfirst year depreciation for RA property.

SECTION 2. BACKGROUND AND RAPROPERTY

.01 Section 15345(a)(1) of the Act pro-vides, in general, that § 1400N(d) of theInternal Revenue Code shall apply to theKansas disaster area. Section 1400N(d),added by § 101 of the Gulf OpportunityZone Act of 2005, Pub. L. No. 109–135,119 Stat. 2577 (Dec. 21, 2005), gen-erally allows a 50-percent additional firstyear depreciation deduction for qualifiedGulf Opportunity Zone property. Section15345(d)(1) of the Act provides that, withthe exception of newly revised dates fordetermining the eligibility of the Kansasadditional first year depreciation deduc-tion for RA property, the rules for deter-mining the eligibility of the Kansas addi-tional first year depreciation deduction forRA property will be determined by follow-ing § 1400N(d)(1) through (5).

.02 RA property is depreciable prop-erty that meets all of the following require-ments:

(1) The property is de-scribed in § 168(k)(2)(A)(i) and§ 1.168(k)–1(b)(2)(i) of the IncomeTax Regulations, or the property isnonresidential real property (as definedin § 168(e)(2)(B)) or residential rentalproperty (as defined in § 168(e)(2)(A))and depreciated under § 168;

(2) Substantially all of the use of theproperty is in the Kansas disaster area (asdefined in § 15345(b) of the Act and sec-tion 2.04 of this notice) and in the activeconduct of a trade or business by the tax-payer in the Kansas disaster area. For pur-poses of this section 2.02(2), rules sim-ilar to the rules in section 3 of Notice2006–77, 2006–2 C.B. 590, for determin-ing “substantially all” and “active conductof a trade or business” apply;

(3) The original use of the propertycommences with the taxpayer in theKansas disaster area on or after May 5,2007. Used property will satisfy the origi-nal use requirement so long as the propertyhas not been previously used within theKansas disaster area. For purposes ofthis section 2.02(3), rules similar to theoriginal use rules in section 5 of Notice2007–36, 2007–17 I.R.B. 1000, apply;

(4) The property is acquired by the tax-payer by purchase (as defined in § 179(d)and § 1.179–4(c)) on or after May 5, 2007,but only if no written binding contractfor the acquisition of the property was ineffect on or before May 4, 2007. For pur-poses of this section 2.02(4), rules similarto the rules in § 1.168(k)–1(b)(4)(ii) (bind-ing contract), in § 168(k)(2)(E)(i) and§ 1.168(k)–1(b)(4)(iii) (self-constructedproperty), and in § 168(k)(2)(E)(iv) and§ 1.168(k)–1(b)(4)(iv) (disqualified trans-actions) apply; and

(5) The property is placed in service bythe taxpayer on or before December 31,2008 (December 31, 2009, in the case ofqualified nonresidential real property andresidential rental property).

.03 Depreciable property is not eligiblefor the Kansas additional first year depre-ciation deduction if:

(1) The 50-percent additional first yeardepreciation deduction under § 168(k), asamended by § 103 of the Economic Stim-ulus Act of 2008, Pub. L. No. 110–185,122 Stat. 613 (Feb. 13, 2008), applies tothe property;

(2) The property is de-scribed in § 168(k)(2)(D)(i) and§ 1.168(k)–1(b)(2)(ii)(A)(2);

(3) The property is described in§ 168(f);

(4) Any portion of the property is fi-nanced with the proceeds of any obligation

the interest on which is tax-exempt under§ 103;

(5) The property is a qualified revital-ization building (as defined in § 1400I(b))for which the taxpayer has made an elec-tion under § 1400I(a)(1) or (a)(2) in ac-cordance with section 7 of Rev. Proc.2003–38, 2003–1 C.B. 1017;

(6) The property is included in any classof property for which the taxpayer electsnot to deduct the Kansas additional firstyear depreciation (see section 4 of this no-tice);

(7) The property is placed in serviceand disposed of during the same taxableyear. However, rules similar to the rulesin § 1.168(k)–1(f)(1)(ii) and (iii) (tech-nical termination of a partnership under§ 708(b)(1)(B) or transactions described in§ 168(i)(7)) apply; or

(8) The property is converted from busi-ness or income-producing use to personaluse in the same taxable year in which theproperty is placed in service by a taxpayer.

.04 The counties in Kansas thatcomprise the Kansas disaster areaare: Barton, Clay, Cloud, Comanche,Dickinson, Edwards, Ellsworth, Kiowa,Leavenworth, Lyon, McPherson, Osage,Osborne, Ottawa, Phillips, Pottawatomie,Pratt, Reno, Rice, Riley, Saline, Shawnee,Smith, and Stafford.

.05 If depreciable property is not RAproperty in the taxable year in whichthe property is placed in service by thetaxpayer, the Kansas additional firstyear depreciation deduction is not al-lowable for the property even if theproperty subsequently becomes RAproperty due to a change in use. See§ 1.168(k)–1(f)(6)(iv)(B).

.06 Limitation provisions of the Code(for example, §§ 465, 469, and 704(d)) ap-ply and may limit the amount of the Kansasadditional first year depreciation deduc-tion that may be claimed by a taxpayer sub-ject to such a provision.

.07 If RA property is no longer RAproperty in the hands of the same taxpayerat any time before the end of the RA prop-erty’s recovery period as determined under§ 167(f)(1) or § 168, as applicable, then thetaxpayer generally must recapture in thetaxable year in which the RA property isno longer RA property the benefit derived

August 11, 2008 307 2008–32 I.R.B.

from claiming the Kansas additional firstyear depreciation deduction for such prop-erty. See § 1400N(d)(5). For purposes ofthis section 2.07, rules similar to the recap-ture rules in section 3 of Notice 2008–25,2008–9 I.R.B. 484, apply.

SECTION 3. CLAIMING THEKANSAS ADDITIONAL FIRST YEARDEPECIATION FOR THE TAXABLEYEAR THAT INCLUDES MAY 5, 2007

.01 In General. The Kansas additionalfirst year depreciation deduction is allow-able in the taxable year in which the RAproperty is placed in service by the tax-payer. The computation of the allowableKansas additional first year depreciationdeduction and the otherwise allowable de-preciation deduction for RA property ismade in accordance with rules similar tothe rules for 50-percent bonus depreciationproperty in § 1.168(k)–1(d)(1)(i), (1)(iii),and (2). Further, rules similar to the rulesin § 1.168(k)–1(f) apply for purposes ofthe Kansas additional first year deprecia-tion deduction.

.02 Returns Not Filed for the TaxableYear that Includes May 5, 2007. If a tax-payer has not filed its federal tax returnfor the taxable year that includes May 5,2007, and wants to claim the Kansas ad-ditional first year depreciation for a classof property (as defined in section 4.02 ofthis notice) that is RA property placed inservice by the taxpayer on or after May 5,2007, during the taxable year that includesMay 5, 2007, the taxpayer may claim theKansas additional first year depreciationfor that class of property on line 14 ofForm 4562, Depreciation and Amortiza-tion, for the federal tax return for the tax-able year that includes May 5, 2007. Ifthe RA property is listed property under§ 280F(d)(4), such as passenger automo-biles or computers, the taxpayer may claimthe Kansas additional first year deprecia-tion for that listed property on line 25 ofForm 4562, Depreciation and Amortiza-tion, for the federal tax return for the tax-able year that includes May 5, 2007.

.03 Returns Filed for the Taxable Yearthat Includes May 5, 2007.

(1) In general. If a taxpayer timely filedits federal tax return for the taxable yearthat includes May 5, 2007, and did notclaim on that return the Kansas additionalfirst year depreciation for a class of prop-

erty that is RA property placed in serviceby the taxpayer on or after May 5, 2007,during the taxable year that includes May5, 2007, but wants to do so, the taxpayermay claim the Kansas additional first yeardepreciation for that class of property un-der this section 3.03, provided the taxpayerdid not make an election not to deduct theKansas additional first year depreciationfor the class of property pursuant to section4.03 of this notice. The taxpayer has theoption of claiming the Kansas additionalfirst year depreciation for the taxable yearthat includes May 5, 2007:

(a) by filing an amended federal tax re-turn (or a qualified amended return underRev. Proc. 94–69, 1994–2 C.B. 804, if ap-plicable) on or before December 31, 2009,for the taxable year that includes May 5,2007, and any affected subsequent taxableyear, and including the statement “FiledPursuant to Notice 2008–67” at the top ofany amended return (or qualified amendedreturn);

(b) by filing a Form 3115, Applicationfor Change in Accounting Method, withthe taxpayer’s timely filed federal tax re-turn for the first taxable year succeedingthe taxable year that includes May 5, 2007,if this return has not been filed on or beforeAugust 11, 2008, and the taxpayer ownsthe property as of the first day of this tax-able year; or

(c) if the taxpayer’s federal tax returnfor the first taxable year succeeding thetaxable year that includes May 5, 2007,was filed on or before August 11, 2008,by —

(i) filing an amended federal tax return(or a qualified amended return) on or be-fore December 31, 2009, for the first tax-able year succeeding the taxable year thatincludes May 5, 2007, attaching a Form3115 to the amended federal tax return,and including the statement “Filed Pur-suant to Notice 2008–67” at the top of anyamended return (or qualified amended re-turn); or

(ii) filing a Form 3115 with the tax-payer’s timely filed federal tax return forthe second taxable year succeeding the tax-able year that includes May 5, 2007, if thetaxpayer owns the property as of the firstday of this taxable year.

(2) Automatic change in method of ac-counting. The Form 3115 is to be com-pleted and filed in accordance with the au-tomatic change in method of accounting

provisions in Rev. Proc. 2002–9, 2002–1C.B. 327 (as modified and amplified byRev. Proc. 2002–19, 2002–1 C.B. 696, asamplified, clarified, and modified by Rev.Proc. 2002–54, 2002–2 C.B. 432, and asmodified and clarified by Announcement2002–17, 2002–1 C.B. 561), or any suc-cessor, with the following modifications:

(a) The scope limitations in section 4.02of Rev. Proc. 2002–9 do not apply; and

(b) For purposes of section 6.02(4)(a)of Rev. Proc. 2002–9, the taxpayer mustinclude on line 1a of the Form 3115 thedesignated automatic accounting methodchange number 115.

SECTION 4. ELECTION NOT TODEDUCT THE KANSAS ADDITIONALFIRST YEAR DEPRECIATION

.01 In General. A taxpayer may makean election not to deduct the Kansas addi-tional first year depreciation for any classof property that is RA property placedin service during the taxable year. See§ 1400N(d)(2)(B)(iv). If a taxpayer makesthis election, then the election applies toall RA property that is in the same classof property and placed in service in thesame taxable year, and no Kansas addi-tional first year depreciation deduction isallowable for the class of property. Theelection not to deduct the Kansas addi-tional first year depreciation is made byeach person owning RA property (for ex-ample, for each member of a consolidatedgroup by the common parent of the group,by the partnership, or by the S corpora-tion). In addition, rules similar to the rulesin § 1.168(k)–1(e)(5) (failure to makeelection), (6) (alternative minimum tax),and (7) (revocation of election) apply forpurposes of the election not to deduct theKansas additional first year depreciationdeduction.

.02 Definition of Class of Property. Forpurposes of this notice, the term “class ofproperty” means:

(1) Except for the property describedin this section 4.02(2), (3), (4), (5), and(6), each class of property described in§ 168(e) (for example, 5-year property);

(2) Water utility property as defined in§ 168(e)(5) and depreciated under § 168;

(3) Computer software as defined in,and depreciated under, § 167(f)(1) and theregulations thereunder;

2008–32 I.R.B. 308 August 11, 2008

(4) Qualified leasehold improvementproperty as defined in § 168(k)(3) and§ 1.168(k)–1(c) and depreciated under§ 168;

(5) Nonresidential real property as de-fined in § 168(e)(2)(B) and depreciated un-der § 168; or

(6) Residential rental property as de-fined in § 168(e)(2)(A) and depreciatedunder § 168.

.03 Time and Manner of Making theElection.

(1) In general. Except as provided insection 4.03(3) of this notice, an electionnot to deduct the Kansas additional firstyear depreciation for any class of propertythat is RA property placed in service dur-ing the taxable year must be made by thedue date (including extensions) of the fed-eral tax return for the taxable year in whichthe RA property is placed in service by thetaxpayer. Except as provided in sections4.03(2) and (3) of this notice, the elec-tion not to deduct the Kansas additionalfirst year depreciation must be made in themanner prescribed on Form 4562, Depre-ciation and Amortization, and its instruc-tions.

(2) Returns for the taxable year that in-cludes May 5, 2007, filed on or after Au-gust 11, 2008. If a taxpayer files its fed-eral tax return for the taxable year that in-cludes May 5, 2007, on or after August 11,2008, and wants to make the election not todeduct the Kansas additional first year de-preciation for any class of property that isRA property placed in service by the tax-payer on or after May 5, 2007, during thetaxable year that includes May 5, 2007, the

taxpayer must follow the instructions forthat taxable year’s Form 4562, Deprecia-tion and Amortization (see “Election Out”on page 4 of the 2006 or 2007 Instruc-tions for Form 4562). Pursuant to thoseinstructions, the taxpayer attaches a state-ment to its timely filed return (includingextensions) identifying the class of prop-erty for which the taxpayer is making theelection and indicating that, for such classof property, the taxpayer is electing not toclaim the Kansas additional first year de-preciation.

(3) Special rules for returns for the tax-able year that includes May 5, 2007, filedbefore August 11, 2008.

(a) If a taxpayer files its federal taxreturn for the taxable year that includesMay 5, 2007, before August 11, 2008, thenthe taxpayer has made the election not todeduct the Kansas additional first year de-preciation for a class of property that is RAproperty placed in service by the taxpayeron or after May 5, 2007, during the taxableyear that includes May 5, 2007, if the tax-payer:

(i) made the election within the timeprescribed in section 4.03(1) of this noticeand in the manner prescribed in section4.03(2) of this notice;

(ii) made the election within the timeprescribed in section 4.03(1) of this noticeand included with the taxpayer’s federaltax return for the taxable year that includesMay 5, 2007, an affirmative statement tothe effect that the taxpayer is not deductingthe Kansas additional first year deprecia-tion for the class of property. The affirma-tive statement may be a statement attached

to, or written on, the return (for example,writing on the Form 4562 “not deductingbonus for 5-year property”); or

(iii) made the deemed election providedfor in section 4.03(3)(b) of this notice.

(b) Deemed election. If section4.03(3)(a)(i) or (ii) of this notice does notapply, a taxpayer that files its federal taxreturn for the taxable year that includesMay 5, 2007, before August 11, 2008, willbe treated as having made the election notto deduct the Kansas additional first yeardepreciation for a class of property that isRA property placed in service by the tax-payer on or after May 5, 2007, during thetaxable year that includes May 5, 2007, ifthe taxpayer:

(i) on that return, did not claim theKansas additional first year depreciationdeduction for that class of property but didclaim depreciation; and

(ii) does not file an amended federal taxreturn (or qualified amended return) or aForm 3115 within the time and in the man-ner prescribed in section 3.03(1) of thisnotice to claim the Kansas additional firstyear depreciation for that class of propertyfor the taxable year that includes May 5,2007.

SECTION 5. DRAFTINGINFORMATION

The principal author of this notice isDouglas H. Kim of the Office of Asso-ciate Chief Counsel (Income Tax and Ac-counting). For further information regard-ing this notice, contact Mr. Kim at (202)622–4930 (not a toll-free call).

August 11, 2008 309 2008–32 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking byCross-Reference toTemporary Regulationsand Notice of Public Hearing

Capital Costs Incurred toComply With EPA SulfurRegulations

REG–143453–05


ACTION: Notice of proposed rulemakingby cross-reference to temporary regula-tions and notice of public hearing.

SUMMARY: In this issue of the Bulletin,the IRS is issuing temporary regulations(T.D. 9404) under section 179B of the In-ternal Revenue Code (Code) relating to thededuction for qualified capital costs paidor incurred by a small business refiner tocomply with the highway diesel fuel sulfurcontrol requirements of the Environmen-tal Protection Agency (EPA). The tempo-rary regulations implement changes to thelaw made by the American Jobs CreationAct of 2004, the Energy Policy Act of2005, and the Tax Technical CorrectionsAct of 2007. The text of those tempo-rary regulations also serves as the text ofthese proposed regulations. This docu-ment also provides notice of a public hear-ing on these proposed regulations.

DATES: Written or electronic commentsmust be received by September 25, 2008.Outlines of topics to be discussed at thepublic hearing scheduled for October 28,2008, at 10 a.m. must be received bySeptember 22, 2008.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–143453–05), room5203, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washing-ton, 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–143453–05),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–143453–05). The public hearingwill be held in the IRS Auditorium,Internal Revenue Building, 1111Constitution Avenue, NW, Washington,DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposed reg-ulations, Nicole Cimino, (202) 622–3110;concerning submissions of comments,the hearing, and/or to be placed on thebuilding access list to attend the hearing,Oulwafunmilayo Taylor, (202) 622–7180(not toll-free numbers).



The collection of information containedin this notice of proposed rulemaking hasbeen submitted to the Office of Manage-ment and Budget for review in accordancewith the Paperwork Reduction Act of 1995(44 U.S.C. 3507(d)). Comments on thecollection of information should be sent tothe Office of Management and Budget,Attn: Desk Officer for the Departmentof the Treasury, Office of Informationand Regulatory Affairs, Washington, DC20503, with copies to the Internal Rev-enue Service, Attn: IRS Reports Clear-ance Officer, SE:W:CAR:MP:T:T:SP,Washington, DC 20224. Comments onthe collection of information should bereceived by August 26, 2008. Commentsare specifically requested concerning:

Whether the proposed collection of in-formation is necessary for the proper per-formance of the functions of the IRS, in-cluding whether the information will havepractical utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation;

How the quality, utility, and clarity ofthe information to be collected may be en-hanced;

How the burden of complying with theproposed collection of information may beminimized, including through the appli-cation of automated collection techniques

or other forms of information technology;and

Estimates of capital or start-up costsand costs of operation, maintenance, andpurchase of service to provide information.

The collection of information inthis proposed regulation is in section1.179B–1T(d) and section 1.179B–1T(e).This information collected under section1.179B–1T(d) relates to the election undersection 179B(a) by a small business refinerto deduct a portion of the qualified capitalcosts paid or incurred. The informationcollected under section 1.179B–1T(e) re-lates to the election under section 179B(e)by a cooperative small business refiner toallocate all or some of its section 179B(a)deduction to its cooperative owners and tonotify those cooperative owners of the al-located amount. This information will beused by the IRS for examination purposes.The collection of information is requiredto obtain a benefit. The likely respondentsare small business refiners.

Estimated total annual reporting bur-den: 50 hours.

The estimated annual burden per re-spondent varies from .75 to 1.5 hours, de-pending on individual circumstances, withan estimated average of 1 hour.

Estimated number of respondents: 50.Estimated frequency of responses: An-

nually.An agency may not conduct or sponsor,

and a person is not required to respond to, acollection of information unless it displaysa valid control number assigned by the Of-fice of Management and Budget.


Background

Temporary regulations in this issueof the Bulletin amend 26 CFR part 1 byadding regulations under section 179Bof the Code. The temporary regulationscontain rules relating to the deductionprovided under section 179B for qualifiedcosts paid or incurred by a small busi-ness refiner to comply with the highway

2008–32 I.R.B. 310 August 11, 2008

diesel fuel sulfur control requirementsof the EPA. The text of those temporaryregulations also serves as the text of theseproposed regulations. The preamble tothe temporary regulations explains thetemporary regulations and these proposedregulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulations.It is hereby certified that the collection ofinformation in these regulations will nothave a significant economic impact on asubstantial number of small entities. Thiscertification is based upon the fact, as dis-cussed earlier in this preamble, that theamount of time necessary to record and re-tain the required information is estimatedto average one hour for those taxpayerselecting to deduct qualified capital costsand electing to allocate all or some of thatdeduction to certain owners. Therefore, aRegulatory Flexibility Analysis under theRegulatory Flexibility Act (5 U.S.C. chap-ter 6) is not required. Pursuant to sec-tion 7805(f) of the Code, this notice ofproposed rulemaking has been submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments(a signed original and eight (8) copies)or electronic comments that are submittedtimely to the IRS. The IRS and the Trea-sury Department specifically request com-ments on the clarity of the proposed rulesand how they may be made easier to un-derstand. All comments will be availablefor public inspection and copying.

A public hearing has been sched-uled for October 28, 2008, beginning at10:00 a.m. in the IRS Auditorium, InternalRevenue Building, 1111 ConstitutionAvenue, NW, Washington, DC. Due tobuilding security procedures, all visitors

must enter at the Constitution Avenueentrance. In addition, all visitors mustpresent photo identification to enter thebuilding. Because of access restrictions,visitors will not be admitted beyond theimmediate entrance area more than 30minutes before the hearing starts. Forinformation about having your nameplaced on the building access list to attendthe hearing, see the FOR FURTHERINFORMATION CONTACT section ofthis preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wishto present oral comments at the hearingmust submit written or electronic com-ments by September 25, 2008 and an out-line of the topics to be discussed and thetime to be devoted to each topic (signedoriginal and eight (8) copies) by Septem-ber 22, 2008. A period of 10 minutes willbe allotted to each person for making com-ments. An agenda showing the schedulingof the speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.


The principal author of these regu-lations is Nicole R. Cimino, Office ofAssociate Chief Counsel (Passthroughsand Special Industries). However, otherpersonnel from the IRS and the TreasuryDepartment participated in their develop-ment.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:



Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.179B–1 is added to

read as follows:

§1.179B–1 Deduction for capital costsincurred in complying with EnvironmentalProtection Agency sulfur regulations.

[The text of this proposed §1.179B–1 isthe same as the text of §1.179B–1T pub-

lished elsewhere in this issue of the Bul-letin].

Kevin M. Brown,Deputy Commissioner forServices and Enforcement.


Notice of ProposedRulemaking byCross-Reference toTemporary Regulationsand Notice of ProposedRulemaking

Modifications to Subpart FTreatment of Aircraft andVessel Leasing Income

REG–138355–07


ACTION: Notice of proposed rulemakingby cross-reference to temporary regula-tions and notice of proposed rulemaking.

SUMMARY: In this issue of the Bulletin,the IRS is issuing temporary regulations(T.D. 9406) relating to the subpart F treat-ment of aircraft and vessel leasing incomeunder sections 954 and 956 of the Inter-nal Revenue Code (Code) and the trans-fer of tangible property incorporated in air-craft and vessels that are used predomi-nantly outside the United States under sec-tion 367 of the Code. The regulationsreflect statutory changes made by section415 of the American Jobs Creation Act of2004 (AJCA)). In general, the regulationswill affect United States shareholders ofcontrolled foreign corporations that deriveincome from the leasing of aircraft or ves-sels in foreign commerce and that transferproperty subject to these leases to a foreigncorporation. The text of those temporaryregulations also serves as the text of theseproposed regulations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by October 1, 2008.

August 11, 2008 311 2008–32 I.R.B.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–138355–07), In-ternal Revenue Service, PO Box 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand deliveredbetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–138355–07),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronically,via the Federal eRulemakingPortal at www.regulations.gov(IRS-REG–138355–07).

FOR FURTHER INFORMATIONCONTACT: Concerning the pro-posed regulations under section 367,John H. Seibert, at (202) 622–3860;concerning the proposed regulations undersection 954 or 956, Paul J. Carlino at(202) 622–3840; concerning submissionsof comments or a public hearing,Richard Hurst, at (202) 622–7180 (nottoll-free numbers).


Background and Explanation ofProvisions

Temporary regulations in this issueof the Bulletin provide guidance undersection 367 of the Code, relating to thenonrecognition of gain on certain propertytransferred to a foreign corporation if theproperty is used by the foreign corpora-tion in the active conduct of a trade orbusiness outside of the United States. Theregulations also provide guidance undersection 954 relating to the determinationof whether rents derived from leasing anaircraft or vessel in foreign commerce willbe treated as derived in the active con-duct of a trade or business under section954(c)(2)(A), and section 956, relating towhether an aircraft or vessel used in thetransportation of persons or property inforeign commerce is excluded from U.S.property. The text of the temporary reg-ulations also serves as the text of theseproposed regulations. The preamble tothe temporary regulations explains thetemporary regulations and these proposedregulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significant

regulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It has also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulations,and because the proposed regulation doesnot impose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. Ch. 6) does not apply. Pur-suant to section 7805(f) of the Code, thisregulation has been submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written (a signedoriginal and eight (8) copies) or electroniccomments that are submitted timely tothe IRS. The IRS and Treasury Depart-ment request comments on the clarity ofthe proposed rules and how they can bemade easier to understand. All commentswill be available for public inspection andcopying. A public hearing will be sched-uled if requested in writing by any personthat timely submits written comments. If apublic hearing is scheduled, notice of thedate, time, and place for the public hearingwill be published in the Federal Register.


The principal authors of theseregulations are John H. Seibert andPaul J. Carlino, Office of AssociateChief Counsel (International). However,other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *





Authority: 26 U.S.C. 7805 * * *

Par. 2. In §1.367(a)–2 is added to readas follows:

§1.367(a)–2 Exception for transfers ofproperty for use in the active conduct ofa trade or business.

[The text of the proposed §1.367(a)–2is the same as the text for §1.367(a)–2T(a)through (e)(2) published elsewhere in thisissue of the Bulletin.]


§1.367(a)–4 Special rules applicableto specified transfers of property(temporary).

[The text of the proposed §1.367(a)–4is the same as the text for §1.367(a)–4T(a)through (i)(1) published elsewhere in thisissue of the Bulletin.]


§1.367(a)–5 Property subject to section367(a)(1) regardless of use in trade orbusiness.

[The text of the proposed §1.367(a)–5is the same as the text for §1.367(a)–5T(a)through (f)(3)(ii) published elsewhere inthis issue of the Bulletin.]

Par. 5. Section 1.954–2(c)(2)(ii),(c)(2)(v) and (c)(3) Example 6 and (i) arerevised to read as follows:

§1.954–2 Foreign personal holdingcompany income.

* * * * *(c) * * *(2) * * *(ii) [The text of the proposed amend-

ment to §1.954–2(c)(2)(ii) is the same asthe text of §1.954–2T(c)(2)(ii) publishedelsewhere in this issue of the Bulletin.]

* * * * *(v) [The text of the proposed amend-

ment to §1.954–2(c)(2)(v) is the same asthe text for §1.954–2T(c)(2)(v) publishedelsewhere in this issue of the Bulletin.]

(vi) [The text of the proposed amend-ment to §1.954–2(c)(2)(vi) is the same asthe text for §1.954–2T(c)(2)(vi) publishedelsewhere in this issue of the Bulletin.]

(vii) [The text of the proposed amend-ment to §1.954–2(c)(2)(vii) is the same as

2008–32 I.R.B. 312 August 11, 2008

the text for §1.954–2T(c)(2)(vii) publishedelsewhere in this issue of the Bulletin.]

(3) * * *Example 6. [The text of the proposed

amendment to §1.954–2(c)(3) Example 6is the same as the text for §1.954–2T(c)(3)Example 6 published elsewhere in this is-sue of the Bulletin.]

(i) [The text of the proposed amend-ment to §1.954–2(c)(3)(i) is the same asthe text for §1.954–2T(c)(3)(i) publishedelsewhere in this issue of the Bulletin.]

Par. 6. Section 1.956–2(b)(1)(vi) and(e) are revised to read as follows:

§1.956–2 Definition of United StatesProperty

* * * * *(b) * * *(1) * * *(vi) [The text of the proposed amend-

ment to §1.956–2(b)(1)(vi) is the same asthe text for §1.956–2T(b)(1)(vi) publishedelsewhere in this issue of the Bulletin.]

* * * * *(e) [The text of the proposed amend-

ment to §1.956–2(e) is the same as thetext of §1.956–2T(e) published elsewherein this issue of the Bulletin].


(Filed by the Office of the Federal Register on July 2, 2008,8:45 a.m., and published in the issue of the Federal Registerfor the July 3, 2008, 73 F.R. 38162)

Notice of ProposedRulemaking and Notice ofPublic Hearing

Accrual Rules for DefinedBenefit Plans

REG–100464–08


ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document containsproposed regulations providing guidanceon the application of the accrual rulefor defined benefit plans under section411(b)(1)(B) of the Internal Revenue Code(Code) in cases where plan benefits aredetermined on the basis of the greatestof two or more separate formulas. Theseregulations would affect sponsors, admin-istrators, participants, and beneficiaries ofdefined benefit plans. This document alsoprovides a notice of a public hearing onthese proposed regulations.

DATES: Written or electronic commentsmust be received by September 16, 2008.Outlines of topics to be discussed at thepublic hearing scheduled for October 15,2008, at 10 a.m. must be received bySeptember 24, 2008.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–100464–08),room 5203, Internal Revenue Service,PO Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–100464–08),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronicallyvia the Federal eRulemakingPortal at www.regulations.gov (IRSREG–100464–08). The public hearingwill be held in the IRS Auditorium,Internal Revenue Building, 1111Constitution Avenue, NW, Washington,DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the regulations,Lauson C. Green or Linda S. F. Marshallat (202) 622–6090; concerning submis-sions of comments, the hearing, and/orbeing placed on the building access listto attend the hearing, Richard A. Hurst [email protected] orat (202) 622–7180 (not toll-free numbers).


Background

This document contains proposed In-come Tax Regulations (26 CFR part 1) un-der section 411(b) of the Code.1

Section 401(a)(7) provides that a trustis not a qualified trust under section 401unless the plan of which such trust is a partsatisfies the requirements of section 411(relating to minimum vesting standards).

Section 411(a) requires a qualified planto provide that an employee’s right to thenormal retirement benefit is nonforfeitableupon attainment of normal retirement ageand that an employee’s right to his or heraccrued benefit is nonforfeitable uponcompletion of the specified number ofyears of service under one of the vestingschedules set forth in section 411(a)(2).Section 411(a)(7)(A)(i) defines a partic-ipant’s accrued benefit under a definedbenefit plan as the employee’s accruedbenefit determined under the plan, ex-pressed in the form of an annual benefitcommencing at normal retirement age,subject to an exception in section 411(c)(3)under which the accrued benefit is theactuarial equivalent of the annual benefitcommencing at normal retirement age inthe case of a plan that does not expressthe accrued benefit as an annual benefitcommencing at normal retirement age.

Section 411(a) also requires that a de-fined benefit plan satisfy the requirementsof section 411(b)(1). Section 411(b)(1)provides that a defined benefit plan mustsatisfy one of the three accrual rules ofsection 411(b)(1)(A), (B), and (C) with re-spect to benefits accruing under the plan.The three accrual rules are the 3 percentmethod of section 411(b)(1)(A), the 1331/3

percent rule of section 411(b)(1)(B), andthe fractional rule of section 411(b)(1)(C).

Section 411(b)(1)(A) provides that adefined benefit plan satisfies the require-ments of the 3 percent method if, underthe plan, the accrued benefit payable uponthe participant’s separation from service isnot less than (A) 3 percent of the normalretirement benefit to which the partici-pant would be entitled if the participantcommenced participation at the earliest

1 Section 204(b) of the Employee Retirement Income Security Act of 1974, Public Law 93–406 (88 Stat. 829), as amended (ERISA), sets forth rules that are parallel to those in section 411(b)of the Code. Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in theseproposed regulations for purposes of ERISA, as well as the Code. Thus, these proposed Treasury regulations issued under section 411(b)(1)(B) of the Code would apply as well for purposesof section 204(b)(1)(B) of ERISA.

August 11, 2008 313 2008–32 I.R.B.

possible entry age under the plan andserved continuously until the earlier ofage 65 or the normal retirement age underthe plan, multiplied by (B) the number ofyears (not in excess of 331/3 years) of hisor her participation in the plan. Section411(b)(1)(A) provides that, in the case ofa plan providing retirement benefits basedon compensation during any period, thenormal retirement benefit to which a par-ticipant would be entitled is determinedas if the participant continued to earn an-nually the average rate of compensationduring consecutive years of service, not inexcess of 10, for which his or her compen-sation was highest. Section 411(b)(1)(A)also provides that Social Security bene-fits and all other relevant factors used tocompute benefits are treated as remainingconstant as of the current plan year for allyears after the current year.

Section 411(b)(1)(B) provides that adefined benefit plan satisfies the require-ments of the 1331/3 percent rule for aparticular plan year if, under the plan,the accrued benefit payable at the normalretirement age is equal to the normal re-tirement benefit, and the annual rate atwhich any individual who is or could bea participant can accrue the retirementbenefits payable at normal retirement ageunder the plan for any later plan year isnot more than 1331/3 percent of the annualrate at which the individual can accruebenefits for any plan year beginning on orafter such particular plan year and beforesuch later plan year.

For purposes of applying the 1331/3 per-cent rule, section 411(b)(1)(B)(i) providesthat any amendment to the plan which isin effect for the current year is treated asin effect for all other plan years. Section411(b)(1)(B)(ii) provides that any changein an accrual rate which does not apply toany individual who is or could be a partici-pant in the current plan year is disregarded.Section 411(b)(1)(B)(iii) provides that thefact that benefits under the plan may bepayable to certain participants before nor-mal retirement age is disregarded. Section411(b)(1)(B)(iv) provides that Social Se-curity benefits and all other relevant fac-tors used to compute benefits are treated asremaining constant as of the current planyear for all years after the current year.

Section 411(b)(1)(C) provides that a de-fined benefit plan satisfies the fractional

rule if the accrued benefit to which any par-ticipant is entitled upon his or her separa-tion from service is not less than a frac-tion of the annual benefit commencing atnormal retirement age to which the partic-ipant would be entitled under the plan asin effect on the date of separation if theparticipant continued to earn annually un-til normal retirement age the same rate ofcompensation upon which the normal re-tirement benefit would be computed un-der the plan, determined as if the partic-ipant had attained normal retirement ageon the date on which any such determina-tion is made (but taking into account nomore than 10 years of service immediatelypreceding separation from service). Thisfraction, which cannot exceed 1, has a nu-merator that is the total number of the par-ticipant’s years of participation in the plan(as of the date of separation from service)and a denominator that is the total num-ber of years the participant would have par-ticipated in the plan if the participant sep-arated from service at normal retirementage. Section 411(b)(1)(C) also providesthat Social Security benefits and all otherrelevant factors used to compute benefitsare treated as remaining constant as of thecurrent plan year for all years after the cur-rent year.

Section 1.411(a)–7(a)(1) of the IncomeTax Regulations provides that, for pur-poses of section 411 and the regulationsunder section 411, the accrued benefit of aparticipant under a defined benefit plan iseither (A) the accrued benefit determinedunder the plan if the plan provides for anaccrued benefit in the form of an annualbenefit commencing at normal retirementage, or (B) an annual benefit commencingat normal retirement age which is the actu-arial equivalent (determined under section411(c)(3) and §1.411(c)–1)) of the accruedbenefit under the plan if the plan does notprovide for an accrued benefit in the formof an annual benefit commencing at nor-mal retirement age.

Section 1.411(b)–1(a)(1) provides thata defined benefit plan is not a qualifiedplan unless the method provided by theplan for determining accrued benefitssatisfies at least one of the alternativemethods in §1.411(b)–1(b) for determin-ing accrued benefits with respect to allactive participants under the plan. Thethree alternative methods are the 3 percent

method, the 1331/3 percent rule, and thefractional rule. A defined benefit plan mayprovide that accrued benefits for partici-pants are determined under more than oneplan formula. Section 1.411(b)–1(a)(1)provides that, in such a case, the accruedbenefits under all such formulas must beaggregated in order to determine whetheror not the accrued benefits under the planfor participants satisfy one of these meth-ods. Under §1.411(b)–1(a)(1), a plan maysatisfy different methods with respect todifferent classifications of employees, orseparately satisfy one method with re-spect to the accrued benefits for each suchclassification, provided that such classifi-cations are not so structured as to evadethe accrued benefit requirements of sec-tion 411(b) and §1.411(b)–1.

Section 1.411(b)–1(b)(2)(i) providesthat a defined benefit plan satisfies the1331/3 percent rule for a particular planyear if (A) under the plan the accruedbenefit payable at the normal retirementage (determined under the plan) is equal tothe normal retirement benefit (determinedunder the plan), and (B) the annual rate atwhich any individual who is or could be aparticipant can accrue the retirement bene-fits payable at normal retirement age underthe plan for any later plan year cannot bemore than 1331/3 percent of the annualrate at which the participant can accruebenefits for any plan year beginning on orafter such particular plan year and beforesuch later plan year.

Section 1.411(b)–1(b)(2)(ii)(A)through (D) sets forth a series of rulesthat correspond to the rules of section411(b)(1)(B)(i) through (iv). For example,§1.411(b)–1(b)(2)(ii)(A) sets forth a spe-cial plan amendment rule for purposes ofsatisfying the 1331/3 percent rule that cor-responds to section 411(b)(1)(B)(i). Underthat rule, any amendment to a plan that isin effect for the current year is treated as ifit were in effect for all other plan years.

Section 1.411(b)–1(b)(2)(ii)(E) pro-vides that a plan is not treated asfailing to satisfy the requirements of§1.411(b)–1(b)(2) for a plan year merelybecause no benefits under the plan accrueto a participant who continues servicewith the employer after the participant has

2008–32 I.R.B. 314 August 11, 2008

attained normal retirement age.2 Section1.411(b)–1(b)(2)(ii)(F) provides that aplan does not satisfy the requirements of§1.411(b)–1(b)(2) if the base for the com-putation of retirement benefits changessolely by reason of an increase in the num-ber of years of participation.

Rev. Rul. 2008–7, 2008–7 I.R.B. 419,see §601.601(d)(2)(ii)(b), describes theapplication of the accrual rules of sec-tion 411(b)(1)(A) through (C) and theregulations under section 411(b)(1)(A)through (C) to a defined benefit plan thatwas amended to change the plan’s ben-efit formula from a traditional formulabased on highest average compensation toa new lump sum-based benefit formula.Under the terms of the plan describedin the revenue ruling, for an employeewho was employed on the day before thechange, a hypothetical account was estab-lished equal to the actuarial present valueof the employee’s accrued benefit as ofthat date, and that account was also to becredited with subsequent pay credits andinterest credits. Under transition rules setforth in the plan, the accrued benefit ofcertain participants is the greater of theaccrued benefit provided by the hypothet-ical account balance at the age 65 normalretirement age and the accrued benefitdetermined under the traditional formulaas in effect on the day before the change,but taking into account post-amendmentcompensation and service for a limitednumber of years.

Revenue Ruling 2008–7 describes howthe accrued benefits of different participantgroups satisfy, or fail to satisfy, the accrualrules under section 411(b)(1)(A) through(C), taking into account the requirementin §1.411(b)–1(a)(1) that a plan that de-termines a participant’s accrued benefitsunder more than one formula must aggre-gate the accrued benefits under all of thoseformulas in order to determine whether ornot the accrued benefits under the plan sat-isfy one of the alternative methods undersection 411(b)(1)(A) through (C). How-ever, Revenue Ruling 2008–7 explainsthat, in the case of a plan amendmentthat replaces the benefit formula underthe plan for all periods after the amend-ment, pursuant to section 411(b)(1)(B)(i)

and §1.411(b)–1(b)(2)(ii)(A), the rulethat would otherwise require aggrega-tion of the multiple formulas does notapply. Under section 411(b)(1)(B)(i) and§1.411(b)–1(b)(2)(ii)(A), any amendmentto the plan which is in effect for the currentplan year is treated as if it were in effectfor all other plan years (including past andfuture plan years).

Revenue Ruling 2008–7 illustrates theapplication of this rule with respect toparticipants who only accrue benefits un-der the new formula (who in the rulingare referred to as participants who are not“grandfathered”). For these participants,the plan amendment completely ceasesaccruals under a traditional pension ben-efit formula that provides an annuity atnormal retirement age based on serviceand average pay and, for all periods afterthe amendment, provides for the greaterof the section 411(d)(6) protected benefitunder the pre-amendment formula and thebenefit under a new post-amendment lumpsum-based benefit formula. In such acase, as stated in Revenue Ruling 2008–7,the section 411(d)(6) protected benefitunder the pre-amendment formula is notaggregated with the post-amendment for-mula, but rather is entirely disregarded,for purposes of applying the 1331/3 per-cent rule because the new formula istreated under section 411(b)(1)(B)(i) and§1.411(b)–1(b)(2)(ii)(A) as having been ineffect for all plan years. This analysis wasreflected in Register v. PNC Fin. Servs.Group, Inc., 477 F.3d 56 (3d Cir. 2007).

In addition to satisfying the require-ments of section 411(b)(1)(B), a definedbenefit plan must also satisfy the age dis-crimination rules of section 411(b)(1)(H),taking into account section 411(b)(5), asadded to the Code by the Pension Pro-tection Act of 2006, Public Law 109–280(120 Stat. 780) (PPA ’06). In the case of aconversion of a plan to a statutory hybridplan pursuant to an amendment that isadopted after June 29, 2005 (a “post-PPAconversion plan”), the conversion amend-ment must satisfy the rule of section411(b)(5)(B)(iii) that prohibits wearawayof benefits upon conversion. In the case ofa plan converted to a statutory hybrid planpursuant to an amendment that is adopted

on or before June 29, 2005 (a “pre-PPAconversion plan”), as provided in Notice2007–6, the IRS will not consider and willnot issue determination letters with respectto whether such a pre-PPA conversionplan satisfies the requirements of section411(b)(1)(H) (as in effect prior to the ad-dition of section 411(b)(5) by PPA ’06),including the effect of any wearaway.Thus, although wearaway upon conversionis expressly prohibited with respect topost-PPA conversion plans pursuant tosection 411(b)(5), the IRS will not addressand will not issue determination letterswith respect to whether a conversionthat results in wearaway with respectto a pre-PPA conversion plan violatesthe age discrimination rules of section411(b)(1)(H). See §601.601(d)(2)(ii)(b).

Revenue Ruling 2008–7 provides adifferent analysis as to whether a planwith wearaway fails to satisfy the accrualrules of section 411(b)(1)(B) when thepre-amendment formula continues in placeafter the amendment for a group of partici-pants. In such a case, where an amendmenthas gone into effect but continues the priorformula for some period of time with re-spect to one or more participants, the appli-cation of the rule in section 411(b)(1)(B)(i)and §1.411(b)–1(b)(2)(ii)(A) does notresult in a disregard of the prior plan for-mula (which remains in effect after theamendment). Instead, the 1331/3 percentrule must be applied with respect to thoseparticipants based on the combined effectof the two ongoing formulas.3

Revenue Ruling 2008–7 provides relieffrom disqualification under the InternalRevenue Code (under the authority of sec-tion 7805(b)) for a limited class of plansunder which a group of employees speci-fied under the plan receives a benefit equalto the greatest of the benefits providedunder two or more formulas (an applicable“greater-of” benefit), provided that eachsuch formula standing alone would satisfyan accrual rule of section 411(b)(1)(A),(B), or (C) for the years involved. Underthe relief set forth in Rev. Rul. 2008–7,for plan years beginning before January1, 2009, the IRS will not treat a plan eli-gible for the relief as failing to satisfy theaccrual rules of section 411(b)(1)(A), (B),

2 However, section 411(b)(1)(H), which was added to the Code after the issuance of §1.411(b)–1, generally requires the continued accrual of benefits after attainment of normal retirement age.

3 Two federal courts have taken a position contrary to this interpretation of section 411(b)(1)(B)(i) and §1.411(b)–1(b)(2)(ii)(A) as set forth in Revenue Ruling 2008–7. See Tomlinson v.El Paso Corp., 2008 WL 762456 (D. Colo. Mar. 19, 2008); Wheeler v. Pension Value Plan for Employees of Boeing Corp., 2007 WL 2608875 (S.D. Ill. Sept. 6, 2007).

August 11, 2008 315 2008–32 I.R.B.

and (C) solely because the plan providesan applicable “greater-of” benefit, wherethe separate formulas, standing alone,would satisfy an accrual rule of section411(b)(1)(A), (B), and (C).


The fact pattern described in RevenueRuling 2008–7 has occurred in a num-ber of situations over the past few years.Employers sponsoring these plans havesuggested that their plans should satisfythe accrual rules of section 411(b)(1)(A),(B), and (C), contending that any technicalviolation of the accrual rules is directlybecause the participant has higher front-loaded accruals under one formula whencompared to the other formula that willultimately provide the larger benefit underthe plan. While the relief under section7805(b) that is provided under RevenueRuling 2008–7 addresses the situationfor past years, the relief does not applyfor the parallel accrual rules of section204(b)(1)(A), (B) and (C) of ERISA andonly applies to plan years beginning be-fore January 1, 2009.

The proposed regulations would pro-vide a limited exception to the existing re-quirement under §1.411(b)–1(a)(1) to ag-gregate the accrued benefits under all for-mulas in order to determine whether ornot the accrued benefits under the planfor participants satisfy one of the alterna-tive methods under section 411(b)(1)(A)through (C). Under this limited exception,certain plans that determine a participant’sbenefits as the greatest of the benefits de-termined under two or more separate for-mulas would be permitted to demonstratesatisfaction of the 1331/3 percent rule ofsection 411(b)(1)(B) by demonstrating thateach separate formula satisfies the 1331/3percent rule of section 411(b)(1)(B).4

A plan would be eligible for this ex-ception only if each of the separate for-mulas uses a different basis for determin-ing benefits. For example, a plan wouldbe eligible for this special rule if it pro-vides a benefit equal to the greater of thebenefits under two formulas, one of whichdetermines benefits on the basis of high-est average compensation and the other ofwhich determines benefits on the basis of

career average compensation. As anotherexample, a traditional defined benefit planwhich determined benefits based on high-est average compensation that is amendedto add a cash balance formula (as in thefacts of Rev. Rul. 2008–7) would be el-igible for this exception where, in orderto provide a better transition for longerservice active participants, the plan pro-vides that a group of participants is enti-tled to the greater of the benefit providedby the hypothetical account balance andthe benefit determined under the contin-uing traditional formula. In each of theabove two examples, each separate for-mula under the plan uses a different ba-sis for determining benefits and, therefore,both of those plans would be eligible toutilize this exception. Accordingly, bothplans would be permitted to demonstratesatisfaction of the 1331/3 percent rule ofsection 411(b)(1)(B) by demonstrating thateach separate formula under the plan sat-isfies the 1331/3 percent rule of section411(b)(1)(B).

The utility of this exception can be seenfrom the following example of a plan thatprovides a benefit equal to the greater oftwo formulas. One formula provides abenefit of 1 percent of average compen-sation for the 3 consecutive years of ser-vice with the highest such average mul-tiplied by the number of years of serviceat normal retirement age (not in excess of25 years of service), and the other formulaprovides a benefit that is the accumulationof 1.5 percent of compensation for eachyear of service. Under the existing finalregulations, the 1331/3 percent rule of sec-tion 411(b)(1)(B) is applied by referenceto the annual rate of accrual for each yearfrom the year of the test through normal re-tirement age. If the participant’s accruedbenefit currently is determined using the1 percent formula (because the high-3 av-erage compensation is significantly higherthan the effective career average compen-sation that is used under the 1.5 percentformula), but the participant’s normal re-tirement benefit will ultimately be deter-mined using the 1.5 percent formula if ser-vice continues to normal retirement age(because the 25-year service cap will ap-ply to the 1 percent formula, but not the1.5 percent formula), then the annual rate

of accrual will have to be determined fortesting purposes on a consistent basis foreach year, either using each year’s com-pensation or high-3 average compensation.Thus, in order to test the plan under the1331/3 percent rule, the existing final reg-ulations would require that either the ac-cruals under the 1 percent formula be ex-pressed in terms of a single year’s payor the accruals under the 1.5 percent for-mula be expressed in terms of high-3 aver-age compensation. In either case, the an-nual rates of accrual would differ from thestated rates under the plan formulas. In ad-dition, the annual rates of accrual for theaccumulation formula when those rates areexpressed in terms of high-3 average com-pensation could be negative in some cases.In contrast, using the exception set forth inthe proposed regulation would enable theplan to be tested using the annual rates ofaccrual expressed in the plan formulas.

The proposed regulations would alsoprovide an extension of this exception inthe case of a plan that provides benefitsbased on the greatest of three or more ben-efit formulas. In such a case, the planwould be eligible for a modified version ofthe formula-by-formula testing under theproposed regulations. Under this modifi-cation, the accrued benefits determined un-der all benefit formulas that have the samebasis are first aggregated and then thoseaggregated formulas are treated as a singleformula for purposes of applying the sep-arate testing rule under the proposed regu-lations.

Eligibility for separate testing un-der the proposed regulations would beconstrained by an anti-abuse rule. Theproposed regulations would provide thata plan is not eligible for separate test-ing if the Commissioner determines thatthe plan’s use of separate formulas withdifferent bases is structured to evade thegeneral requirement to aggregate formulasunder §1.411(b)–1(a)(1) (for example, ifthe differences between the bases of theseparate formulas are minor).

Proposed Effective/Applicability Date

These regulations are proposed to beeffective for plan years beginning on orafter January 1, 2009.

4 These proposed regulations would only apply for purposes of the 1331/3 percent rule of section 411(b)(1)(B) (and the parallel rule of section 204(b)(1)(B) of ERISA). Neither Rev. Rul.2008–7 nor these proposed regulations are relevant to (and thus they do not affect) the application of the age discrimination rules of section 411(b)(1)(H) (or the parallel age discriminationrules of section 204(b)(1)(H) of ERISA).

2008–32 I.R.B. 316 August 11, 2008

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 also hasbeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these reg-ulations, and because the regulations donot impose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,this regulation has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written (a signedoriginal and eight (8) copies) or electroniccomments that are submitted timely to theIRS. The IRS and the Treasury Depart-ment specifically request comments onthe clarity of the proposed regulations andhow they may be made easier to under-stand. All comments will be available forpublic inspection and copying.

Under these proposed regulations, aplan eligible for the separate testing optionwould not violate the accrual rules merelybecause the plan provides higher front-loaded accruals under one formula whencompared to the other formula that willultimately provide the larger benefit underthe plan. Some commentators have sug-gested a broader rule that would modifythe regulations to provide that a plan doesnot violate the accrual rules where the planprovides a pattern of accruals that affordshigher benefits in earlier years (that is,benefit accruals are frontloaded) relativeto a pattern of accruals that satisfies theaccrual rules. The 3 percent method ofsection 411(b)(1)(A) and the fractionalrule of section 411(b)(1)(C) automaticallyachieve this result because they are cumu-lative tests that test on the basis of the totalaccrued benefit compared to the projectednormal retirement benefit. By contrast,the 1331/3 percent rule is based on a com-parison of the “annual rate at which anyindividual who is or could be a participant

can accrue the retirement benefits payableat normal retirement age” for a later planyear with the annual rate for an earlier planyear. The existing final regulations in-clude an example (§1.411(b)–1(b)(2)(iii),Example (3)) that demonstrates how aplan fails the 1331/3 percent rule whereit provides accruals in earlier years thatare frontloaded relative to accruals thatapply in later years. The proposed regu-lations do not include a provision underthe 1331/3 percent rule that recognizesprior frontloading of benefits. However,commentators who would suggest sucha provision under the 1331/3 percent ruleshould describe how that provision wouldfit within the statutory language of section411(b)(1)(B), including the application ofsection 411(b)(1)(B)(i) (which requiresthat an amendment to the plan that is ineffect for the current year be treated as ineffect for all other plan years).

A public hearing has been scheduled forOctober 15, 2008, beginning at 10 a.m. inthe Auditorium, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC. Due to building security proce-dures, visitors must enter at the Consti-tution 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 written or electronic comments bySeptember 16, 2008, and an outline of top-ics to be discussed and the amount of timeto be devoted to each topic (a signed orig-inal and eight (8) copies) by September24, 2008. A period of 10 minutes will beallotted to each person for making com-ments. An agenda showing the schedulingof the speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.


The principal authors of these reg-ulations are Lauson C. Green andLinda S. F. Marshall, Office of DivisionCounsel/Associate Chief Counsel (TaxExempt and Government Entities).However, other personnel from the IRSand the Treasury Department participatedin the development of these regulations.

* * * * *





Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.411(b)–1 is amended

by adding new paragraph (b)(2)(ii)(G) toread as follows:

§1.411(b)–1 Accrued benefitrequirements.

* * * * *(b) * * *(2) * * *(ii) * * *(G) Special rule for multiple formu-

las—(1) In general. Notwithstandingparagraph (a)(1) of this section, a plan thatdetermines a participant’s accrued benefitas the greatest of the benefits determinedunder two or more separate formulas ispermitted, to the extent provided underthis paragraph (b)(2)(ii)(G), to demon-strate satisfaction of section 411(b)(1)(B)and this paragraph (b) by demonstratingthat each separate formula satisfies therequirements of section 411(b)(1)(B) andthis paragraph (b).

(2) Separate bases requirement. A planis eligible for separate testing under thisparagraph (b)(2)(ii)(G) if each of the sepa-rate formulas uses a different basis for de-termining benefits. For example, a plan iseligible for this special rule if it provides anaccrued benefit equal to the greater of thebenefits under two formulas, one of whichdetermines accrued benefits on the basisof highest average compensation and theother of which determines accrued benefits

August 11, 2008 317 2008–32 I.R.B.

on the basis of career average compensa-tion. As another example, a defined bene-fit plan that bases benefits on highest av-erage compensation and that is amendedto add a statutory hybrid benefit formula(as defined in §1.411(a)(13)–1(d)(3)) thatprovides for pay credits to be made basedon each year’s compensation is eligible forthis separate testing exception if the planprovides that one or more participants areentitled to the greater of the benefit deter-mined under the statutory hybrid benefitformula and the benefit determined underthe original formula.

(3) Plans with three or more formulas.If a plan determines a participant’s bene-fits as the greatest of the benefits deter-mined under three or more separate for-mulas, but two or more of the formulasuse the same basis for determining bene-fits, then the plan may nonetheless applyparagraphs (b)(2)(ii)(G)(1) and (2) of thissection by aggregating all benefit formulasthat have the same basis and treating thoseaggregated formulas as a single formulafor purposes of paragraphs (b)(2)(ii)(G)(1)and (2) of this section.

(4) Anti-abuse rule. A plan is not eli-gible for separate testing under this para-graph (b)(2)(ii)(G) if the Commissionerdetermines that the plan’s use of separateformulas with different bases is structuredto evade the requirement to aggregate for-mulas under paragraph (a)(1) of this sec-tion (for example, if the differences be-tween the bases of the separate formulasare minor).

(5) Effective/applicability date. Thisparagraph (b)(2)(ii)(G) is applicable forplan years beginning on or after January 1,2009.

Steven T. Miller,Acting Deputy Commissionerfor Services and Enforcement.


Deletions From CumulativeList of OrganizationsContributions to Whichare Deductible Under Section170 of the Code

Announcement 2008–69

The Internal Revenue Service has re-voked its determination that the organi-zations listed below qualify as organiza-tions described in sections 501(c)(3) and170(c)(2) of the Internal Revenue Code of1986.

Generally, the Service will not disallowdeductions for contributions made to alisted organization on or before the dateof announcement in the Internal RevenueBulletin that an organization no longerqualifies. However, the Service is notprecluded from disallowing a deductionfor any contributions made after an or-ganization ceases to qualify under section170(c)(2) if the organization has not timelyfiled a suit for declaratory judgment undersection 7428 and if the contributor (1) hadknowledge of the revocation of the rulingor determination letter, (2) was aware thatsuch revocation was imminent, or (3) wasin part responsible for or was aware of theactivities or omissions of the organizationthat brought about this revocation.

If on the other hand a suit for declara-tory judgment has been timely filed, con-tributions from individuals and organiza-tions described in section 170(c)(2) thatare otherwise allowable will continue tobe deductible. Protection under section7428(c) would begin on August 11, 2008,and would end on the date the court firstdetermines that the organization is not de-scribed in section 170(c)(2) as more partic-ularly set forth in section 7428(c)(1). Forindividual contributors, the maximum de-duction protected is $1,000, with a hus-band and wife treated as one contributor.This benefit is not extended to any indi-vidual, in whole or in part, for the acts oromissions of the organization that were thebasis for revocation.

Homes for All, Inc.Fort Myers, FL

H & H Housing, Inc.Los Angeles, CA

Family Home Providers, Inc.Cumming, GA

Miller County New Vision Coalition, Inc.Colquitt, GA

Buyer’s Dream FundCleveland Heights, OH

American Bowling CongressWyoming, MI

Accelerated Trust, Inc.Boca Raton, FL

National Home Charities, Inc.Westminster, CO

Independent Group, Inc.Covington, KY

Shepherd Hills Development CorporationLas Vegas, NV

Foundations Status of CertainOrganizations


The following organizations have failedto establish or have been unable to main-tain their status as public charities or as op-erating foundations. Accordingly, grantorsand contributors may not, after this date,rely on previous rulings or designationsin the Cumulative List of Organizations(Publication 78), or on the presumptionarising from the filing of notices under sec-tion 508(b) of the Code. This listing doesnot indicate that the organizations have losttheir status as organizations described insection 501(c)(3), eligible to receive de-ductible contributions.

Former Public Charities. The follow-ing organizations (which have been treatedas organizations that are not private foun-dations described in section 509(a) of theCode) are now classified as private foun-dations.

Adonai Christian Ministries, Inc.,Norfolk, VA

Advance Humanity Aide AHA,McClellanville, SC

Almarie King Education Fund,Port Orchard, WA

Alpha and Omega Church Alphaand Omega Immanuel NFP-Inc.,Chicago, IL

Alvarado Project, San Francisco, CAAmerican Cowboy Association, Inc.,

Longwood, FLAmerican Indian Community History

Center, Kensington, CAAmericare Community Services, Inc.,

Richmond, WA

2008–32 I.R.B. 318 August 11, 2008

Anchored in Excellence CommunityDevelopment Corporation,Baytown, TX

Annie Laura Avant Community, Inc.,Detroit, MI

Aqua Resources, Inc., Beaumont, TXArkansas Hunters Feeding the Hungry,

Inc., Little Rock, ARArts Fund Inc., Salem, MAAscended Masters Healing Center for the

Mind Body and Soul, Tucson, AZAssociated Lenders, Desoto, TXAuko Community Development

Corporaton, Los Angeles, CAB & S Kitter Kare, Crane, MOBaby Basics, Inc., Milwaukee, WIBackpacks for Kids, Dallas, TXBaldwin Bethany Community

Development Corporation,Los Angeles, CA

B E S T Academy, Houston, TXBewear Prison Ministry, Inc., Houston, TXBreath of Life of Central Florida,

Lake Panasoffke, FLBRH New Communities, Inc.,

Baton Rouge, LABridges of Hope Community

Development Center, Inc.,Inglewood, CA

Brooks Chapel Project Outreach, Inc.,Moscow, TN

Building Blocks Center, Inc., Fresno, TXCaeli Foundation, Orem, UTCairs, Inc., Nokomis, FLCalifornia Museum of Military History,

Inc., San Francisco, CACAPPA Children’s Foundation,

Sacramento, CACaring for Cats Charitable Trust,

Stoughton, MACaring for Families, Los Angeles, CACenter for Religious Architecture,

Chicago, ILCharity Challenges, Inc., Rochester, NYChisholm Community Services of

Oklahoma, Inc., Jefferson, TXChoice Resolutions Group, Inc.,

Houston, TXCian Society Foundation, New York, NYCircle of Life Foundation, Inc.,

Odenton, MDCitizens for Parental Rights,

Grand Rapids, MICity Community Development

Corporation, Cleveland, OHClaver House of Renewal NFP,

Chicago, ILCollege Solutions, Inc., Gilbert, AZ

Come and Dine Ministries, Inc.,Adelphi, MD

Committee to Preserve Luna ParkHousing, Brooklyn, NY

Community Awareness Committee,Avalon, PA

Community Mobilization Organization,Bronx, NY

Comnec, Incorporated, Los Angeles, CACompassion Global Relief Mission,

Randallstown, MDConcerned Rosebud Area Citizens, Inc.,

White River, SDCreston Community Development

Corporation, Inc., Houston, TXCrew Ensemble, Inc., Baltimore, MDCulverton Affordable Housing

Development Fund Company, Inc.,Troy, NY

Dawn of Hope, Granville, OHDaybreak Community Development

Corp., Plainfield, NJDeanza Clinic, Calexico, CADivine Institute of Modeling & Etiquette,

Inc., Tempe, AZDublin Area Senior Volunteer Program,

Dublin, CAEagles Missionary Supply, Inc.,

Midlothian, VAEastside Affordable Housing Program,

Bellevue, WAEastside Community and Development

Center, Inc., Springfield, ILEden Foundation, Incorporated,

Winter Park, FLEducation Support, Inc., Cheyenne, WYE G T Community Development Corp.,

Bayonne, NJEmmanuel Christian Fellowship

Ministries, Inc., Severn, MDEmmanuel House, Newark, NJE-nitiative Wealth, Inc., Torrance, CAE.R. Rewis Water & Spirit Outreach, Inc.,

Chokoloskee, FLEvangelical Crusade Outreach,

Phoenix, AZEzekiel House, Inc., Lansing, MIFaith Temple Outreach Ministries,

Grenada, MSFannie Roberts Adult Day Care,

Thomasville, GAFinancial Fitness Center, Inc., FFC,

Atlanta, GAFlips Community Development &

Outreach of Texas, Inc., Irving, TXFor Childrens Sake of Maryland,

Austin, TX

Foundation for Agape of North Alabama,Huntsville, AL

Foundation for People With Disabilities,Fulton, NY

Fourth Watch Ministries, Seymour, TNFrancies Nonprofit Housing Community

Development Corporation,Rochester, MI

Friendly Community Services Outreach,Inc., Victorville, CA

Friendly Group Home, Inc.,Lehigh Acres, FL

Friends & Neighbors Elderly Support& Housing Services of LA, Inc.,Lafayette, LA

Friends of Idasa, Inc., Washington, DCFull Gospel Globe Mission Church,

Powell, OHGenesis House, Inc., Indianapolis, INGhana Golden Pod Organization, Inc.,

Bronx, NYGhova Institute, Inc., Hyattsville, MDGilbert Lindsay Manor Tenant

Committe-Association,Los Angeles, CA

Global Harvest Ministerial Association,Inc., Clearwater, FL

Golden Gate Community DevelopmentCorporation, Raeford, NC

Good Stewardship, Inc., Summerville, SCGrace and Mercy Foundation,

Inglewood, CAGrazette Halfway House, Inc.,

West Palm Beach, FLGregory House Foundation, Jackson, MSGregory Training Center,

San Francisco, CAGrupo Jalisco En San Antonio TX,

San Antonio, TXGuardian Angel Foster Home, Inc.,

Hinesville, GAGuardians of Childrens and Parents

Family Rights Organization,Washington, DC

Guidance Behind the Walls, Aurora, COHawaii Mana, Honolulu, HIHelp Us, Incorporated, Martinsburg, WVHelping Hands Community Resource

Distribution Center, Inc., Miami, FLHelping Hands Family Services,

Chicago, ILHeritage House, Inc., Lithonia, GAHis Greatest Creation, Fort Worth, TXHistoric Stop Six Empowerment

Coalition, Fort Worth, TXHollies Hope, Inc., Metairie, LAHome Buyers Network, Inc.,

McDonough, GA

August 11, 2008 319 2008–32 I.R.B.

HOPE, Philippi, WVHopkins County Healthcare Service,

Sulphur Springs, TXHumanity Resources, Inc.,

Ft. Lauderdale, FLIllinois Chaplaincy, Inc., Chicago, ILIn the Gap Ministries Community

Development Corporation,Charlotte, NC

Infamous Warriors Drill Team of DesMoines, Des Moines, IA

Inner Circle Counsel Enterprise, Inc.,Miami, FL

Institute for World Transformation,Antioch, CA

Inter-Action, Inc., Stone Mountain, GAInternational Association of Rosenbergs

System of Integrative BodyPsychotherapy, Santa Monica, CA

International Bodytalk Foundation, Inc.,Sarasota, FL

Ivana Housing Development Corporation,Citrus Heights, CA

James A. Rhodes Leadership Foundation,Columbus, OH

Jesus Children Ministry, Sacramento, CAJoshua Ministries, Inc., Nashville, TNJubilee House, Riverside, CAKhmer County Services of Florida,

Cerritos, CAL & K Teen Summit, Jacksonville, FLLaura B. Collins Child Development

Center, Inc., Chicago, ILLife Center, Inc., Newport News, VALifefaqs Org., Oakdale, CTLord’s Kitchenette & Ministries of Helps,

Inc., Tulsa, OKLos Angeles Oral Health Foundation,

Los Angeles, CALott of Love Foundation, Inc.,

Baton Rouge, LALove at Work Group, Inc.,

Washington, DCLoving Care Foundation, Salem, VAMarcelo Balboa Ironman Foundation,

Superior, COMary Alice Foundation, Inc.,

Milwaukee, WIMary Esther Enterprises, Inc., Shelby, NCMcPherson Gardens, Inc., Euclid, OHMedicine Lodge, Inc., Great Falls, MTMetrovoice Youth Entrepreneurs Program,

Inc., Washington, DCMichigan Elite Hoops, Detroit, MIMichigan Institute for Prevention and

Intervention, Gross Pointe, MIMiddle Tennessee Labrador Retriever

Rescue, Nashville, TN

Milestone Social Services, Inc.,Winter Park, FL

Mobiles Pride Youth Organization,Mobile, AL

Molly Crouch Anderson ScholarshipFoundation, Itasca, TX

Moorish Development Corporation,Wichita, KS

More Than a Memory Productions,Channelview, TX

Morning Star Community DevelopmentCorporation, Williamston, NC

Mountain View Home for the ElderlyCorp., Cidra, PR

Mt. Sinai Senior Services, Inc.,South Setuaket, NY

Multicultural Citizens AdvisoryCommissioners, Inc., Atlantic City, NJ

My Contribution, Hercules, CAMy Fathers House, Shaker Heights, OHNational Artist Development Academy,

Inc., Brooklyn, NYNational Center for Open Source

and Education Corporation,Thetford Center, VT

National Interscholastic MotorsportsAssociation, Inc., NIMA, Warren, AR

Natural Home, Inc., Washington, DCNBPT, Inc., Selma, ALNeighborhood Center for Greater Omaha,

Omaha, NENew Creations Revelations Ministries,

Riverside, CANew World Shalom Initiative,

Clarksdale, MSNext Step up Ministries, Greensboro, NCNorth Miami Performing Arts, Inc.,

Opalocka, FLNorthwest Collaborative, Spokane, WANorthwest Intake Center, Inc.,

Cypress, TXOakville Community Center, Inc.,

Danville, ALOmni Women Center, Washington, DCOpendoor Services, Inc.-Employment

Services, Modesto, CAOregon Association of Family Career

and Community Leaders of America,Salem, OR

Oregon Association of HealthOccupations Students of America,Salem, OR

Organization for the Developmentof Agriculture in Haiti OADH,Brooklyn, NY

Othell Adkins Ministries, Gulfport, MSOur Loving Arms, Inc., Buffalo, NY

Paradigm Athletic Association,Silver Springs, MD

PASC Academy Charter School,Stockton, CA

Peace Education Foundation of Florida,Inc., Hollywood, FL

Peek Adventures, Lauderdale, MNPhotoaid, Inc., New York, NYPrairie Ridge Elementary School Parent

Teacher Organization, Longmont, COPrinceton Future Farmer Agriculture

Corporation, Princeton, CAProceed Community Development

Corporation, Inc., Elizabeth, NJProject Clean Across America, Avon, COProject Hope, Inc., Northport, ALPueblo Zoological Society Foundation,

Pueblo, CORaising the Bar, Blue Springs, MORD Foundation, Rockford, ILRebuilding Everyone’s Attitude Causes

Hope (REACH), Spring, TXReform & Independent Services, Inc.,

Detroit, MIRescue Ministries International, Inc.,

Lakeland, FLRiver Ridge Learning Center,

River Ridge, LARiverside County Underwater Search and

Recovery Team, Inc., Perris, CAROCS, Scottsdale, AZRobert L. Campbell Ministries, Inc.,

Sugar Land, TXRoharco, Inc., Cincinnati, OHRural West Texas Community

Partnerships, Denver City, TXSafespaces Org., Brentwood, CASant Kiltirel Mapou, Inc., Miami, FLSecond Baptist Community Development

NFP, Evanston, ILSeneca High School Foundation,

Seneca, ILSenior Services, Inc., Wheatfield, NYShelton and Lucille Buchanan Family

Foundation, San Diego, CASierra Development Corporation,

Somerset, NJSouthwest Community Center of

Rockford, Rockford, ILSpecial Education Advocacy Services for

Children and Youth, Washington, DCSpirit Builders, Inc., Cordova, TNSpiritual Essence by Pamela Dorsey,

Dallas, TXSt. Paul/Gillespie-Selden Rural Life

Community Center, Inc., Cordele, GAStepping Stones Academy, Inc.,

Crosby, TX

2008–32 I.R.B. 320 August 11, 2008

Strategies to Equip People for Success,Inc., Lauderdale Lakes, FL

Sun Civic League, Sun, LATabernacle of Faith Outreach Ministries,

Detroit, MITemple Education Ministries, Inc.,

Inmann, SCTexas Institute for Housing Opportunities,

Inc., Austin, TXTime of the End Ministries, San Diego, CAT. J. Striders Youth Track and Field Club,

San Bernardino, CATNT Connections Charities, Inc.,

Jacksonville, FLTotal Life Center, Virginia Beach, VATransformations Community

Development Corporation, Inc.,Bowie, MD

Transformers International, Inc.,Miami, FL

Tutor in Town, Incorporated, Miami, FLValley Initiative for Affordable Housing,

Merced, CAVictory Foundation, Corona, CAVision Inspires Synergy in Organizations

Nationwide, Inc., Elizabeth, NJVisionary Institute for Total Ageless

Living, Inc., Potomac, MDUjima Consortium, Inc., Southfield, MIWee Bee Care, Inc., Stockbridge, CAWest Georgia Community Development

Corporation, Newnan, GAWGH Heritage, Inc., Grand Prairie, TXWilmingtonians, Inc., Middletown, DEWings Foundation, Inc., Oak Hill, WVWomen of Color Public Policy and

Education Institute, Inc., Brooklyn, NYWon Last Chance, Inc., Chandler, AZWork Works, Inc., Poughkeepsie, NYWorstell Foundation, Mexico, MOYouth Solutions, Inc., Brandon, MS

If an organization listed above submitsinformation that warrants the renewal ofits classification as a public charity or asa private operating foundation, the Inter-nal Revenue Service will issue a ruling ordetermination letter with the revised clas-sification as to foundation status. Grantorsand contributors may thereafter rely uponsuch ruling or determination letter as pro-vided in section 1.509(a)–7 of the IncomeTax Regulations. It is not the practice ofthe Service to announce such revised clas-sification of foundation status in the Inter-nal Revenue Bulletin.

Multiemployer Plan FundingGuidance; Correction



ACTION: Correction to a notice of a pub-lic hearing on proposed rulemaking.

SUMMARY: This document contains acorrection to a notice of public hearing(Announcement 2008–64, 2008–28 I.R.B.114) on a notice of proposed rulemakingthat was published in the Federal Reg-ister on Friday, June 27, 2008 (73 FR36476) providing additional rules for cer-tain multiemployer defined benefit plansthat are in effect on July 16, 2006. Theseproposed regulations affect sponsors andadministrators of, and participants in mul-tiemployer plans that are in either endan-gered or critical status. These regulationsare necessary to implement the new rulesset forth in section 432 that are effectivefor plan years beginning after 2007. Theproposed regulations reflect changes madeby the Pension Protection Act of 2006.

FOR FURTHER INFORMATIONCONTACT: Bruce Perlin, (202) 622–6090(not a toll-free number).


Background

The correction notice that is the subjectof this document is under section 432 ofthe Internal Revenue Code.

Need for Correction

As published, a notice of a pub-lic hearing on proposed rulemaking(REG–151135–07) contains an error thatmay prove to be misleading and is in needof clarification.

Correction of Publication

Accordingly, the publication of a noticeof public hearing on proposed rulemaking(REG–151135–07), which was the subjectof FR Doc. E8–14563, is corrected as fol-lows:

On page 36477, column 1, under thecaption “SUPPLEMENTARY INFOR-MATION:”, line 5, the language “Fed-eral Register on Tuesday, March 8,” iscorrected to read “Federal Register onTuesday, March 18,”.

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 July 1, 2008,8:45 a.m., and published in the issue of the Federal Registerfor July 2, 2008, 73 F.R. 37910)

Section 7428(c) Validationof Certain ContributionsMade During Pendencyof Declaratory JudgmentProceedings


This announcement serves notice to po-tential donors that the organization listedbelow has recently filed a timely declara-tory judgment suit under section 7428 ofthe Code, challenging revocation of itsstatus as an eligible donee under section170(c)(2).

Protection under section 7428(c) of theCode begins on the date that the noticeof revocation is published in the InternalRevenue Bulletin and ends on the dateon which a court first determines that anorganization is not described in section170(c)(2), as more particularly set forth insection 7428(c)(1).

In the case of individual contributors,the maximum amount of contributionsprotected during this period is limited to$1,000.00, with a husband and wife beingtreated as one contributor. This protec-tion is not extended to any individual whowas responsible, in whole or in part, forthe acts or omissions of the organizationthat were the basis for the revocation.This protection also applies (but withoutlimitation as to amount) to organizationsdescribed in section 170(c)(2) which areexempt from tax under section 501(a). Ifthe organization ultimately prevails in itsdeclaratory judgment suit, deductibilityof contributions would be subject to the

August 11, 2008 321 2008–32 I.R.B.

normal limitations set forth under section170.

Sea of Sound Production, Inc.Midlothian, VA

Educate the Children, Inc.Long Beach, CA

Family Home Providers, Inc.Cumming, GA

2008–32 I.R.B. 322 August 11, 2008

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 situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

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.

August 11, 2008 i 2008–32 I.R.B.

Numerical Finding List1

Bulletins 2008–27 through 2008–32

Announcements:

2008-62, 2008-27 I.R.B. 74

2008-63, 2008-28 I.R.B. 114

2008-64, 2008-28 I.R.B. 114

2008-65, 2008-31 I.R.B. 279

2008-66, 2008-29 I.R.B. 164

2008-67, 2008-29 I.R.B. 164

2008-68, 2008-30 I.R.B. 244

2008-69, 2008-32 I.R.B. 318

2008-70, 2008-32 I.R.B. 318

2008-71, 2008-32 I.R.B. 321

2008-72, 2008-32 I.R.B. 321

Notices:

2008-55, 2008-27 I.R.B. 11

2008-56, 2008-28 I.R.B. 79

2008-57, 2008-28 I.R.B. 80

2008-58, 2008-28 I.R.B. 81

2008-59, 2008-29 I.R.B. 123

2008-60, 2008-30 I.R.B. 178

2008-61, 2008-30 I.R.B. 180

2008-62, 2008-29 I.R.B. 130

2008-63, 2008-31 I.R.B. 261

2008-64, 2008-31 I.R.B. 268

2008-65, 2008-30 I.R.B. 182

2008-66, 2008-31 I.R.B. 270

2008-67, 2008-32 I.R.B. 307

Proposed Regulations:

REG-143453-05, 2008-32 I.R.B. 310

REG-129243-07, 2008-27 I.R.B. 32

REG-138355-07, 2008-32 I.R.B. 311

REG-149405-07, 2008-27 I.R.B. 73

REG-100464-08, 2008-32 I.R.B. 313

REG-101258-08, 2008-28 I.R.B. 111

REG-102122-08, 2008-31 I.R.B. 278

REG-121698-08, 2008-29 I.R.B. 163

Revenue Procedures:

2008-32, 2008-28 I.R.B. 82

2008-33, 2008-28 I.R.B. 93

2008-34, 2008-27 I.R.B. 13

2008-35, 2008-29 I.R.B. 132

2008-37, 2008-29 I.R.B. 137

2008-38, 2008-29 I.R.B. 139

2008-39, 2008-29 I.R.B. 143

2008-40, 2008-29 I.R.B. 151

2008-41, 2008-29 I.R.B. 155

2008-42, 2008-29 I.R.B. 160

2008-43, 2008-30 I.R.B. 186

2008-44, 2008-30 I.R.B. 187

2008-45, 2008-30 I.R.B. 224

Revenue Procedures— Continued:

2008-46, 2008-30 I.R.B. 238

2008-47, 2008-31 I.R.B. 272

Revenue Rulings:

2008-32, 2008-27 I.R.B. 6

2008-33, 2008-27 I.R.B. 8

2008-34, 2008-28 I.R.B. 76

2008-35, 2008-29 I.R.B. 116

2008-36, 2008-30 I.R.B. 165

2008-37, 2008-28 I.R.B. 77

2008-38, 2008-31 I.R.B. 249

2008-39, 2008-31 I.R.B. 252

2008-40, 2008-30 I.R.B. 166

2008-41, 2008-30 I.R.B. 170

2008-42, 2008-30 I.R.B. 175

2008-43, 2008-31 I.R.B. 258

2008-44, 2008-32 I.R.B. 292

Treasury Decisions:

9401, 2008-27 I.R.B. 1

9402, 2008-31 I.R.B. 254

9403, 2008-32 I.R.B. 285

9404, 2008-32 I.R.B. 280

9405, 2008-32 I.R.B. 293

9406, 2008-32 I.R.B. 287

9409, 2008-29 I.R.B. 118

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin2008–26, dated June 30, 2008.

2008–32 I.R.B. ii August 11, 2008

Finding List of Current Actions onPreviously Published Items1

Bulletins 2008–27 through 2008–32

Announcements:

2008-64

Corrected by by

Ann. 2008-71, 2008-32 I.R.B. 321

Notices:

99-48

Superseded by

Rev. Proc. 2008-40, 2008-29 I.R.B. 151

2000-9

Obsoleted by

Rev. Proc. 2008-41, 2008-29 I.R.B. 155

2004-2

Amplified by

Notice 2008-59, 2008-29 I.R.B. 123

2004-50

Amplified by

Notice 2008-59, 2008-29 I.R.B. 123

2006-88

Modified and superseded by

Notice 2008-60, 2008-30 I.R.B. 178

2007-22

Amplified by

Notice 2008-59, 2008-29 I.R.B. 123

Proposed Regulations:

REG-151135-07

Hearing scheduled by

Ann. 2008-64, 2008-28 I.R.B. 114

Revenue Procedures:

92-25

Superseded by

Rev. Proc. 2008-41, 2008-29 I.R.B. 155

92-83

Obsoleted by

Rev. Proc. 2008-37, 2008-29 I.R.B. 137

2001-42

Superseded by

Rev. Proc. 2008-39, 2008-29 I.R.B. 143

2002-9

Modified and amplified by

Rev. Proc. 2008-43, 2008-30 I.R.B. 186

2006-29

Superseded by

Rev. Proc. 2008-34, 2008-27 I.R.B. 13

2006-34

Superseded by

Rev. Proc. 2008-44, 2008-30 I.R.B. 187

Revenue Procedures— Continued:

2007-19

Superseded by

Rev. Proc. 2008-39, 2008-29 I.R.B. 143

2007-42

Superseded by

Rev. Proc. 2008-32, 2008-28 I.R.B. 82

2007-43

Superseded by

Rev. Proc. 2008-33, 2008-28 I.R.B. 93

2007-70

Modified by

Ann. 2008-63, 2008-28 I.R.B. 114

2007-72

Amplified and superseded by

Rev. Proc. 2008-47, 2008-31 I.R.B. 272

2008-12

Modified and superseded by

Rev. Proc. 2008-35, 2008-29 I.R.B. 132

Revenue Rulings:

67-213

Amplified by

Rev. Rul. 2008-40, 2008-30 I.R.B. 166

71-234

Modified by

Rev. Proc. 2008-43, 2008-30 I.R.B. 186

77-480

Modified by

Rev. Proc. 2008-43, 2008-30 I.R.B. 186

91-17

Amplified by

Rev. Proc. 2008-41, 2008-29 I.R.B. 155Rev. Proc. 2008-42, 2008-29 I.R.B. 160

Superseded in part by

Rev. Proc. 2008-40, 2008-29 I.R.B. 151

2005-6

Amplified by

Rev. Proc. 2008-38, 2008-29 I.R.B. 139

2008-12

Amplified by

Rev. Rul. 2008-38, 2008-31 I.R.B. 249

Clarified by

Ann. 2008-65, 2008-31 I.R.B. 279

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin 2008–26, dated June 30, 2008.

August 11, 2008 iii 2008–32 I.R.B.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-tendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINSThe contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are

sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weeklyBulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of printand are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from theSuperintendent of Documents.

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