income tax t.d. 9689, page 456. - internal revenue serviceseptember 2, 2014 bulletin no. 2014–36...

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

Notice 2014–46, page 520.Clarification and Modification of Notice 2013–29 and Notice2013–60. This notice clarifies and modifies Notice 2013–29and Notice 2013–60 regarding the application of the PhysicalWork Test, the ability to transfer a facility after constructionhas begun, and modifies the application of the Safe Harbor forcertain facilities with respect to which a taxpayer paid orincurred less than five percent, but at least three percent, ofthe total cost of the facility before January 1, 2014.

Rev. Proc. 2014–48, page 527.This revenue procedure provides the exclusive procedures fortaxpayers to obtain the automatic consent of the Commis-sioner to change a method of accounting under the retailinventory method to comply with final regulations under § 471of the Code. The final regulations (TD 9688) were published inthe Federal Register on August 15, 2014.

T.D. 9687, page 486.This document contains final regulations that provide compre-hensive guidance for the award program authorized underInternal Revenue Code section 7623. These regulations areeffective on August 12, 2014.

T.D. 9688, page 482.Final regulations provide rules under section 471 of the Coderelating to the retail inventory method of accounting. The finalregulations clarify the computation of ending inventory valuesunder the retail inventory method and provide special rules forvendor allowances required to reduce only cost of goods soldand for margin protection payments. These regulations areeffective on August 15, 2014.

T.D. 9689, page 456.Final regulations regarding dispositions of property subject todepreciation under section 168 of the Internal Revenue Code(Modified Accelerated Cost Recovery System (MACRS) prop-erty). The final regulations also amend the general asset ac-count regulations under § 1.168(i)–1 and the accounting forMACRS property regulations under § 1.168(i)–7. The finalregulations provide rules for determining gain or loss upon thedisposition of MACRS property, determining the asset dis-posed of, and accounting for partial dispositions of MACRSproperty. The final regulations also remove temporary regula-tions under section 168 regarding general asset accounts anddisposition of MACRS property. These regulations are effectiveon August 18, 2014.

EMPLOYEE PLANS

Notice 2014–48, page 523.This notice sets forth updates on the corporate bond monthlyyield curve, the corresponding spot segment rates for July2014 used under § 417(e)(3)(D), the 24-month average seg-ment rates applicable for August 2014, and the 30-year Trea-sury rates. These rates reflect the application of§ 430(h)(2)(C)(iv), which was added by the Moving Ahead forProgress in the 21st Century Act, Public Law 112–141 (MAP-21) and amended by section 2003 of the Highway and Trans-portation Funding Act of 2014 (HATFA).

(Continued on the next page)

Finding Lists begin on page ii.Index for July through September begins on page iv.

Bulletin No. 2014–36September 2, 2014

EXCISE TAX

Notice 2014–47, page 522.Section 9010 of the Patient Protection and Affordable Care Act(PPACA), Public Law 111–148 (124 Stat. 119 (2010)), asamended by § 10905 of PPACA, and as further amended by§ 1406 of the Health Care and Education Reconciliation Act of2010, Public Law 111–152 (124 Stat. 1029 (2010)) imposesan annual fee on certain health insurance providers. Notice2014–47 clarifies how the Internal Revenue Service and theDepartment of Treasury will administer the definition of a “cov-ered entity” for the 2014 fee year. Entities that meet therequirements of an exclusion under § 9010(c)(2) to the defini-tion of a covered entity for the entire 2013 data year or for theentire 2014 fee year, will not be treated as covered entities forpurposes of the 2014 fee year. Additionally, a controlled groupshould not report in 2014 the net premiums written in 2013 ofa controlled group member who would not qualify as a coveredentity in the 2014 fee year if it were a stand-alone entity. Thenotice applies only to the 2014 fee year.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-force the 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.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulings totaxpayers or technical advice to Service field offices, identify-ing details and information of a confidential nature are deletedto prevent unwarranted invasions of privacy and to comply withstatutory requirements.

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 cautioned

against 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, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

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

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

The last Bulletin for each month includes a cumulative index forthe 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.

September 2, 2014 Bulletin No. 2014–36

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 168.— Acceleratedcost recovery system

T.D. 9689

26 CFR 1.168(i)–8T–Dispositions of MACRS Prop-erty (Temporary).

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Guidance RegardingDispositions of TangibleDepreciable Property

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations regarding dispositions ofproperty subject to depreciation undersection 168 of the Internal Revenue Code(Code) (Modified Accelerated Cost Re-covery System (MACRS) property). Thefinal regulations also amend the generalasset account regulations and the account-ing for MACRS property regulations. Thefinal regulations provide rules for deter-mining gain or loss upon the dispositionof MACRS property, determining the as-set disposed of, and accounting for partialdispositions of MACRS property. The fi-nal regulations affect taxpayers that dis-pose of MACRS property. The final reg-ulations also remove temporary regulationsunder section 168 regarding general assetaccounts and disposition of MACRSproperty.

DATES: Effective Date: These regula-tions are effective on August 18, 2014.

Applicability Dates: These regulationsapply to taxable years beginning on orafter January 1, 2014. For dates of appli-cability of the final regulations, see§§ 1.168(i)–1(m), 1.168(i)–7(e), and1.168(i)–8(j).

FOR FURTHER INFORMATIONCONTACT: Kathleen Reed or PatrickClinton, Office of Associate Chief Coun-sel (Income Tax and Accounting), (202)317-7005 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On December 27, 2011, the IRS andthe Treasury Department published in theFederal Register (76 FR 81060) tempo-rary regulations (TD 9564) regarding theaccounting for, and dispositions of, prop-erty subject to depreciation under section168 (MACRS property). The temporaryregulations also amended the general assetaccount regulations under § 1.168(i)–1.On the same date, the IRS published in theFederal Register (76 FR 81128) a noticeof proposed rulemaking (REG–168745–03) cross-referencing the temporary regu-lations (2011 proposed regulations). TheIRS and the Treasury Department re-ceived numerous written comments re-sponding to the 2011 proposed regulationsand held a public hearing on May 9, 2012.

The temporary regulations initially ap-plied to taxable years beginning on orafter January 1, 2012. In response to thecomments received and the statementsmade at the public hearing, the IRS andthe Treasury Department released Notice2012 –73, 2012–51 IRB 713, on Novem-ber 20, 2012, announcing that, to helptaxpayers transition to the final regula-tions, the IRS and the Treasury Depart-ment would change the applicability dateof the temporary regulations to taxableyears beginning on or after January 1,2014, while permitting taxpayers tochoose to apply the temporary regulationsto taxable years beginning on or after Jan-uary 1, 2012, and before the applicabilitydate of the final regulations. Notice2012–73 also alerted taxpayers that theIRS and the Treasury Department in-tended to publish final regulations in 2013and expected the final regulations to applyto taxable years beginning on or after Jan-uary 1, 2014, but that the final regulationswould permit taxpayers to apply the pro-visions of the final regulations to taxable

years beginning on or after January 1,2012. On December 17, 2012, the IRS andthe Treasury Department published in theFederal Register (77 FR 74583) a tech-nical amendment to TD 9564, whichamended the applicability date of the tem-porary regulations to taxable years begin-ning on or after January 1, 2014, whilepermitting taxpayers to choose to applythe temporary regulations to taxable yearsbeginning on or after January 1, 2012, andbefore the applicability date of the finalregulations.

Notice 2012–73 also alerted taxpayersthat the IRS and the Treasury Departmentintended to revise the disposition rules inthe temporary regulations. After consider-ing the comment letters and the statementsmade at the public hearing, the IRS andthe Treasury Department removed thetemporary regulations under section 167and § 1.168(i)–7 and issued final regula-tions in the Federal Register on Septem-ber 19, 2013 (78 FR 57686). The finalregulations under section 167 providerules for depreciation of leasehold im-provements and amend existing regula-tions under section 167 regarding ac-counting for and retirement of depreciableproperty. Section 1.168(i)–7 providesrules for how to account for MACRSproperty. On the same date, the IRS alsowithdrew the 2011 proposed regulationsunder §§ 1.168(i)–1 and 1.168(i)–8 andpublished a notice of proposed rulemaking(REG–110732–13) under §§ 1.168(i)–1,1.168(i)–7, and 1.168(i)–8 (2013 pro-posed regulations) in the Federal Regis-ter (78 FR 57547). The 2011 proposedregulations under § 1.168(i)–1 amendedthe existing regulations on general assetaccounts, and the 2011 proposed regula-tions under § 1.168(i)–8 provided rulesfor dispositions of MACRS property. TheIRS and the Treasury Department did notwithdraw or remove the temporary regu-lations under §§ 1.168(i)–1T and1.168(i)–8T and taxpayers continued tohave the option of applying those tempo-rary regulations to taxable years begin-ning on or after January 1, 2012, andbefore the applicability date of the finalregulations.


No comments were received from thepublic in response to the 2013 proposedregulations. No public hearing was re-quested or held. However, the IRS and theTreasury Department are making clarify-ing changes to the 2013 proposed regula-tions regarding the determination of theunadjusted depreciable basis of a disposedasset in a general or multiple asset accountor a disposed portion of an asset, and themanner of making certain dispositionelections for assets included in a generalasset account when section 280B applies.These revisions are discussed in this pre-amble. The IRS and the Treasury Depart-ment are removing the temporary regula-tions under §§ 1.168(i)–1T and 1.168(i)–8Tand are issuing final regulations under§§ 1.168(i)–1, 1.168(i)–7, and 1.168(i)–8.The 2013 proposed regulations are ad-opted as amended by this Treasury deci-sion.

Explanation of Provisions andRevisions

I. OverviewThe final regulations under §§ 1.168(i)–1,

1.168(i)–7, and 1.168(i)–8 generally re-tain all of the provisions of the 2013 pro-posed regulations. Section 1.168(i)–1amends the existing general asset accountregulations regarding establishment ofgeneral asset accounts, depreciation of ageneral asset account, and dispositions ofassets in a general asset account. Section1.168(i)–7 amends the existing regula-tions on accounting for MACRS propertyto address partial dispositions of MACRSproperty. Section 1.168(i)–8 providesrules for dispositions of MACRS prop-erty. These final regulations generally ap-ply to taxable years beginning on or afterJanuary 1, 2014.

II. Disposition Rules for MACRS Prop-erty Under § 1.168(i)–8

Section 1.168(i)–8 provides the basicrules applicable to dispositions ofMACRS property, and § 1.168(i) –1 pro-vides special rules applicable to MACRSproperty included in a general asset ac-count.

A. Definition of dispositionThe final regulations retain the defini-

tion of “disposition” for MACRS propertythat is set forth in the 2013 proposed reg-ulations. A disposition occurs when own-ership of the asset is transferred or when

the asset is permanently withdrawn fromuse either in the taxpayer’s trade or busi-ness or in the production of income. Adisposition includes the sale, exchange,retirement, physical abandonment, or de-struction of an asset. A disposition alsoincludes the retirement of a structuralcomponent (or a portion thereof) of abuilding only if the partial disposition rule(discussed in II.C) applies to such struc-tural component (or a portion thereof).Finally, the manner of disposition (for ex-ample, abnormal retirement or normal re-tirement) is not taken into consideration indetermining whether a disposition occursor gain or loss is recognized.

B. Determining appropriate disposedasset

The final regulations also retain therules in the 2013 proposed regulations fordetermining the disposed asset for tax dis-position purposes. In general, the factsand circumstances of each disposition areconsidered in determining the appropriatedisposed asset. However and as providedin the 2013 proposed regulations, the assetfor tax disposition purposes may not con-sist of items placed in service by the tax-payer on different dates (without takinginto account the applicable convention).Further, the unit of property as determinedunder § 1.263(a)–3(e) or in publishedguidance in the Internal Revenue Bulletinunder section 263(a) does not apply forpurposes of determining what is the ap-propriate disposed asset.

In addition to these general rules, thefinal regulations provide special rules forcertain types of properties. The final reg-ulations retain the rule in the 2013 pro-posed regulations that each building (in-cluding its structural components) is theasset for tax disposition purposes, unlessmore than one building (including itsstructural components) is treated as theasset under § 1.1250–1(a)(2)(ii), there isan improvement or addition to an existingbuilding (including its structural compo-nents), or the building includes two ormore condominium or cooperative units.If there is an improvement or addition toan existing building (including its struc-tural components), the improvement oraddition is the asset. If a building includestwo or more condominium or cooperativeunits, each condominium or cooperative

unit (including its structural components)is the asset.

The final regulations also provide thatif a taxpayer properly includes an item inone of the asset classes 00.11 through 00.4of Rev. Proc. 87–56 (1987–2 CB 674) orclassifies an item in one of the categoriesunder section 168(e)(3) (other than a cat-egory that includes buildings or structuralcomponents; for example, retail motor fu-els outlet and qualified leasehold improve-ment property), each item is the asset pro-vided it is not an improvement or additionto an existing asset.

Finally, and consistent with section168(i)(6), the final regulations providethat if the taxpayer places in service animprovement or addition to an asset afterthe taxpayer placed the asset in service,the improvement or addition is a separateasset.

C. Partial dispositionsThe final regulations also retain the

partial disposition rule in the 2013 pro-posed regulations. Consequently, the dis-position rules in the final regulations ap-ply to a partial disposition of an asset (forexample, the disposition of a roof (or aportion of a roof)). The partial dispositionrule allows taxpayers to claim a loss uponthe disposition of a structural component(or a portion thereof) of a building or uponthe disposition of a component (or a por-tion thereof) of any other asset withoutidentifying the component as an asset be-fore the disposition event. The partial dis-position rule also minimizes circum-stances in which an original part and anysubsequent replacements of the same partare required to be capitalized and depre-ciated simultaneously. These final regula-tions provide examples demonstrating theapplication of the partial disposition rule.

In many cases, the partial dispositionrule is elective (“partial disposition elec-tion”). However, consistent with the 2013proposed regulations and the operation ofsections 165, 168(i)(7), 1031, and 1033,and because sales of a portion of an assetare common, the partial disposition rule isrequired to be applied to a disposition of aportion of an asset as a result of a casualtyevent described in section 165, to a dis-position of a portion of an asset for whichgain (determined without regard to section1245 or 1250) is not recognized in wholeor in part under section 1031 or 1033, to a

Bulletin No. 2014–36 September 2, 2014457

transfer of a portion of an asset in a step-in-the-shoes transaction described in sec-tion 168(i)(7)(B), or to a sale of a portionof an asset. Consequently, a dispositionincludes a disposition of a portion of anasset under these circumstances, even ifthe taxpayer does not make the partialdisposition election for that disposed por-tion. For other transactions, a dispositionincludes a disposition of a portion of anasset only if the taxpayer makes the partialdisposition election for that disposed por-tion.

A taxpayer may make the partial dis-position election for the disposition of aportion of any type of MACRS property,including an asset that is properly in-cluded in one of the asset classes 00.11through 00.4 of Rev. Proc. 87–56. How-ever, consistent with section 168(i)(6) andthe 2013 proposed regulations, a taxpayermaking the partial disposition election forthe disposition of a portion of an asset thatis properly included in one of the assetclasses 00.11 through 00.4 of Rev. Proc.87–56 must classify the replacement por-tion of the asset under the same asset classas the disposed portion of the asset.

The partial disposition election is madeon the taxpayer’s timely filed originalFederal tax return, including extensions,for the taxable year in which the portionof the asset is disposed of by the taxpayer.This election may not be made or revokedby the filing of an application for a changein method of accounting. A taxpayer mayrevoke a partial disposition election byfiling a request for a letter ruling andobtaining the consent of the Commis-sioner of Internal Revenue to revoke thiselection. The Commissioner may grant arequest to revoke this election if the tax-payer acted reasonably and in good faith,and the revocation will not prejudice theinterests of the Government. In decidingwhether to grant such a request, the Com-missioner anticipates applying standardssimilar to the standards under§ 301.9100–3 of this chapter for grantingextensions of time for making regulatoryelections. If a taxpayer chooses to applythese final regulations to its taxable yearbeginning in 2012 or 2013, these finalregulations also provide rules for makingthe partial disposition election for the por-tion of an asset disposed of by the tax-payer during those taxable years.

The final regulations also provide aspecial partial disposition rule to addressthe effect of an IRS disallowance of ataxpayer’s characterization of the replace-ment of a portion of an asset as a repair.When the IRS disallows a taxpayer’s re-pair deduction for the amount paid or in-curred for the replacement of a portion ofan asset and capitalizes such amount un-der § 1.263(a)–2 or § 1.263(a)–3, the tax-payer may make the partial dispositionelection for the disposition of the portionof the asset to which the IRS’s adjustmentpertains by filing an application forchange in accounting method, providedthe asset of which the disposed portionwas a part is owned by the taxpayer at thebeginning of the year of change (as de-fined for purposes of section 446(e)).

D. Gain or lossThe final regulations also retain the

rules in the 2013 proposed regulations fordetermining gain or loss upon the dispo-sition of MACRS property. These rulesare generally consistent with the disposi-tion rules under § 1.168–6 of the pro-posed regulations on the Accelerated CostRecovery System of former section 168(ACRS) (which generally have been ap-plied to MACRS property). If an asset isdisposed of by sale, exchange, or involun-tary conversion, gain or loss is recognizedunder the applicable provisions of theCode. If an asset is disposed of by phys-ical abandonment, loss is recognized inthe amount of the asset’s adjusted depre-ciable basis at the time of the abandon-ment, unless an abandoned asset is subjectto nonrecourse indebtedness in which casethe asset is treated in the same manner asan asset disposed of by sale. Finally, if anasset is disposed of other than by sale,exchange, involuntary conversion, physi-cal abandonment, or conversion to per-sonal use (for example, when the asset istransferred to a supplies or scrap account),gain is not recognized but loss is recog-nized in the amount of the excess of theasset’s adjusted depreciable basis over itsfair market value at the time of disposi-tion. The same rules apply when the par-tial disposition rule applies to a disposi-tion of a portion of an asset.

E. Determination of basis of disposedasset

The final regulations retain the rule inthe 2013 proposed regulations on deter-

mining the unadjusted depreciable basisof a disposed asset if that asset is in amultiple asset account and it is impracti-cable from the taxpayer’s records to de-termine the unadjusted depreciable basisof the disposed asset. In such a situation,the final regulations provide that the tax-payer may use any reasonable method thatis consistently applied to all assets in thesame multiple asset account. The IRS andthe Treasury Department expect that rea-sonable methods are available that useinformation readily available or known tothe taxpayer and do not necessitate under-taking an expensive study.

These final regulations also providenonexclusive examples of reasonablemethods. These examples are the sameexamples in the 2013 proposed regula-tions, except that the final regulations donot include discounting the cost of thereplacement asset by the Consumer PriceIndex as an example of a reasonablemethod. After further review, the IRS andthe Treasury Department have determinedthat the Producer Price Index for FinishedGoods (and its successor, the ProducerPrice Index for Final Demand) more ac-curately reflects inflation for capital ex-penditures. The final regulations also clar-ify that discounting the cost of thereplacement asset using the ProducerPrice Index for Finished Goods is a rea-sonable method only if the replacementasset is a restoration under § 1.263(a)–3(k) and is not a betterment under§ 1.263(a)–3(j) or is not an adaptation to anew or different use under § 1.263(a)–3(l). The examples in the final regulationsinclude the following: (1) discounting thecost of the replacement asset to its placed-in-service year cost using the ProducerPrice Index for Finished Goods (or itssuccessor, the Producer Price Index forFinal Demand, or any other index desig-nated by guidance in the Internal RevenueBulletin (see § 601.601(d)(2) of the chap-ter) for purposes of the final regulations)where the replacement asset is a restora-tion under § 1.263(a)–3(k) and is not abetterment under § 1.263(a)–3(j) or is notan adaptation to a new or different useunder § 1.263(a)–3(l); (2) a pro rata allo-cation of the unadjusted depreciable basisof the multiple asset account based on thereplacement cost of the disposed asset andthe replacement cost of all of the assets in


the multiple asset account; and (3) a studyallocating the cost of the asset to its indi-vidual components.

The final regulations also provide rulesto determine the unadjusted depreciablebasis of the disposed portion of an assetwhen the partial disposition rule applies.While these rules retain most of the rulesin the 2013 proposed regulations, the finalregulations were changed to clarify whena taxpayer may use a reasonable methodfor determining the unadjusted deprecia-ble basis of a disposed portion of an asset.The IRS and the Treasury Department in-tended to allow taxpayers to use a reason-able method under the same circum-stances as described above for determiningthe unadjusted depreciable basis of a dis-posed asset in a multiple asset account.However, the 2013 proposed regulationsdid not reflect this intent. Consequently,the final regulations clarify that a taxpayermay use any reasonable method for deter-mining the unadjusted depreciable basisof the disposed portion of the asset only ifit is impracticable from the taxpayer’s re-cords to determine such unadjusted depre-ciable basis. If a taxpayer disposes ofmore than one portion of the same assetand it is impracticable from the taxpayer’srecords to determine the unadjusted de-preciable basis of the first disposed por-tion of the asset, the reasonable methodused by the taxpayer must be consistentlyapplied to all portions of the same assetfor purposes of determining the unad-justed depreciable basis of each disposedportion of the asset. If the asset, a portionof which is disposed of, is in a multipleasset account, the reasonable method usedby the taxpayer must be consistently ap-plied to all assets and portions of assets inthe same multiple asset account. Finally,the final regulations provide nonexclusiveexamples of reasonable methods that aresimilar to those discussed in the precedingparagraph.

F. Identification of disposed assetThe final regulations retain the rules in

the 2013 proposed regulations for deter-mining the placed-in-service year of a dis-posed asset. In general, a taxpayer mustuse the specific identification method. Un-der this method, the taxpayer can deter-mine when the asset disposed of wasplaced in service. If an asset is in a mul-tiple asset account and it is impracticable

from the taxpayer’s records to determinethe particular year in which the asset wasplaced in service by the taxpayer, the finalregulations allow the taxpayer to identifythe asset by using the following: a first-in,first-out (FIFO) method, a modified FIFOmethod, a mortality dispersion table if theasset is a mass asset, or any other methoddesignated by the Secretary in publishedguidance. A last-in, first-out (LIFO) methodis not permitted. These rules also applywhen the partial disposition rule appliesto a disposition of a portion of an assetand it is impracticable from the taxpay-er’s records to determine the particulartaxable year in which the asset wasplaced in service by the taxpayer. Thefinal regulations provide an additionalexample of the LIFO method, which isimpermissible.

III. General Asset Accounts Under§ 1.168(i)–1

Section 168(i)(4) provides that, underregulations, a taxpayer may maintain oneor more general asset accounts for anyMACRS property. Except as provided inregulations, all proceeds realized on anydisposition of property in a general assetaccount shall be included in income asordinary income.

The final regulations generally retainall of the provisions in the 2013 proposedregulations for general asset accounts. Thefinal regulations apply only to assets forwhich the taxpayer has made an electionto account for the assets in general assetaccounts. Each general asset account ef-fectively is treated as the asset.

A. Establishing general asset accountsThe final regulations retain the rules in

the 2013 proposed regulations for estab-lishing general asset accounts. The finalregulations provide that assets may begrouped into one or more general assetaccounts. In general, each general assetaccount must include assets that have thesame depreciation method, recovery pe-riod, and convention, and are placed inservice in the same taxable year. Howeverand as provided in the 2013 proposed reg-ulations, the final regulations provide spe-cial rules in certain circumstances for es-tablishing general asset accounts. Forexample, assets eligible for the additionalfirst year depreciation deduction cannot begrouped with assets ineligible for the ad-ditional first year depreciation deduction.

Also, assets eligible for the additional firstyear depreciation deduction may begrouped only with assets eligible for thesame percentage of the additional firstyear depreciation.

B. Depreciation of a general asset ac-count

The final regulations retain the rules inthe 2013 proposed regulations for deter-mining depreciation for each general assetaccount. The final regulations explain howto determine depreciation for a generalasset account when all the assets in theaccount are eligible for the additional firstyear depreciation deduction and when allthe assets in the account are not eligiblefor that deduction.

C. Disposition of an asset from a gen-eral asset account

1. Disposition DefinitionThe final regulations retain the defini-

tion of “disposition” that is set forth in the2013 proposed regulations. This definitionis the same as the definition of “disposi-tion” that was previously discussed underthe disposition rules for MACRS propertyunder § 1.168(i)–8. That is, a dispositionoccurs when ownership of the asset istransferred or when the asset is perma-nently withdrawn from use either in thetaxpayer’s trade or business or in the pro-duction of income. A disposition includesthe sale, exchange, retirement, physicalabandonment, or destruction of an asset.A disposition also includes the retirementof a structural component (or a portionthereof) of a building only if the partialdisposition rule (discussed in III.C.4) ap-plies to such structural component (or aportion thereof). Finally, the manner ofdisposition (for example, abnormal retire-ment or normal retirement) is not takeninto consideration in determining whethera disposition occurs or gain or loss isrecognized.

2. Determining the Appropriate Dis-posed Asset

The final regulations also retain therules in the 2013 proposed regulations fordetermining the disposed asset included ina general asset account for tax dispositionpurposes. These rules are the same asthose previously discussed for determin-ing the disposed asset for purposes of§ 1.168(i)–8.

In general, the facts and circumstancesof each disposition are considered in de-


termining the appropriate disposed assetincluded in a general asset account. How-ever, the asset for tax disposition purposesmay not consist of items placed in serviceby the taxpayer on different dates (withouttaking into account the applicable conven-tion under section 168(d)). Further, theunit of property as determined under§ 1.263(a)–3(e) or in published guidancein the Internal Revenue Bulletin undersection 263(a) does not apply for purposesof determining what is the appropriate dis-posed asset.

In addition to these general rules, thefinal regulations retain the special rules inthe 2013 proposed regulations for certaintypes of properties. These special rules arethe same as the previously discussed spe-cial rules for determining the appropriatedisposed asset under § 1.168(i)–8. Thefinal regulations provide special rules fordetermining the appropriate disposed as-set that is included in a general asset ac-count and that is: (a) a building (includingits structural components); (b) a buildingthat includes two or more condominiumor cooperative units; (c) an item properlyincluded in one of the asset classes 00.11through 00.4 of Rev. Proc. 87–56 (1987–2CB 674) or classified in one of the cate-gories under section 168(e)(3) (other thana category that includes buildings or struc-tural components; for example, retail mo-tor fuels outlet and qualified leasehold im-provement property); or (d) an improvementor addition to an existing asset.

3. Disposition RulesThe final regulations retain the dispo-

sition rules in the 2013 proposed regula-tions. Immediately before any dispositionof an asset (or a portion thereof) in ageneral asset account, the final regulationsprovide that the asset (or a portionthereof) is treated as having an adjusteddepreciable basis of zero for purposes ofsection 1011. Therefore, no loss is real-ized upon the disposition of the asset (or aportion thereof). The final regulations alsoprovide that any amount realized on adisposition generally is recognized as or-dinary income. Further, the final regula-tions provide that the unadjusted deprecia-ble basis and depreciation reserve of thegeneral asset account are not affected bythe disposition. Accordingly, a taxpayercontinues to depreciate the general assetaccount, including the disposed asset (or a

portion thereof), as though no dispositionoccurred.

The final regulations also allow a tax-payer to terminate general asset accounttreatment upon certain dispositions. Un-der the final regulations, a taxpayer mayelect to recognize gain or loss for a gen-eral asset account when the taxpayer dis-poses of all of the assets, the last asset, orthe remaining portion of the last asset inthe account.

The final regulations further allow ataxpayer to elect to terminate general assetaccount treatment for an asset in a generalasset account when the taxpayer disposesof the asset in a qualifying disposition. Aqualifying disposition is a disposition thatdoes not involve all the assets, the lastasset, or the remaining portion of the lastasset, remaining in a general asset accountand that is: (1) a direct result of a fire,storm, shipwreck, or other casualty, orfrom theft; (2) a charitable contributionfor which a deduction is allowable undersection 170; (3) a direct result of a cessa-tion, termination, or disposition of a busi-ness, manufacturing, or other income pro-ducing process, operation, facility, plant,or other unit (other than by transfer to asupplies, scrap, or similar account); or (4)generally a transaction to which a nonrec-ognition section of the Code applies. If ataxpayer elects to terminate general assetaccount treatment for an asset disposed ofin a qualifying disposition, the taxpayermust remove the disposed asset from thegeneral asset account and adjust the unad-justed depreciable basis and depreciationreserve of the account.

The final regulations retain the rules inthe 2013 proposed regulations on themanner of making (1) the election to ter-minate the general asset account upon thedisposition of all of the assets, the lastasset, or the remaining portion of the lastasset in that general asset account, or (2)the qualifying disposition election. Thefinal regulations provide that a taxpayermaking either of these elections must applysection 280B and § 1.280B–1 to determinewhether and to what extent gain or loss isrecognized. Generally, a taxpayer makesthese elections by reporting the gain, loss, orother deduction on the taxpayer’s timelyfiled original Federal tax return (includingextensions) for the taxable year in which thedisposition occurs.

In the case of a loss sustained on ac-count of the demolition of a structure towhich section 280B and § 1.280B –1 ap-ply, however, the loss is capitalized to theland on which the demolished structurewas located, and no gain or loss is re-ported at the time of demolition. Never-theless, a taxpayer generally will report adepreciation deduction for the demolishedstructure for the taxable year in which thedemolition occurs. Accordingly, the finalregulations clarify that a taxpayer makesthe election to terminate the general assetaccount or the qualifying disposition elec-tion by ending depreciation for the demol-ished structure at the time of disposition(taking into account the applicable con-vention) and reporting the depreciationamount for that structure for the taxableyear in which the disposition occurs onthe taxpayer’s timely filed original Fed-eral tax return (including extensions) forthat taxable year.

For assets in general asset accounts, thefinal regulations also require a taxpayer toterminate general asset account treatmentfor an asset that is disposed of in a trans-action subject to section 167(i)(7)(B), sec-tion 1031, or section 1033, disposed of inan abusive transaction described under thefinal regulations, or used for any personaluse. In such a case, the taxpayer mustremove the disposed asset from the gen-eral asset account and adjust the unad-justed depreciable basis and depreciationreserve of the account.

In addition, the final regulations re-quire a partnership to terminate its generalasset accounts upon the technical termina-tion of the partnership under section708(b)(1)(B). If there is a redeterminationof basis of an asset in a general assetaccount (for example, due to contingentpurchase price or discharge of indebted-ness), the final regulations provide that thegeneral asset account election for the assetalso applies to the increase or decrease inbasis and require the taxpayer to establisha new general asset account for that in-crease or decrease in basis.

4. Partial DispositionsThe final regulations retain the partial

disposition rule in the 2013 proposed reg-ulations. Similar to the partial dispositionrule under § 1.168(i)–8 that was previ-ously discussed, the disposition rules in§ 1.168(i) –1 apply to a partial disposition


of an asset included in a general assetaccount. Consequently, a disposition in-cludes a disposition of a portion of anasset as a result of a casualty event de-scribed in section 165, a disposition of aportion of an asset for which gain (deter-mined without regard to section 1245 or1250) is not recognized in whole or in partunder section 1031 or 1033, a transfer of aportion of an asset in a transaction de-scribed in section 168(i)(7)(B), a sale of aportion of an asset, or a disposition of aportion of an asset in a transaction de-scribed under the anti-abuse rules applica-ble to general asset accounts. For othertransactions, a disposition includes a dis-position of a portion of an asset only if thetaxpayer makes the election to terminatethe general asset account upon the dispo-sition of all of the assets, the last asset, orthe remaining portion of the last asset inthat general asset account or makes thequalifying disposition election for thatdisposed portion. A separate partial dispo-sition election is not provided for assets ina general asset account because a taxpayercan claim a loss upon the disposition of anasset (or a portion thereof) in a generalasset account only when the taxpayermakes either one of these two elections.

D. Determination of basis of disposedasset

The final regulations generally retainthe rules in the 2013 proposed regulationson determining the unadjusted depreciablebasis of an asset for which general assetaccount treatment is terminated. Becausethe general asset account is the asset, thefinal regulations provide that a taxpayermay use any reasonable method that isconsistently applied to all assets in thesame general asset account to determinethe unadjusted depreciable basis of a dis-posed asset in that account if it is imprac-ticable from the taxpayer’s records to de-termine the unadjusted depreciable basisof that asset. This rule also applies whenthe partial disposition rule applies to adisposition of a portion of an asset in-cluded in a general asset account. The IRSand the Treasury Department expect thatreasonable methods are available that useinformation readily available or known tothe taxpayer and do not necessitate under-taking an expensive study.

These final regulations also providenonexclusive examples of reasonable

methods. These examples are the sameexamples in the 2013 proposed regula-tions, except the final regulations do notinclude the Consumer Price Index as anexample of a reasonable method for thereason previously discussed in II.E. Sim-ilar to the rules for determining the unad-justed depreciable basis of a disposed assetunder § 1.168(i)–8, the final regulationsclarify that, when discounting the cost ofthe replacement asset, using the ProducerPrice Index for Finished Goods (or itssuccessor, the Producer Price Index forFinal Demand) is a reasonable method.The examples in the final regulations in-clude the following: (1) discounting thecost of the replacement asset to its placed-in-service year cost using the ProducerPrice Index for Finished Goods (or itssuccessor, the Producer Price Index forFinal Demand, or any other index desig-nated by guidance in the Internal RevenueBulletin (see § 601.601(d)(2) of the chap-ter) only if the replacement asset is arestoration under § 1.263(a)–3(k) and isnot a betterment under § 1.263(a)–3(j) oris not an adaptation to a new or differentuse under § 1.263(a)–3(l); (2) a pro rataallocation of the unadjusted depreciablebasis of the general asset account based onthe replacement cost of the disposed assetand the replacement cost of all of theassets in the general asset account; and (3)a study allocating the cost of the asset toits individual components.

E. Identification of disposed assetThe final regulations retain the rules in

the 2013 proposed regulations for deter-mining the placed-in-service year of anasset for which general asset accounttreatment is terminated. These rules arethe same as those previously discussed foridentifying the placed-in-service year ofthe disposed asset for purposes of§ 1.168(i)–8: the specific identificationmethod, the FIFO method, the modifiedFIFO method, a mortality dispersion tableif the asset is a mass asset, or any othermethod designated by the Secretary inpublished guidance. A LIFO method isnot permitted. These rules also applywhen the partial disposition rule applies toa disposition of a portion of an asset in-cluded in a general asset account. Thefinal regulations provide an additional ex-ample of the LIFO method, which is im-permissible.

IV. Accounting for MACRS PropertyUnder § 1.168(i)–7

The final regulations retain the rule inthe 2013 proposed regulations regardinghow to account for a disposed portion ofan asset. The final regulations under§ 1.168(i)–8 provide that if a taxpayerdisposes of a portion of an asset and thepartial disposition rule applies to that dis-position, the taxpayer must account for thedisposed portion in a single asset accountbeginning in the taxable year in which thedisposition occurs. This rule also is pro-vided in the final regulations under§ 1.168(i)–7.

V. Conforming ChangesThe final regulations also amend

§§ 1.165–2, 1.168(i)–7, 1.263(a)–3, and1.1016–3 to replace references to the tem-porary regulations and the 2013 proposedregulations with references to these finalregulations.

VI. Applicability DatesThe final regulations apply to taxable

years beginning on or after January 1,2014. Alternatively, a taxpayer maychoose to apply the final regulations totaxable years beginning on or after Janu-ary 1, 2012.

A taxpayer also may choose to rely onthe provisions of the 2013 proposed reg-ulations for taxable years beginning on orafter January 1, 2012, and beginning be-fore January 1, 2014. Finally, a taxpayermay choose to apply the temporary regu-lations to taxable years beginning on orafter January 1, 2012, and beginning be-fore January 1, 2014.

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, as supplemented byExecutive Order 13563. Therefore, a reg-ulatory assessment is not required. It alsohas been determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations, and because these regulationsdo not impose a collection of informationon small entities, the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) does not ap-ply. Pursuant to section 7805(f) of theCode, the 2013 proposed regulations pre-ceding this regulation were submitted tothe Chief Counsel for Advocacy of the


Small Business Administration for com-ment on their impact on small business,and no comments were received.

Statement of Availability for IRSDocument

For copies of recently issued RevenueProcedures, Revenue Rulings, notices,and other guidance published in the Inter-nal Revenue Bulletin please visit the IRSwebsite at http://www.irs.gov or the Su-perintendent of Documents, U.S. Govern-ment Printing Office, Washington, DC20402.

Drafting Information

The principal author of these regula-tions is Kathleen Reed, Office of the As-sociate Chief Counsel (Income Tax andAccounting). However, other personnelfrom the IRS and the Treasury Depart-ment participated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR Part 1 isamended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is revised by adding an entry for§ 1.168(i)–1 to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.168(i)–1 also issued under 26

U.S.C. 168(i)(4).Par. 2. Section 1.165–2 is amended by

revising the first sentence in paragraph (c)to read as follows:

§ 1.165–2 Obsolescence ofnondepreciable property.

* * * * *(c) Cross references. For the allowance

under section 165(a) of losses arisingfrom the permanent withdrawal of depre-ciable property from use in the trade orbusiness or in the production of income,see § 1.167(a)–8, § 1.168(i)–1, or§ 1.168(i)–8, as applicable. * * *

* * * * *Par. 3. Section 1.168(i)–0 is amended

by:

a. Redesignating the entries for para-graphs (b)(4), (5), and (6) as paragraphs(b)(5), (6), and (7), respectively, and re-vising newly redesignated paragraphs(b)(6) and (7).

b. Adding entries for paragraphs (b)(4),(b)(8), and (b)(9).

c. Revising entries for paragraphs(c)(3), (d)(2), (d)(3), (e), (e)(1), (e)(2)(v)through (viii), (e)(3)(vi), (h)(1), (i), and(m).

d. Adding entries for paragraphs(e)(1)(i) and (ii).

e. Removing the entry for paragraph(h)(2) and redesignating the entry forparagraph (h)(3) as paragraph (h)(2).

The additions and revisions read as fol-lows:

§ 1.168(i)–0 Table of contents for thegeneral asset account rules.

* * * * *

§ 1.168(i)–1 General asset accounts.

* * * * *(b) * * *(4) Building.* * *(6) Mass assets.(7) Portion of an asset.(8) Remaining adjusted depreciable ba-

sis of the general asset account.(9) Structural component.(c) * * *(3) Examples.* * * * *(d) * * *(2) Assets in general asset account are

eligible for additional first year deprecia-tion deduction.

(3) No assets in general asset accountare eligible for additional first year depre-ciation deduction.

* * * * *(e) Dispositions from a general asset

account.(1) Scope and definition.(i) In general.(ii) Disposition of a portion of an asset.(2) * * *(v) Manner of disposition.(vi) Disposition by transfer to a sup-

plies account.(vii) Leasehold improvements.

(viii) Determination of asset disposedof.

* * * * *(3) * * *(vi) Technical termination of a partner-

ship.* * * * *(h) * * *(1) Conversion to any personal use.* * * * *(i) Redetermination of basis.* * * * *(m) Effective/applicability dates.

§ 1.168(i)–0T [Removed]

Par. 4. Section 1.168(i)–0T is re-moved.

Par. 5. Section 1.168(i)–1 is amendedby revising paragraphs (a) through (l)(1),and (m) to read as follows:

§ 1.168(i)–1 General asset accounts.

(a) Scope. This section provides rulesfor general asset accounts under section168(i)(4). The provisions of this sectionapply only to assets for which an electionhas been made under paragraph (l) of thissection.

(b) Definitions. For purposes of thissection, the following definitions apply:

(1) Unadjusted depreciable basis hasthe same meaning given such term in§ 1.168(b)–1(a)(3).

(2) Unadjusted depreciable basis of thegeneral asset account is the sum of theunadjusted depreciable bases of all assetsincluded in the general asset account.

(3) Adjusted depreciable basis of thegeneral asset account is the unadjusteddepreciable basis of the general asset ac-count less the adjustments to basis de-scribed in section 1016(a)(2) and (3).

(4) Building has the same meaning asthat term is defined in § 1.48–1(e)(1).

(5) Expensed cost is the amount of anyallowable credit or deduction treated as adeduction allowable for depreciation oramortization for purposes of section 1245(for example, a credit allowable undersection 30 or a deduction allowable undersection 179, section 179A, or section190). Expensed cost does not include anyadditional first year depreciation deduc-tion.

(6) Mass assets is a mass or group ofindividual items of depreciable assets–


(i) That are not necessarily homoge-nous;

(ii) Each of which is minor in valuerelative to the total value of the mass orgroup;

(iii) Numerous in quantity;(iv) Usually accounted for only on a

total dollar or quantity basis;(v) With respect to which separate

identification is impracticable; and(vi) Placed in service in the same tax-

able year.(7) Portion of an asset is any part of an

asset that is less than the entire asset asdetermined under paragraph (e)(2)(viii) ofthis section.

(8) Remaining adjusted depreciablebasis of the general asset account is theunadjusted depreciable basis of the gen-eral asset account less the amount of theadditional first year depreciation deduc-tion allowed or allowable, whichever isgreater, for the general asset account.

(9) Structural component has the samemeaning as that term is defined in § 1.48–1(e)(2).

(c) Establishment of general asset ac-counts–(1) Assets eligible for general as-set accounts–(i) General rules. Assets thatare subject to either the general deprecia-tion system of section 168(a) or the alter-native depreciation system of section168(g) may be accounted for in one ormore general asset accounts. An asset isincluded in a general asset account only tothe extent of the asset’s unadjusted depre-ciable basis. However, an asset is not to beincluded in a general asset account if theasset is used both in a trade or business orfor the production of income and in apersonal activity at any time during thetaxable year in which the asset is placed inservice by the taxpayer or if the asset isplaced in service and disposed of duringthe same taxable year.

(ii) Special rules for assets generatingforeign source income. (A) Assets thatgenerate foreign source income, bothUnited States and foreign source income,or combined gross income of a foreignsales corporation (as defined in formersection 922), domestic international salescorporation (as defined in section 992(a)),or possession corporation (as defined insection 936) and its related supplier maybe included in a general asset account ifthe requirements of paragraph (c)(2)(i) of

this section are satisfied. If, however, theinclusion of these assets in a general assetaccount results in a substantial distortionof income, the Commissioner may disre-gard the general asset account electionand make any reallocations of income orexpense necessary to clearly reflect in-come.

(B) A general asset account shall betreated as a single asset for purposes ofapplying the rules in § 1.861–9T(g)(3)(relating to allocation and apportionmentof interest expense under the assetmethod). A general asset account that gen-erates income in more than one groupingof income (statutory and residual) is amultiple category asset (as defined in§ 1.861–9T(g)(3)(ii)), and the incomeyield from the general asset account mustbe determined by applying the rules formultiple category assets as if the generalasset account were a single asset.c-counts—(i) General rules. If a taxpayermakes the election under paragraph (l) ofthis section, assets that are subject to theelection are grouped into one or moregeneral asset accounts. Assets that are el-igible to be grouped into a single generalasset account may be divided into morethan one general asset account. Each gen-eral asset account must include only assetsthat—

(A) Have the same applicable depreci-ation method;

(B) Have the same applicable recoveryperiod;

(C) Have the same applicable conven-tion; and

(D) Are placed in service by the tax-payer in the same taxable year.

(ii) Special rules. In addition to thegeneral rules in paragraph (c)(2)(i) of thissection, the following rules apply whenestablishing general asset accounts—

(A) Assets subject to the mid-quarterconvention may only be grouped into ageneral asset account with assets that areplaced in service in the same quarter ofthe taxable year;

(B) Assets subject to the mid-monthconvention may only be grouped into ageneral asset account with assets that areplaced in service in the same month of thetaxable year;

(C) Passenger automobiles for whichthe depreciation allowance is limited un-

der section 280F(a) must be grouped intoa separate general asset account;

(D) Assets not eligible for any addi-tional first year depreciation deduction(including assets for which the taxpayerelected not to deduct the additional firstyear depreciation) provided by, for exam-ple, section 168(k), section 168(l), section168(m), section 168(n), section 1400L(b),or section 1400N(d), must be grouped intoa separate general asset account;

(E) Assets eligible for the additionalfirst year depreciation deduction may onlybe grouped into a general asset accountwith assets for which the taxpayer claimedthe same percentage of the additional firstyear depreciation (for example, 30 per-cent, 50 percent, or 100 percent);

(F) Except for passenger automobilesdescribed in paragraph (c)(2)(ii)(C) of thissection, listed property (as defined in sec-tion 280F(d)(4)) must be grouped into aseparate general asset account;

(G) Assets for which the depreciationallowance for the placed-in-service year isnot determined by using an optional de-preciation table (for further guidance, seesection 8 of Rev. Proc. 87–57, 1987–2 CB687, 693 (see § 601.601(d)(2) of thischapter)) must be grouped into a separategeneral asset account;

(H) Mass assets that are or will besubject to paragraph (j)(2)(i)(D) of thissection (disposed of or converted massasset is identified by a mortality disper-sion table) must be grouped into a sepa-rate general asset account; and

(I) Assets subject to paragraph(h)(2)(iii)(A) of this section (change inuse results in a shorter recovery period ora more accelerated depreciation method)for which the depreciation allowance forthe year of change (as defined in§ 1.168(i)–4(a)) is not determined by us-ing an optional depreciation table must begrouped into a separate general asset ac-count.

(3) Examples. The following examples illus-trate the application of this paragraph (c):

Example 1. In 2014, J, a proprietorship with acalendar year-end, purchases and places in ser-vice one item of equipment that costs $550,000.This equipment is section 179 property and also is5-year property under section 168(e). On its Fed-eral tax return for 2014, J makes an electionunder section 179 to expense $25,000 of the equip-ment’s cost and makes an election under para-graph (l) of this section to include the equipmentin a general asset account. As a result, the unad-


justed depreciable basis of the equipment is$525,000. In accordance with paragraph (c)(1) ofthis section, J must include only $525,000 of theequipment’s cost in the general asset account.

Example 2. In 2014, K, a proprietorship witha calendar year-end, purchases and places in ser-vice 100 items of equipment. All of these items are5-year property under section 168(e), are notlisted property, and are not eligible for any addi-tional first year depreciation deduction. On itsFederal tax return for 2014, K does not make anelection under section 179 to expense the cost ofany of the 100 items of equipment and does makean election under paragraph (l) of this section toinclude the 100 items of equipment in a generalasset account. K depreciates its 5-year propertyplaced in service in 2014 using the optional de-preciation table that corresponds with the generaldepreciation system, the 200-percent decliningbalance method, a 5-year recovery period, andthe half-year convention. In accordance withparagraph (c)(2) of this section, K includes all ofthe 100 items of equipment in one general assetaccount.

Example 3. The facts are the same as in Ex-ample 2, except that K decides not to include all ofthe 100 items of equipment in one general assetaccount. Instead and in accordance with para-graph (c)(2) of this section, K establishes 100general asset accounts and includes one item ofequipment in each general asset account.

Example 4. L, a calendar-year corporation, isa wholesale distributer. In 2014, L places in ser-vice the following properties for use in its whole-sale distribution business: computers, automo-biles, and forklifts. On its Federal tax return for2014, L does not make an election under section179 to expense the cost of any of these items ofequipment and does make an election underparagraph (l) of this section to include all of theseitems of equipment in a general asset account. Allof these items are 5-year property under section168(e) and are not eligible for any additional firstyear depreciation deduction. The computers arelisted property, and the automobiles are listedproperty and are subject to section 280F(a). Ldepreciates its 5-year property placed in servicein 2014 using the optional depreciation table thatcorresponds with the general depreciation sys-tem, the 200-percent declining balance method, a5-year recovery period, and the half-year conven-tion. Although the computers, automobiles, andforklifts are 5-year property, L cannot include allof them in one general asset account because thecomputers and automobiles are listed property.Further, even though the computers and automo-biles are listed property, L cannot include them inone general asset account because the automo-biles also are subject to section 280F(a). In accor-dance with paragraph (c)(2) of this section, Lestablishes three general asset accounts: one forthe computers, one for the automobiles, and onefor the forklifts.

Example 5. M, a fiscal-year corporation with ataxable year ending June 30, purchases andplaces in service ten items of new equipment inOctober 2014, and purchases and places in ser-vice five other items of new equipment in Febru-

ary 2015. On its Federal tax return for the taxableyear ending June 30, 2015, M does not make anelection under section 179 to expense the cost ofany of these items of equipment and does make anelection under paragraph (l) of this section toinclude all of these items of equipment in a gen-eral asset account. All of these items of equipmentare 7-year property under section 168(e), are notlisted property, and are property described insection 168(k)(2)(B). All of the ten items of equip-ment placed in service in October 2014 are eligi-ble for the 50-percent additional first year depre-ciation deduction provided by section 168(k)(1).All of the five items of equipment placed in ser-vice in February 2015 are not eligible for anyadditional first year depreciation deduction. Mdepreciates its 7-year property placed in servicefor the taxable year ending June 30, 2015, usingthe optional depreciation table that correspondswith the general depreciation system, the 200-percent declining balance method, a 7-year recov-ery period, and the half-year convention. Al-though the 15 items of equipment are depreciatedusing the same depreciation method, recoveryperiod, and convention, M cannot include all ofthem in one general asset account because someof items of equipment are not eligible for anyadditional first year depreciation deduction. Inaccordance with paragraph (c)(2) of this section,M establishes two general asset accounts: one forthe ten items of equipment eligible for the 50-percent additional first year depreciation deduc-tion and one for the five items of equipment noteligible for any additional first year depreciationdeduction.

(d) Determination of depreciation al-lowance—(1) In general. Depreciation al-lowances are determined for each generalasset account. The depreciation allow-ances must be recorded in a depreciationreserve account for each general asset ac-count. The allowance for depreciation un-der this section constitutes the amount ofdepreciation allowable under section167(a).

(2) Assets in general asset account areeligible for additional first year deprecia-tion deduction. If all the assets in a generalasset account are eligible for the addi-tional first year depreciation deduction,the taxpayer first must determine the al-lowable additional first year depreciationdeduction for the general asset account forthe placed-in-service year and then mustdetermine the amount otherwise allowableas a depreciation deduction for the generalasset account for the placed-in-serviceyear and any subsequent taxable year. Theallowable additional first year deprecia-tion deduction for the general asset ac-count for the placed-in-service year is de-termined by multiplying the unadjusteddepreciable basis of the general asset ac-

count by the additional first year depreci-ation deduction percentage applicable tothe assets in the account (for example, 30percent, 50 percent, or 100 percent). Theremaining adjusted depreciable basis ofthe general asset account then is depreci-ated using the applicable depreciationmethod, recovery period, and conventionfor the assets in the account.

(3) No assets in general asset accountare eligible for additional first year depre-ciation deduction. If none of the assets ina general asset account are eligible for theadditional first year depreciation deduc-tion, the taxpayer must determine the al-lowable depreciation deduction for thegeneral asset account for the placed-in-service year and any subsequent taxableyear by using the applicable depreciationmethod, recovery period, and conventionfor the assets in the account.

(4) Special rule for passenger automo-biles. For purposes of applying section280F(a), the depreciation allowance for ageneral asset account established for pas-senger automobiles is limited for each tax-able year to the amount prescribed in sec-tion 280F(a) multiplied by the excess ofthe number of automobiles originally in-cluded in the account over the number ofautomobiles disposed of during the tax-able year or in any prior taxable year in atransaction described in paragraph(e)(3)(iii) (disposition of an asset in aqualifying disposition), paragraph (e)(3)(iv)(transactions subject to section 168(i)(7)),paragraph (e)(3)(v) (transactions subjectto section 1031 or section 1033), para-graph (e)(3)(vi) (technical termination ofa partnership), paragraph (e)(3)(vii) (anti-abuse rule), paragraph (g) (assets subjectto recapture), or paragraph (h)(1) (conver-sion to any personal use) of this section.

(e) Dispositions from a general assetaccount—(1) Scope and definition—(i) Ingeneral. This paragraph (e) provides rulesapplicable to dispositions of assets in-cluded in a general asset account. Forpurposes of this paragraph (e), an asset ina general asset account is disposed ofwhen ownership of the asset is transferredor when the asset is permanently with-drawn from use either in the taxpayer’strade or business or in the production ofincome. A disposition includes the sale,exchange, retirement, physical abandon-ment, or destruction of an asset. A dispo-


sition also occurs when an asset is trans-ferred to a supplies, scrap, or similaraccount, or when a portion of an asset isdisposed of as described in paragraph(e)(1)(ii) of this section. If a structuralcomponent, or a portion thereof, of abuilding is disposed of in a dispositiondescribed in paragraph (e)(1)(ii) of thissection, a disposition also includes thedisposition of such structural componentor such portion thereof.

(ii) Disposition of a portion of an asset.For purposes of applying paragraph (e) ofthis section, a disposition includes a dis-position of a portion of an asset in a gen-eral asset account as a result of a casualtyevent described in section 165, a disposi-tion of a portion of an asset in a generalasset account for which gain, determinedwithout regard to section 1245 or section1250, is not recognized in whole or in partunder section 1031 or section 1033, atransfer of a portion of an asset in a gen-eral asset account in a transaction de-scribed in section 168(i)(7)(B), a sale of aportion of an asset in a general asset ac-count, or a disposition of a portion of anasset in a general asset account in a trans-action described in paragraph (e)(3)(vii)(B)of this section. For other transactions, adisposition includes a disposition of a por-tion of an asset in a general asset accountonly if the taxpayer makes the electionunder paragraph (e)(3)(ii) of this sectionto terminate the general asset account inwhich that disposed portion is included ormakes the election under paragraph(e)(3)(iii) of this section for that disposedportion.

(2) General rules for a disposition—(i)No immediate recovery of basis. Except asprovided in paragraph (e)(3) of this sec-tion, immediately before a disposition ofany asset in a general asset account or adisposition of a portion of such asset asdescribed in paragraph (e)(1)(ii) of thissection, the asset or the portion of theasset, as applicable, is treated as having anadjusted depreciable basis (as defined in§ 1.168(b)–1(a)(4)) of zero for purposesof section 1011. Therefore, no loss is re-alized upon the disposition of an assetfrom the general asset account or upon thedisposition of a portion of such asset asdescribed in paragraph (e)(1)(ii) of thissection. Similarly, where an asset or aportion of an asset, as applicable, is dis-

posed of by transfer to a supplies, scrap,or similar account, the basis of the asset orthe portion of the asset, as applicable, inthe supplies, scrap, or similar account willbe zero.

(ii) Treatment of amount realized. Anyamount realized on a disposition is recog-nized as ordinary income, notwithstand-ing any other provision of subtitle A of theInternal Revenue Code (Code), to the ex-tent the sum of the unadjusted depreciablebasis of the general asset account and anyexpensed cost (as defined in paragraph(b)(5) of this section) for assets in theaccount exceeds any amounts previouslyrecognized as ordinary income upon thedisposition of other assets in the accountor upon the disposition of portions of suchassets as described in paragraph (e)(1)(ii)of this section. The recognition and char-acter of any excess amount realized aredetermined under other applicable provi-sions of the Code other than sections 1245and 1250 or provisions of the Code thattreat gain on a disposition as subject tosection 1245 or section 1250.

(iii) Effect of disposition on a generalasset account. Except as provided in para-graph (e)(3) of this section, the unadjusteddepreciable basis and the depreciation re-serve of the general asset account are notaffected as a result of a disposition of anasset from the general asset account or ofa disposition of a portion of such asset asdescribed in paragraph (e)(1)(ii) of thissection.

(iv) Coordination with nonrecognitionprovisions. For purposes of determiningthe basis of an asset or a portion of anasset, as applicable, acquired in a transac-tion, other than a transaction described inparagraph (e)(3)(iv) (pertaining to trans-actions subject to section 168(i)(7)), para-graph (e)(3)(v) (pertaining to transactionssubject to section 1031 or section 1033),and paragraph (e)(3)(vi) (pertaining totechnical terminations of partnerships) ofthis section, to which a nonrecognitionsection of the Code applies, determinedwithout regard to this section, the amountof ordinary income recognized under thisparagraph (e)(2) is treated as the amountof gain recognized on the disposition.

(v) Manner of disposition. The mannerof disposition (for example, normal retire-ment, abnormal retirement, ordinary re-tirement, or extraordinary retirement) is

not taken into account in determiningwhether a disposition occurs or gain orloss is recognized.

(vi) Disposition by transfer to a sup-plies account. If a taxpayer made an elec-tion under § 1.162–3(d) to treat the cost ofany rotable spare part, temporary sparepart, or standby emergency spare part (asdefined in § 1.162–3(c)) as a capital ex-penditure subject to the allowance for de-preciation and also made an election un-der paragraph (l) of this section to includethat rotable, temporary, or standby emer-gency spare part in a general asset ac-count, the taxpayer can dispose of therotable, temporary, or standby emergencyspare part by transferring it to a suppliesaccount only if the taxpayer has obtainedthe consent of the Commissioner to re-voke the § 1.162–3(d) election. If a tax-payer made an election under § 1.162–3T(d) to treat the cost of any material andsupply (as defined in § 1.162–3T(c)(1)) asa capital expenditure subject to the allow-ance for depreciation and also made anelection under paragraph (l) of this sectionto include that material and supply in ageneral asset account, the taxpayer candispose of the material and supply bytransferring it to a supplies account only ifthe taxpayer has obtained the consent ofthe Commissioner to revoke the § 1.162–3T(d) election. See § 1.162–3(d)(3) forthe procedures for revoking a § 1.162–3(d) or a § 1.162–3T(d) election.

(vii) Leasehold improvements. Therules of paragraph (e) of this section alsoapply to—

(A) A lessor of leased property thatmade an improvement to that property forthe lessee of the property, has a deprecia-ble basis in the improvement, made anelection under paragraph (l) of this sectionto include the improvement in a generalasset account, and disposes of the im-provement, or disposes of a portion of theimprovement as described in paragraph(e)(1)(ii) of this section, before or uponthe termination of the lease with the les-see. See section 168(i)(8)(B); and

(B) A lessee of leased property thatmade an improvement to that property,has a depreciable basis in the improve-ment, made an election under paragraph(l) of this section to include the improve-ment in a general asset account, and dis-poses of the improvement, or disposes of


a portion of the improvement as describedin paragraph (e)(1)(ii) of this section, be-fore or upon the termination of the lease.

(viii) Determination of asset disposedof—(A) General rules. For purposes ofapplying paragraph (e) of this section tothe disposition of an asset in a generalasset account, instead of the disposition ofthe general asset account, the facts andcircumstances of each disposition are con-sidered in determining what is the appro-priate asset disposed of. The asset for dis-position purposes may not consist of itemsplaced in service by the taxpayer on dif-ferent dates, without taking into accountthe applicable convention. For purposes ofdetermining what is the appropriate assetdisposed of, the unit of property determi-nation under § 1.263(a)–3(e) or in pub-lished guidance in the Internal RevenueBulletin under section 263(a) (see§ 601.601(d)(2) of this chapter) does notapply.

(B) Special rules. In addition to thegeneral rules in paragraph (e)(2)(viii)(A)of this section, the following rules applyfor purposes of applying paragraph (e) ofthis section to the disposition of an assetin a general asset account instead of thedisposition of the general asset account:

(1) Each building, including its struc-tural components, is the asset, except asprovided in § 1.1250–1(a)(2)(ii) or inparagraph (e)(2)(viii)(B)(2) or (4) of thissection.

(2) If a building has two or more con-dominium or cooperative units, each con-dominium or cooperative unit, includingits structural components, is the asset, ex-cept as provided in § 1.1250–1(a)(2)(ii) orin paragraph (e)(2)(viii)(B)(4) of this sec-tion.

(3) If a taxpayer properly includes anitem in one of the asset classes 00.11through 00.4 of Rev. Proc. 87–56 (1987–2CB 674) (see § 601.601(d)(2) of this chap-ter) or properly classifies an item in one ofthe categories under section 168(e)(3), ex-cept for a category that includes buildingsor structural components (for example, re-tail motor fuels outlet, qualified leaseholdimprovement property, qualified restaurantproperty, and qualified retail improvementproperty), each item is the asset, providedthat paragraph (e)(2)(viii)(B)(4) of this sec-tion does not apply to the item. For exam-ple, each desk is the asset, each computer

is the asset, and each qualified smart elec-tric meter is the asset.

(4) If the taxpayer places in service animprovement or addition to an asset afterthe taxpayer placed the asset in service,the improvement or addition and, if appli-cable, its structural components are a sep-arate asset.

(ix) Examples. The following examplesillustrate the application of this paragraph(e)(2):

Example 1. A, a calendar-year partnership,maintains one general asset account for one officebuilding that cost $10 million. A discovers a leakin the roof of the building and decides to replacethe entire roof. The roof is a structural compo-nent of the building. In accordance with para-graph (e)(2)(viii)(B)(1) of this section, the officebuilding, including its structural components, isthe asset for disposition purposes. The retirementof the replaced roof is not a disposition of aportion of an asset as described in paragraph(e)(1)(ii) of this section. Thus, the retirement ofthe replaced roof is not a disposition under para-graph (e)(1) of this section. As a result, A contin-ues to depreciate the $10 million cost of the gen-eral asset account. If A must capitalize theamount paid for the replacement roof pursuant to§ 1.263(a)–3, the replacement roof is a separateasset for disposition purposes pursuant to para-graph (e)(2)(viii)(B)(4) of this section and for de-preciation purposes pursuant to section 168(i)(6).

Example 2. B, a calendar-year commercialairline company, maintains one general asset ac-count for five aircraft that cost a total of $500million. These aircraft are described in asset class45.0 of Rev. Proc. 87–56. B replaces the existingengines on one of the aircraft with new engines.Assume each aircraft is a unit of property asdetermined under § 1.263(a)–3(e)(3) and each en-gine of an aircraft is a major component or sub-stantial structural part of the aircraft as deter-mined under § 1.263(a)–3(k)(6). Assume also thatB treats each aircraft as the asset for dispositionpurposes in accordance with paragraph(e)(2)(viii) of this section. The retirement of thereplaced engines is not a disposition of a portionof an asset as described in paragraph (e)(1)(ii) ofthis section. Thus, the retirement of the replacedengines is not a disposition under paragraph(e)(1) of this section. As a result, B continues todepreciate the $500 million cost of the generalasset account. If B must capitalize the amountpaid for the replacement engines pursuant to§ 1.263(a)–3, the replacement engines are a sep-arate asset for disposition purposes pursuant toparagraph (e)(2)(viii)(B)(4) of this section and fordepreciation purposes pursuant to section168(i)(6).

Example 3. (i) R, a calendar-year corporation,maintains one general asset account for ten ma-chines. The machines cost a total of $10,000 andare placed in service in June 2014. Of the tenmachines, one machine costs $8,200 and nine ma-chines cost a total of $1,800. Assume R depreci-ates this general asset account using the optional

depreciation table that corresponds with the gen-eral depreciation system, the 200-percent declin-ing balance method, a 5-year recovery period,and a half-year convention. R does not make asection 179 election for any of the machines, andall of the machines are not eligible for any addi-tional first year depreciation deduction. As ofJanuary 1, 2015, the depreciation reserve of theaccount is $2,000 ($10,000 � 20%).

(ii) On February 8, 2015, R sells the machinethat cost $8,200 to an unrelated party for $9,000.Under paragraph (e)(2)(i) of this section, this ma-chine has an adjusted depreciable basis of zero.

(iii) On its 2015 tax return, R recognizes theamount realized of $9,000 as ordinary incomebecause such amount does not exceed the unad-justed depreciable basis of the general asset ac-count ($10,000), plus any expensed cost for assetsin the account ($0), less amounts previously rec-ognized as ordinary income ($0). Moreover, theunadjusted depreciable basis and depreciation re-serve of the account are not affected by the dis-position of the machine. Thus, the depreciationallowance for the account in 2015 is $3,200($10,000 � 32%).

Example 4. (i) The facts are the same as inExample 3. In addition, on June 4, 2016, R sellsseven machines to an unrelated party for a totalof $1,100. In accordance with paragraph (e)(2)(i)of this section, these machines have an adjusteddepreciable basis of zero.

(ii) On its 2016 tax return, R recognizes $1,000as ordinary income (the unadjusted depreciablebasis of $10,000, plus the expensed cost of $0, lessthe amount of $9,000 previously recognized asordinary income). The recognition and characterof the excess amount realized of $100 ($1,100–$1,000) are determined under applicable provi-sions of the Code other than section 1245 (such assection 1231). Moreover, the unadjusted depre-ciable basis and depreciation reserve of the ac-count are not affected by the disposition of themachines. Thus, the depreciation allowance forthe account in 2016 is $1,920 ($10,000 � 19.2%).

(3) Special rules—(i) In general. Thisparagraph (e)(3) provides the rules for ter-minating general asset account treatmentupon certain dispositions. While the rulesunder paragraphs (e)(3)(ii) and (iii) of thissection are optional rules, the rules underparagraphs (e)(3)(iv), (v), (vi), and (vii) ofthis section are mandatory rules. A tax-payer elects to apply paragraph (e)(3)(ii)or (iii) of this section by reporting thegain, loss, or other deduction on the tax-payer’s timely filed original Federal taxreturn, including extensions, for the tax-able year in which the disposition occurs.However, if the loss is on account of thedemolition of a structure to which section280B and § 1.280B–1 apply, a taxpayerelects to apply paragraph (e)(3)(ii) or (iii)of this section by ending depreciation forthe structure at the time of the disposition


of the structure, taking into account theconvention applicable to the general assetaccount in which the demolished structurewas included, and reporting the amount ofdepreciation for that structure for the tax-able year in which the disposition occurson the taxpayer’s timely filed originalFederal tax return, including extensions,for that taxable year. A taxpayer may re-voke the election to apply paragraph(e)(3)(ii) or (iii) of this section only byfiling a request for a private letter rulingand obtaining the Commissioner’s con-sent to revoke the election. The Commis-sioner may grant a request to revoke thiselection if the taxpayer acted reasonablyand in good faith, and the revocation willnot prejudice the interests of the Govern-ment. See generally § 301.9100–3 of thischapter. The election to apply paragraph(e)(3)(ii) or (iii) of this section may not bemade or revoked through the filing of anapplication for change in accountingmethod. For purposes of applying para-graphs (e)(3)(iii) through (vii) of this sec-tion, see paragraph (j) of this section foridentifying an asset disposed of and itsunadjusted depreciable basis. Solely forpurposes of applying paragraphs(e)(3)(iii), (e)(3)(iv)(C), (e)(3)(v)(B), and(e)(3)(vii) of this section, the term asset is:

(A) The asset as determined underparagraph (e)(2)(viii) of this section; or

(B) The portion of such asset that isdisposed of in a disposition described inparagraph (e)(1)(ii) of this section.

(ii) Disposition of all assets remainingin a general asset account—(A) Optionaltermination of a general asset account.Upon the disposition of all of the assets,the last asset, or the remaining portion ofthe last asset in a general asset account, ataxpayer may apply this paragraph(e)(3)(ii) to recover the adjusted deprecia-ble basis of the general asset accountrather than having paragraph (e)(2) of thissection apply. Under this paragraph(e)(3)(ii), the general asset account termi-nates and the amount of gain or loss forthe general asset account is determinedunder section 1001(a) by taking into ac-count the adjusted depreciable basis of thegeneral asset account at the time of thedisposition, as determined under the ap-plicable convention for the general assetaccount. Whether and to what extent gainor loss is recognized is determined under

other applicable provisions of the Code,including section 280B and § 1.280B–1.The character of the gain or loss is deter-mined under other applicable provisionsof the Code, except that the amount ofgain subject to section 1245 is limited tothe excess of the depreciation allowed orallowable for the general asset account,including any expensed cost, over anyamounts previously recognized as ordi-nary income under paragraph (e)(2) of thissection, and the amount of gain subject tosection 1250 is limited to the excess of theadditional depreciation allowed or allow-able for the general asset account, overany amounts previously recognized as or-dinary income under paragraph (e)(2) ofthis section.

(B) Examples. The following examplesillustrate the application of this paragraph(e)(3)(ii):

Example 1. (i) T, a calendar-year corporation,maintains a general asset account for 1,000 cal-culators. The calculators cost a total of $60,000and are placed in service in 2014. Assume Tdepreciates this general asset account using theoptional depreciation table that corresponds withthe general depreciation system, the 200-percentdeclining balance method, a 5-year recovery pe-riod, and a half-year convention. T does not makea section 179 election for any of the calculators,and all of the calculators are not eligible for anyadditional first year depreciation deduction. In2015, T sells 200 of the calculators to an unrelatedparty for a total of $10,000 and recognizes the$10,000 as ordinary income in accordance withparagraph (e)(2) of this section.

(ii) On March 26, 2016, T sells the remainingcalculators in the general asset account to anunrelated party for $35,000. T elects to applyparagraph (e)(3)(ii) of this section. As a result, theaccount terminates and gain or loss is determinedfor the account.

(iii) On the date of disposition, the adjusteddepreciable basis of the account is $23,040 (unad-justed depreciable basis of $60,000 less the depre-ciation allowed or allowable of $36,960). Thus, in2016, T recognizes gain of $11,960 (amount real-ized of $35,000 less the adjusted depreciable basisof $23,040). The gain of $11,960 is subject tosection 1245 to the extent of the depreciationallowed or allowable for the account, plus theexpensed cost for assets in the account, less theamounts previously recognized as ordinary in-come ($36,960 � $0 � $10,000 � $26,960). As aresult, the entire gain of $11,960 is subject tosection 1245.

Example 2. (i) J, a calendar-year corporation,maintains a general asset account for one item ofequipment. This equipment costs $2,000 and isplaced in service in 2014. Assume J depreciatesthis general asset account using the optional de-preciation table that corresponds with the generaldepreciation system, the 200-percent declining

balance method, a 5-year recovery period, and ahalf-year convention. J does not make a section179 election for the equipment, and it is not eli-gible for any additional first year depreciationdeduction. In June 2016, J sells the equipment toan unrelated party for $1,000. J elects to applyparagraph (e)(3)(ii) of this section. As a result, theaccount terminates and gain or loss is determinedfor the account.

(ii) On the date of disposition, the adjusteddepreciable basis of the account is $768 (unad-justed depreciable basis of $2,000 less the depre-ciation allowed or allowable of $1,232). Thus, in2016, J recognizes gain of $232 (amount realizedof $1,000 less the adjusted depreciable basis of$768). The gain of $232 is subject to section 1245to the extent of the depreciation allowed or allow-able for the account (plus the expensed cost forassets in the account) less the amounts previouslyrecognized as ordinary income ($1,232 � $0– $0� $1,232). As a result, the entire gain of $232 issubject to section 1245.

(iii) Disposition of an asset in a qual-ifying disposition—(A) Optional determi-nation of the amount of gain, loss, orother deduction. In the case of a qualify-ing disposition (described in paragraph(e)(3)(iii)(B) of this section) of an asset, ataxpayer may elect to apply this paragraph(e)(3)(iii) rather than having paragraph(e)(2) of this section apply. Under thisparagraph (e)(3)(iii), general asset accounttreatment for the asset terminates as of thefirst day of the taxable year in which thequalifying disposition occurs, and theamount of gain, loss, or other deduction forthe asset is determined under § 1.168(i)–8by taking into account the asset’s adjusteddepreciable basis at the time of the disposi-tion. The adjusted depreciable basis of theasset at the time of the disposition, as deter-mined under the applicable convention forthe general asset account in which the assetwas included, equals the unadjusted depre-ciable basis of the asset less the depreciationallowed or allowable for the asset, com-puted by using the depreciation method, re-covery period, and convention applicable tothe general asset account in which the assetwas included and by including the portionof the additional first year depreciation de-duction claimed for the general asset ac-count that is attributable to the asset dis-posed of. Whether and to what extent gain,loss, or other deduction is recognized is de-termined under other applicable provisionsof the Code, including section 280B and§ 1.280B–1. The character of the gain, loss,or other deduction is determined under otherapplicable provisions of the Code, exceptthat the amount of gain subject to section


1245 or section 1250 is limited to the lesserof—

(1) The depreciation allowed or allow-able for the asset, including any expensedcost or, in the case of section 1250 prop-erty, the additional depreciation allowedor allowable for the asset; or

(2) The excess of—(i) The original unadjusted depreciable

basis of the general asset account plus, inthe case of section 1245 property origi-nally included in the general asset ac-count, any expensed cost; over

(ii) The cumulative amounts of gainpreviously recognized as ordinary incomeunder either paragraph (e)(2) of this sec-tion or section 1245 or section 1250.

(B) Qualifying dispositions. A qualify-ing disposition is a disposition that doesnot involve all the assets, the last asset, orthe remaining portion of the last assetremaining in a general asset account andthat is—

(1) A direct result of a fire, storm,shipwreck, or other casualty, or fromtheft;

(2) A charitable contribution for whicha deduction is allowable under section170;

(3) A direct result of a cessation, ter-mination, or disposition of a business,manufacturing or other income producingprocess, operation, facility, plant, or otherunit, other than by transfer to a supplies,scrap, or similar account; or

(4) A transaction, other than a transac-tion described in paragraph (e)(3)(iv)(pertaining to transactions subject to sec-tion 168(i)(7)), paragraph (e)(3)(v) (per-taining to transactions subject to section1031 or section 1033), paragraph(e)(3)(vi) (pertaining to technical termina-tions of partnerships), or paragraph(e)(3)(vii) (anti-abuse rule) of this section,to which a nonrecognition section of theInternal Revenue Code applies (deter-mined without regard to this section).

(C) Effect of a qualifying dispositionon a general asset account. If the taxpayerelects to apply this paragraph (e)(3)(iii) toa qualifying disposition of an asset,then—

(1) The asset is removed from the gen-eral asset account as of the first day of thetaxable year in which the qualifying dis-position occurs. For that taxable year, thetaxpayer accounts for the asset in a single

asset account in accordance with the rulesunder § 1.168(i)–7(b);

(2) The unadjusted depreciable basis ofthe general asset account is reduced by theunadjusted depreciable basis of the assetas of the first day of the taxable year inwhich the disposition occurs;

(3) The depreciation reserve of the gen-eral asset account is reduced by the depre-ciation allowed or allowable for the assetas of the end of the taxable year immedi-ately preceding the year of disposition,computed by using the depreciationmethod, recovery period, and conventionapplicable to the general asset account inwhich the asset was included and by in-cluding the portion of the additional firstyear depreciation deduction claimed forthe general asset account that is attribut-able to the asset disposed of; and

(4) For purposes of determining theamount of gain realized on subsequentdispositions that is subject to ordinary in-come treatment under paragraph (e)(2)(ii)of this section, the amount of any ex-pensed cost with respect to the asset isdisregarded.

(D) Examples. The following examplesillustrate the application of this paragraph(e)(3)(iii):

Example 1. (i) Z, a calendar-year corporation,maintains one general asset account for 12 ma-chines. Each machine costs $15,000 and is placedin service in 2014. Of the 12 machines, nine ma-chines that cost a total of $135,000 are used in Z’sKentucky plant, and three machines that cost atotal of $45,000 are used in Z’s Ohio plant. As-sume Z depreciates this general asset accountusing the optional depreciation table that corre-sponds with the general depreciation system, the200-percent declining balance method, a 5-yearrecovery period, and the half-year convention. Zdoes not make a section 179 election for any of themachines, and all of the machines are not eligiblefor any additional first year depreciation deduc-tion. As of December 31, 2015, the depreciationreserve for the account is $93,600.

(ii) On May 27, 2016, Z sells its entire manu-facturing plant in Ohio to an unrelated party. Thesales proceeds allocated to each of the three ma-chines at the Ohio plant is $5,000. This transac-tion is a qualifying disposition under paragraph(e)(3)(iii)(B)(3) of this section, and Z elects toapply paragraph (e)(3)(iii) of this section.

(iii) For Z’s 2016 return, the depreciation al-lowance for the account is computed as follows.As of December 31, 2015, the depreciation al-lowed or allowable for the three machines at theOhio plant is $23,400. Thus, as of January 1,2016, the unadjusted depreciable basis of the ac-count is reduced from $180,000 to $135,000($180,000 less the unadjusted depreciable basis of

$45,000 for the three machines), and, as of De-cember 31, 2015, the depreciation reserve of theaccount is decreased from $93,600 to $70,200($93,600 less the depreciation allowed or allow-able of $23,400 for the three machines as of De-cember 31, 2015). Consequently, the depreciationallowance for the account in 2016 is $25,920($135,000 � 19.2%).

(iv) For Z’s 2016 return, gain or loss for eachof the three machines at the Ohio plant is deter-mined as follows. The depreciation allowed orallowable in 2016 for each machine is $1,440(($15,000 � 19.2%)/ 2). Thus, the adjusted depre-ciable basis of each machine under section 1011 is$5,760 (the adjusted depreciable basis of $7,200removed from the account less the depreciationallowed or allowable of $1,440 in 2016). As aresult, the loss recognized in 2016 for each ma-chine is $760 ($5,000– $5,760), which is subject tosection 1231.

Example 2. (i) A, a calendar-year partnership,maintains one general asset account for one officebuilding that cost $20 million and was placed inservice in July 2011. A depreciates this generalasset account using the optional depreciation ta-ble that corresponds with the general deprecia-tion system, the straight-line method, a 39-yearrecovery period, and the mid-month convention.As of January 1, 2014, the depreciation reservefor the account is $1,261,000.

(ii) In May 2014, a tornado occurs where thebuilding is located and damages the roof of thebuilding. A decides to replace the entire roof. Theroof is replaced in June 2014. The roof is a struc-tural component of the building. Because the roofwas damaged as a result of a casualty event de-scribed in section 165, the partial disposition ruleprovided under paragraph (e)(1)(ii) of this sectionapplies to the roof. Although the office building,including its structural components, is the assetfor disposition purposes, the partial dispositionrule provides that the retirement of the replacedroof is a disposition under paragraph (e)(1) of thissection. This retirement is a qualifying dispositionunder paragraph (e)(3)(iii)(B)(1) of this section,and A elects to apply paragraph (e)(3)(iii) of thissection for the retirement of the damaged roof.

(iii) Of the $20 million cost of the office build-ing, assume $1 million is the cost of the retiredroof.

(iv) For A’s 2014 return, the depreciation allow-ance for the account is computed as follows. As ofDecember 31, 2013, the depreciation allowed orallowable for the retired roof is $63,050. Thus, as ofJanuary 1, 2014, the unadjusted depreciable basisof the account is reduced from $20,000,000 to$19,000,000 ($20,000,000 less the unadjusted depre-ciable basis of $1,000,000 for the retired roof), andthe depreciation reserve of the account is decreasedfrom $1,261,000 to $1,197,950 ($1,261,000 less thedepreciation allowed or allowable of $63,050 for theretired roof as of December 31, 2013). Conse-quently, the depreciation allowance for the accountin 2014 is $487,160 ($19,000,000 � 2.564%).

(v) For A’s 2014 return, gain or loss for theretired roof is determined as follows. The depre-ciation allowed or allowable in 2014 for the re-tired roof is $11,752 (($1,000,000 � 2.564%) �


5.5/12). Thus, the adjusted depreciable basis ofthe retired roof under section 1011 is $925,198(the adjusted depreciable basis of $936,950 re-moved from the account less the depreciationallowed or allowable of $11,752 in 2014). As aresult, the loss recognized in 2014 for the retiredroof is $925,198, which is subject to section 1231.

(vi) If A must capitalize the amount paid forthe replacement roof under § 1.263(a)–3, the re-placement roof is a separate asset for deprecia-tion purposes pursuant to section 168(i)(6). If Aincludes the replacement roof in a general assetaccount, the replacement roof is a separate assetfor disposition purposes pursuant to paragraph(e)(2)(viii)(B)(4) of this section. If A includes thereplacement roof in a single asset account or amultiple asset account under § 1.168(i)–7, the re-placement roof is a separate asset for dispositionpurposes pursuant to § 1.168(i)–8(c)(4)(ii)(D).

(iv) Transactions subject to section168(i)(7)—(A) In general. If a taxpayertransfers one or more assets, or a portionof such asset, in a general asset account ina transaction described in section168(i)(7)(B) (pertaining to treatment oftransferees in certain nonrecognitiontransactions), the taxpayer (the transferor)and the transferee must apply this para-graph (e)(3)(iv) to the asset or the portionof such asset, instead of applying para-graph (e)(2), (e)(3)(ii), or (e)(3)(iii) of thissection. The transferee is bound by thetransferor’s election under paragraph (l)of this section for the portion of the trans-feree’s basis in the asset or the portion ofsuch asset that does not exceed the trans-feror’s adjusted depreciable basis of thegeneral asset account or the asset or theportion of such asset, as applicable, asdetermined under paragraph (e)(3)(iv)(B)(2)or (C)(2) of this section, as applicable.

(B) All assets remaining in general as-set account are transferred. If a taxpayertransfers all the assets, the last asset, or theremaining portion of the last asset in ageneral asset account in a transaction de-scribed in section 168(i)(7)(B)—

(1) The taxpayer (the transferor) mustterminate the general asset account on thedate of the transfer. The allowable depre-ciation deduction for the general asset ac-count for the transferor’s taxable year inwhich the section 168(i)(7)(B) transactionoccurs is computed by using the depreci-ation method, recovery period, and con-vention applicable to the general asset ac-count. This allowable depreciation deductionis allocated between the transferor and thetransferee on a monthly basis. This allo-cation is made in accordance with the

rules in § 1.168(d)–1(b)(7)(ii) for allocat-ing the depreciation deduction betweenthe transferor and the transferee;

(2) The transferee must establish a newgeneral asset account for all the assets, thelast asset, or the remaining portion of thelast asset, in the taxable year in which thesection 168(i)(7)(B) transaction occurs forthe portion of its basis in the assets thatdoes not exceed the transferor’s adjusteddepreciable basis of the general asset ac-count in which all the assets, the last asset,or the remaining portion of the last asset,were included. The transferor’s adjusteddepreciable basis of this general asset ac-count is equal to the adjusted depreciablebasis of that account as of the beginningof the transferor’s taxable year in whichthe transaction occurs, decreased by theamount of depreciation allocable to thetransferor for the year of the transfer, asdetermined under paragraph (e)(3)(iv)(B)(1)of this section. The transferee is treated asthe transferor for purposes of computingthe allowable depreciation deduction forthe new general asset account under sec-tion 168. The new general asset accountmust be established in accordance withthe rules in paragraph (c) of this section,except that the unadjusted depreciablebases of all the assets, the last asset, or theremaining portion of the last asset, and thegreater of the depreciation allowed or al-lowable for all the assets, the last asset, orthe remaining portion of the last asset,including the amount of depreciation forthe transferred assets that is allocable tothe transferor for the year of the transfer,are included in the newly established gen-eral asset account. Consequently, this gen-eral asset account in the year of the trans-fer will have a beginning balance for boththe unadjusted depreciable basis and thedepreciation reserve of the general assetaccount; and

(3) For purposes of section 168 and thissection, the transferee treats the portion ofits basis in the assets that exceeds thetransferor’s adjusted depreciable basis ofthe general asset account in which all theassets, the last asset, or the remaining por-tion of the last asset, were included, asdetermined under paragraph (e)(3)(iv)(B)(2)of this section, as a separate asset that thetransferee placed in service on the date ofthe transfer. The transferee accounts forthis asset under § 1.168(i)–7 or may make

an election under paragraph (l) of thissection to include the asset in a generalasset account.

(C) Not all assets remaining in generalasset account are transferred. If a taxpayertransfers an asset in a general asset accountin a transaction described in section168(i)(7)(B) and if paragraph (e)(3)(iv)(B)of this section does not apply to this asset—

(1) The taxpayer (the transferor) mustremove the transferred asset from the gen-eral asset account in which the asset isincluded, as of the first day of the taxableyear in which the section 168(i)(7)(B)transaction occurs. In addition, the adjust-ments to the general asset account de-scribed in paragraphs (e)(3)(iii)(C)(2)through (4) of this section must be made.The allowable depreciation deduction forthe asset for the transferor’s taxable yearin which the section 168(i)(7)(B) transac-tion occurs is computed by using the de-preciation method, recovery period, andconvention applicable to the general assetaccount in which the asset was included.This allowable depreciation deduction isallocated between the transferor and thetransferee on a monthly basis. This allo-cation is made in accordance with therules in § 1.168(d)–1(b)(7)(ii) for allocat-ing the depreciation deduction betweenthe transferor and the transferee;

(2) The transferee must establish a newgeneral asset account for the asset in thetaxable year in which the section 168(i)(7)(B)transaction occurs for the portion of itsbasis in the asset that does not exceed thetransferor’s adjusted depreciable basis ofthe asset. The transferor’s adjusted depre-ciable basis of this asset is equal to theadjusted depreciable basis of the asset asof the beginning of the transferor’s tax-able year in which the transaction occurs,decreased by the amount of depreciationallocable to the transferor for the year ofthe transfer, as determined under para-graph (e)(3)(iv)(C)(1) of this section. Thetransferee is treated as the transferor forpurposes of computing the allowable de-preciation deduction for the new generalasset account under section 168. The newgeneral asset account must be establishedin accordance with the rules in paragraph(c) of this section, except that the unad-justed depreciable basis of the asset, andthe greater of the depreciation allowed orallowable for the asset, including the


amount of depreciation for the transferredasset that is allocable to the transferor forthe year of the transfer, are included in thenewly established general asset account.Consequently, this general asset accountin the year of the transfer will have abeginning balance for both the unadjusteddepreciable basis and the depreciation re-serve of the general asset account; and

(3) For purposes of section 168 and thissection, the transferee treats the portion ofits basis in the asset that exceeds the trans-feror’s adjusted depreciable basis of theasset, as determined under paragraph(e)(3)(iv)(C)(2) of this section, as a sepa-rate asset that the transferee placed in ser-vice on the date of the transfer. The trans-feree accounts for this asset under§ 1.168(i)–7 or may make an electionunder paragraph (l) of this section to in-clude the asset in a general asset account.

(v) Transactions subject to section1031 or section 1033—(A) Like-kind ex-change or involuntary conversion of allassets remaining in a general asset ac-count. If all the assets, the last asset, or theremaining portion of the last asset in ageneral asset account are transferred by ataxpayer in a like-kind exchange (as de-fined under § 1.168–6(b)(11)) or in aninvoluntary conversion (as defined under§ 1.168–6(b)(12)), the taxpayer must ap-ply this paragraph (e)(3)(v)(A) instead ofapplying paragraph (e)(2), (e)(3)(ii), or(e)(3)(iii) of this section. Under this para-graph (e)(3)(v)(A), the general asset ac-count terminates as of the first day of theyear of disposition (as defined in§ 1.168(i)–6(b)(5)) and—

(1) The amount of gain or loss for thegeneral asset account is determined undersection 1001(a) by taking into account theadjusted depreciable basis of the generalasset account at the time of disposition (asdefined in § 1.168(i)–6(b)(3)). The depre-ciation allowance for the general asset ac-count in the year of disposition is deter-mined in the same manner as thedepreciation allowance for the relin-quished MACRS property (as defined in§ 1.168(i)–6(b)(2)) in the year of disposi-tion is determined under § 1.168(i)–6.The recognition and character of gain orloss are determined in accordance withparagraph (e)(3)(ii)(A) of this section,notwithstanding that paragraph (e)(3)(ii)of this section is an optional rule; and

(2) The adjusted depreciable basis ofthe general asset account at the time ofdisposition is treated as the adjusted de-preciable basis of the relinquishedMACRS property.

(B) Like-kind exchange or involuntaryconversion of less than all assets remain-ing in a general asset account. If an assetin a general asset account is transferred bya taxpayer in a like-kind exchange or in aninvoluntary conversion and if paragraph(e)(3)(v)(A) of this section does not applyto this asset, the taxpayer must apply thisparagraph (e)(3)(v)(B) instead of applyingparagraph (e)(2), (e)(3)(ii), or (e)(3)(iii) ofthis section. Under this paragraph (e)(3)(v)(B),general asset account treatment for theasset terminates as of the first day of theyear of disposition (as defined in§ 1.168(i)–6(b)(5)), and—

(1) The amount of gain or loss for theasset is determined by taking into accountthe asset’s adjusted depreciable basis atthe time of disposition (as defined in§ 1.168(i)–6(b)(3)). The adjusted depre-ciable basis of the asset at the time ofdisposition equals the unadjusted depre-ciable basis of the asset less the depreci-ation allowed or allowable for the asset,computed by using the depreciationmethod, recovery period, and conventionapplicable to the general asset account inwhich the asset was included and by in-cluding the portion of the additional firstyear depreciation deduction claimed forthe general asset account that is attribut-able to the relinquished asset. The depre-ciation allowance for the asset in the yearof disposition is determined in the samemanner as the depreciation allowance forthe relinquished MACRS property (as de-fined in § 1.168(i)–6(b)(2)) in the year ofdisposition is determined under § 1.168(i)–6.The recognition and character of the gainor loss are determined in accordance withparagraph (e)(3)(iii)(A) of this section,notwithstanding that paragraph (e)(3)(iii)of this section is an optional rule; and

(2) As of the first day of the year ofdisposition, the taxpayer must remove therelinquished asset from the general assetaccount and make the adjustments to thegeneral asset account described in para-graphs (e)(3)(iii)(C)(2) through (4) of thissection.

(vi) Technical termination of a part-nership. In the case of a technical termi-

nation of a partnership under section708(b)(1)(B), the terminated partnershipmust apply this paragraph (e)(3)(vi) in-stead of applying paragraph (e)(2),(e)(3)(ii), or (e)(3)(iii) of this section. Un-der this paragraph (e)(3)(vi), all of theterminated partnership’s general asset ac-counts terminate as of the date of its ter-mination under section 708(b)(1)(B). Theterminated partnership computes the al-lowable depreciation deduction for eachof its general asset accounts for the tax-able year in which the technical termina-tion occurs by using the depreciationmethod, recovery period, and conventionapplicable to the general asset account.The new partnership is not bound by theterminated partnership’s election underparagraph (l) of this section.

(vii) Anti-abuse rule—(A) In general.If an asset in a general asset account isdisposed of by a taxpayer in a transactiondescribed in paragraph (e)(3)(vii)(B) ofthis section, general asset account treat-ment for the asset terminates as of the firstday of the taxable year in which the dis-position occurs. Consequently, the tax-payer must determine the amount of gain,loss, or other deduction attributable to thedisposition in the manner described inparagraph (e)(3)(iii)(A) of this section,notwithstanding that paragraph (e)(3)(iii)(A)of this section is an optional rule, andmust make the adjustments to the generalasset account described in paragraphs(e)(3)(iii)(C)(1) through (4) of this sec-tion.

(B) Abusive transactions. A transactionis described in this paragraph (e)(3)(vii)(B)if the transaction is not described in para-graph (e)(3)(iv), (e)(3)(v), or (e)(3)(vi) ofthis section, and if the transaction is en-tered into, or made, with a principal pur-pose of achieving a tax benefit or resultthat would not be available absent an elec-tion under this section. Examples of thesetypes of transactions include—

(1) A transaction entered into with aprincipal purpose of shifting income ordeductions among taxpayers in a mannerthat would not be possible absent an elec-tion under this section to take advantageof differing effective tax rates among thetaxpayers; or

(2) An election made under this sectionwith a principal purpose of disposing ofan asset from a general asset account to


utilize an expiring net operating loss orcredit if the transaction is not a bona fidedisposition. The fact that a taxpayer with anet operating loss carryover or a creditcarryover transfers an asset to a relatedperson or transfers an asset pursuant to anarrangement where the asset continues tobe used or is available for use by thetaxpayer pursuant to a lease or otherwiseindicates, absent strong evidence to thecontrary, that the transaction is describedin this paragraph (e)(3)(vii)(B).

(f) Assets generating foreign source in-come—(1) In general. This paragraph (f)provides the rules for determining thesource of any income, gain, or loss recog-nized, and the appropriate section 904(d)separate limitation category or categoriesfor any foreign source income, gain, orloss recognized on a disposition (withinthe meaning of paragraph (e)(1) of thissection) of an asset in a general assetaccount that consists of assets generatingboth United States and foreign source in-come. These rules apply only to a dispo-sition to which paragraph (e)(2) (generaldisposition rules), paragraph (e)(3)(ii)(disposition of all assets remaining in ageneral asset account), paragraph(e)(3)(iii) (disposition of an asset in aqualifying disposition), paragraph (e)(3)(v)

(transactions subject to section 1031 orsection 1033), or paragraph (e)(3)(vii)(anti-abuse rule) of this section applies.Solely for purposes of applying this para-graph (f), the term asset is:

(i) The asset as determined under para-graph (e)(2)(viii) of this section; or

(ii) The portion of such asset that isdisposed of in a disposition described inparagraph (e)(1)(ii) of this section.

(2) Source of ordinary income, gain, orloss—(i) Source determined by allocationand apportionment of depreciation al-lowed. The amount of any ordinary in-come, gain, or loss that is recognized onthe disposition of an asset in a generalasset account must be apportioned be-tween United States and foreign sourcesbased on the allocation and apportionmentof the—

(A) Depreciation allowed for the gen-eral asset account as of the end of thetaxable year in which the disposition oc-curs if paragraph (e)(2) of this sectionapplies to the disposition;

(B) Depreciation allowed for the gen-eral asset account as of the time of dispo-sition if the taxpayer applies paragraph(e)(3)(ii) of this section to the dispositionof all assets, the last asset, or the remain-ing portion of the last asset, in the general

asset account, or if all the assets, the lastasset, or the remaining portion of the lastasset, in the general asset account are dis-posed of in a transaction described inparagraph (e)(3)(v)(A) of this section; or

(C) Depreciation allowed for the assetdisposed of for only the taxable year inwhich the disposition occurs if the tax-payer applies paragraph (e)(3)(iii) of thissection to the disposition of the asset in aqualifying disposition, if the asset is dis-posed of in a transaction described inparagraph (e)(3)(v)(B) of this section(like-kind exchange or involuntary con-version), or if the asset is disposed of in atransaction described in paragraph (e)(3)(vii)of this section (anti-abuse rule).

(ii) Formula for determining foreignsource income, gain, or loss. The amountof ordinary income, gain, or loss recog-nized on the disposition that shall betreated as foreign source income, gain, orloss must be determined under the for-mula in this paragraph (f)(2)(ii). For pur-poses of this formula, the allowed depre-ciation deductions are determined for theapplicable time period provided in para-graph (f)(2)(i) of this section. The formulais:

Foreign Total Allowed

Source Ordinary Depreciation

Income, Gain, Income, Deductions

or Loss from � Gain, or � Allocated and

The Loss from the Apportioned to

Disposition Disposition Foreign Source

of an Asset of an Asset Income/Total

Allowed

Depreciation

Deductions for

the General

Asset Account

or for the

Asset Disposed of

(as applicable)

(3) Section 904(d) separate categories.If the assets in the general asset accountgenerate foreign source income in more

than one separate category under section904(d)(1) or another section of the Code(for example, income treated as foreign

source income under section 904(g)(10)),or under a United States income tax treatythat requires the foreign tax credit limita-


tion to be determined separately for spec-ified types of income, the amount of for-eign source income, gain, or loss from thedisposition of an asset, as determined un-der the formula in paragraph (f)(2)(ii) of

this section, must be allocated and appor-tioned to the applicable separate categoryor categories under the formula in thisparagraph (f)(3). For purposes of this for-mula, the allowed depreciation deductions

are determined for the applicable time pe-riod provided in paragraph (f)(2)(i) of thissection. The formula is:

Foreign Foreign Allowed

Source Source Depreciation

Income, Gain, � Income, � Deductions

or Loss in a Gain, or Allocated and

Separate Loss from Apportioned to

Category The a Separate

Disposition Category Total/

of an Asset Allowed

Depreciation

Deductions and

Apportioned to

Foreign Source

Income

(g) Assets subject to recapture. If thebasis of an asset in a general asset accountis increased as a result of the recapture ofany allowable credit or deduction (for ex-ample, the basis adjustment for the recap-ture amount under section 30(e)(5),50(c)(2), 168(l)(6), 168(n)(4), 179(d)(10),179A(e)(4), or 1400N(d)(5)), general as-set account treatment for the asset termi-nates as of the first day of the taxable yearin which the recapture event occurs. Con-sequently, the taxpayer must remove theasset from the general asset account as ofthat day and must make the adjustments tothe general asset account described inparagraphs (e)(3)(iii)(C)(2) through (4) ofthis section.

(h) Changes in use—(1) Conversion toany personal use. An asset in a generalasset account becomes ineligible for gen-eral asset account treatment if a taxpayeruses the asset in any personal activity dur-ing a taxable year. Upon a conversion toany personal use, the taxpayer must re-move the asset from the general asset ac-count as of the first day of the taxable yearin which the change in use occurs (theyear of change) and must make the adjust-ments to the general asset account de-scribed in paragraphs (e)(3)(iii)(C)(2)through (4) of this section.

(2) Change in use results in a differentrecovery period and/or depreciation

method—(i) No effect on general assetaccount election. A change in the use de-scribed in § 1.168(i)–4(d) (change in useresults in a different recovery period ordepreciation method) of an asset in a gen-eral asset account shall not cause or per-mit the revocation of the election madeunder this section.

(ii) Asset is removed from the generalasset account. Upon a change in the usedescribed in § 1.168(i)–4(d), the taxpayermust remove the asset from the generalasset account as of the first day of the yearof change (as defined in § 1.168(i)–4(a))and must make the adjustments to thegeneral asset account described in para-graphs (e)(3)(iii)(C)(2) through (4) of thissection. If, however, the result of thechange in use is described in § 1.168(i)–4(d)(3) (change in use results in a shorterrecovery period or a more accelerated de-preciation method) and the taxpayer electsto treat the asset as though the change inuse had not occurred pursuant to§ 1.168(i)–4(d)(3)(ii), no adjustment ismade to the general asset account uponthe change in use.

(iii) New general asset account is es-tablished—(A) Change in use results in ashorter recovery period or a more accel-erated depreciation method. If the resultof the change in use is described in§ 1.168(i)–4(d)(3) (change in use results

in a shorter recovery period or a moreaccelerated depreciation method) and ad-justments to the general asset account aremade pursuant to paragraph (h)(2)(ii) ofthis section, the taxpayer must establish anew general asset account for the asset inthe year of change in accordance with therules in paragraph (c) of this section, ex-cept that the adjusted depreciable basis ofthe asset as of the first day of the year ofchange is included in the general assetaccount. For purposes of paragraph (c)(2)of this section, the applicable depreciationmethod, recovery period, and conventionare determined under § 1.168(i)–4(d)(3)(i).

(B) Change in use results in a longerrecovery period or a slower depreciationmethod. If the result of the change in useis described in § 1.168(i)–4(d)(4) (changein use results in a longer recovery periodor a slower depreciation method), the tax-payer must establish a separate generalasset account for the asset in the year ofchange in accordance with the rules inparagraph (c) of this section, except thatthe unadjusted depreciable basis of theasset, and the greater of the depreciationof the asset allowed or allowable in accor-dance with section 1016(a)(2), as of thefirst day of the year of change are includedin the newly established general asset ac-count. Consequently, this general asset ac-count as of the first day of the year of


change will have a beginning balance forboth the unadjusted depreciable basis andthe depreciation reserve of the general as-set account. For purposes of paragraph(c)(2) of this section, the applicable depre-ciation method, recovery period, and con-vention are determined under § 1.168(i)–4(d)(4)(ii).

(i) Redetermination of basis. If, afterthe placed-in-service year, the unadjusteddepreciable basis of an asset in a generalasset account is redetermined due to atransaction other than that described inparagraph (g) of this section (for example,due to contingent purchase price or dis-charge of indebtedness), the taxpayer’selection under paragraph (l) of this sectionfor the asset also applies to the increase ordecrease in basis resulting from the rede-termination. For the taxable year in whichthe increase or decrease in basis occurs,the taxpayer must establish a new generalasset account for the amount of the in-crease or decrease in basis in accordancewith the rules in paragraph (c) of thissection. For purposes of paragraph (c)(2)of this section, the applicable recoveryperiod for the increase or decrease in basisis the recovery period of the asset remain-ing as of the beginning of the taxable yearin which the increase or decrease in basisoccurs, the applicable depreciation methodand applicable convention for the increaseor decrease in basis are the same depreci-ation method and convention applicable tothe asset that applies for the taxable yearin which the increase or decrease in basisoccurs, and the increase or decrease inbasis is deemed to be placed in service inthe same taxable year as the asset.

(j) Identification of disposed or con-verted asset—(1) In general. The rules ofthis paragraph (j) apply when an asset in ageneral asset account is disposed of orconverted in a transaction described inparagraph (e)(3)(iii) (disposition of an as-set in a qualifying disposition), paragraph(e)(3)(iv)(B) (transactions subject to sec-tion 168(i)(7)), paragraph (e)(3)(v)(B)(transactions subject to section 1031 orsection 1033), paragraph (e)(3)(vii) (anti-abuse rule), paragraph (g) (assets subjectto recapture), or paragraph (h)(1) (conver-sion to any personal use) of this section.

(2) Identifying which asset is disposedof or converted—(i) In general. For pur-poses of identifying which asset in a gen-

eral asset account is disposed of or con-verted, a taxpayer must identify thedisposed of or converted asset by using—

(A) The specific identification methodof accounting. Under this method of ac-counting, the taxpayer can determine theparticular taxable year in which the dis-posed of or converted asset was placed inservice by the taxpayer;

(B) A first-in, first-out method of ac-counting if the taxpayer can readily deter-mine from its records the total disposi-tions of assets with the same recoveryperiod during the taxable year but the tax-payer cannot readily determine from itsrecords the unadjusted depreciable basisof the disposed of or converted asset. Un-der this method of accounting, the tax-payer identifies the general asset accountwith the earliest placed-in-service yearthat has the same recovery period as thedisposed of or converted asset and that hasassets at the beginning of the taxable yearof the disposition or conversion, and thetaxpayer treats the disposed of or con-verted asset as being from that generalasset account. To determine which generalasset account has assets at the beginningof the taxable year of the disposition orconversion, the taxpayer reduces the num-ber of assets originally included in theaccount by the number of assets disposedof or converted in any prior taxable yearin a transaction to which this paragraph (j)applies;

(C) A modified first-in, first-outmethod of accounting if the taxpayer canreadily determine from its records the to-tal dispositions of assets with the samerecovery period during the taxable yearand the unadjusted depreciable basis ofthe disposed of or converted asset. Underthis method of accounting, the taxpayeridentifies the general asset account withthe earliest placed-in-service year that hasthe same recovery period as the disposedof or converted asset and that has assets atthe beginning of the taxable year of thedisposition or conversion with the sameunadjusted depreciable basis as the dis-posed of or converted asset, and the tax-payer treats the disposed of or convertedasset as being from that general asset ac-count. To determine which general assetaccount has assets at the beginning of thetaxable year of the disposition or conver-sion, the taxpayer reduces the number of

assets originally included in the accountby the number of assets disposed of orconverted in any prior taxable year in atransaction to which this paragraph (j) ap-plies;

(D) A mortality dispersion table if theasset is a mass asset accounted for in aseparate general asset account in accor-dance with paragraph (c)(2)(ii)(H) of thissection and if the taxpayer can readilydetermine from its records the total dispo-sitions of assets with the same recoveryperiod during the taxable year. The mor-tality dispersion table must be based uponan acceptable sampling of the taxpayer’sactual disposition and conversion experi-ence for mass assets or other acceptablestatistical or engineering techniques. Touse a mortality dispersion table, the tax-payer must adopt recordkeeping practicesconsistent with the taxpayer’s prior prac-tices and consonant with good accountingand engineering practices; or

(E) Any other method as the Secretarymay designate by publication in the Fed-eral Register or in the Internal RevenueBulletin (see § 601.601(d)(2) of this chap-ter) on or after September 19, 2013. Seeparagraph (j)(2)(iii) of this section regard-ing the last-in, first-out method of ac-counting.

(ii) Disposition of a portion of an asset.If a taxpayer disposes of a portion of anasset and paragraph (e)(1)(ii) of this sec-tion applies to that disposition, the tax-payer may identify the asset by using anyapplicable method provided in paragraph(j)(2)(i) of this section, after taking intoaccount paragraph (j)(2)(iii) of this sec-tion.

(iii) Last-in, first-out method of ac-counting. For purposes of paragraph (j)(2)of this section, a last-in, first-out methodof accounting may not be used. Examplesof a last-in, first-out method of accountinginclude the taxpayer identifying the gen-eral asset account with the most recentplaced-in-service year that has the samerecovery period as the disposed of or con-verted asset and that has assets at thebeginning of the taxable year of the dis-position or conversion, and the taxpayertreating the disposed of or converted assetas being from that general asset account,or the taxpayer treating the disposed por-tion of an asset as being from the generalasset account with the most recent placed-


in-service year that has assets that are thesame as the asset of which the disposedportion is a part.

(3) Basis of disposed of or convertedasset. (i) Solely for purposes of this para-graph (j)(3), the term asset is the asset asdetermined under paragraph (e)(2)(viii) ofthis section or the portion of such assetthat is disposed of in a disposition de-scribed in paragraph (e)(1)(ii) of this sec-tion. After identifying which asset in ageneral asset account is disposed of orconverted, the taxpayer must determinethe unadjusted depreciable basis of, andthe depreciation allowed or allowable for,the disposed of or converted asset. If it isimpracticable from the taxpayer’s recordsto determine the unadjusted depreciablebasis of the disposed of or converted asset,the taxpayer may use any reasonablemethod that is consistently applied to allassets in the same general asset accountfor purposes of determining the unad-justed depreciable basis of the disposed ofor converted asset in that general assetaccount. Examples of a reasonablemethod include, but are not limited to, thefollowing:

(A) If the replacement asset is a resto-ration (as defined in § 1.263(a)–3(k)), andis not a betterment (as defined in§ 1.263(a)–3(j)) or an adaptation to a newor different use (as defined in § 1.263(a)–3(l)), discounting the cost of the replace-ment asset to its placed-in-service yearcost using the Producer Price Index forFinished Goods or its successor, the Pro-ducer Price Index for Final Demand, orany other index designated by guidance inthe Internal Revenue Bulletin (see§ 601.601(d)(2) of this chapter) for pur-poses of this paragraph (j)(3);

(B) A pro rata allocation of the unad-justed depreciable basis of the general as-set account based on the replacement costof the disposed asset and the replacementcost of all of the assets in the general assetaccount; and

(C) A study allocating the cost of theasset to its individual components.

(ii) The depreciation allowed or allow-able for the disposed of or converted assetis computed by using the depreciationmethod, recovery period, and conventionapplicable to the general asset account inwhich the disposed of or converted assetwas included and by including the addi-

tional first year depreciation deductionclaimed for the disposed of or convertedasset.

(k) Effect of adjustments on prior dis-positions. The adjustments to a generalasset account under paragraph (e)(3)(iii),(e)(3)(iv), (e)(3)(v), (e)(3)(vii), (g), or (h)of this section have no effect on the rec-ognition and character of prior disposi-tions subject to paragraph (e)(2) of thissection.

(l) Election—(1) Irrevocable election.If a taxpayer makes an election under thisparagraph (l), the taxpayer consents to,and agrees to apply, all of the provisionsof this section to the assets included in ageneral asset account. Except as providedin paragraph (c)(1)(ii)(A), (e)(3), (g), or(h) of this section or except as otherwiseexpressly provided by other guidancepublished in the Internal Revenue Bulletin(see § 601.601(d)(2) of this chapter), anelection made under this section is irrevo-cable and will be binding on the taxpayerfor computing taxable income for the tax-able year for which the election is madeand for all subsequent taxable years. Anelection under this paragraph (l) is madeseparately by each person owning an assetto which this section applies (for example,by each member of a consolidated group,at the partnership level and not by thepartner separately, or at the S corporationlevel and not by the shareholder sepa-rately).

* * * * *(m) Effective/applicability dates—(1)

In general. This section applies to taxableyears beginning on or after January 1,2014. Except as provided in paragraphs(m)(2), (m)(3), and (m)(4) of this section,§ 1.168(i)–1 as contained in 26 CFR part1 edition revised as of April 1, 2011,applies to taxable years beginning beforeJanuary 1, 2014.

(2) Early application of this section. Ataxpayer may choose to apply the provi-sions of this section to taxable years be-ginning on or after January 1, 2012.

(3) Early application of regulationproject REG–110732–13. A taxpayer mayrely on the provisions of this section inregulation project REG–110732–13(2013–43 IRB 404) (see § 601.601(d)(2)of this chapter) for taxable years begin-ning on or after January 1, 2012. How-ever, a taxpayer may not rely on the pro-

visions of this section in regulation projectREG–110732–13 for taxable years begin-ning on or after January 1, 2014.

(4) Optional application of TD 9564. Ataxpayer may choose to apply§ 1.168(i)–1T as contained in 26 CFR part1 edition revised as of April 1, 2014, totaxable years beginning on or after Janu-ary 1, 2012. However, a taxpayer may notapply § 1.168(i)–1T as contained in 26CFR part 1 edition revised as of April 1,2014, to taxable years beginning on orafter January 1, 2014.

(5) Change in method of accounting. Achange to comply with this section fordepreciable assets placed in service in ataxable year ending on or after December30, 2003, is a change in method of ac-counting to which the provisions of sec-tion 446(e) and the regulations under sec-tion 446(e) apply. A taxpayer also maytreat a change to comply with this sectionfor depreciable assets placed in service ina taxable year ending before December30, 2003, as a change in method of ac-counting to which the provisions of sec-tion 446(e) and the regulations under sec-tion 446(e) apply. This paragraph (m)(5)does not apply to a change to comply withparagraph (e)(3)(ii), (e)(3)(iii), or (l) ofthis section, except as otherwise expresslyprovided by other guidance published inthe Internal Revenue Bulletin (see§ 601.601(d)(2) of this chapter).

§ 1.168(i)–1T [Removed]

Par. 6. Section 1.168(i)–1T is removed.Par. 7. Section 1.168(i)–7 is amended

by revising the last sentence in paragraph(a) and revising paragraphs (b), (c)(2)(ii)(H),and (e) to read as follows:

§ 1.168(i)–7 Accounting for MACRSproperty.

(a) * * * For rules applicable to generalasset accounts, see § 1.168(i)–1.

(b) Required use of single asset ac-counts. A taxpayer must account for anasset in a single asset account if the taxpayeruses the asset both in a trade or business orfor the production of income and in a per-sonal activity, or if the taxpayer places inservice and disposes of the asset during thesame taxable year. Also, if general assetaccount treatment for an asset terminatesunder § 1.168(i)–1(c)(1)(ii)(A), (e)(3)(iii),


(e)(3)(v), (e)(3)(vii), (g), or (h)(1), as ap-plicable, the taxpayer must account for theasset in a single asset account beginningin the taxable year in which the generalasset account treatment for the asset ter-minates. If a taxpayer accounts for anasset in a multiple asset account or a pooland the taxpayer disposes of the asset, thetaxpayer must account for the asset in asingle asset account beginning in the tax-able year in which the disposition occurs.See § 1.168(i)–8(h)(2)(i). If a taxpayerdisposes of a portion of an asset and§ 1.168(i)–8(d)(1) applies to that disposi-tion, the taxpayer must account for thedisposed portion in a single asset accountbeginning in the taxable year in which thedisposition occurs. See § 1.168(i)–8(h)(3)(i).

(c) * * *(2) * * *(ii) * * *(H) Mass assets (as defined in

§ 1.168(i)–8(b)(3)) that are or will besubject to § 1.168(i)–8(g)(2)(iii) (dis-posed of or converted mass asset is iden-tified by a mortality dispersion table) mustbe grouped into a separate multiple assetaccount or pool.

* * * * *(e) Effective/applicability dates—(1)

In general. This section applies to taxableyears beginning on or after January 1,2014.


(3) Early application of regulationproject REG–110732–13. A taxpayer mayrely on the provisions of this section inregulation project REG–110732–13(2013–43 IRB 404) (see § 601.601(d)(2)of this chapter) for taxable years begin-ning on or after January 1, 2012. How-ever, a taxpayer may not rely on the pro-visions of this section in regulation projectREG–110732–13 for taxable years begin-ning on or after January 1, 2014.

(4) Optional application of TD 9564. Ataxpayer may choose to apply§ 1.168(i)–7T as contained in 26 CFR part1 edition revised as of April 1, 2013, totaxable years beginning on or after Janu-ary 1, 2012. However, a taxpayer may notapply § 1.168(i)–7T as contained in 26CFR part 1 edition revised as of April 1,

2013, to taxable years beginning on orafter January 1, 2014.

(5) Change in method of accounting. Achange to comply with this section fordepreciable assets placed in service in ataxable year ending on or after December30, 2003, is a change in method of ac-counting to which the provisions of sec-tion 446(e) and the regulations under sec-tion 446(e) apply. A taxpayer also maytreat a change to comply with this sectionfor depreciable assets placed in service ina taxable year ending before December30, 2003, as a change in method of ac-counting to which the provisions of sec-tion 446(e) and the regulations under sec-tion 446(e) apply.

Par. 8. Section 1.168(i)–8 is added toread as follows:

§ 1.168(i)–8 Dispositions of MACRSproperty.

(a) Scope. This section provides rulesapplicable to dispositions of MACRSproperty (as defined in § 1.168(b)–1(a)(2))or to depreciable property (as defined in§ 1.168(b)–1(a)(1)) that would beMACRS property but for an electionmade by the taxpayer either to expense allor some of the property’s cost under sec-tion 179, section 179A, section 179B, sec-tion 179C, section 179D, or section1400I(a)(1), or any similar provision, or toamortize all or some of the property’s costunder section 1400I(a)(2) or any similarprovision. This section also applies to dis-positions described in paragraph (d)(1) ofthis section of a portion of such property.Except as provided in § 1.168(i)–1(e)(3),this section does not apply to dispositionsof assets included in a general asset ac-count. For rules applicable to dispositionsof assets included in a general asset ac-count, see § 1.168(i)–1(e).

(b) Definitions. For purposes of thissection—

(1) Building has the same meaning asthat term is defined in § 1.48–1(e)(1).

(2) Disposition occurs when ownershipof the asset is transferred or when theasset is permanently withdrawn from useeither in the taxpayer’s trade or businessor in the production of income. A dispo-sition includes the sale, exchange, retire-ment, physical abandonment, or destruc-tion of an asset. A disposition also occurs

when an asset is transferred to a supplies,scrap, or similar account, or when a por-tion of an asset is disposed of as describedin paragraph (d)(1) of this section. If astructural component, or a portion thereof,of a building is disposed of in a disposi-tion described in paragraph (d)(1) of thissection, a disposition also includes thedisposition of such structural componentor such portion thereof.

(3) Mass assets is a mass or group ofindividual items of depreciable assets—

(i) That are not necessarily homoge-nous;

(ii) Each of which is minor in valuerelative to the total value of the mass orgroup;

(iii) Numerous in quantity;(iv) Usually accounted for only on a

total dollar or quantity basis;(v) With respect to which separate

identification is impracticable; and(vi) Placed in service in the same tax-

able year.(4) Portion of an asset is any part of an

asset that is less than the entire asset asdetermined under paragraph (c)(4) of thissection.

(5) Structural component has the samemeaning as that term is defined in § 1.48–1(e)(2).

(6) Unadjusted depreciable basis of themultiple asset account or pool is the sumof the unadjusted depreciable bases (asdefined in § 1.168(b)–1(a)(3)) of all assetsincluded in the multiple asset account orpool.

(c) Special rules—(1) Manner of dis-position. The manner of disposition (forexample, normal retirement, abnormal re-tirement, ordinary retirement, or extraor-dinary retirement) is not taken into ac-count in determining whether a dispositionoccurs or gain or loss is recognized.

(2) Disposition by transfer to a sup-plies account. If a taxpayer made an elec-tion under § 1.162–3(d) to treat the cost ofany rotable spare part, temporary sparepart, or standby emergency spare part (asdefined in § 1.162–3(c)) as a capital ex-penditure subject to the allowance for de-preciation, the taxpayer can dispose of therotable, temporary, or standby emergencyspare part by transferring it to a suppliesaccount only if the taxpayer has obtainedthe consent of the Commissioner to re-voke the § 1.162–3(d) election. If a tax-


payer made an election under § 1.162–3T(d) to treat the cost of any material andsupply (as defined in § 1.162–3T(c)(1)) asa capital expenditure subject to the allow-ance for depreciation, the taxpayer candispose of the material and supply bytransferring it to a supplies account only ifthe taxpayer has obtained the consent ofthe Commissioner to revoke the § 1.162–3T(d) election. See § 1.162–3(d)(3) forthe procedures for revoking a § 1.162–3(d) or a § 1.162–3T(d) election.

(3) Leasehold improvements. This sec-tion also applies to—

(i) A lessor of leased property thatmade an improvement to that property forthe lessee of the property, has a deprecia-ble basis in the improvement, and dis-poses of the improvement, or disposes ofa portion of the improvement under para-graph (d)(1) of this section, before or uponthe termination of the lease with the les-see. See section 168(i)(8)(B); and

(ii) A lessee of leased property thatmade an improvement to that property,has a depreciable basis in the improve-ment, and disposes of the improvement, ordisposes of a portion of the improvementunder paragraph (d)(1) of this section, be-fore or upon the termination of the lease.

(4) Determination of asset disposedof—(i) General rules. For purposes of ap-plying this section, the facts and circum-stances of each disposition are consideredin determining what is the appropriate as-set disposed of. The asset for dispositionpurposes may not consist of items placedin service by the taxpayer on differentdates, without taking into account the ap-plicable convention. For purposes of de-termining what is the appropriate assetdisposed of, the unit of property determi-nation under § 1.263(a)–3(e) or in pub-lished guidance in the Internal RevenueBulletin (see § 601.601(d)(2) of this chap-ter) under section 263(a) does not apply.

(ii) Special rules. In addition to thegeneral rules in paragraph (c)(4)(i) of thissection, the following rules apply for pur-poses of applying this section:

(A) Each building, including its struc-tural components, is the asset, except asprovided in § 1.1250–1(a)(2)(ii) or inparagraph (c)(4)(ii)(B) or (D) of this sec-tion.

(B) If a building has two or more con-dominium or cooperative units, each con-

dominium or cooperative unit, includingits structural components, is the asset, ex-cept as provided in § 1.1250–1(a)(2)(ii) orin paragraph (c)(4)(ii)(D) of this section.

(C) If a taxpayer properly includes anitem in one of the asset classes 00.11through 00.4 of Rev. Proc. 87–56 (1987–2CB 674) (see § 601.601(d)(2) of this chap-ter) or properly classifies an item in one ofthe categories under section 168(e)(3), ex-cept for a category that includes buildingsor structural components (for example, re-tail motor fuels outlet, qualified leaseholdimprovement property, qualified restau-rant property, and qualified retail im-provement property), each item is the as-set provided paragraph (c)(4)(ii)(D) ofthis section does not apply to the item. Forexample, each desk is the asset, each com-puter is the asset, and each qualified smartelectric meter is the asset.

(D) If the taxpayer places in service animprovement or addition to an asset afterthe taxpayer placed the asset in service,the improvement or addition and, if appli-cable, its structural components are a sep-arate asset.

(d) Disposition of a portion of an as-set—(1) In general. For purposes of ap-plying this section, a disposition includesa disposition of a portion of an asset as aresult of a casualty event described insection 165, a disposition of a portion ofan asset for which gain, determined with-out regard to section 1245 or section 1250,is not recognized in whole or in part undersection 1031 or section 1033, a transfer ofa portion of an asset in a transaction de-scribed in section 168(i)(7)(B), or a sale ofa portion of an asset, even if the taxpayerdoes not make the election under para-graph (d)(2)(i) of this section for that dis-posed portion. For other transactions, adisposition includes a disposition of a por-tion of an asset only if the taxpayer makesthe election under paragraph (d)(2)(i) ofthis section for that disposed portion.

(2) Partial disposition election—(i) Ingeneral. A taxpayer may make an electionunder this paragraph (d)(2) to apply thissection to a disposition of a portion of anasset. If the asset is properly included inone of the asset classes 00.11 through 00.4of Rev. Proc. 87–56, a taxpayer may makean election under this paragraph (d)(2) toapply this section to a disposition of aportion of such asset only if the taxpayer

classifies the replacement portion of theasset under the same asset class as thedisposed portion of the asset.

(ii) Time and manner for making elec-tion—(A) Time for making election. Ex-cept as provided in paragraph (d)(2)(iii) or(iv) of this section, a taxpayer must makethe election specified in paragraph(d)(2)(i) of this section by the due date,including extensions, of the original Fed-eral tax return for the taxable year inwhich the portion of an asset is disposedof by the taxpayer.

(B) Manner of making election. Exceptas provided in paragraph (d)(2)(iii) or (iv)of this section, a taxpayer must make theelection specified in paragraph (d)(2)(i) ofthis section by applying the provisions ofthis section for the taxable year in whichthe portion of an asset is disposed of bythe taxpayer, by reporting the gain, loss,or other deduction on the taxpayer’stimely filed, including extensions, originalFederal tax return for that taxable year,and, if the asset is properly included inone of the asset classes 00.11 through 00.4of Rev. Proc. 87–56, by classifying thereplacement portion of such asset underthe same asset class as the disposed por-tion of the asset in the taxable year inwhich the replacement portion is placed inservice by the taxpayer. Except as pro-vided in paragraph (d)(2)(iii) or (iv)(B) ofthis section or except as otherwise ex-pressly provided by other guidance pub-lished in the Internal Revenue Bulletin(see § 601.601(d)(2) of this chapter), theelection specified in paragraph (d)(2)(i) ofthis section may not be made through thefiling of an application for change in ac-counting method.

(iii) Special rule for subsequent Inter-nal Revenue Service adjustment. Thisparagraph (d)(2)(iii) applies when a tax-payer deducted the amount paid or in-curred for the replacement of a portion ofan asset as a repair under § 1.162–4, thetaxpayer did not make the election speci-fied in paragraph (d)(2)(i) of this sectionfor the disposed portion of that assetwithin the time and in the manner underparagraph (d)(2)(ii) or (iv) of this section,and as a result of an examination of thetaxpayer’s Federal tax return, the InternalRevenue Service disallows the taxpayer’srepair deduction for the amount paid orincurred for the replacement of the portion


of that asset and instead capitalizes suchamount under § 1.263(a)–2 or § 1.263(a)–3.If this paragraph (d)(2)(iii) applies, thetaxpayer may make the election specifiedin paragraph (d)(2)(i) of this section forthe disposition of the portion of the assetto which the Internal Revenue Service’sadjustment pertains by filing an applica-tion for change in accounting method,provided the asset of which the disposedportion was a part is owned by the tax-payer at the beginning of the year ofchange (as defined for purposes of section446(e)).

(iv) Special rules for 2012 or 2013returns. If, under paragraph (j)(2) of thissection, a taxpayer chooses to apply theprovisions of this section to a taxable yearbeginning on or after January 1, 2012, andending on or before September 19, 2013(applicable taxable year), and the taxpayerdid not make the election specified inparagraph (d)(2)(i) of this section on itstimely filed original Federal tax return forthe applicable taxable year, including ex-tensions, the taxpayer must make the elec-tion specified in paragraph (d)(2)(i) of thissection for the applicable taxable year byfiling either—

(A) An amended Federal tax return forthe applicable taxable year on or before180 days from the due date including ex-tensions of the taxpayer’s Federal tax re-turn for the applicable taxable year, not-withstanding that the taxpayer may nothave extended the due date; or

(B) An application for change in ac-counting method with the taxpayer’stimely filed original Federal tax return forthe first or second taxable year succeedingthe applicable taxable year.

(v) Revocation. A taxpayer may revokethe election specified in paragraph(d)(2)(i) of this section only by filing arequest for a private letter ruling and ob-taining the Commissioner’s consent to re-voke the election. The Commissioner maygrant a request to revoke this election ifthe taxpayer acted reasonably and in goodfaith, and the revocation will not prejudicethe interests of the Government. See gen-erally § 301.9100–3 of this chapter. Theelection specified in paragraph (d)(2)(i) ofthis section may not be revoked throughthe filing of an application for change inaccounting method.

(e) Gain or loss on dispositions. Solelyfor purposes of this paragraph (e), theterm asset is an asset within the scope ofthis section or the portion of such assetthat is disposed of in a disposition de-scribed in paragraph (d)(1) of this section.Except as provided by section 280B and§ 1.280B–1, the following rules applywhen an asset is disposed of during ataxable year:

(1) If an asset is disposed of by sale,exchange, or involuntary conversion, gainor loss must be recognized under the ap-plicable provisions of the Internal Reve-nue Code.

(2) If an asset is disposed of by phys-ical abandonment, loss must be recog-nized in the amount of the adjusted depre-ciable basis (as defined in § 1.168(b)–1(a)(4)) of the asset at the time of theabandonment, taking into account the ap-plicable convention. However, if theabandoned asset is subject to nonrecourseindebtedness, paragraph (e)(1) of this sec-tion applies to the asset instead of thisparagraph (e)(2). For a loss from physicalabandonment to qualify for recognitionunder this paragraph (e)(2), the taxpayermust intend to discard the asset irrevoca-bly so that the taxpayer will neither usethe asset again nor retrieve it for sale,exchange, or other disposition.

(3) If an asset is disposed of other thanby sale, exchange, involuntary conver-sion, physical abandonment, or conver-sion to personal use (as, for example,when the asset is transferred to a suppliesor scrap account), gain is not recognized.Loss must be recognized in the amount ofthe excess of the adjusted depreciable ba-sis of the asset at the time of the disposi-tion, taking into account the applicableconvention, over the asset’s fair marketvalue at the time of the disposition, takinginto account the applicable convention.

(f) Basis of asset disposed of—(1) Ingeneral. The adjusted basis of an assetdisposed of for computing gain or loss isits adjusted depreciable basis at the timeof the asset’s disposition, as determinedunder the applicable convention for theasset.

(2) Assets disposed of are in multipleasset accounts. (i) If the taxpayer accountsfor the asset disposed of in a multipleasset account or pool and it is impractica-ble from the taxpayer’s records to deter-

mine the unadjusted depreciable basis (asdefined in § 1.168(b)–1(a)(3)) of the assetdisposed of, the taxpayer may use anyreasonable method that is consistently ap-plied to all assets in the same multipleasset account or pool for purposes of de-termining the unadjusted depreciable ba-sis of assets disposed of. Examples of areasonable method include, but are notlimited to, the following:

(A) If the replacement asset is a resto-ration (as defined in § 1.263(a)–3(k)), andis not a betterment (as defined in§ 1.263(a)–3(j)) or an adaptation to a newor different use (as defined in § 1.263(a)–3(l)), discounting the cost of the replace-ment asset to its placed-in-service yearcost using the Producer Price Index forFinished Goods or its successor, the Pro-ducer Price Index for Final Demand, orany other index designated by guidance inthe Internal Revenue Bulletin (see§ 601.601(d)(2) of this chapter) for pur-poses of this paragraph (f)(2);

(B) A pro rata allocation of the unad-justed depreciable basis of the multipleasset account or pool based on the re-placement cost of the disposed asset andthe replacement cost of all of the assets inthe multiple asset account or pool; and


(ii) To determine the adjusted depre-ciable basis of an asset disposed of in amultiple asset account or pool, the depre-ciation allowed or allowable for the assetdisposed of is computed by using the de-preciation method, recovery period, andconvention applicable to the multiple as-set account or pool in which the assetdisposed of was included and by includingthe additional first year depreciation de-duction claimed for the asset disposed of.

(3) Disposition of a portion of an asset.(i) This paragraph (f)(3) applies onlywhen a taxpayer disposes of a portion ofan asset and paragraph (d)(1) of this sec-tion applies to that disposition. For com-puting gain or loss, the adjusted basis ofthe disposed portion of the asset is theadjusted depreciable basis of that disposedportion at the time of its disposition, asdetermined under the applicable conven-tion for the asset. If it is impracticablefrom the taxpayer’s records to determinethe unadjusted depreciable basis (as de-fined in § 1.168(b)–1(a)(3)) of the dis-


posed portion of the asset, the taxpayermay use any reasonable method for pur-poses of determining the unadjusted de-preciable basis (as defined in § 1.168(b)–1(a)(3)) of the disposed portion of theasset. If a taxpayer disposes of more thanone portion of the same asset and it isimpracticable from the taxpayer’s recordsto determine the unadjusted depreciablebasis (as defined in § 1.168(b)–1(a)(3)) ofthe first disposed portion of the asset, thereasonable method used by the taxpayermust be consistently applied to all por-tions of the same asset for purposes ofdetermining the unadjusted depreciablebasis of each disposed portion of the asset.If the asset, a portion of which is disposedof, is in a multiple asset account or pooland it is impracticable from the taxpayer’srecords to determine the unadjusted de-preciable basis (as defined in § 1.168(b)–1(a)(3)) of the disposed portion of theasset, the reasonable method used by thetaxpayer must be consistently applied toall assets in the same multiple asset ac-count or pool for purposes of determiningthe unadjusted depreciable basis of assetsdisposed of or any disposed portion of theassets. Examples of a reasonable methodinclude, but are not limited to, the follow-ing:

(A) If the replacement portion is a res-toration (as defined in § 1.263(a)–3(k)),and is not a betterment (as defined in§ 1.263(a)–3(j)) or an adaptation to a newor different use (as defined in § 1.263(a)–3(l)), discounting the cost of the replace-ment portion of the asset to its placed-in-service year cost using the Producer PriceIndex for Finished Goods or its successor,the Producer Price Index for Final De-mand, or any other index designated byguidance in the Internal Revenue Bulletin(see § 601.601(d)(2) of this chapter) forpurposes of this paragraph (f)(3);

(B) A pro rata allocation of the unad-justed depreciable basis of the asset basedon the replacement cost of the disposedportion of the asset and the replacementcost of the asset; and


(ii) To determine the adjusted depre-ciable basis of the disposed portion of theasset, the depreciation allowed or allow-able for the disposed portion is computedby using the depreciation method, recov-

ery period, and convention applicable tothe asset in which the disposed portionwas included and by including the portionof the additional first year depreciationdeduction claimed for the asset that isattributable to the disposed portion.

(g) Identification of asset disposed of—(1) In general. Except as provided in para-graph (g)(2) or (3) of this section, a tax-payer must use the specific identificationmethod of accounting to identify whichasset is disposed of by the taxpayer. Underthis method of accounting, the taxpayercan determine the particular taxable yearin which the asset disposed of was placedin service by the taxpayer.

(2) Asset disposed of is in a multipleasset account. If a taxpayer accounts forthe asset disposed of in a multiple assetaccount or pool and the total dispositionsof assets with the same recovery periodduring the taxable year are readily deter-mined from the taxpayer’s records, but itis impracticable from the taxpayer’s re-cords to determine the particular taxableyear in which the asset disposed of wasplaced in service by the taxpayer, the tax-payer must identify the asset disposed ofby using—

(i) A first-in, first-out method of ac-counting if the unadjusted depreciable ba-sis of the asset disposed of cannot bereadily determined from the taxpayer’s re-cords. Under this method of accounting,the taxpayer identifies the multiple assetaccount or pool with the earliest placed-in-service year that has the same recoveryperiod as the asset disposed of and thathas assets at the beginning of the taxableyear of the disposition, and the taxpayertreats the asset disposed of as being fromthat multiple asset account or pool;

(ii) A modified first-in, first-out methodof accounting if the unadjusted deprecia-ble basis of the asset disposed of can bereadily determined from the taxpayer’s re-cords. Under this method of accounting,the taxpayer identifies the multiple assetaccount or pool with the earliest placed-in-service year that has the same recoveryperiod as the asset disposed of and thathas assets at the beginning of the taxableyear of the disposition with the same un-adjusted depreciable basis as the asset dis-posed of, and the taxpayer treats the assetdisposed of as being from that multipleasset account or pool;

(iii) A mortality dispersion table if theasset disposed of is a mass asset. Themortality dispersion table must be basedupon an acceptable sampling of the tax-payer’s actual disposition experience formass assets or other acceptable statisticalor engineering techniques. To use a mor-tality dispersion table, the taxpayer mustadopt recordkeeping practices consistentwith the taxpayer’s prior practices andconsonant with good accounting and en-gineering practices; or

(iv) Any other method as the Secretarymay designate by publication in the Fed-eral Register or in the Internal RevenueBulletin (see § 601.601(d)(2) of this chap-ter) on or after September 19, 2013. Seeparagraph (g)(4) of this section regardingthe last-in, first-out method of accounting.

(3) Disposition of a portion of an asset.If a taxpayer disposes of a portion of anasset and paragraph (d)(1) of this sectionapplies to that disposition, but it is imprac-ticable from the taxpayer’s records to de-termine the particular taxable year inwhich the asset was placed in service, thetaxpayer must identify the asset by usingany applicable method provided in para-graph (g)(2) of this section, after takinginto account paragraph (g)(4) of this sec-tion.

(4) Last-in, first-out method of ac-counting. For purposes of this paragraph(g), a last-in, first-out method of account-ing may not be used. Examples of a last-in, first-out method of accounting includethe taxpayer identifying the multiple assetaccount or pool with the most recentplaced-in-service year that has the samerecovery period as the asset disposed ofand that has assets at the beginning of thetaxable year of the disposition, and thetaxpayer treating the asset disposed of asbeing from that multiple asset account orpool, or the taxpayer treating the disposedportion of an asset as being from an assetwith the most recent placed-in-serviceyear that is the same as the asset of whichthe disposed portion is a part.

(h) Accounting for asset disposed of—(1) Depreciation ends. Depreciation endsfor an asset at the time of the asset’sdisposition, as determined under the ap-plicable convention for the asset. See§ 1.167(a)–10(b). If the asset disposed ofis in a single asset account initially or as aresult of § 1.168(i)–8(h)(2)(i), § 1.168(i)–


8(h)(3)(i), or general asset account treat-ment for the asset terminated under§ 1.168(i)–1(c)(1)(ii)(A), (e)(3)(iii),(e)(3)(v), (e)(3)(vii), (g), or (h)(1), as ap-plicable, the single asset account termi-nates at the time of the asset’s disposition,as determined under the applicable con-vention for the asset. If a taxpayer dis-poses of a portion of an asset and para-graph (d)(1) of this section applies to thatdisposition, depreciation ends for that dis-posed portion of the asset at the time ofthe disposition of the disposed portion, asdetermined under the applicable conven-tion for the asset.

(2) Asset disposed of in a multiple assetaccount or pool. If the taxpayer accountsfor the asset disposed of in a multipleasset account or pool, then—

(i) As of the first day of the taxableyear in which the disposition occurs, theasset disposed of is removed from themultiple asset account or pool and isplaced into a single asset account. See§ 1.168(i)–7(b);

(ii) The unadjusted depreciable basis ofthe multiple asset account or pool must bereduced by the unadjusted depreciable ba-sis of the asset disposed of as of the firstday of the taxable year in which the dis-position occurs. See paragraph (f)(2)(i) ofthis section for determining the unad-justed depreciable basis of the asset dis-posed of;

(iii) The depreciation reserve of themultiple asset account or pool must bereduced by the depreciation allowed orallowable for the asset disposed of as ofthe end of the taxable year immediatelypreceding the year of disposition, com-puted by using the depreciation method,recovery period, and convention applica-ble to the multiple asset account or pool inwhich the asset disposed of was includedand by including the additional first yeardepreciation deduction claimed for the as-set disposed of; and

(iv) In determining the adjusted depre-ciable basis of the asset disposed of at thetime of disposition, taking into accountthe applicable convention, the deprecia-tion allowed or allowable for the assetdisposed of is computed by using the de-preciation method, recovery period, andconvention applicable to the multiple as-set account or pool in which the assetdisposed of was included and by including

the additional first year depreciation de-duction claimed for the asset disposed of.

(3) Disposition of a portion of an asset.This paragraph (h)(3) applies only when ataxpayer disposes of a portion of an assetand paragraph (d)(1) of this section ap-plies to that disposition. In this case—

(i) As of the first day of the taxableyear in which the disposition occurs, thedisposed portion is placed into a singleasset account. See § 1.168(i)–7(b);

(ii) The unadjusted depreciable basis ofthe asset must be reduced by the unad-justed depreciable basis of the disposedportion as of the first day of the taxableyear in which the disposition occurs. Seeparagraph (f)(3)(i) of this section for de-termining the unadjusted depreciable ba-sis of the disposed portion;

(iii) The depreciation reserve of theasset must be reduced by the depreciationallowed or allowable for the disposed por-tion as of the end of the taxable yearimmediately preceding the year of dispo-sition, computed by using the depreciationmethod, recovery period, and conventionapplicable to the asset in which the dis-posed portion was included and by includ-ing the portion of the additional first yeardepreciation deduction claimed for the as-set that is attributable to the disposed por-tion; and

(iv) In determining the adjusted depre-ciable basis of the disposed portion at thetime of disposition, taking into accountthe applicable convention, the deprecia-tion allowed or allowable for the disposedportion is computed by using the depreci-ation method, recovery period, and con-vention applicable to the asset in whichthe disposed portion was included and byincluding the portion of the additional firstyear depreciation deduction claimed forthe asset that is attributable to the dis-posed portion.

(i) Examples. The application of thissection is illustrated by the following ex-amples:

Example 1. A owns an office building withfour elevators. A replaces one of the elevators.The elevator is a structural component of theoffice building. In accordance with paragraph(c)(4)(ii)(A) of this section, the office building,including its structural components, is the assetfor disposition purposes. A does not make thepartial disposition election provided under para-graph (d)(2) of this section for the elevator. Thus,the retirement of the replaced elevator is not adisposition. As a result, depreciation continues

for the cost of the building, including the cost ofthe retired elevator and the building’s otherstructural components, and A does not recognizea loss for this retired elevator. If A must capitalizethe amount paid for the replacement elevatorpursuant to § 1.263(a)–3, the replacement eleva-tor is a separate asset for disposition purposespursuant to paragraph (c)(4)(ii)(D) of this sectionand for depreciation purposes pursuant to section168(i)(6).

Example 2. The facts are the same as in Ex-ample 1, except A accounts for each structuralcomponent of the office building as a separateasset in its fixed asset system. Although A treatseach structural component as a separate asset inits records, the office building, including its struc-tural components, is the asset for disposition pur-poses in accordance with paragraph (c)(4)(ii)(A)of this section. Accordingly, the result is the sameas in Example 1.

Example 3. The facts are the same as in Ex-ample 1, except A makes the partial dispositionelection provided under paragraph (d)(2) of thissection for the elevator. Although the office build-ing, including its structural components, is theasset for disposition purposes, the result of Amaking the partial disposition election for theelevator is that the retirement of the replacedelevator is a disposition. Thus, depreciation forthe retired elevator ceases at the time of its re-tirement, taking into account the applicable con-vention, and A recognizes a loss upon this retire-ment. Further, A must capitalize the amount paidfor the replacement elevator pursuant to§ 1.263(a)–3(k)(1)(i), and the replacement eleva-tor is a separate asset for disposition purposespursuant to paragraph (c)(4)(ii)(D) of this sectionand for depreciation purposes pursuant to section168(i)(6).

Example 4. B, a calendar-year commercialairline company, owns several aircraft that areused in the commercial carrying of passengersand described in asset class 45.0 of Rev. Proc.87–56. B replaces the existing engines on one ofthe aircraft with new engines. Assume each air-craft is a unit of property as determined under§ 1.263(a)–3(e)(3) and each engine of an aircraft isa major component or substantial structural partof the aircraft as determined under § 1.263(a)–3(k)(6). Assume also that B treats each aircraft asthe asset for disposition purposes in accordancewith paragraph (c)(4) of this section. B makes thepartial disposition election provided under para-graph (d)(2) of this section for the engines in theaircraft. Although the aircraft is the asset fordisposition purposes, the result of B making thepartial disposition election for the engines is thatthe retirement of the replaced engines is a dispo-sition. Thus, depreciation for the retired enginesceases at the time of their retirement, taking intoaccount the applicable convention, and B recog-nizes a loss upon this retirement. Further, B mustcapitalize the amount paid for the replacementengines pursuant to § 1.263(a)–3(k)(1)(i), and thereplacement engines are a separate asset for dis-position purposes pursuant to paragraph(c)(4)(ii)(D) of this section and for depreciationpurposes pursuant to section 168(i)(6).


Example 5. The facts are the same as in Ex-ample 4, except B does not make the partial dis-position election provided under paragraph (d)(2)of this section for the engines. Thus, the retire-ment of the replaced engines on one of the air-craft is not a disposition. As a result, depreciationcontinues for the cost of the aircraft, including thecost of the retired engines, and B does not recog-nize a loss for these retired engines. If B mustcapitalize the amount paid for the replacementengines pursuant to § 1.263(a)–3, the replacementengines are a separate asset for disposition pur-poses pursuant to paragraph (c)(4)(ii)(D) of thissection and for depreciation purposes pursuant tosection 168(i)(6).

Example 6. C, a corporation, owns severaltrucks that are used in its trade or business anddescribed in asset class 00.241 of Rev. Proc. 87–56. C replaces the engine on one of the trucks witha new engine. Assume each truck is a unit ofproperty as determined under § 1.263(a)–3(e)(3)and each engine is a major component or sub-stantial structural part of the truck as determinedunder § 1.263(a)–3(k)(6). Because the trucks aredescribed in asset class 00.241 of Rev. Proc. 87–56, C must treat each truck as the asset for dis-position purposes. C does not make the partialdisposition election provided under paragraph(d)(2) of this section for the engine. Thus, theretirement of the replaced engine on the truck isnot a disposition. As a result, depreciation con-tinues for the cost of the truck, including the costof the retired engine, and C does not recognize aloss for this retired engine. If C must capitalizethe amount paid for the replacement engine pur-suant to § 1.263(a)–3, the replacement engine is aseparate asset for disposition purposes pursuantto paragraph (c)(4)(ii)(D) of this section and fordepreciation purposes pursuant to section168(i)(6).

Example 7. D owns a retail building. D re-places 60% of the roof of this building. In accor-dance with paragraph (c)(4)(ii)(A) of this section,the retail building, including its structural com-ponents, is the asset for disposition purposes. As-sume D must capitalize the costs incurred forreplacing 60% of the roof pursuant to § 1.263(a)–3(k)(1)(vi). D makes the partial disposition elec-tion provided under paragraph (d)(2) of this sec-tion for the 60% of the replaced roof. Thus, theretirement of 60% of the roof is a disposition. Asa result, depreciation for 60% of the roof ceasesat the time of its retirement, taking into accountthe applicable convention, and D recognizes a lossupon this retirement. Further, D must capitalizethe amount paid for the 60% of the roof pursuantto § 1.263(a)–3(k)(1)(i) and (vi) and the replace-ment 60% of the roof is a separate asset fordisposition purposes pursuant to paragraph(c)(4)(ii)(D) of this section and for depreciationpurposes pursuant to section 168(i)(6).

Example 8. (i) The facts are the same as inExample 7. Ten years after replacing 60% of theroof, D replaces 55% of the roof of the building.In accordance with paragraph (c)(4)(ii)(A) and(D) of this section, for disposition purposes, theretail building, including its structural compo-nents, except the replacement 60% of the roof, is

an asset and the replacement 60% of the roof is aseparate asset. Assume D must capitalize the costsincurred for replacing 55% of the roof pursuantto § 1.263(a)–3(k)(1)(vi). D makes the partial dis-position election provided under paragraph (d)(2)of this section for the 55% of the replaced roof.Thus, the retirement of 55% of the roof is adisposition.

(ii) However, D cannot determine from itsrecords whether the replaced 55% is part of the60% of the roof replaced ten years ago orwhether the replaced 55% includes part or all ofthe remaining 40% of the original roof. Pursuantto paragraph (g)(3) of this section, D identifieswhich asset it disposed of by using the first-in,first-out method of accounting. As a result, Ddisposed of the remaining 40% of the originalroof and 25% of the 60% of the roof replaced tenyears ago.

(iii) Thus, depreciation for the remaining 40%of the original roof ceases at the time of its retire-ment, taking into account the applicable conven-tion, and D recognizes a loss upon this retirement.Further, depreciation for 25% of the 60% of theroof replaced ten years ago ceases at the time ofits retirement, taking into account the applicableconvention, and D recognizes a loss upon thisretirement. Also, D must capitalize the amountpaid for the 55% of the roof pursuant to§ 1.263(a)–3(k)(1)(i) and (vi), and the replacement55% of the roof is a separate asset for dispositionpurposes pursuant to paragraph (c)(4)(ii)(D) ofthis section and for depreciation purposes pursu-ant to section 168(i)(6).

Example 9. (i) On July 1, 2011, E, a calendar-year taxpayer, purchased and placed in service anexisting multi-story office building that costs$20,000,000. The cost of each structural compo-nent of the building was not separately stated. Eaccounts for the building and its structural com-ponents in its tax and financial accounting re-cords as a single asset with a cost of $20,000,000.E depreciates the building as nonresidential realproperty and uses the optional depreciation tablethat corresponds with the general depreciationsystem, the straight-line method, a 39-year recov-ery period, and the mid-month convention. As ofJanuary 1, 2014, the depreciation reserve for thebuilding is $1,261,000.

(ii) On June 30, 2014, E replaces one of thetwo elevators in the office building. E did notdispose of any other structural components of thisbuilding in 2014 and prior years. E makes thepartial disposition election provided under para-graph (d)(2) of this section for this elevator. Al-though the office building, including its structuralcomponents, is the asset for disposition purposes,the result of E making the partial dispositionelection for the elevator is that the retirement ofthe replaced elevator is a disposition. Assume thereplacement elevator is a restoration under§ 1.263(a)–3(k), and not a betterment under§ 1.263(a)–3(j)) or an adaptation to a new ordifferent use under § 1.263(a)–3(l)). Because Ecannot identify the cost of the elevator from itsrecords and the replacement elevator is a resto-ration under § 1.263(a)–3(k), E determines thecost of the disposed elevator by discounting the

cost of the replacement elevator to its placed-in-service year cost using the Producer Price Indexfor Final Demand. Using this reasonable method,E determines the cost of the retired elevator bydiscounting the cost of the replacement elevatorto its cost in 2011 (the placed-in-service year)using the Producer Price Index for Final De-mand, resulting in $150,000 of the $20,000,000purchase price for the building to be the cost ofthe retired elevator. Using the optional deprecia-tion table that corresponds with the general de-preciation system, the straight-line method, a 39-year recovery period, and the mid-monthconvention, the depreciation allowed or allowablefor the retired elevator as of December 31, 2013,is $9,458.

(iii) For E’s 2014 Federal tax return, the lossfor the retired elevator is determined as follows.The depreciation allowed or allowable for 2014for the retired elevator is $1,763 ((unadjusteddepreciable basis of $150,000 � depreciation rateof 2.564% for 2014) � 5.5/12 months). Thus, theadjusted depreciable basis of the retired elevatoris $138,779 (the adjusted depreciable basis of$140,542 removed from the building cost less thedepreciation allowed or allowable of $1,763 for2014). As a result, E recognizes a loss of $138,779for the retired elevator in 2014.

(iv) For E’s 2014 Federal tax return, the de-preciation allowance for the building is computedas follows. As of January 1, 2014, the unadjusteddepreciable basis of the building is reduced from$20,000,000 to $19,850,000 ($20,000,000 less theunadjusted depreciable basis of $150,000 for theretired elevator), and the depreciation reserve ofthe building is reduced from $1,261,000 to$1,251,542 ($1,261,000 less the depreciation al-lowed or allowable of $9,458 for the retired ele-vator as of December 31, 2013). Consequently, thedepreciation allowance for the building for 2014is $508,954 ($19,850,000 � depreciation rate of2.564% for 2014).

(v) E also must capitalize the amount paid forthe replacement elevator pursuant to § 1.263(a)–3(k)(1). The replacement elevator is a separateasset for disposition purposes pursuant to para-graph (c)(4)(ii)(D) of this section and for depre-ciation purposes pursuant to section 168(i)(6).

Example 10. (i) Since 2005, F, a calendar yeartaxpayer, has accounted for items of MACRSproperty that are mass assets in pools. Each poolincludes only the mass assets that have the samedepreciation method, recovery period, and con-vention, and are placed in service by F in thesame taxable year. None of the pools are generalasset accounts under section 168(i)(4) and theregulations under section 168(i)(4). F identifiesany dispositions of these mass assets by specificidentification.

(ii) During 2014, F sells 10 items of mass assetswith a 5-year recovery period each for $100. Un-der the specific identification method, F identifiesthese mass assets as being from the pool estab-lished by F in 2012 for mass assets with a 5-yearrecovery period. Assume F depreciates this poolusing the optional depreciation table that corre-sponds with the general depreciation system, the200-percent declining balance method, a 5-year


recovery period, and the half-year convention. Felected not to deduct the additional first yeardepreciation provided by section 168(k) for5-year property placed in service during 2012. Asof January 1, 2014, this pool contains 100 similaritems of mass assets with a total cost of $25,000and a total depreciation reserve of $13,000. Be-cause all the items of mass assets in the pool aresimilar, F allocates the cost and depreciation al-lowed or allowable for the pool ratably amongeach item in the pool. This allocation is a reason-able method because all the items of mass assetsin the pool are similar. Using this reasonablemethod, F allocates a cost of $250 ($25,000 �

(1/100)) to each disposed of mass asset and depre-ciation allowed or allowable of $130 ($13,000 �

(1/100)) to each disposed of mass asset. The de-preciation allowed or allowable in 2014 for eachdisposed of mass asset is $24 (($250 � 19.2%) / 2).As a result, the adjusted depreciable basis of eachdisposed of mass asset under section 1011 is $96($250– $130– $24). Thus, F recognizes a gain of$4 for each disposed of mass asset in 2014, whichis subject to section 1245.

(iii) Further, as of January 1, 2014, the unad-justed depreciable basis of the 2012 pool of massassets with a 5-year recovery period is reducedfrom $25,000 to $22,500 ($25,000 less the unad-justed depreciable basis of $2,500 for the 10 dis-posed of items), and the depreciation reserve ofthis 2012 pool is reduced from $13,000 to $11,700($13,000 less the depreciation allowed or allow-able of $1,300 for the 10 disposed of items as ofDecember 31, 2013). Consequently, as of January1, 2014, the 2012 pool of mass assets with a 5-yearrecovery period has 90 items with a total cost of$22,500 and a depreciation reserve of $11,700.Thus, the depreciation allowance for this pool for2014 is $4,320 ($22,500 � 19.2%).

Example 11. (i) The facts are the same as inExample 10. Because of changes in F’s record-keeping in 2015, it is impracticable for F to con-tinue to identify disposed of mass assets usingspecific identification and to determine the unad-justed depreciable basis of the disposed of massassets. As a result, F files a Form 3115, Applica-tion for Change in Accounting Method, to changeto a first-in, first-out method beginning with thetaxable year beginning on January 1, 2015, on amodified cut-off basis. See § 1.446–1(e)(2)(ii)(d)(2)(vii). Under the first-in, first-outmethod, the mass assets disposed of in a taxableyear are deemed to be from the pool with theearliest placed-in-service year that has assets as ofthe beginning of the taxable year of the disposi-tion with the same recovery period as the assetdisposed of. The Commissioner of Internal Rev-enue consents to this change in method of ac-counting.

(ii) During 2015, F sells 20 items of mass assetswith a 5-year recovery period each for $50. As ofJanuary 1, 2015, the 2008 pool is the pool with theearliest placed-in-service year for mass assetswith a 5-year recovery period, and this pool con-tains 25 items of mass assets with a total cost of$10,000 and a total depreciation reserve of$10,000. Thus, F allocates a cost of $400 ($10,000� (1/25)) to each disposed of mass asset and

depreciation allowed or allowable of $400 to eachdisposed of mass asset. As a result, the adjusteddepreciable basis of each disposed of mass asset is$0. Thus, F recognizes a gain of $50 for eachdisposed of mass asset in 2015, which is subject tosection 1245.

(iii) Further, as of January 1, 2015, the unad-justed depreciable basis of the 2008 pool of massassets with a 5-year recovery period is reducedfrom $10,000 to $2,000 ($10,000 less the unad-justed depreciable basis of $8,000 for the 20 dis-posed of items ($400 � 20)), and the depreciationreserve of this 2008 pool is reduced from $10,000to $2,000 ($10,000 less the depreciation allowed orallowable of $8,000 for the 20 disposed of items asof December 31, 2014). Consequently, as of Jan-uary 1, 2015, the 2008 pool of mass assets with a5-year recovery period has 5 items with a totalcost of $2,000 and a depreciation reserve of$2,000.

(j) Effective/applicability dates—(1) Ingeneral. This section applies to taxableyears beginning on or after January 1,2014.


(3) Early application of regulationproject REG–110732–13. A taxpayer mayrely on the provisions of this section inregulation project REG–110732–13(2013–43 IRB 404) (see § 601.601(d)(2)of this chapter) for taxable years begin-ning on or after January 1, 2012. How-ever, a taxpayer may not rely on the pro-visions of this section in regulation projectREG–110732–13 for taxable years begin-ning on or after January 1, 2014.

(4) Optional application of TD 9564. Ataxpayer may choose to apply§ 1.168(i)–8T as contained in 26 CFRpart 1 edition revised as of April 1, 2014,to taxable years beginning on or after Jan-uary 1, 2012. However, a taxpayer maynot apply § 1.168(i)–8T as contained in26 CFR part 1 edition revised as of April1, 2014, to taxable years beginning on orafter January 1, 2014.

(5) Change in method of accounting. Achange to comply with this section fordepreciable assets placed in service in ataxable year ending on or after December30, 2003, is a change in method of ac-counting to which the provisions of sec-tion 446(e) and the regulations under sec-tion 446(e) apply. A taxpayer also maytreat a change to comply with this sectionfor depreciable assets placed in service ina taxable year ending before December

30, 2003, as a change in method of ac-counting to which the provisions of sec-tion 446(e) and the regulations under sec-tion 446(e) apply. This paragraph (j)(5)does not apply to a change to comply withparagraph (d)(2) of this section, except asprovided in paragraph (d)(2)(iii) or (iv)(B)of this section or otherwise provided byother guidance published in the InternalRevenue Bulletin (see § 601.601(d)(2) ofthis chapter).

§ 1.168(i)–8T [Removed]

Par. 9. Section 1.168(i)–8T is re-moved.

§ 1.263(a)–3 [Amended]

Par. 10. Section 1.263(a)–3 is amendedby:

a. In paragraphs (g)(2)(i), (g)(2)(ii) Ex-ample 2, and (g)(2)(ii) Example 4, remov-ing the language “Prop. Reg. § 1.168(i)–8(d) (September 19, 2013)” and addingthe language “§ 1.168(i)–8(d)” in itsplace.

b. In paragraph (g)(2)(i), removing thelanguage “§ 1.168(i)–1T(e)(3) nor Prop.Reg. § 1.168(i)–1(e)(3) (September 19,2013)” and adding the language“§ 1.168(i)–1(e)(3)” in its place, and re-moving the language “Prop. Reg.§ 1.168(i)–1(e)(2)(ix) (September 19,2013)” and adding the language“§ 1.168(i)–1(e)(1)(ii)” in its place.

c. In paragraphs (g)(2)(ii) and (g)(2)(ii)Example 1, removing the language “Prop.Reg. § 1.168(i)–1(e) (September 19,2013), or Prop. Reg. § 1.168(i)–8 (Sep-tember 19, 2013)” and adding the lan-guage “§ 1.168(i)–1(e) or § 1.168(i)–8” inits place.

d. In paragraph (k)(7) Example 30, re-moving the language “Prop. Reg.§ 1.168(i)–8” and adding the language“§ 1.168(i)–8” in its place, and removingthe language “Prop. Reg. § 1.168(i)–8(c)(4)(ii)(A) (September 19, 2013)” andadding the language “§ 1.168(i)–8(c)(4)(ii)(A)” in its place.

e. In paragraph (k)(7) Example 30 andExample 31, removing the language“Prop. Reg. § 1.168(i)–8(d)(2) (Septem-ber 19, 2013),” and adding the language“§ 1.168(i)–8(d)(2)” in its place.

f. In paragraph (k)(7) Example 31, re-moving the language “Prop. Reg.


§ 1.68(i)–8(c)(4)(ii)(D) (September 19,2013)” and adding the language“§ 1.168(i)–8(c)(4)(ii)(D)” in its place.

Par. 11. Section 1.1016–3 is amendedby revising the fourth sentence in para-graph (a)(1)(ii) to read as follows:

§ 1.1016–3 Exhaustion, wear and tear,obsolescence, amortization, anddepletion for periods since February 13,1913.

(a) * * *(1) * * *(ii) * * * For rules governing losses on

retirement or disposition of depreciableproperty, including rules for determiningbasis, see § 1.167(a)–8, 1.168(i)–1(e), or1.168(i)–8, as applicable. * * *

* * * * *

John Dalrymple,Deputy Commissioner for Services and

Enforcement.

Approved: July 11, 2014.

Mark J. Mazur,Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on August 14,2014, 11:15 a.m., and published in the issue of the FederalRegister for August 18, 2014, 79 F.R. 48661)

Section 471.— Generalrule for inventories26 CFR 1.471–8: Inventories of retail merchants

T.D. 9688


Retail Inventory Method


ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations relating to the retail inven-tory method of accounting. The regula-tions restate and clarify the computation

of ending inventory values under the retailinventory method and provide a specialrule for certain taxpayers that receive mar-gin protection payments or vendor allow-ances that are required to reduce only costof goods sold. The regulations affect tax-payers that are retailers and use a retailinventory method.


Applicability Date: For date of appli-cability, see § 1.471–8(f).

FOR FURTHER INFORMATIONCONTACT: Christopher Call, (202) 317-7007 (not a toll-free number).


Background

This document contains final regula-tions that amend the Income Tax Regula-tions (26 CFR part 1) relating to the retailinventory method of accounting under§ 1.471–8 of the Income Tax Regulations.On October 7, 2011, a notice of proposedrulemaking (REG–125949–10) was pub-lished in the Federal Register (76 FR62327). A public hearing was not re-quested or held. No comments were re-ceived during the comment period. Threecomments were received after the end ofthe comment period and were considered,as discussed later in this preamble. Theproposed regulations are adopted asamended by this Treasury decision.

Summary of Comments andExplanation of Revisions

Section 471 of the Internal RevenueCode provides that a taxpayer’s method ofaccounting for inventories must clearlyreflect income. Section 1.471–2(c) pro-vides that the bases of inventory valuationmost commonly used and meeting the re-quirements of section 471 are (1) cost and(2) cost or market, whichever is lower(LCM). Section 1.471–3 provides rulesfor determining inventories at cost. Sec-tion 1.471–4 provides rules for determin-ing inventories at lower of cost or market.Section 1.471–8 of the regulations con-tains rules specific to retailers, allowingthem to approximate cost or LCM of thegoods in their ending inventory by usingthe retail inventory method. Under the

retail inventory method, a taxpayer com-putes the value of ending inventory bymultiplying a cost complement by the re-tail selling prices of the goods on hand atthe end of the taxable year. The numeratorof the cost complement is the value ofbeginning inventory plus the cost of pur-chases during the taxable year, and thedenominator is the retail selling prices ofbeginning inventory plus the initial retailselling prices of purchases. For taxpayersusing the retail inventory method to valueinventories at cost (retail cost method), thedenominator of the cost complement isadjusted for all permanent markups andmarkdowns. Taxpayers using the retail in-ventory method to value inventories atLCM (retail LCM method) generally donot make adjustments to the denominatorfor markdowns.

The proposed regulations provided thata taxpayer using the retail LCM methodmay not reduce the numerator of the costcomplement by the amount of an allow-ance, discount, or price rebate that is re-lated to or intended to compensate for apermanent reduction in the taxpayer’s re-tail selling price of inventory, often calleda margin protection payment or a mark-down allowance. The proposed regula-tions also provided that a taxpayer usingthe retail inventory method (whether valu-ing inventories at LCM or at cost) may notreduce the numerator of the cost comple-ment by the amount of a sales-based ven-dor allowance.

Commenters suggested that taxpayersusing the retail LCM method to valueinventories should reduce the numeratorof the cost complement for all vendorallowances and discounts, including mar-gin protection payments and sales-basedvendor allowances (but should not be re-quired to reduce the denominator by therelated price reduction), because all allow-ances and discounts reduce the cost ofinventory and allow retailers to achievetheir margin goals. The commenters as-serted that if the numerator of the costcomplement is not reduced for marginprotection payments and sales-based ven-dor allowances, taxpayers’ income willnot be clearly reflected, the economics ofthe underlying business transaction willbe ignored, and small retailers would beadversely affected. The commenters sug-gested that small retailers have less bar-


gaining power than large retailers and areless able to negotiate purchase-based dis-counts from vendors.

The final regulations do not adopt thesecomments. A margin protection payment,unlike other types of allowances, is inher-ently related to a markdown that will bereflected in the retail selling prices of theitems remaining in ending inventory.When a taxpayer using retail LCM re-duces the numerator of the cost comple-ment by the amount of a margin protec-tion payment without reducing thedenominator by the amount of the corre-sponding markdown, ending inventoryvalue does not clearly reflect income, anddoes not reflect the economics of the un-derlying transaction. Taxpayers using theretail cost method to value inventories, asopposed to retail LCM, are allowed toreduce the numerator of the cost comple-ment by the amount of a margin protec-tion payment because these taxpayers alsoreduce the denominator of the cost com-plement by the amount of a related mark-down, maintaining the relationship be-tween cost and retail price.

With regard to sales-based vendor al-lowances, the final regulations adopt, witha modification, the proposed rule that thenumerator of the cost complement is notreduced for sales-based vendor allow-ances. Proposed regulations under§ 1.471–3(e) provided that sales-basedvendor allowances (the amount of an al-lowance, discount, or price rebate that ataxpayer earns by selling specific mer-chandise) reduce cost of goods sold anddo not reduce ending inventory value. Be-cause the retail inventory method pro-duces an ending inventory value andsales-based vendor allowances could notbe allocated to ending inventory, the pro-posed regulations under § 1.471–8 pro-vided that sales-based vendor allowancesdo not reduce the numerator of the costcomplement. The final regulations under§ 1.471–3(e) (TD 9652, 79 FR 2094) ap-ply specifically to only one type of sales-based vendor allowance, a sales-basedvendor chargeback, and reserve rules forother types of sales-based vendor allow-ances. To conform to this modification,these final regulations under § 1.471–8provide that sales-based vendor allow-ances that are required to reduce only costof goods sold under § 1.471–3(e) do not

reduce the numerator of the cost comple-ment. This rule will apply only to sales-based vendor chargebacks until furtherguidance is issued under § 1.471–3(e).

Commenters also requested that the fi-nal regulations allow retail LCM taxpay-ers to reduce the numerator of the costcomplement by margin protection pay-ments and sales-based vendor allowancesbecause requiring taxpayers to track mar-gin protection payments and sales-basedvendor allowances separately from othertypes of allowances would create burden-some recordkeeping requirements. Thiscomment is not adopted because, as dis-cussed earlier in this preamble, allowing aretail LCM taxpayer to reduce the numer-ator of the cost complement by theamount of a margin protection paymentwithout reducing the denominator by theamount of the corresponding markdownwould not clearly reflect income andwould not reflect the economics of theunderlying transaction. Nonetheless, asdiscussed later in this preamble, to easetaxpayers’ compliance burden, the finalregulations provide alternative methodsand procedures for computing the costcomplement for retail LCM taxpayers.

The preamble to the proposed regula-tions requested comments on an alterna-tive method for retail LCM taxpayers toaccount for margin protection paymentswhen computing the cost complement.The method described in that preamblewould have permitted retail LCM taxpay-ers to reduce the numerator of the costcomplement for all non-sales-based al-lowances, discounts, or price rebates, in-cluding margin protection payments ormarkdown allowances, and also wouldhave required a reduction of the denomina-tor of the cost complement for permanentmarkdowns to which the margin protectionpayments or markdown allowances relate(related markdowns). Although comment-ers did not address this proposal explic-itly, they stated that in some cases, basedon the nature of their business dealingswith vendors and the variety of allow-ances offered, taxpayers have difficultydistinguishing between the different typesof vendor allowances their vendors pro-vide. For example, commenters contendthat it might be difficult for a taxpayer todistinguish the amount of a margin pro-tection payment or markdown allowance

received from a vendor from the amountsof other types of allowances receivedfrom that vendor, thus making it difficultto determine the amount by which theywere required to reduce the numerator ofthe cost complement under the proposedregulations.

The final regulations address thesecomments and ease taxpayers’ compli-ance with the regulations by allowing re-tail LCM taxpayers to use a method sim-ilar to the method described in thepreamble to the proposed regulations thatdoes not require taxpayers to distinguishthe amounts of margin protection pay-ments from the amounts of other vendorallowances (except for vendor allowancesrequired to be allocated to cost of goodssold under § 1.471–3(e)). Under the alter-native method provided in the final regu-lations, retail LCM taxpayers reduce thenumerator for margin protection paymentsand must quantify and reduce the denom-inator for the related markdowns. Thisalternative method results in a reductionof the numerator of the cost complementby all vendor allowances other than thoserequired to reduce cost of goods sold un-der § 1.471–3(e). This alternative methodaccordingly reduces the compliance bur-den for taxpayers that cannot distinguishmargin protection payments from otherallowances, but that can identify the mark-downs related to those margin protectionpayments.

Commenters also stated that some ac-counting systems cannot sufficiently trackthe related markdowns. Accordingly, asecond alternative provided in the finalregulations allows taxpayers that are ableto determine the amount of their marginprotection payments to reduce the numer-ator of the cost complement for the mar-gin protection payments and adjust thedenominator by the amount that, in con-junction with the reduction of the numer-ator, maintains what would have been thecost complement percentage before takinginto account the margin protection pay-ments and related markdowns. This sec-ond alternative method assumes that amargin protection payment maintains thetaxpayer’s profit margin after a relatedmarkdown in retail selling price. Thus, ifbefore taking into account the margin pro-tection payment and the related mark-down the cost complement is 50 percent


($10/$20), and the taxpayer receives amargin protection payment of $2, the tax-payer must reduce the denominator by $4to maintain a cost complement of 50 per-cent ($8/$16) under this second alterna-tive method.

A retail LCM taxpayer must use one ofthese three methods (the general methodand the two alternative methods) for com-puting all of its cost complements. Achange from one to another of these meth-ods is a change in method of accounting.

The final regulations further facilitateidentifying margin protection paymentsand related markdowns by allowing retailLCM taxpayers to use statistical samplingin accordance with Rev. Proc. 2011–42(2011–37 IRB 318), see § 601.601(d), inconjunction with any of the three meth-ods. A retail LCM taxpayer using statisti-cal sampling must use it for all marginprotection payments and related mark-downs associated with the inventory itemsvalued by a particular cost complement.However, a retail LCM taxpayer that cal-culates more than one cost complement isnot required to use statistical sampling forall cost complements. A change from us-ing to not using statistical sampling, orfrom not using to using statistical sam-pling, to identify margin protection pay-ments and related markdowns is not achange in method of accounting.

The proposed regulations provided thata taxpayer may apply the retail inventorymethod to a department, a class of goods,or a stock-keeping unit. A commentersuggested that the final regulations specifythat a taxpayer may use the retail inven-tory method to value ending inventory fora sub-class of goods, style of goods, orother similar category of goods to avoidthe implication that the scope of the retailinventory method is limited to thosegroupings specifically identified in theproposed regulations. The categories sug-gested by the commenter are already en-compassed by the terms department, classof goods, or stock-keeping unit. Accord-ingly, the final regulations do not adoptthis comment.

A commenter suggested that the finalregulations should allow taxpayers to cal-culate their cost complements using ameasurement period shorter than the en-tire taxable year and should clarifywhether beginning inventory may or must

be eliminated from the cost complementof a last-in, first-out (LIFO) taxpayer us-ing the retail inventory method. These is-sues were not addressed in the proposedregulations and therefore are not ad-dressed in the final regulations. However,the final regulations do not reflect achange in established administrative prac-tice regarding whether LIFO taxpayers us-ing the retail inventory method may ex-clude beginning inventory from the costcomplement.

Effective/Applicability Date

These regulations apply to taxableyears beginning after December 31, 2014.For taxable years beginning before Janu-ary 1, 2015, see § 1.471–8 as contained in26 CFR part 1, revised April 1, 2014.

Special Analyses

This Treasury decision is not a signif-icant regulatory action as defined in Ex-ecutive Order 12866, as supplemented byExecutive Order 13563. Therefore, a reg-ulatory assessment is not required. Section553(b) of the Administrative ProcedureAct (5 U.S.C. chapter 5) does not apply tothese regulations and, because the regula-tions do not impose a collection of infor-mation on small entities, the RegulatoryFlexibility Act (5 U.S.C. chapter 6) doesnot apply. Pursuant to section 7805(f) ofthe Internal Revenue Code, the notice ofproposed rulemaking that preceded thesefinal regulations was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business. No com-ments were received from the Small Busi-ness Administration.


The principal author of these regula-tions is Natasha M. Mulleneaux of theOffice of Associate Chief Counsel (In-come Tax and Accounting). However,other personnel from the IRS and theTreasury Department participated in theirdevelopment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 isamended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.471–8 is revised to

read as follows:

§ 1.471–8 Inventories of retailmerchants.

(a) In general. A taxpayer that is aretail merchant may use the retail inven-tory method of accounting described inthis section. The retail inventory methoduses a formula to convert the retail sellingprice of ending inventory to an approxi-mation of cost (retail cost method) or anapproximation of lower of cost or market(retail LCM method). A taxpayer may usethe retail inventory method instead ofvaluing inventory at cost under § 1.471–3or lower of cost or market under§ 1.471–4.

(b) Computation—(1) In general. Ataxpayer computes the value of endinginventory under the retail inventorymethod by multiplying a cost complementby the retail selling prices of the goods onhand at the end of the taxable year.

(2) Cost complement—(i) In general.The cost complement is a ratio computedas follows:

(A) The numerator is the value of be-ginning inventory plus the cost (as deter-mined under § 1.471–3, except as other-wise provided in this section) of goodspurchased during the taxable year.

(B) The denominator is the retail sell-ing prices of beginning inventory plus theretail selling prices of goods purchasedduring the year (that is, the bona fide retailselling prices of the items at the timeacquired), adjusted for all permanentmarkups and markdowns, includingmarkup and markdown cancellations andcorrections. The denominator is not ad-justed for temporary markups or mark-downs.

(ii) Vendor allowances required to re-duce only cost of goods sold. A taxpayermay not reduce the numerator of the cost


complement by the amount of an allow-ance, discount, or price rebate that is re-quired under § 1.471–3(e) to reduce onlycost of goods sold.

(3) Additional rules for cost comple-ment for retail LCM method—(i) In gen-eral—(A) Margin protection payments. Ataxpayer using the retail LCM methodmay not reduce the numerator of the costcomplement by the amount of an allow-ance, discount, or price rebate that is re-lated to or intended to compensate for apermanent reduction in the taxpayer’s re-tail selling price of inventory (a marginprotection payment).

(B) Markdowns. A taxpayer using theretail LCM method does not adjust thedenominator of the cost complement formarkdowns (and markdown cancellationsor corrections). Markups must be reducedby the markdowns made to cancel or cor-rect them.

(ii) Alternative methods for computingcost complement—(A) In general. In lieuof the method described in paragraph(b)(3)(i) of this section, a taxpayer usingthe retail LCM method may compute thecost complement using one of the alterna-tive methods described in this paragraph(b)(3)(ii). A taxpayer using an alternativemethod under this paragraph (b)(3)(ii)must use that method for all cost comple-ments.

(B) Adjust numerator and denomina-tor. A taxpayer using the retail LCMmethod may reduce the numerator of thecost complement by the amount of allmargin protection payments if the tax-payer also reduces the denominator of thecost complement by the amount of thepermanent reduction in retail selling priceto which the margin protection paymentsrelate (related markdowns).

(C) Deemed adjustment to denomina-tor. A taxpayer using the retail LCMmethod that is able to determine theamount of all margin protection paymentsbut cannot determine the amount of therelated markdowns may reduce the nu-merator of the cost complement by theamount of all margin protection paymentsif the taxpayer also reduces the denomi-nator by the amount that, in conjunctionwith the reduction of the numerator for themargin protection payments, maintainswhat would have been the cost comple-ment percentage before taking into ac-

count the margin protection payment andthe related markdown. A taxpayer thatcan determine the amount of a relatedmarkdown but not the associated marginprotection payments may not use thismethod to compute an adjustment to thenumerator.

(iii) Statistical sampling. A taxpayerusing the retail LCM method may usestatistical sampling in accordance withRev. Proc. 2011–42 or any successor (see§ 601.601(d) of this chapter), in conjunc-tion with any method of computing thecost complement described in this para-graph (b)(3), to determine the amount ofmargin protection payments and relatedmarkdowns. A taxpayer using statisticalsampling must use it for all margin pro-tection payments and related markdownsassociated with the inventory items valuedby a particular cost complement, but is notrequired to use it for every cost comple-ment.

(4) Ending inventory retail sellingprices. A taxpayer must include all per-manent markups and markdowns but maynot include temporary markups or mark-downs in determining the retail sellingprices of goods on hand at the end of thetaxable year. A taxpayer may not includea markdown that is not an actual reductionof retail selling price.

(c) Special rules for LIFO taxpayers. Ataxpayer using the last-in, first-out (LIFO)inventory method with the retail inventorymethod uses the retail cost method. See§ 1.472–1(k) for additional adjustmentsfor a taxpayer using the LIFO inventorymethod with the retail cost method.

(d) Scope of retail inventory method. Ataxpayer may use the retail inventorymethod to value ending inventory for adepartment, a class of goods, or a stock-keeping unit. A taxpayer maintainingmore than one department or dealing inclasses of goods with different percent-ages of gross profit must compute costcomplements separately for each depart-ment or class of goods.

(e) Examples. The following examplesillustrate the rules of this section:

Example 1. (i) R, a retail merchant who usesthe retail LCM method and uses a calendar tax-able year, has no beginning inventory in 2012. Rpurchases 40 tables during 2012 for $60 each fora total of $2,400. R offers the tables for sale at$100 each for an aggregate retail selling price of$4,000. R does not sell any tables at a price of

$100, so R permanently marks down the retailselling price of its tables to $90 each. As a resultof the $10 markdown, R’s supplier provides R a$6 per table margin protection payment. R sells25 tables during 2012 and has 15 tables in endinginventory at the end of 2012.

(ii) Under paragraph (b)(2)(i)(A) of this sec-tion, the numerator of the cost complement is theaggregate cost of the tables, $2,400. Under para-graph (b)(3)(i)(A) of this section, R may not re-duce the numerator of the cost complement bythe amount of the margin protection payment.Under paragraph (b)(2)(i)(B) of this section, thedenominator of the cost complement is the aggre-gate of the bona fide retail selling prices of all thetables at the time acquired, $4,000. Under para-graph (b)(3)(i)(B) of this section, R does not ad-just the denominator of the cost complement forthe markdown. Therefore, R’s cost complement is$2,400/$4,000, or 60%.

(iii) Under paragraph (b)(4) of this section,R includes the permanent markdown in deter-mining year-end retail selling prices. Therefore,the aggregate retail selling price of R’s endingtable inventory is $1,350 (15 * $90). Approxi-mating LCM under the retail method, the valueof R’s ending table inventory is $810 (60% *$1,350).

Example 2. (i) The facts are the same as inExample 1, except that R permanently reducesthe retail selling price of all 40 tables to $50 perunit and the 15 tables on hand at the end of theyear are marked for sale at that price. The addi-tional $40 markdown is unrelated to a marginprotection payment or other allowance.

(ii) Under paragraph (b)(3)(i)(B) of this sec-tion, R does not adjust the denominator of thecost complement for the markdown. Therefore,R’s cost complement is $2,400/$4,000, or 60%.

(iii) Under paragraph (b)(4) of this section, Rincludes the permanent markdowns in determin-ing year-end retail selling prices. Therefore, theaggregate retail selling price of R’s ending inven-tory is $750 (15 * $50). Approximating LCMunder the retail method, the value of R’s endinginventory is $450 (60% * $750).

Example 3. (i) The facts are the same as inExample 1, except that R computes the cost com-plement using the alternative method under para-graph (b)(3)(ii)(B) of this section.

(ii) R reduces the numerator of the cost com-plement by the margin protection payments of$240 ($6 * 40) and reduces the denominator of thecost complement by the related markdowns of$400 ($10 * 40). Therefore, R’s cost complementis $2,160/$3,600, or 60%.

(iii) Under paragraph (b)(4) of this section, Rincludes the permanent markdown in determin-ing year-end retail selling prices. Therefore, theaggregate retail selling price of R’s ending tableinventory is $1,350 (15 * $90). ApproximatingLCM under the retail method, the value of R’sending table inventory is $810 (60% * $1,350).

Example 4. (i) The facts are the same as inExample 1, except that R cannot determine theamount of its related markdowns and computesthe cost complement using the alternative methodunder paragraph (b)(3)(ii)(C) of this section.


(ii) R reduces the numerator of the cost com-plement by the margin protection payments of$240 ($6 * 40). R reduces the denominator of thecost complement by the amount that, in conjunc-tion with the reduction in the numerator, main-tains the cost complement percentage before tak-ing into account the margin protection paymentsand the related markdowns. R’s original costcomplement was 60% ($2,400/$4,000). The nu-merator of R’s new cost complement is $2,160($2,400 – $240). Therefore, R reduces the denom-inator by $400, which maintains the cost comple-ment of 60% ($2,160/$3,600).

(iii) Under paragraph (b)(4) of this section, Rincludes the permanent markdowns in determin-ing year-end retail selling prices. Therefore, theaggregate retail selling price of R’s ending tableinventory is $1,350 (15 * $90). ApproximatingLCM under the retail method, the value of R’sending table inventory is $810 (60% * $1,350).

Example 5. (i) The facts are the same as inExample 1, except that R uses the LIFO inventorymethod. R must value inventories at cost and,under paragraph (c) of this section, uses the retailcost method.

(ii) Under paragraph (b)(2)(i)(A) of this sec-tion, R reduces the numerator of the cost comple-ment by the amount of the margin protectionpayment. Under paragraph (b)(2)(i)(B) of thissection, R includes the permanent markdown inthe denominator of the cost complement. There-fore, R’s cost complement is $2,160/$3,600, or60%.

(iii) Under paragraph (b)(4) of this section, Rincludes the permanent markdown in determin-ing year-end retail selling prices. Therefore, theaggregate retail selling price of R’s ending inven-tory is $1,350 (15 * $90). Approximating costunder the retail method, the value of R’s endinginventory is $810 (60% * $1,350).

(f) Effective/applicability date. Thissection applies to taxable years beginningafter December 31, 2014. For taxableyears beginning before January 1, 2015,see § 1.471–8 as contained in 26 CFR part1, revised April 1, 2014.

John Dalrymple,Deputy Commissioner for

Services and Enforcement.

Approved: July 30, 2014


(Tax Policy).


Section 7623.— Expensesof detection ofunderpayments and fraud,etc.26 CFR 301.7623–1: Rewards and awards for infor-mation relating to violations of internal revenuelaws

T.D. 9687


Awards for InformationRelating to DetectingUnderpayments of Tax orViolations of the InternalRevenue Laws


ACTION: Final regulations.

SUMMARY: These regulations providecomprehensive guidance for the awardprogram authorized under Internal Reve-nue Code (Code) section 7623. The regu-lations provide guidance on submitting in-formation regarding underpayments of taxor violations of the internal revenue lawsand filing claims for award, as well as onthe administrative proceedings applicableto claims for award under section 7623.The regulations also provide guidance onthe determination and payment of awards,and provide definitions of key terms usedin section 7623. Finally, the regulationsconfirm that the Director, officers, andemployees of the Whistleblower Officeare authorized to disclose return informa-tion to the extent necessary to conductwhistleblower administrative proceed-ings. The regulations provide neededguidance to the general public as well asofficers and employees of the IRS whoreview claims under section 7623.


Applicability Date: Sections301.7623–1, 301.7623–2, 301.7623–3,and 301.6103(h)(4)–1 apply to informa-tion submitted on or after August 12,

2014, and to claims for award under sec-tions 7623(a) and 7623(b) that are open asof August 12, 2014. Section 301.7623–4applies to information submitted on orafter August 12, 2014, and to claims foraward under section 7623(b) that are openas of August 12, 2014.

FOR FURTHER INFORMATIONCONTACT: Melissa A. Jarboe at (202)317-5437 (not a toll-free number).


Background

Section 406 of the Tax Relief andHealth Care Act of 2006 (the 2006 Act),Public Law 109–432 (120 Stat. 2922),enacted on December 20, 2006, amendedsection 7623 of the Code regarding thepayment of awards to certain persons whoprovide information to the IRS relating tothe detection of underpayments of tax orthe detection and bringing to trial andpunishment persons guilty of violating theinternal revenue laws or conniving at thesame. In this preamble, the Treasury De-partment (Treasury) and the IRS use thephrase “underpayments of tax and viola-tions of the internal revenue laws” as ashorthand reference for the range of civiland criminal matters to which informationand, in turn, awards may relate under thestatute. Section 406 redesignated the ex-isting statutory authority to pay awards atthe discretion of the Secretary of the Trea-sury as section 7623(a), and it added anew provision regarding awards to certainindividuals as section 7623(b). Generally,section 7623(b) provides that qualifyingwhistleblowers will receive an award of atleast 15 percent, but not more than 30percent, of the collected proceeds result-ing from the action with which the Secre-tary proceeded based on the informationprovided to the IRS by the whistleblower.In off-Code provisions, section 406 alsoaddressed several award program admin-istrative issues and established a Whistle-blower Office within the IRS, which oper-ates at the direction of the Commissioner, toanalyze information received under sec-tion 7623, assign the investigation to theappropriate IRS office, and determine theamount of the award under section7623(b).

In Notice 2008–4, 2008–1 CB 253 (Jan-uary 14, 2008) (see § 601.601(d)(2)(ii)(b)),


Treasury and the IRS provided guidanceon filing claims for award under section7623. In the notice, Treasury and the IRSrecognized that the award program autho-rized by section 7623(a) had been previ-ously implemented through regulationsappearing at § 301.7623–1 of the Proce-dure and Administration Regulations. TheInternal Revenue Manual (IRM) providedadditional guidance to IRS officers andemployees on the award program autho-rized by section 7623(a). The notice pro-vided that the IRS would generally con-tinue to follow § 301.7623–1 and the IRMprovisions for claims for award within thescope of section 7623(a), subject to cer-tain exceptions listed in the notice. Thenotice also provided, however, that theregulations would not apply to the newaward program authorized under section7623(b). Instead, the notice provided in-terim guidance applicable to claims foraward submitted under section 7623(b).

On March 25, 2008, Treasury and theIRS published Temp. Treas. Reg.§ 301.6103(n)–2T, and correspondingproposed regulations, describing the cir-cumstances and process in and by whichofficers and employees of the Treasurymay disclose return information towhistleblowers (and their legal represen-tatives, if any) in connection with writtencontracts for services relating to the de-tection of violations of the internal reve-nue laws or related statutes. Whistleblow-ers and legal representatives that receivereturn information pursuant to these reg-ulations are subject to the civil and crim-inal penalty provisions of sections 7431,7213, and 7213A for the unauthorized in-spection or disclosure of return informa-tion. Treasury and the IRS finalized theproposed regulations on March 15, 2011(the 2011 regulations).

In December 2008, the IRS revisedIRM Part 25.2.2, updating policies andprocedures concerning the handling of in-formation, processing of claims forawards, and payment of awards under sec-tion 7623. The IRS also redelegated theauthority to approve section 7623(a)awards to the Director of the Whistle-blower Office, thereby promoting consis-tency across the full range of award deci-sions. Delegation Order 25–07 (Rev.1)(2008). In July 2010, the IRS further re-vised IRM Part 25.2.2 to provide detailed

instructions to IRS officials and employ-ees on the computation and payment ofawards under section 7623 and to describethe administrative procedures applicableto claims for award under section 7623(b).The revised IRM introduced many guid-ance elements that are developed in theseregulations, including definitions of keyterms, the whistleblower administrativeproceedings, the fixed percentage awardframework and criteria for making awarddeterminations, and rules on handlingmultiple and joint claimants.

On January 18, 2011, Treasury and theIRS published proposed regulations (76FR 2852) clarifying the definitions of theterms proceeds of amounts collected andcollected proceeds for purposes of section7623 and providing that the provisions ofexisting § 301.7623–1(a), concerning re-fund prevention claims, apply to claimsunder both section 7623(a) and section7623(b). The proposed regulations furtherprovided that the reduction of an overpay-ment credit balance constitutes proceedsof amounts collected and collected pro-ceeds for purposes of section 7623. Trea-sury and the IRS finalized the proposedregulations on February 22, 2012 (the2012 regulations).

On December 28, 2012, Treasury andthe IRS published proposed regulations inthe Federal Register (77 FR 74798) pro-viding comprehensive guidance with re-spect to section 7623 (the proposed regu-lations). The proposed regulationsprovided guidance on issues relating tothe award program under section 7623from the filing of a claim to the paymentof an award, focusing on three major ele-ments of the program: (i) the submissionof information and filing of claims foraward; (ii) the whistleblower administra-tive proceedings applicable to claims foraward under section 7623; and (iii) thecomputational determination and paymentof awards. The proposed regulations alsoprovided definitions of key terms undersection 7623 and confirmed that the Di-rector, officers, and employees of theWhistleblower Office are authorized todisclose return information to the extentnecessary to conduct whistleblower ad-ministrative proceedings. Treasury andthe IRS received 859 comments in re-sponse to the proposed regulations. Com-menters requested a public hearing, which

was held on April 10, 2013. At the hear-ing, Treasury and the IRS received testi-mony from eight commenters. After con-sideration of the comments and hearingtestimony, Treasury and the IRS madesome modifications to the proposed regu-lations, which are discussed in detail laterin this preamble. This Treasury decisionadopts the proposed regulations, as mod-ified. These final regulations provide com-prehensive guidance for the award pro-gram authorized under section 7623.

Summary of Comments andExplanation of Revisions

Over 70 percent of the 859 writtencomments received were identical formletters. These one-page letters expressedsupport for the comments of SenatorCharles Grassley, which were set out in aJanuary 28, 2013, letter from SenatorGrassley to Acting Treasury SecretaryNeal Wolin, Acting IRS CommissionerSteven Miller, and Assistant Secretary(Tax Policy) Mark J. Mazur. Two othercomments incorporated Senator Grass-ley’s January 28, 2013, letter in its en-tirety, and several comments offered gen-eral support for Senator Grassley’s viewson the IRS Whistleblower Program. Inaddition to the comments referencing Sen-ator Grassley’s letter or views on theWhistleblower Program, Treasury and theIRS received several substantive com-ments containing specific recommenda-tions for the final regulations. Treasuryand the IRS also received over 30 nearlyidentical comments expressing concernthat the proposed regulations restricted thescope of the Whistleblower Program andawards, prohibited whistleblowers fromcollecting awards on technical grounds,limited the size of whistleblower awards,and failed to require the IRS to act onwhistleblower claims. The issues raised inthese comments are addressed in greaterdetail in the discussion that follows.

Treasury and the IRS also receivedover a hundred comments that referredgenerally to a need to protect and supportwhistleblowers and the IRS’s Whistle-blower Program. These comments offeredno further substantive discussion or spe-cific recommendations with respect to theregulations. Treasury and the IRS, how-ever, considered the general message be-hind these comments in considering


whether changes should be made to theproposed regulations. A few of the com-ments received suggested that the ChiefCounsel, himself, should not be involvedin the process of finalizing the regulationsdue to his professional experience prior tobecoming Chief Counsel. After consider-ing these comments, Treasury and the IRSfound that the concerns expressed in thecomments were unfounded. Accordingly,the Chief Counsel did not recuse himselffrom the process. Finally, Treasury andthe IRS received a few comments thatwere completely unrelated to the proposedregulations and the IRS WhistleblowerProgram. These unrelated comments wereoutside the scope of the regulations andtherefore are not discussed further in thispreamble or these final regulations.

Information Disclosures inWhistleblower AdministrativeProceedings—§ 301.6103(h)(4)–1

Under section 6103(a), returns and re-turn information are confidential, unlessan exception applies. Section 6103(h)(4)authorizes the disclosure of returns andreturn information in administrative or ju-dicial proceedings pertaining to tax ad-ministration in certain circumstances. Awhistleblower administrative proceedingunder section 7623 is an administrativeproceeding under section 6103(h)(4). Sec-tion 301.6103(h)(4)–1 of the proposedregulations specifically confirmed the au-thority of the Director, officers, and em-ployees of the Whistleblower Office todisclose return information to the extentnecessary to conduct whistleblower ad-ministrative proceedings. To minimize thepotentially adverse consequences of thedisclosure, and possible redisclosure, ofreturn information, the proposed regula-tion provided that the Whistleblower Of-fice will use confidentiality agreements insection 7623(b) whistleblower award de-termination administrative proceedings,as well as other safeguards, while stillproviding meaningful opportunities forwhistleblowers to participate in whistle-blower administrative proceedings.

In general, the comments receivedviewed these provisions favorably. Onecommenter recommended that section6103 and § 301.6103 be amended to per-mit greater communication between the

IRS and whistleblowers. Treasury and theIRS lack the authority to amend section6103. Accordingly, the final regulationsdo not adopt this comment. Instead, in theproposed regulations, Treasury and theIRS took steps to expand the opportunitiesfor communication between the IRS andwhistleblowers within the confines of theIRS’s existing authority under section6103. For example, Treasury and the IRSprovided for whistleblower administrativeproceedings, in part, to increase the IRS’sability to communicate with whistleblow-ers. Some comments suggested thatwhistleblower administrative proceedingsshould begin earlier, and these commentsare more fully addressed in the discussionof § 301.7623–3. Treasury and the IRSdetermined that the proposed regulationsstruck an appropriate balance among min-imizing possible redisclosures of confi-dential return information, providingmeaningful opportunities for claimants toparticipate in the administrative process,and placing an undue burden on theWhistleblower Office. After considerationof the comments, the proposed regulationunder section 6103 is adopted withoutsubstantive change.

Submitting Information and FilingClaims for Award—§ 301.7623–1

This final regulation provides guidanceon submitting information to the IRS andfiling claims for award with the Whistle-blower Office. The regulation is intendedto clarify the process whistleblowersshould follow to be eligible to receiveawards under section 7623. The final reg-ulation, in large part, tracks the rules thatTreasury and the IRS have previously pro-vided, as set forth in the 2012 regulations,the proposed regulations, Notice 2008–4,and the IRM. The comments received andany changes to proposed § 301.7623–1 arediscussed in the sections that follow.

Terminology for Individuals who SubmitInformation and Claim an Award

Under section 7623(a), the Secretarypossesses the discretionary authority topay awards for information necessary todetect underpayments of tax or violationsof the tax laws. Section 7623(b) furtherrequires the payment of awards to individ-

uals in certain circumstances. The pro-posed regulations used both the term “in-dividual” and the term “claimant” invarious respects. Generally, the terminol-ogy in the proposed regulations was de-signed to mimic the statute’s use of theterm “individual(s).” One commenter sug-gested that the final regulations should usethe term “claimant” throughout and elim-inate all references to the term “individ-ual.” The final regulations recognize,however, that not all individuals who sub-mit information to the IRS regarding taxnon-compliance become award claimants.To achieve consistency with Treas. Reg.§ 301.6103(n)–2 and reduce any confu-sion caused by the use of several terms,Treasury and the IRS changed almost allof the references to “individual” or“claimant” to “whistleblower” in the finalregulations. In some instances, however,the final regulations still use the term “in-dividual” to mimic the statute. Thesechanges are not intended to be substantivein nature.

List of Ineligible Whistleblowers

Section 7623 does not specifically ex-clude any whistleblower from filing aclaim for award, although awards undersection 7623(b) are limited to individuals.Moreover, section 7623(b)(3) requires theWhistleblower Office to deny an award toa whistleblower convicted of a crime aris-ing from the whistleblower’s role in plan-ning and initiating the actions that led tothe underpayment of tax or violations ofthe internal revenue laws. The regulationsin effect under section 7623 at the time ofthe 2006 amendments to the statute, how-ever, restricted the eligibility of Federalemployees to file claims for award. The2006 amendments to section 7623 did notaddress, and thus did not seek to change,the rule of Federal employee ineligibility.In the proposed regulations, the IRS iden-tified as ineligible certain categories ofindividuals that would have access to re-turn information of third parties by virtueof their relationship with the Federal Gov-ernment. These categories were identifiedin Notice 2008–4, and their exclusionwas based upon the understanding thatsuch individuals have a pre-existing legalor ethical obligation to disclose any vio-lations of the internal revenue laws. For


example, section 7214 of the Code re-quires “[a]ny officer or employee of theUnited States acting in connection withany revenue law of the United States. . .who, having knowledge or information ofthe violation of any revenue law by anyperson, or of fraud committed by anyperson against the United States underany revenue law. . .to report, in writing,such knowledge or information to theSecretary.”

Treasury and the IRS received twocomments suggesting that the list of inel-igible or excluded claimants included inthe proposed regulations was overbroad,and one comment recommending that theproposed regulations should be finalizedwithout change. One commenter sug-gested that, with respect to State and localgovernment employees, only those thathave access to Federal tax return recordsrelated to State and local taxpayers shouldbe ineligible. The other commenter sug-gested that the only whistleblowers ex-cluded from receiving awards under thestatute are those convicted of a crime forplanning and initiating, and thus the IRSshould not identify any ineligible whistle-blowers. This commenter also expressedconcern that the exclusion of individualsrequired to disclose (or to not disclose)information under Federal law was toovague and would discourage whistleblow-ers from submitting information. Finally,the commenter that suggested the pro-posed regulations should be adopted with-out change noted that individuals shouldnot be eligible to receive awards afterobtaining information in the course oftheir employment as a Federal employee.

The final regulations address the con-cerns raised by commenters that the cate-gories of ineligible claimants in the pro-posed regulations were too broad.Treasury and the IRS agree with the com-menters that the categories of ineligiblewhistleblowers should be narrowly de-fined. Accordingly, in finalizing the regu-lations, Treasury and the IRS removedState and local government employeesand members of a Federal or State body orcommission from the categories of ineli-gible whistleblowers. Treasury and theIRS determined that the final regulationsshould continue to reflect the longstandingstatutory, regulatory, and contractual re-quirements that Federal employees and

contractors have a duty to disclose infor-mation and are prohibited from seeking anaward for the performance of such duty.Similarly, under the final regulations, anindividual otherwise required to discloseinformation or precluded from disclosinginformation by Federal law or regulationis not eligible to claim an award for pro-viding such information. This reflectsTreasury and the IRS’s determination thatsection 7623 does not incentivize conductthat is either already mandated by, or con-trary to, Federal law.

Submission of Information

Any individual may submit informa-tion to the IRS regarding suspected under-payments of tax or violations of the inter-nal revenue laws. The proposedregulations provided that the informationsubmitted must be specific and credible ifthe individual intends to submit a claimfor award based on the information sub-mitted. In this regard, the proposed regu-lations provided that a whistleblower sub-mitting a claim should identify a personand describe and document the facts sup-porting the whistleblower’s belief that theperson owes taxes or violated the tax laws.

One commenter suggested that the pro-posed regulations improperly requiredwhistleblowers to identify a specific tax-payer in the submission of information.The proposed regulations did not, how-ever, require that a whistleblower’s infor-mation identify a taxpayer by name. TheIRS and the Whistleblower Office must beable to identify a taxpayer in order toproceed with an action and, ultimately, todetermine an award. The more identifyinginformation that a whistleblower includesin the submission, the more likely it is thatthe submission will be considered to iden-tify a taxpayer. Treasury and the IRS de-termined that the concerns raised in thecomment are adequately addressed by thelanguage in the proposed regulations. Ac-cordingly, these regulations retain the rulefrom the proposed regulations.

Penalty of Perjury Requirement

To form the basis for an award undersection 7623(b), section 7623(b)(6)(C) re-quires that information be submitted un-der penalty of perjury. The proposed reg-

ulations required any claim for award tobe accompanied by an original signeddeclaration under penalty of perjury thatthe application is true, correct, and com-plete to the best of the applicant’s knowl-edge. One commenter suggested that thefinal regulations should expressly addresshow the penalty of perjury declaration ap-plies to information submitted by awhistleblower subsequent to the initialclaim for award. In general, the IRS re-quires a penalty of perjury declarationonly as part of the initial claim for award.In most cases, the IRS does not requirethat a whistleblower reaffirm the originalpenalty of perjury declaration and, in-stead, the IRS deems the original declara-tion to cover any subsequent informationsubmitted by the whistleblower. This isreflected in the Instructions to the Form211, “Application for Award for OriginalInformation,” which provide that supple-mental submissions of information neednot be submitted as a claim for award withthe corresponding penalty of perjury dec-laration. In some cases, however, the IRSmay ask a whistleblower to reaffirm thepenalty of perjury declaration with respectto a subsequent information submission.In those cases, the whistleblower will begiven an opportunity to—and must—reaf-firm the penalty of perjury declaration forthe information to be considered submit-ted under penalty of perjury. Treasury andthe IRS anticipate that these cases will berare, and additional information submittedafter a claim for award may be addressedby the IRS on a case-by-case basis. Ac-cordingly, these regulations retain the rulefrom the proposed regulations.

Request for Assistance

The 2006 Act provided that the IRSmay ask for assistance from whistleblow-ers. As noted, in the 2011 regulations,Treasury and the IRS provided final rulesunder section 6103(n) describing the cir-cumstances and process in and by whichofficers and employees of the Treasurymay disclose return information towhistleblowers (and their legal represen-tatives, if any) in connection with writtencontracts for services and assistance. Theproposed regulations clarified that theWhistleblower Office, the IRS, or the IRSOffice of Chief Counsel may request as-


sistance from a whistleblower or thewhistleblower’s representative. The pro-posed regulations provided that such as-sistance shall be at the direction or controlof the Whistleblower Office, the IRS, orthe IRS Office of Chief Counsel. The pro-posed regulations also referred to Treas.Reg. § 301.6103(n)–2 for rules regardingwritten contracts between the IRS andwhistleblowers or their representatives.

Several commenters suggested that theregulations should do more to improveand expand communications between theIRS and whistleblowers. Many comment-ers specifically addressed the IRS’s use ofsection 6103(n) contracts. Commentersoften expressed concern that the IRS doesnot effectively utilize section 6103(n)contracts and suggested that the IRSshould make better use of its section6103(n) contract authority to facilitate in-creased communication with, and partici-pation by, whistleblowers. One com-menter suggested that the regulationsshould clarify when the IRS will use itscontract authority and establish protocolsfor its use. This commenter also suggestedthat the regulations could do more to clar-ify when and what type of information canbe shared with the whistleblower so thathe or she may assist the IRS. Anothercommenter suggested that the regulationsshould require the Whistleblower Officeand the IRS Office of Chief Counsel torequest assistance by conducting a de-briefing of the whistleblower in all cases.

As noted, returns and return informa-tion are confidential pursuant to section6103, unless an exception applies. In a2012 memorandum to the IRS OperatingDivisions, the IRS stressed the use ofmethods of communicating with whistle-blowers within the framework of section6103. IRS Whistleblower Program Mem-orandum (Deputy Commissioner for Ser-vices and Enforcement Steven T. Miller,June 20, 2012) (the 2012 memo). The2012 memo recognized the value ofwhistleblower debriefings and stated theexpectation that debriefings will be therule, not the exception. The IRS routinelydebriefs whistleblowers to clarify and de-velop the information provided. Althoughnot discussed in the 2012 memo, the IRShas also relied, and will continue to rely,on section 6103(k)(6) to disclose informa-tion to whistleblowers when the disclo-

sure is necessary to obtain informationfrom the whistleblower. These investiga-tory disclosures are a routine element ofthe IRS’s enforcement activities. The2012 memo also noted that section6103(n) contracts may be used when dis-closure of taxpayer information is neces-sary to obtain a whistleblower’s expertiseinto complex technical or factual issues.Although the IRS’s need for this level ofexpertise into complex issues arises lesscommonly than the need for section6103(k)(6) investigative disclosures, theIRS Operating Divisions will use this toolas needed. Specific issues regarding theuse of section 6103(n) contracts by theIRS and whistleblowers are beyond thescope of these regulations. These regula-tions do not specifically address section6103(n) contracts because they are al-ready provided for in regulations undersection 6103, as appropriately reflected bythe cross reference contained in the pro-posed regulations and these regulations.Nevertheless, debriefings, section 6103(k)(6)disclosures, and section 6103(n) contractsare not the only methods by which the IRScommunicates with whistleblowers. Laterin the life cycle of the underlying taxmatter, the IRS Office of Chief Counselmay, under section 6103(h)(4), seek assis-tance from a whistleblower in litigating acase. For example, the IRS Office of ChiefCounsel has relied on, and will continue torely on, whistleblowers as potential wit-nesses in Tax Court cases, but only asneeded and only following appropriateconsideration of whistleblower confiden-tiality concerns, as discussed later in thispreamble. Finally, as discussed both ear-lier and later in this preamble, theseregulations provide whistleblower ad-ministrative proceedings that will, inmany cases, enable two-way communi-cations with whistleblowers before theIRS makes the award determination.

Confidentiality of Whistleblowers

Section 7623 does not provide any pro-tections regarding the identification ofwhistleblowers. Treasury and the IRS,however, are very sensitive to the legitimateconcerns whistleblowers have with protect-ing their identities. In the Administration’sFiscal Year 2014 and 2015 Revenue Pro-posals, Treasury recommended amending

section 7623 to explicitly protect whistle-blowers from retaliatory actions, consis-tent with the protections currently avail-able to whistleblowers under the FalseClaims Act. Moreover, existing Treas. Reg.§ 301.7623–1(e) provides that “[n]o unau-thorized person will be advised of theidentity of an informant.” The proposedregulations reaffirmed the commitment ofTreasury and the IRS to safeguard theidentity of whistleblowers who submit in-formation under section 7623. Under theproposed rules, the IRS reaffirmed that itwill use its best efforts to: (i) prevent thedisclosure of a whistleblower’s identity;and (ii) notify a whistleblower prior to anydisclosure. One commenter suggested thatthe final regulations should go further andrequire notification to a whistleblowerprior to any disclosure. Another com-menter suggested that whistleblowersshould be allowed to opt out of the infor-mant privilege. This commenter sug-gested that allowing the whistleblower toopt out of the informant’s privilege woulddecrease the amount of time for an admin-istrative action because it would allow theIRS to use and rely upon documents pro-vided by the whistleblower, rather thanseeking to independently gather the doc-uments.

The informant privilege allows theGovernment to withhold the identity of aperson that provides information about vi-olations of law to those charged with en-forcing the law. The informant privilege isheld by the Government, not the infor-mant, and is not an absolute privilege.There may be instances when, after care-ful deliberation and high-level IRS ap-proval, the disclosure of the identity of awhistleblower may be determined to be inthe best interests of the Government.Nonetheless, in such cases, the IRS firstcarefully considers and weighs the poten-tial risks to the whistleblower and theGovernment’s need for the disclosure, andlooks for alternative solutions.

The final regulations reflect the deter-mination of Treasury and the IRS thatpreventing the disclosure of whistle-blower information is of critical impor-tance not only to whistleblowers, but alsoto the IRS’s whistleblower program. TheIRS has implemented a multi-level reviewprocess to ensure that the identities ofwhistleblowers are disclosed only after


careful consideration. The IRS will con-tinue to use its best efforts to preventdisclosures and to provide notificationprior to any disclosure. The IRS recog-nizes, however, that despite its best ef-forts, it may not always be possible toprovide such notification.

In some instances, whistleblowers haveconsented to the disclosure of their iden-tities in the hope that the IRS will proceedwith a tax case more quickly. Even whena whistleblower consents to disclosure,however, disclosing the whistleblower’sidentity may not be in the Government’sbest interest. Moreover, a whistleblowercannot unilaterally opt out of the infor-mant privilege because the privilege isheld by the Government. Finally, it is thelongstanding practice of the IRS to justifytax adjustments through information ob-tained independently of the whistle-blower. This enables the IRS to betterdefend tax adjustments in court and sup-ports the IRS’s sound administration ofthe tax case. As such, the IRS will act onspecific and credible information regard-ing tax compliance issues when that infor-mation can be corroborated, as part of abalanced tax enforcement program, andwill not forgo this process at the whistle-blower’s request to expedite a potentialaward. Accordingly, these regulations re-tain the rule from the proposed regulations.

Electronic Claim Filing

Section 7623 does not require the sub-mission of information or claims for anaward to be in a particular format. Toclaim an award for information providedto the IRS, the proposed regulations pro-vided that a whistleblower must file a for-mal claim for award by completing andsending Form 211, “Application forAward for Original Information,” to theInternal Revenue Service, WhistleblowerOffice, at the address provided on theform, or by complying with other claimfiling procedures as may be prescribed bythe IRS in other published guidance. Cur-rently, a whistleblower cannot file a Form211 electronically. The proposed regula-tions solicited comments on whether elec-tronic claim filing would be appropriateand beneficial to whistleblowers, and ifso, what features should be included in anelectronic claim filing system.

Treasury and the IRS received severalcomments suggesting that such proce-dures would be beneficial, but some com-menters expressed concern with how anelectronic claim filing system would beimplemented. Based upon the varied com-ments received, Treasury and the IRShave decided not to include specific guid-ance on electronic claim filing in the finalregulations. The final regulations adoptthe proposed rule and require whistle-blowers to file a formal claim for awardby completing and sending a Form 211 tothe IRS. The language in the final regula-tions does, however, allow for the IRS tospecify an alternative submission methodpursuant to additional guidance. If Trea-sury and the IRS implement electronicclaim filing, the comments received on theproposed regulations regarding imple-mentation will be considered and ad-dressed in future guidance.

Definitions of Key Terms—§ 301.7623–2

These final regulations define severalkey terms for purposes of determiningawards under section 7623 and the corre-sponding regulations. These terms in-clude: action, administrative action, judi-cial action, proceeds based on, relatedaction, collected proceeds, amount in dis-pute, and gross income. Two other keyterms, planned and initiated and final de-termination of tax, are described and de-fined in § 301.7623–4 of these regula-tions. The definitions are intended tofacilitate the IRS’s administration of thewhistleblower award program in a mannerthat is consistent with the statutory lan-guage. As described later in this preamble,several of the definitions, including thedefinition of the terms proceeds based on,related action, and collected proceeds,build on definitions contained in Notice2008–4, the 2012 regulations, and theIRM. The comments received and anychanges to the definitions of these termsare addressed in the sections that follow.

Administrative Action

The application of section 7623(b)hinges on whether the IRS proceeds withan action, and more specifically, an ad-ministrative or judicial action, against ataxpayer. Section 7623 does not, however,

define the terms action, judicial action, oradministrative action. The proposed reg-ulations defined an administrative actionas all, or a portion of, an IRS civil orcriminal proceeding against a person thatmay result in collected proceeds. Exam-ples of an administrative action include anexamination, a collection proceeding, astatus determination proceeding, or acriminal investigation. And, as noted, un-der the proposed regulations, an adminis-trative action can be a discrete portion ofan IRS civil proceeding. For example, theexamination of a single issue, within amulti-issue examination, can constitute anadministrative action. In such a case, de-terminations such as whether the IRS pro-ceeded with the action based on thewhistleblower’s information or the extentof the whistleblower’s substantial contri-bution to the action will be made by ref-erence to just the discrete and relevantportion of the examination to which theinformation provided relates.

One commenter suggested that an ad-ministrative action should begin with thefiling of a claim for an award. Althoughthe commenter made this suggestion inthe context of the definition of “adminis-trative action,” Treasury and the IRS be-lieve that it relates to the whistlebloweraward administrative proceedings dis-cussed later in this preamble. Some com-menters suggested that the definition ofthe term “administrative action” should bebroader. More specifically, one com-menter suggested that the list of examplesshould include making an assessment andanother commenter suggested that theterm “administrative action” should en-compass all actions taken by the IRS toinitiate taxpayer compliance by anymeans. Finally, commenters expressedconcern that a whistleblower would not beentitled to an award when the whistle-blower’s information related to an issuethat was already being examined, but re-sulted in the IRS making a greater assess-ment than the IRS would have made with-out the whistleblower’s information.Commenters raised a similar concern indiscussing the proposed regulations’ def-inition of the term proceeds based on.This concern is addressed in that sectionof this preamble.

Off-code provisions of the 2006 Actexplicitly provide that the IRS will ana-


lyze information received under section7623 and investigate the matter. Giventhat this requirement must be satisfied bythe IRS with respect to all informationprovided, it follows that the techniquesand tools used by the IRS to do the anal-ysis and investigation of the whistleblow-er’s claim cannot in and of themselvesprovide a basis—they cannot be the ad-ministrative action—that supports anaward determination. Nonetheless, if awhistleblower’s information contributesto the IRS’s use of these techniques andtools, for example, the issuance of a sum-mons or Information Document Request,and these intermediate steps result in anadministrative action, as defined in theregulations, then the IRS will determinewhether it proceeded with that resultingadministrative action based on the infor-mation, as described further in the discus-sion of the definition of proceeds basedon. Similarly, an assessment is a book-keeping entry employed by the IRS toreflect a determination that results from anadministrative action within the meaningof section 7623. Because an assessmentmerely reflects the determination that re-sults from an administrative action, it isnot appropriate to include the making ofan assessment in the definition of the termadministrative action. Essentially, the def-inition of administrative action is broadlyanalogous to the definition of judicial ac-tion, as each term focuses on a caseagainst a taxpayer that may result in col-lected proceeds, rather than on any partic-ular tools or techniques used to conductthe case. After considering the commentson the definition of administrative action,the definition in the proposed regulationsis adopted without change. Treasury andthe IRS did, however, address some of theconcerns raised by the comments on thisdefinition through changes to the defini-tion of proceeds based on, as described inthe discussion that follows.

Proceeds Based On

Section 7623(b) provides that if theSecretary proceeds with an administrativeor judicial action based on the informationprovided by a whistleblower, then thewhistleblower will receive an award fromthe collected proceeds resulting from theaction (including any related actions). Un-

der the proposed regulations the IRS pro-ceeds based on information provided byan individual only when the IRS: (i) ini-tiates a new action; (ii) expands the scopeof an ongoing action; or (iii) continues topursue an ongoing action, that the IRSwould not have initiated, expanded thescope of, or continued to pursue, respec-tively, but for the information provided bythe individual. The IRS does not proceedbased on when the IRS merely analyzesthe information provided by the individualand investigates the matter.

Commenters to the proposed regula-tions generally expressed concern that theregulatory language narrowed the scopeof the statute by limiting the instances inwhich the Whistleblower Office will de-termine that the IRS proceeded based on awhistleblower’s information. Some com-menters disagreed with the use of thewords “only” and “but for” in the pro-posed regulations’ definition and sug-gested removing this language. One com-menter recommended removing the lastsentence in the proposed regulations’ def-inition—“The IRS does not proceed basedon when the IRS merely analyzes the in-formation provided by the individual andinvestigates the matter.” Some comment-ers suggested that the IRS should be con-sidered to proceed based on informationanytime that the IRS “uses” the informa-tion, or more specifically, anytime the in-formation is transmitted by the Whistle-blower Office to an IRS field office forfurther investigation. Some commenterssuggested that the definition needed tospecifically include instances when awhistleblower’s information materially orsubstantially assists in or significantlycontributes to the IRS’s detection and re-covery of tax. As noted in the discussionof the definition of administrative action,some commenters expressed concern thata whistleblower would not be entitled toan award when the whistleblower’s infor-mation related to an issue that was alreadybeing examined or was included in a gen-eral audit plan, but resulted in the IRSmaking a greater assessment than the IRSwould have made without the whistle-blower’s information. Similarly, somecommenters expressed concern that underthe proposed regulations’ definition, theIRS could use a whistleblower’s informa-tion but assert that it would have acted

without the information and therefore de-termine that the IRS did not proceed basedon the information.

As noted, the off-Code provisions ofthe 2006 Act require the IRS to analyzethe information provided by the whistle-blower (in the Form 211 and otherwise,such as through debriefs) and investigatethe matter. As a result, it follows that forthe IRS to proceed based on the informa-tion provided, the IRS must do more thanthis analysis or investigation. Therefore,Treasury and the IRS retained this explan-atory language in the final regulations.Treasury and the IRS recognize, however,that, by listing exclusive actions taken bythe IRS, the proposed regulations createdthe appearance that individuals who pro-vide information that is not only used bythe IRS, but is in fact critical to sustainingtax adjustments, might not receiveawards. Accordingly, these final regula-tions adopt a general standard for whenthe IRS proceeds based on informationprovided—when the information substan-tially contributes to the action—and thelist of exclusive actions are cited as exam-ples of when the information providedmay substantially contribute to an action.In addition, the final regulations removethe word “only” from the definition. Ac-cordingly, under the final regulations, theWhistleblower Office must determinewhen the information provided substan-tially contributed to the underlying action,and this determination will depend on thefacts and circumstances of each individualcase. Nevertheless, the final regulationsprovide additional examples to clarify theoperation of the rule. These examples il-lustrate that the whistleblower’s informa-tion substantially contributes to the under-lying action if it leads to an examination,an expansion of an issue already beingexamined, an expansion of the examina-tion to another year, or an additional ad-justment. The examples also illustrate thatthe whistleblower’s information does notsubstantially contribute to the underlyingaction if that information merely supportsinformation obtained independently bythe IRS.

Related Action

Under section 7623(b), when the IRSproceeds with an action based on a


whistleblower’s information, the whistle-blower receives an award from the col-lected proceeds resulting from the action(including any related actions). Under theproposed regulations the term related ac-tion was limited to: (i) a second or subse-quent action against the person(s) identi-fied in the information provided andsubject to the original action if, in thesecond or subsequent action, the IRS pro-ceeds based on the specific facts describedand documented in the information pro-vided; and (ii) an action against a personother than the person(s) identified in theinformation provided and subject to theoriginal action if: (A) the other, unidenti-fied person is directly related to the personidentified in the information provided; (B)the facts relating to the underpayment oftax or violations of the internal revenuelaws by the other person are substantiallythe same as the facts described and docu-mented in the information provided (withrespect to the person(s) subject to the orig-inal action); and (C) the IRS proceedswith the action against the other personbased on the specific facts described anddocumented in the information provided.Under the proposed regulations an un-identified person was directly related tothe person identified in the informationprovided if the IRS can identify the un-identified person using only the informa-tion provided (without first having to usethe information provided to identify anyother person or having to independentlyobtain additional information).

The definition of the term related ac-tion contained in the proposed regulationsdefined which actions may be included forpurposes of computing collected proceedsby requiring a clear link between the orig-inal action and the other, related action(s).This clear link required: (i) a direct rela-tionship between the person identified inthe information provided and subject tothe original action and the person(s) sub-ject to the other action(s); and (ii) a sub-stantial similarity between the specificfacts contained in the information pro-vided and the relevant facts of the otheraction(s).

In general, comments received on thedefinition of related action in the pro-posed regulations, including the form let-ters, suggested that the definition was toorestrictive. The commenters suggested

that instead of requiring a direct relation-ship, the IRS should conduct a proximatecause analysis, under which related ac-tions are those actions with which the IRSproceeds in a natural and continuous se-quence from the actions first taken in re-sponse to a whistleblower’s information.One commenter suggested that a directrelationship or one-step rule is inconsis-tent with the ordinary meaning given tothe term “related.” Another commentersuggested that a related action should beany issue that is related to the whistle-blower’s submission with respect to thetax year, the taxpayer, or the tax issue.This commenter expressed concern thatthe definition of related action would ex-clude subsequent years of the same tax-payer for which the same issue exists,unless the information provided containedspecific facts and documentation fromthose subsequent years. Two other com-menters suggested that the language atProp. Reg. § 301.7623–2(c)(i) describesan original action rather than a relatedaction. These commenters suggested thatwhen the IRS initiates a second or subse-quent action against a person identified inthe information provided by the whistle-blower based on the specific facts de-scribed and documented in the informa-tion provided, then the IRS has proceededbased on the information and there istherefore no need to look to the definitionof related action to determine the whistle-blower’s eligibility for an award.

After considering the comments, Trea-sury and the IRS determined that the con-cern that whistleblowers would not begiven full credit for the information pro-vided was partially addressed through thechanges made to the definition of the termproceeds based on in the final regulationsand described earlier in this preamble.Moreover, the broadened language of thedefinition of the term proceeds based onin the final regulations encompassed andmade redundant the language in Prop.Reg. § 301.7623–2(c)(i) that focused onactions involving subsequent tax yearsand, thus, it was removed from the finalregulations. The corresponding exampleillustrating the application of the rules toactions involving subsequent tax yearsmoved with the rule to the definition ofproceeds based on. Finally, Treasury andthe IRS made several non-substantive re-

visions to the language of the definition ofrelated action.

The final regulations retain the pro-posed regulations’ requirement of a clearlink between the original action and anyother, related action(s), which requires: (i)a substantial similarity between the spe-cific facts contained in the informationprovided and the relevant facts of theother action(s); and (ii) a relationship be-tween the person identified in the infor-mation provided and subject to the origi-nal action and the person(s) subject to theother action(s). This conjunctive test ex-cludes from the definition of related actionactions that are merely factually similar tothe original action, for example, actionsagainst unidentified taxpayers that merelyengaged in substantially similar transac-tions to the transaction identified in theinformation provided. The relationshiptest in the second prong thus retains aone-step rule: the taxpayer subject to therelated action can be no more than onestep removed–in terms of identification bythe IRS–from a taxpayer identified in theinformation provided. In addition, the fi-nal regulations at § 301.7623–1(c)(1) pro-vide that certain information submissionsrelating to pass-through entities and firmswill be considered to have identified cer-tain persons who were not explicitly iden-tified in the information provided.

Despite commenters’ requests that thedefinition should be even broader andmore subjective, Treasury and the IRSdetermined that the clear link approach isa reasonable interpretation and applicationof the language contained in section 7623.Treasury and the IRS determined that thefinal regulations’ definition of the termrelated action finds a reasonable middleground between overly narrow and overlybroad interpretations. For example, theterm could be given a narrow application,encompassing only actions that followfrom the action with which the IRS pro-ceeded based on the information and ac-tually produce collected proceeds. Giventhat many administrative and judicial ac-tions produce no collected proceeds, thisinterpretation would give effect to thestatutory language in such cases by ensur-ing that whistleblowers would receiveawards when any related actions producecollected proceeds. Treasury and the IRShave concluded that such a definition


would be too narrow because, under thisinterpretation, a related action (such as acollection action) would be required inalmost every case. At the other end of thespectrum, the term related action could bebroadly interpreted to include every sim-ilar fact pattern entered into by any tax-payer at any time. Such an interpretationis overly broad and would be impossiblefor the IRS to administer because it wouldrequire the IRS to keep whistleblowerclaims open and search for similar factpatterns in perpetuity.

Instead, these final regulations adopt adefinition that finds a reasonable middleground. The definition encompasses a fi-nite group of actions that, while likelyunknown to the whistleblower, are objec-tively connected to the information pro-vided. Treasury and the IRS adopt theone-step approach of the proposed regu-lations because, by setting a clear standardfor the Whistleblower Office to apply, theone-step approach is administrable. Tortlaw concepts, on the other hand, are rarelyapplied to tax, and the appropriate appli-cation of such concepts is unclear. Finally,based on the IRS’s experience administer-ing whistleblower claims, Treasury andthe IRS believe that, in most cases, theresults of a proximate cause analysis and aone-step approach are likely to be thesame. Ultimately, Treasury and the IRSdetermined that the definition in the finalregulations provides an administrable, ob-jective test that strikes an appropriate bal-ance between the IRS’s and the whistle-blower’s substantial contributions.

Collected Proceeds

Section 7623(a) provides the Secretarywith the authority to pay such sums as hedeems necessary from proceeds ofamounts collected based on informationprovided to the Secretary when the infor-mation relates to the detection of under-payments of tax or the detection andbringing to trial and punishment personsguilty of violating the internal revenuelaws or conniving at the same. Section7623(b) requires the Secretary to payawards to whistleblowers if the Secretaryproceeds with an administrative or judi-cial action that results in collected pro-ceeds based on information provided bythe whistleblower. The definition of col-

lected proceeds contained in the proposedregulations built on the definition con-tained in the 2012 regulations. The defi-nition in the proposed regulations restatedthe rule from those final regulations thatcollected proceeds include: tax, penalties,interest, additions to tax, and additionalamounts collected because of the informa-tion provided; amounts collected prior toreceipt of the information provided if theinformation results in the denial of a claimfor refund that otherwise would have beenpaid; and a reduction of an overpaymentcredit balance used to satisfy a tax liabilityincurred because of the information pro-vided. The definition also addressed re-fund netting, criminal fines that must bedeposited into the Victims of Crime Fund,and a computational rule for determiningcollected proceeds. Finally, consistentwith provisions in the IRM, the proposedregulations provided that amounts recov-ered under the provisions of non-Title 26laws do not constitute collected proceeds,because the language of section 7623 au-thorizes awards for detecting underpay-ments of tax and violations of the internalrevenue laws. Several commenters ad-dressed various aspects of the definition ofcollected proceeds contained in the pro-posed regulations. The substance of thesecomments and the determinations of Trea-sury and the IRS are set out in detail in thepreamble discussion that follows.

Timing Issues and Treatment of TaxAttributes Including Net OperatingLosses (NOLs)

Section 7623 provides for the paymentof awards from collected proceeds, but itdoes not specifically address the treatmentof claims that involve tax attributes thatdo not result in collected proceeds formany years, if ever. The proposed regula-tions provided a computational rule thatreflects the discussion contained in thepreamble to the 2012 regulations. There,Treasury and the IRS noted that tax attri-butes such as NOLs do not representamounts credited to the taxpayer’s ac-count that are directly available to satisfycurrent or future tax liabilities or that canbe refunded. Rather, tax attributes such asNOLs are component elements of a tax-payer’s liability. The disallowance of anNOL claimed by a taxpayer may affect the

taxpayer’s liability and, in the context of awhistleblower claim, may result in col-lected proceeds or it may be carried for-ward 20 years and expire, thus never re-sulting in collected proceeds. To enablethe IRS to administer the WhistleblowerProgram, the proposed regulations’ com-putational rule provided that, after therehas been a final determination of tax, theIRS would compute the amount of col-lected proceeds taking into account allinformation known with respect to thetaxpayer’s account (including all tax attri-butes such as NOLs). Under the proposedregulations, any tax attributes that havebeen used at the time of the final determi-nation of tax may affect the awardamount. The proposed regulations re-flected Treasury and the IRS’s attempt tomake an award determination and pay anyresulting award as soon as possible afterproceeds are collected. The proposed reg-ulations also reflected Treasury and theIRS’s determination that tracking tax at-tributes into the future after payment of anaward would impose significant costs anda heavy administrative burden. Thus, theproposed rule attempted to balance thewhistleblower’s interest in receiving atimely award determination and payoutwith the Government’s interest in main-taining an administrable program.

Several commenters suggested that theproposed regulations did not strike theappropriate balance and recommendedthat tax attributes, specifically NOLs,should be included in the definition ofcollected proceeds. The commenters gen-erally expressed concern that under theproposed regulations, a whistleblowermight not receive credit for proceeds col-lected after the final determination of tax,as a result of tax attributes being carriedforward to reduce a later liability. Somecommenters suggested that the IRS shouldattempt to calculate and apply a presentvalue to determine an award amount forany unused tax attributes. Other comment-ers recommended that, in the final regula-tions, the IRS should agree to track taxattributes for a specific period of time, forexample, ten years. One commenter sug-gested that after the period of time that theIRS had agreed to track, the whistleblowerand the IRS could enter into a settlementagreement wherein the whistleblowercould agree to the amounts computed as


of that date and waive any rights to afuture appeal. Finally, one commenterrecommended that the IRS should allowwhistleblowers to submit a new claim foraward when the whistleblower was awareof subsequently collected proceeds.

In light of the comments received,Treasury and the IRS have reconsideredthe approach in the proposed regulations.These final regulations provide that theWhistleblower Office will monitor the rel-evant taxpayer account or accounts untilthe IRS receives collected proceeds as aresult of a reduction in the tax attribute, orthe taxpayer’s ability to apply the tax at-tribute expires unused. For example, if aNOL is reduced as a result of actionstaken based on whistleblower informa-tion, the Whistleblower Office will peri-odically review the taxpayer account todetermine whether future year tax pay-ments are made that would not have beenmade if the NOL had not been reduced.Under the approach in the final regula-tions, awards will be paid on any suchpost-determination collected proceeds. Ifthe NOL carry-forward period expires be-fore the reduced NOL results in a taxpayment, no award will be payable.

The decision to monitor future yearactivities for impact on the amount ofcollected proceeds will apply to all claims,not just claims involving NOLs. As a re-sult, in some cases, the Whistleblower Of-fice may defer action on an award claim.For example, whistleblower informationmay result in IRS action to disallow ataxpayer’s treatment of the purchase of anasset as an expense in Year 1, because theasset should be capitalized and depreci-ated in accordance with the applicable de-preciation schedule. As a result, taxableincome in Year 1 is increased by the pur-chase price of the asset, less allowableYear 1 depreciation. Taxable income infuture years would be reduced by the al-lowable depreciation for each year, untilthe asset is fully depreciated (or sold orotherwise disposed of). When this occurs,the Whistleblower Office will monitor thetaxpayer’s account to determine whetherfuture year offsetting reductions in liabil-ity related to the Year 1 tax liability occur,and will reduce the amount of collectedproceeds accordingly.

The adoption of a monitoring approachin the final regulations, however, is only

intended to explicitly enable the IRS tomake an additional award payment whena tax attribute produces collected proceedsafter an award has been determined, asdescribed in the preceding paragraphs. Itis not intended to, and does not in anyway, limit the Whistleblower Office’s dis-cretion to aggregate or disaggregateclaims, nor does it provide a basis for, orenable the IRS to make, mandatory, par-tial, or ongoing award determinations andpayments every time the IRS collectssome amount of proceeds. In other words,monitoring does not alter the general rulethat no award will be paid until there hasbeen a final determination of tax, as de-fined in the final regulations.

Amounts Collected Under Title 26

Section 7623 of Title 26 provides forawards for information leading to detec-tion of underpayments of tax or violationsof the internal revenue laws. The proposedregulations provided that amounts recov-ered under the provisions of non-Title 26laws do not constitute collected proceedsfor award purposes. The majority of com-ments, including the form letters, sug-gested that such amounts, specificallyamounts collected under Title 18 and Title31, should be included in collected pro-ceeds. Many of the comments suggestedthat not including amounts collected un-der Title 18 and Title 31 eliminates awhistleblower’s incentive to provide in-formation on violations under those titlesand could reduce the number of whistle-blowers willing to provide such informa-tion to the IRS. The comments generallysuggested that collected proceeds shouldinclude any amounts that are collected bythe IRS. A few comments also suggestedthat the statutory language “collected pro-ceeds (including penalties, interest, addi-tions to tax, and additional amounts)”means that Congress intended for col-lected proceeds to be a broad and inclu-sive concept consisting of any amountscollected by the IRS and any amounts tobe collected by the IRS in the future.Similarly, one commenter suggested thatthe use of the word “any” throughout thestatute was another reason that the statuteand Congress’ intent with respect to thestatute should be interpreted broadly.

Like section 7623, the internal revenuelaws are contained in Title 26 and imple-menting guidance is issued under that ti-tle. Although the IRS may collect penal-ties for violations of Title 31, Money andFinance, and seize property under Title18, Crimes and Criminal Procedure, thosepenalties and seizures do not relate to “un-derpayments of tax,” may be imposed in-dependently of whether a tax underpay-ment occurs, and are not related toviolations of the internal revenue laws un-der Title 26. Moreover, administrative ac-tions under Title 26 and Title 31 entailseparate administrative proceedings, andadministrative distinctions persist evenwhen the actions proceed at the sametime. In some cases, the IRS may collectpenalties for failure to file Form 114, “Re-port of Foreign Bank and Financial Ac-counts” (FBAR), which is an informationreporting requirement under Title 31 theviolation of which does not necessarilyresult in an underpayment of tax. As aresult, FBAR penalties do not constitutecollected proceeds. Moreover, sections5323(a) and 9703(a) of Title 31 provideindependent authority, separate and apartfrom section 7623, for the payment ofrewards for information relating to certainviolations of Title 31 or Title 18. Finally,the terms “additions to tax” and “addi-tional amounts” have long been used toencompass the penalties under SubchapterA of Chapter 68 of Subtitle F of the Codeand they are routinely used in forms is-sued by the IRS pursuant to Title 26 torefer to those penalties. They do not pro-vide any support for treating non-Title 26amounts as collected proceeds. The com-ments received did not change the view ofTreasury and the IRS that section 7623only authorizes awards for amounts col-lected under the internal revenue laws,which are contained in Title 26, the Inter-nal Revenue Code. Treasury and the IRSrecognize the commenters’ concern thatthe statute may reduce the incentive toprovide information to the IRS regardingnon-Title 26 violations. The language ofthe statute does not, however, support abroader, more-inclusive definition of col-lected proceeds. Treasury and the IRS in-stead emphasize that when the IRS col-lects amounts based on informationrelated to non-Title 26 violations and alsocollects related proceeds under Title 26,


the Title 26 collected proceeds may formthe basis for an award under section 7623.Moreover, depending on the facts and cir-cumstances, the non-Title 26 proceedsmay form the basis for an award under awhistleblower award program other thanthe one authorized by section 7623.

Amounts Deposited in the Victims ofCrime Fund

Under the Victims of Crimes Act of1984, criminal fines that are imposed on adefendant by a district court shall be de-posited into the Victims of Crime Fund.See 42 U.S.C. 10601(b)(1). Although theVictims of Crime Act does except certainspecified amounts that are payable toother sources pursuant to other statutorymandates, amounts payable under section7623 are not included in the exceptions.The proposed regulations provided thatcriminal fines that must be deposited intothe Victims of Crime Fund do not consti-tute collected proceeds. One commentersuggested that such criminal fines are col-lected proceeds and that the award amountshould be paid before the rest of the pro-ceeds are transferred to the Victims ofCrime Fund. As noted above, the Victimsof Crime Act of 1984 mandates that theentire amount of fines imposed in criminaltax cases be deposited into the Victims ofCrime Fund, meaning that the IRS lacksthe authority to deposit only a portion ofthe fines into the Victims of Crime Fund,and these funds cannot be available to theSecretary to pay awards under section7623. As a result, these regulations retainthe rule from the proposed regulations,reflecting the determination that amountsdeposited in the Victims of Crime Funddo not constitute collected proceeds.Criminal restitution, however, may be col-lected by the IRS as a tax under section6201(a)(4)(A), and in such instances, theamounts collected as restitution are in-cluded in the definition of collected pro-ceeds.

Amended Returns

The proposed regulations did not ad-dress whether amounts collected based ona taxpayer’s future compliance were in-cluded in collected proceeds. Commentersrequested clarification on whether a

whistleblower could receive an awardbased on amounts collected due toamended returns. Some commenters sug-gested that the definitions of administra-tive action or proceeds based on should beinterpreted as providing for an award incases when a taxpayer files an amendedreturn in response to a whistleblower’sinformation. Similarly, these commenterssuggested that the final regulations shouldencourage and reward whistleblowerswho report internally and cause taxpayersto self-report to the IRS.

In the proposed regulations, Treasuryand the IRS intended to include certainamounts collected based on amended re-turns as collected proceeds. The final reg-ulations are modified to explicitly providefor this outcome. Section 7623(b) requiresthat the IRS proceed with an administra-tive or judicial action based on the infor-mation provided. Once the IRS proceedswith an action, however, the amounts col-lected based on amended returns may con-stitute collected proceeds. Specifically, ifa whistleblower files a claim, the IRS be-gins an administrative or judicial action,and the taxpayer subsequently files anamended return, any proceeds collectedbased on that amended return, and relatedto the information provided, will consti-tute collected proceeds under the final reg-ulations’ general definition of the termcollected proceeds. But if the IRS does notproceed with an action, for example if ataxpayer files amended returns, preemp-tively self-assessing and paying the liabil-ity before the IRS initiates any action,then, consistent with the plain language ofthe statute, there can be no collected pro-ceeds.

While Treasury and the IRS certainlyencourage internal reporting and preemp-tive action to correct incorrect returns, theplain language of the statute does not pro-vide for a determination of awards in suchcases. Moreover, it would be nearly im-possible for the Service to connectamended returns to internally-reportedwhistleblower claims. Ultimately, if theamounts paid based on amended returnscan be linked to any action with which theIRS proceeded based on the whistleblow-er’s information, then the amounts will beincluded as collected proceeds. In suchinstances, the proceeds can be attributedto IRS action, as required by section 7623,

and the proceeds collected may be deter-mined by reference to the difference be-tween the original amount reported as taxand the amount of tax assessed and col-lected based on the amended return. Trea-sury and the IRS believe that the changesto the final regulations reflect the statutoryrequirement that awards stem from IRSaction and provide an administrable rulewithout discouraging whistleblowers fromengaging in internal reporting and taxpay-ers to self-police.

The final regulations do not incorpo-rate the comments suggesting that the IRSshould also look to future years in which ataxpayer is compliant and determine col-lected proceeds in those years based onprevious noncompliance. Unlike cases inwhich the taxpayer has already filed anoriginal return, in these cases, the IRSwould have no way to determine with anyreasonable certainty what the taxpayer’sreporting position would have been if notfor the underlying action and whether thetaxpayer’s compliance was a direct resultof the underlying action. Similarly, theIRS has no way of knowing whether awhistleblower’s internal reporting of anissue caused a taxpayer to self-report andpay taxes.

Amount in Dispute

Section 7623(b)(5) provides that sub-section (b) applies only when the tax, pen-alties, interest, additions to tax, and addi-tional amounts in dispute in an actionagainst a taxpayer exceed $2,000,000 (andin the case of an individual taxpayer,when the individual’s gross income ex-ceeds $200,000 for any taxable year sub-ject to the action). The proposed regula-tions defined amount in dispute as themaximum total of tax, penalties, interest,additions to tax, and additional amountsthat could have resulted from the action(s)with which the IRS proceeded based onthe information provided, if the formalpositions taken by the IRS had been sus-tained. The proposed regulations furtherprovided that the IRS would compute theamount in dispute, for purposes of awarddeterminations, after the final determina-tion of tax. Finally, the proposed regula-tions provided that, for purposes of con-ducting whistleblower administrativeproceedings, the IRS may rely on the


whistleblower’s description of the amountowed by the taxpayer(s) or other informa-tion. These rules were intended to ensurethat administrative proceedings would beconducted for every claim that could ar-guably satisfy the requirements of section7623(b)(5), even before the IRS knowswhether the claim actually does.

Treasury and the IRS did not receiveany comments recommending changes tothe definition of amount in dispute. Nev-ertheless, Treasury and the IRS recognizethe need to clarify an aspect of the defi-nition that was not clear and that, withoutthe clarification, could have led to unin-tended results. Specifically, the final reg-ulations delete the reference to “couldhave resulted” so as not to suggest that ahypothetical computation is required. Thefinal regulations further clarify that theamount in dispute is the greatest of theamounts actually determined and amountsstated in the formal positions actuallytaken by the IRS. Treasury and the IRSalso added additional examples to furtherclarify the application of the rule adoptedin the final regulations.

The definition will apply, regardless ofwhether an award is paid pursuant to sec-tion 7623(a) or section 7623(b), includingfor purposes of Tax Court review. Forpurposes of applying the administrativeproceedings provided for under the finalregulations, however, the WhistleblowerOffice may rely on the whistleblower’sdescription of the amount owed if thatamount is higher than the maximum totalamount asserted by the IRS in its formalposition in an administrative or judicialaction.

Affiliated Claimants

Under section 7623(b)(6)(C), no awardmay be made under section 7623(b) basedon information submitted to the Secretaryunless such information is submitted un-der penalty of perjury. In Notice 2008–4and the proposed regulations, Treasuryand the IRS provided that this requirementprecludes the filing of a claim for awardby a person serving as a representative of,or in any way on behalf of, another indi-vidual as part of implementing the statu-tory requirement that a claim for award befiled under penalties of perjury. Nonethe-less, the proposed regulations provided a

definition of affiliated whistleblowers andrelated rules for addressing eligible andineligible affiliated whistleblower cases.Treasury and the IRS have reconsideredthe need for the affiliated whistleblowerrules in light of the statutory penalty ofperjury requirement. Indeed, given thatthe final regulations retain the rule prohib-iting a whistleblower from submitting aclaim on behalf of another, the definitionfor affiliated individuals and the cross ref-erence to the rule for ineligible affiliatedindividuals at § 301.7623–1(b)(3) wereremoved from the final regulations. Therule for eligible affiliated whistleblowersat § 301.7623–4(c)(4) of the proposedregulations was also removed. The finalregulations retain the rule, however, stat-ing that the Whistleblower Office will re-ject claims filed by ineligible affiliatedwhistleblowers, to discourage and preventwhistleblowers from claiming an award intheir own names based on informationobtained from ineligible whistleblowers.In the final regulations, the rule is relo-cated and added to the list of ineligiblewhistleblowers.

Whistleblower AdministrativeProceedings—§ 301.7623–3

Section 7623 does not require that theIRS conduct a particular administrativeprocess prior to making an award deter-mination, rejection, or denial. Treasuryand the IRS, however, have determinedthat such processes will help ensure thatwhistleblowers have a meaningful oppor-tunity to participate in the determinationprocess, enable the Whistleblower Officeto make award determinations based oncomplete information, and ensure a fully-documented record on appeal to the TaxCourt. This regulation describes the ad-ministrative proceedings applicable toclaims for award under both section7623(a) and section 7623(b).

For purposes of applying the whistle-blower administrative proceedings, the fi-nal regulations provide that the Whistle-blower Office may rely on thewhistleblower’s description of the amountowed or on other information. This rule isintended to ensure that the IRS can pro-vide whistleblowers the benefits of pro-ceedings applicable to section 7623(b)

claims even before having made a finaldetermination of tax.

For awards under section 7623(a), theproposed regulations provided that theWhistleblower Office will send a prelim-inary award recommendation letter to thewhistleblower. Sending this letter marksthe beginning of the whistleblower admin-istrative proceeding. The whistleblowerwill then have 30 days within which toprovide comments to the WhistleblowerOffice. This approach is intended to pro-vide whistleblowers under section 7623(a)with an opportunity to participate in theaward process, both to add transparency tothe proceeding and to assist the Whistle-blower Office in considering all poten-tially relevant information in payingawards under section 7623(a), eventhough those awards are not subject toTax Court review. The proposed regula-tions did not, however, provide prelimi-nary notice and comment procedures forrejections or denials of claims for awardthat are treated, for administrative pur-poses, as claims made under section7623(a), given the large administrativeburden associated with such procedures.

In cases in which the WhistleblowerOffice determines and pays an award un-der section 7623(b), the proposed regula-tions provided that a whistleblower ad-ministrative proceeding also begins whenthe Whistleblower Office sends out thepreliminary award recommendation letter.After this letter is sent to the whistle-blower, the whistleblower (and thewhistleblower’s representative, if any)may participate in the administrative pro-ceeding under section 7623(b), which willultimately culminate in an award determi-nation letter issued by the WhistleblowerOffice. Finally, the proposed regulationsprovided that prior to denying or rejectinga claim under section 7623(b), theWhistleblower Office will send a prelim-inary denial letter to the whistleblower,beginning the administrative proceedingand after which the whistleblower has 30days to provide comments to the Whistle-blower Office. Again, this approach is in-tended to foster a transparent and accuratereview process.

The final regulations in large part adoptthe proposed regulations. The commentsreceived and any changes to the proposed


rules for § 301.7623–3 are discussed inthe sections that follow.

Beginning of WhistleblowerAdministrative Proceedings

Under the proposed regulations, incases in which the Whistleblower Officerecommends payment of an award undersection 7623(a) or determines and pays anaward under section 7623(b), the Whistle-blower Office will first send a preliminaryaward recommendation letter to thewhistleblower. In these cases, the whistle-blower administrative proceeding beginswhen this letter is sent. In cases in whichthe Whistleblower Office rejects or deniesa claim for award under section 7623(b),the Whistleblower Office will first send apreliminary denial letter to the whistle-blower. In these cases, the whistlebloweradministrative proceeding begins whenthis letter is sent. In cases in which theWhistleblower Office rejects or denies aclaim for award under section 7623(a),there will not be a separate administrativeproceeding. (For further information, seeRejections and Denials, later in this pre-amble.) The final regulations largely adoptthe proposed regulations. The commentsreceived and the changes made are dis-cussed in further detail in this section.

Several commenters suggested thatwhistleblower administrative proceedingsshould begin earlier. The commenters of-fered different suggestions for how thiscould be accomplished, including begin-ning whistleblower administrative pro-ceedings at the time that a claim is sub-mitted on the Form 211 or when the Form11369, “Confidential Evaluation Reporton Claim for Award,” is transmitted to theWhistleblower Office by the OperatingDivision. One commenter suggested thatthe regulations should require theWhistleblower Office to notify thewhistleblower and begin the administra-tive proceeding within 90 days of a tax-payer agreeing to pay any taxes, penalties,interest or additional amounts, and re-questing that the whistleblower provideany information relevant to an award de-termination within 30 days. This com-menter suggested that the IRS should thensend another notification to the whistle-blower within 90 days after the IRS hadcollected proceeds.

The proposed regulations provided forwhistleblower administrative proceedingsin an effort to respond to whistleblowers’concerns regarding the IRS’s ability tocommunicate with whistleblowers. Afterconsidering the comments received, Trea-sury and the IRS determined that begin-ning the administrative proceeding beforethe preliminary award determination letterwould not meaningfully increase awhistleblower’s ability to participate inand provide comments relating to theaward determination. As discussed earlierin this preamble, the IRS will use severaltools, including debriefings, section6103(n) contracts, and section 6103(k)(6)disclosures to communicate with whistle-blowers following the submission of aclaim. The whistleblower award adminis-trative proceedings discussed in this sec-tion of the preamble are intended to facil-itate communication with whistleblowersbefore the IRS makes the award determi-nation.

Deadlines for IRS Whistleblower OfficeAction

The proposed regulations provided nomandatory deadlines for WhistleblowerOffice action. The proposed regulationsinstead provided for payment of an award,when appropriate, as promptly as circum-stances permit. Recognizing that thetimely and comprehensive evaluation ofinformation provided by whistleblowers isessential to the success of the program, theIRS has articulated goals for Whistle-blower Office action in other internalguidance. IRS Whistleblower ProgramMemorandum (Deputy Commissioner forServices and Enforcement Steven T.Miller, June 20, 2012). This memorandumestablished goals for action on whistle-blower submissions, and demonstrates theIRS’s commitment to timely and compre-hensive evaluation of whistleblower infor-mation. The memorandum also recog-nizes the need for flexibility andrecognizes that there are times when theestablished goals will not be met. Thisdoes not detract from the emphasis placedon timely action, but instead flows from arecognition of the unique nature of theseclaims and a desire to ensure that whenthe Whistleblower Office takes action, it

has available all relevant and necessaryinformation relating to an action.

The form comment letters suggestedthat the regulations should adopt and ex-pand on the guidelines set out in the June20, 2012, IRS Whistleblower ProgramMemorandum. Several commenters sug-gested that the final regulations shouldincorporate mandatory deadlines for ac-tion by the Whistleblower Office. Twocommenters generally suggested that theregulations should require that prelimi-nary award determination letters be sentby a specified time after proceeds are col-lected, for example, between 90 and 180days after the IRS has collected proceeds.One commenter suggested that the regu-lations should require the WhistleblowerOffice to notify the whistleblower and be-gin the administrative proceeding within90 days of a taxpayer agreeing to pay anytaxes, penalties, interest or additionalamounts, and requesting that the whistle-blower provide any information relevantto an award determination within 30 days.This commenter suggested that the IRSshould then send another notification tothe whistleblower 90 days after the IRShad collected proceeds. This commentersuggested that these measures should beimplemented to ensure that preliminaryaward determination letters are issuedprior to a final determination of tax.

As noted, the June 20, 2012, IRSWhistleblower Program Memorandumidentified timelines and policy goals forWhistleblower Office action. Treasuryand the IRS have determined not to adoptthese program goals as regulatory require-ments to retain flexibility to make changesto accommodate future developments.The Whistleblower Office, however, re-mains committed to taking timely actionon whistleblower submissions from thedate a claim is first submitted through thedate on which an award is determined orthe claim is denied.

Deadlines for Whistleblower Action orResponse

The proposed rules at § 301.7623–3contained several deadlines for whistle-blower action. These deadlines are de-signed to ensure that the administrativeproceedings are conducted in a timelyfashion. In cases in which the Whistle-


blower Office recommends payment of anaward under section 7623(a), a whistle-blower has 30 days to submit commentson the Whistleblower Office’s preliminaryaward determination. In cases in whichthe Whistleblower Office denies an awardunder section 7623(b), a whistleblowerhas 30 days to submit comments on theWhistleblower Office’s preliminary denialletter. Finally, in cases in which theWhistleblower Office determines anaward under section 7623(b), the whistle-blower has 30 days to respond to the pre-liminary award recommendation letter;when applicable, the whistleblower has 30days to respond after receiving a detailedreport from the Whistleblower Office; andwhen applicable, the whistleblower has 30days to submit comments after receivingan opportunity to review the documentssupporting the award report recommenda-tions. Under the proposed regulations, thetime periods for responding in cases inwhich the Whistleblower Office deter-mines an award under section 7623(b)may be extended at the sole discretion ofthe Whistleblower Office.

Several commenters generally sug-gested that all of the time periods forwhistleblowers to respond or submit com-ments should be more flexible. One com-menter requested that different, longertime periods be applied to whistleblowerslocated outside of the United States. An-other commenter suggested that “goodcause” should be added as a reason why awhistleblower may take longer than 30days to respond or submit comments tothe Whistleblower Office. Finally, onecommenter requested clarification onwhen the 30-day period to respond to thedetailed report would begin.

After considering the comments, Trea-sury and the IRS adopt the proposed reg-ulations without substantive change. Thedeadlines for whistleblower action in thefinal regulations are intended to allowwhistleblower administrative proceedingsto proceed in a timely and efficient man-ner. Further, the Whistleblower Office hasthe discretion to extend the time periodsand has routinely done so at the request ofwhistleblowers or their representatives. Inresponse to the comments, however, Trea-sury and the IRS included language in thefinal regulations intended to clarify that

the periods begin when the WhistleblowerOffice sends the notices.

Award Consent Forms

A number of comments were receivedthat expressed frustration with the amountof time that it takes from when a whistle-blower submits a claim for award to whenthe Whistleblower Office pays the award.The factors that contribute to this lengthof time are largely outside of the controlof whistleblowers and the WhistleblowerOffice. The proposed regulations, how-ever, provided for award consent forms,which allow the Whistleblower Office tomake an award determination and pay anaward, without providing an award deter-mination letter and waiting for thewhistleblower’s time to appeal such deter-mination to expire. The purpose of theaward consent form is to expedite the ad-ministrative process for cases in which thewhistleblower agrees with the Whistle-blower Office’s preliminary award recom-mendation. A whistleblower may submitan award consent form to the Whistle-blower Office at any time during thewhistleblower administrative proceeding.

One commenter suggested that theaward consent form is unfair because itforces the whistleblower to waive any ap-peal rights before receiving an award. Un-der the proposed rules, a whistleblowercan receive an award regardless ofwhether an award consent form is submit-ted. For example, if a whistleblower de-clines to execute the award consent form,then after the whistleblower has finishedparticipating in the whistleblower admin-istrative proceeding and after a final de-termination of tax, as defined in§ 301.7623–4(d)(2), the WhistleblowerOffice will provide the whistleblower witha determination letter, stating the amountof any award. In such cases, the awardwould be payable after all appeals of theWhistleblower Office’s determinationwere final. Executing the award consentand waiving the appeal rights serves todecrease the time between the determina-tion and payment of the award. Becausethe execution of an award consent form isat the option of the whistleblower, theseregulations retain the proposed regula-tions’ rules regarding the use of awardconsent forms. Under the final regula-

tions, whistleblowers may choose to exe-cute an award consent form at any timeduring the whistleblower’s participationin the administrative proceeding for awardunder section 7623(b). If the whistle-blower signs, dates, and returns the awardconsent form, the Whistleblower Officewill pay the award to the whistleblower aspromptly as circumstances permit afterthere has been a final determination of tax.Thus, while there is absolutely no require-ment that a whistleblower execute theaward consent, doing so provides whistle-blowers a way to get the benefit of finalityand, assuming there are no other openissues, a faster award payment.

Confidentiality Agreements

Treasury and the IRS recognize that,while detailed administrative claim filesassist the Whistleblower Office in makingfair and accurate award determinations,safeguards aimed at preventing the poten-tial redisclosure or misuse of the taxpay-er’s confidential return information con-tained in those files remain critical.Section 6103(h)(4) and § 301.6103(h)(4)–1of the proposed regulations confirmed theauthority to disclose return information inthe course of a whistleblower administra-tive proceeding, but neither provides re-disclosure prohibitions or penalties. In theAdministration’s Fiscal Year 2014 and2015 Revenue Proposals, Treasury rec-ommended amending section 6103 to pro-vide that the section 6103(p) safeguardingrequirements apply to whistleblowers andtheir legal representatives who receive taxreturn information in whistleblower ad-ministrative proceedings. Despite the lackof statutory redisclosure prohibitions andpenalties, Treasury and the IRS, in theproposed regulations, sought to balancewhistleblowers’ desire for increased com-munication with protections and safe-guards for taxpayers’ confidential information.Accordingly, the proposed regulations re-quired whistleblowers to execute confi-dentiality agreements before they may re-ceive a detailed description of the factorsthat contributed to the preliminary awardrecommendation or view documents thatsupport the recommendation. A whistle-blower is not required to execute a confi-dentiality agreement before appealing anaward determination to the Tax Court, and


executing an agreement does not prevent awhistleblower from seeking Tax Court re-view.

One commenter recommended that ev-ery whistleblower should be required toenter into a confidentiality agreement withthe Whistleblower Office at the time thatthey submit a claim. This commenter sug-gested that such agreements would allowthe Whistleblower Office to share infor-mation with the whistleblower earlier inthe process, prior to any whistlebloweradministrative proceeding. Another com-menter also suggested that confidentialityagreements should be mandatory in everycase to allow for the disclosure of infor-mation to whistleblowers and to provideprotection to taxpayers with respect to dis-closed information.

Although Treasury and the IRS supportthe use of confidentiality agreements as amechanism for protecting confidentialtaxpayer return information disclosed dur-ing the course of an administrative pro-ceeding, the agreements do not in them-selves authorize the IRS or theWhistleblower Office to disclose such in-formation. In addition, Treasury and theIRS have determined that disclosures arenot necessary in every case. Accordingly,the final regulations do not mandate theuse of confidentiality agreements in everycase. Instead, the final regulations adoptthe rule in the proposed regulations per-mitting whistleblowers to choose to enterinto confidentiality agreements with theWhistleblower Office during whistle-blower administrative proceedings forawards under section 7623(b). When thewhistleblower signs, dates, and returns theconfidentiality agreement, the Whistle-blower Office will provide the whistle-blower with a detailed award report andan opportunity to review documents sup-porting the report.

Opportunity to Review DocumentsSupporting Award ReportRecommendations

Under the proposed regulations, if awhistleblower signs, dates, and returns theconfidentiality agreement accompanyingthe preliminary award determination, thenafter reviewing the Whistleblower Of-fice’s detailed report, the whistleblowercan request an appointment to review the

documents supporting the detailed report.During this appointment, the Whistle-blower Office will provide for viewing thepertinent information from the administra-tive claim file. The Whistleblower Officewill supervise the whistleblower’s reviewof the documents and the whistleblowerwill not be permitted to make copies ofthe documents. Thus, while the proposedregulations provide whistleblowers withan opportunity to view information in theadministrative claim file that is not pro-tected from disclosure by one or morecommon law or statutory privileges, theproposed regulations provided rules in-tended to safeguard the disclosure of in-formation to a whistleblower.

One commenter suggested that thewhistleblower should be able to review allnon-privileged information in the admin-istrative claim file, whether or not it isdeemed pertinent. Treasury and the IRShave determined that the rules applicableto the document review—including onsite review and no copying—adequatelyprotect taxpayer information from redis-closure. Accordingly, in response to thiscomment, the final regulations remove theterm “pertinent.”

Administrative Record

Under the proposed regulations, the ad-ministrative record comprises all informa-tion contained in the administrative claimfile that is not protected by one or morestatutory privileges that is relevant to theaward determination. One commentersuggested that the IRS Whistleblower Of-fice should be required to provide a priv-ilege log to detail any items that are ex-cluded from the administrative record.After considering the comment, Treasuryand the IRS have determined that creating aprivilege log in every administrative pro-ceeding involving privileged documentsthat are withheld by the Whistleblower Of-fice would offer minimal benefits and posean unjustifiable administrative burden. As aresult, no changes were made to the pro-posed regulations.

Rejection and Denial Letters

The proposed regulations provided forrejection and denial letters in cases undersection 7623(a) and 7623(b). In practice, a

rejection is a determination that relatessolely to the whistleblower and the infor-mation on the face of his or her claim thatpertains to the whistleblower, while a de-nial often relates to or implicates taxpayerinformation (for example, because the IRSdid not proceed based on the informationprovided or did not collect any proceeds).Pursuant to proposed § 301.7623–3(b)(3),for rejections or denials under section7623(a), the Whistleblower Office willprovide written notice to claimants of therejection or denial of award claims with-out an administrative proceeding. Onecommenter expressed concern with theamount of information contained in rejec-tion and denial letters. In these cases, be-cause there is no whistleblower adminis-trative proceeding, section 6103 (whichprovides that all tax return information isconfidential, unless an exception applies)operates to limit the amount of taxpayerinformation that the Whistleblower Officecan provide. Treasury and the IRS consid-ered whether to make denials of claimsunder section 7623(a) subject to an ad-ministrative proceeding similar to the de-nial of claims under section 7623(b).However, given the nature of claims undersection 7623(a) and the large number ofsuch claims, Treasury and the IRS deter-mined that the administrative burden ofproviding an administrative proceedingwould significantly outweigh the smallamount of additional information thatwould be provided in the denial letters.We note, however, that the same section6103 concerns are not present with rejec-tion letters. Accordingly, in the case of arejection under section 7623(a) or (b), thewritten notice is not subject to the samelimitations under section 6103 and willexplain the basis for the rejection. Al-though no substantive changes weremade, to improve clarity, the final regula-tions separate the rules for rejections un-der section 7623(b) and denials under sec-tion 7623(b) into separate provisions anddescribe when a claim is rejected or de-nied.

Subsequent Determinations

One commenter suggested that the def-inition of collected proceeds should takeinto account circumstances in which awhistleblower submits a claim for an on-


going issue and an administrative action istaken for some, but not all years (appar-ently because the statute of limitations hasexpired). If the taxpayer becomes compli-ant in future years, the commenter sug-gested that the whistleblower’s awardshould be determined based on collectedproceeds for future years determined asthe difference between what is reportedand paid, and what would have been re-ported and paid, if not for the whistle-blower’s information and the IRS’ admin-istrative action. The commenter suggestedlimiting the future years to the number ofyears for which the IRS allowed the stat-ute of limitations to expire with respect tothe whistleblower claim. No changes weremade to the proposed regulations becausethe commenter’s concern—that the IRSwill not be diligent in preserving the stat-ute of limitations—is ameliorated by thefact that the IRS suffers a greater harmthan the whistleblower if the IRS permitsthe statute of limitations to expire and,therefore, the IRS is motivated to preservethe statute of limitations.

Another commenter suggested that thefinal regulations should include proce-dures for reopening a claim that was ini-tially denied if the information is laterused by the IRS, for example, by a differ-ent Operating Division. The proposed reg-ulations did not provide specific proce-dures for addressing the use of awhistleblower’s information following adenial. However, nothing in the proposedregulations precluded future IRS actionbased on a whistleblower’s information orthe determination of an award in suchinstances. For example, the proposed reg-ulations did not preclude the Whistle-blower Office from making a second orsubsequent determination when the IRSproceeds based on the information afterhaving already made a determination.This situation, however, is distinguishablefrom timing cases, discussed earlier in thispreamble, in connection with the defini-tion of collected proceeds, in which theIRS recomputes and pays an award basedupon information not known with respectto the taxpayer’s account as of the date ofthe final determination of tax. These caseswould include, for example, those inwhich whistleblower information resultsin the elimination of an NOL but does notresult in collected proceeds until after the

final determination. In such cases, thereare no new circumstances, only additionalcollected proceeds. A second or subse-quent determination, however, is appro-priate when there are new circumstancesthat result in collected proceeds. Althoughthis result was not precluded under theproposed regulations, Treasury and theIRS added language to the definition offinal determination of tax at § 301.7623–4(d)(2) of the final regulations to explic-itly clarify this point. Because the finalregulations allow for subsequent determi-nations when proceeds are collected afteran initial determination, and any such sub-sequent determination will be subject toall the rules and procedures applicable toan initial determination, no additional pro-cedures are needed in these final regula-tions.

Determining the Amount of Awards andPaying Awards—§ 301.7623–4

This regulation provides the frame-work and criteria that the WhistleblowerOffice will use in exercising the discretiongranted under section 7623 to makeawards. Under the regulation, based onthe Whistleblower Office’s review of theentire administrative claim file, theWhistleblower Office will assign a fixedpercentage to claims for award by evalu-ating the substantial contribution of thewhistleblower to the underlying action(s).The rules of this section apply to claimsfor awards under both section 7623(a) andsection 7623(b). The comments receivedand any changes to proposed§ 301.7623–4 are discussed in the sec-tions that follow.

Fixed Percentage ComputationalFramework

Under section 7623(b), whistleblowersmay receive as an award at least 15 per-cent but not more than 30 percent of thecollected proceeds resulting from an ac-tion (including any related actions), as-suming that there is no reduction in awardpursuant to section 7623(b)(2) or (3). Theproposed regulations adopted a fixed per-centage approach pursuant to which theWhistleblower Office will assign claimsfor award to one of a number of fixedpercentages within the applicable award

percentage range. Under the proposed reg-ulations, to compute an award, theWhistleblower Office will look to the ad-ministrative claim file to determinewhether there are any positive factorspresent that would merit an increasedaward of 22 or 30 percent. The Whistle-blower Office will then determine whetherthere are negative factors present thatwould merit a decreased award of 15, 18,22, or 26 percent.

One commenter disagreed with the useof fixed percentages, suggesting that in-stead the Whistleblower Office shouldhave the discretion and flexibility to con-sider the full range of award percentagesin reaching an award determination. Anumber of the comments received, includ-ing the form comment letters, suggestedthat starting the award computationframework at 15 percent sends the wrongmessage to whistleblowers and would dis-courage whistleblowers by limiting thesize of whistleblower awards. One com-menter suggested that starting at 15 per-cent was unnecessarily biased toward thelower end of the statutorily mandatedrange of 15 to 30 percent. This commentersuggested that this approach would invitelitigation and would limit the upward ef-fect of positive factors. Instead, this com-menter recommended that the Whistle-blower Office should begin its analysis at22.5 percent. Another commenter sug-gested that starting at the bottom preventsthe Whistleblower Office from punishingwhistleblowers that have only negativefactors and also suggested that theWhistleblower Office should begin itsanalysis at 22.5 percent. One commentersuggested that the regulations should alsorequire payment of a minimum 15-percentaward both when a taxpayer self-reports atax liability after a whistleblower submitsinformation to the IRS and when awhistleblower provides information andthe IRS subsequently proceeds with anadministrative action without using thewhistleblower’s information. Finally, sev-eral commenters requested that the finalregulations provide additional informationon when a 30-percent award would beappropriate under the statute. These com-menters suggested that the regulationsshould provide an example of a case inwhich the Whistleblower Office woulddetermine a 30-percent award. To that


end, one commenter suggested that a max-imum 30-percent award should be paidwhen a whistleblower submits informa-tion that leads to the collection of addi-tional amounts in an otherwise nearlycompleted audit, provides specific infor-mation that forms the basis for an assess-ment of tax, provides nearly all of theinformation and documentation needed bythe IRS to conduct an audit, provides as-sistance or is willing to provide assistanceduring the administrative action, testifiesor is willing to testify in a court proceed-ing, or wears a wire or is willing to weara wire to assist in an investigation. Finallyone commenter expressed concern withthe language in the preamble to the pro-posed regulations that provided that theWhistleblower Office would determine a30-percent award only in extraordinarycases.

Treasury and the IRS continue to be-lieve that the fixed percentage approachprovides a structure that will promote con-sistency in the award determination pro-cess by enabling the Whistleblower Officeto determine awards across the breadth ofthe applicable percentage range based onmeaningful distinctions among cases. Thefixed percentage approach also avoidshaving to draw fine distinctions that mightseem unfair and arbitrary, given the dif-ferences among claims for award with re-spect to both the facts and law of theunderlying actions and the nature and ex-tent of the substantial contribution of thewhistleblowers. Accordingly, the finalregulations retain the fixed percentage ap-proach.

Further, Treasury and the IRS deter-mined that starting the award determina-tion at 15 percent merely reflects the factthat the claim has met the threshold re-quirements for an award under section7623(b). All awards under section7623(b)(1) are paid to whistleblowers thatmade a substantial contribution to the un-derlying action(s). Congress, through theplain language of the statute, provided thata 15-percent award is appropriate for awhistleblower that makes a substantialcontribution to the underlying action(s).Although commenters are correct that thisapproach may lead to the same result forboth whistleblowers with no positive fac-tors and whistleblowers with all negativefactors, Treasury and the IRS do not be-

lieve that whistleblowers who merely sub-mit a claim that reflects none of the pos-itive factors and offer nothing beyond thebare minimum to support an award shouldbe entitled to an award above the statutoryminimum. A 15-percent award is a signif-icant financial incentive to whistleblowersand starting the award proceedings at 15percent, with the opportunity for a largerpotential award increase, provides thewhistleblower with a greater incentive toprovide better information and assistanceto the IRS than starting at 22.5 percent.Because the presence of positive factors islargely within the whistleblower’s con-trol, Treasury and the IRS have adoptedan approach that incentivizes whistle-blowers to provide high quality submis-sions that reflect positive factors.

Moreover, the approach taken in thefinal regulations—starting at 15 percentand applying positive and negative fac-tors, based on the extent of the whistle-blower’s substantial contribution—is con-sistent with the approach taken by othergovernment agencies in the regulationsand practices that govern the administra-tion of their whistleblower award pro-grams, including the Department of Jus-tice (in making recommendations in FalseClaims Act cases), the Securities and Ex-change Commission, and Commodity Fu-tures Trading Commission (in applyingFederal whistleblower statutes). As it hasdone since the 2006 amendments to thestatute, the Whistleblower Office will in-crease the award percentage, based on thepresence of positive factors. The final reg-ulations provide several positive factorsdesigned to allow for increased awardsacross a broad range of claims, as merited.

Moreover, the concern expressed bysome commenters that the IRS will payminimum awards in most cases is not sup-ported by the evidence. To date, using thiscomputational approach the IRS has paidawards totaling approximately $175 mil-lion on collected proceeds totaling ap-proximately $700 million, reflecting anaward average of approximately 25 per-cent—nearer the top than the bottom ofthe statutory range. After considering theconcerns raised by these comments, thefinal regulations retain the fixed percent-age approach adopted in the proposed reg-ulations. Finally, in response to the com-ments received on 30-percent awards,

Treasury and the IRS revised the example,extending it to illustrate the full awardpercentage range.

Factors Used to Determine AwardPercentage

Pursuant to section 7623(b), theWhistleblower Office’s determination ofan award amount depends on the extent towhich the claimant’s information substan-tially contributed to the underlying ac-tion(s). Under the proposed regulations,the Whistleblower Office reviews the ad-ministrative claim file and applies the pos-itive factors and negative factors, listed in§ 301.7623–4(b), to the facts to determinethe fixed percentage applicable to a claimfor award.

Some commenters offered suggestionsfor additional positive factors. These sug-gestions included: i) the whistleblowerprovides information on multiple unre-lated taxpayers; ii) the whistlebloweridentifies the target taxpayer; iii) thewhistleblower provides information thatleads to a related party; iv) the IRS wouldnot have discovered a violation “but for”the whistleblower’s information; and v)there is a close nexus between relatedactions. Some of these suggested factorsare already threshold elements required tomerit any award. For example, identifyingthe target taxpayer is required to make aclaim. Others restate the circumstances forwhich the proposed regulations alreadycompensated whistleblowers. For exam-ple, if a whistleblower provides informa-tion on multiple unrelated taxpayers oruncovering a close nexus between relatedactions, and the IRS proceeds based on theinformation and collects proceeds, thenthe whistleblower’s contribution to eachaction will be evaluated and accounted forin determining the award. Further, the fi-nal regulations, like the proposed regula-tions, provide that the positive factors andnegative factors are non-exclusive. Ac-cordingly, the final regulations do not in-corporate any of these suggested factors.The Whistleblower Office may recognizeand apply additional factors in a particularcase that are appropriate in light of theparticular facts.

One commenter suggested that the pos-itive factor at § 301.7623–4(b)(1)(ii), re-garding information that identifies an is-


sue of a type previously unknown to theIRS, should apply when the informationprovided identifies facts of a type previ-ously unknown to the IRS, rather than anissue of a type previously unknown to theIRS. In response, the final regulations ex-pand the factor to include a transactionpreviously unknown to the IRS.

Several commenters suggested that thepositive factor at § 301.7623–4(b)(1)(v)should look only to the whistleblower’swillingness to provide assistance, ratherthan to assistance offered in response to arequest from the IRS. These commentsexpressed concern that whistleblowershave not been given opportunities to pro-vide assistance and, therefore, suggesteddeleting the language “in response to arequest from the Whistleblower Office,the IRS or the IRS Office of Chief Coun-sel.” Treasury and the IRS agree that it isthe whistleblower’s act of providing ex-ceptional cooperation and assistance thatshould be treated as a positive factor, re-gardless of whether that cooperation andassistance was in response to a request. Asa result, the final regulations delete thislanguage. One commenter suggested thatthe regulations should provide more infor-mation on what would be meaningfulwhistleblower participation. Treasury andthe IRS believe that the positive factors inthe final regulations should remainbroadly defined providing the Whistle-blower Office with the necessary discre-tion to increase a whistleblower’s awardpercentage in appropriate cases. Excep-tional assistance depends on the facts andcircumstances and could evolve in re-sponse to specific whistleblower claims.Accordingly, no changes are made in thefinal regulations in response to this com-ment. Nevertheless, the IRS will continueto provide further explanations to staff, asappropriate and needed.

One commenter suggested an addi-tional negative factor—when it is morelikely than not that the IRS would havediscovered the information on its own.One commenter suggested that the IRSshould consider mitigating factors whenthe whistleblower delayed informing theIRS after learning the relevant facts, par-ticularly if the delay adversely affectedthe IRS’s ability to pursue an action orissue. Treasury and the IRS have decidednot to incorporate any new negative or

mitigating factors into the final regula-tions, which would serve only to make itharder for whistleblowers to recover. TheWhistleblower Office will consider all ofthe relevant facts and circumstances whenlooking to apply the positive and negativefactors identified in the regulations.

One commenter suggested that thenegative factor when the whistleblowercontributed to the underpayment of tax ortax noncompliance identified is alreadyaddressed by the planned and initiatedtest. The inclusion of this factor signifiesthat not all situations when a whistle-blower contributes to the actions that ledto the underpayment will constitute plan-ning and initiating under the statute andregulations—as discussed later in this pre-amble, the threshold for planned and ini-tiated is higher than being a mere contrib-utor. In cases when a whistleblower doesnot plan and initiate within the meaning ofthe statute and regulations, but nonethe-less contributes to the action(s) that led totax noncompliance, the WhistleblowerOffice will not apply the threshold plannerand initiator test, but in such a case, it maystill be appropriate to decrease the awardamount because the whistleblower’s ac-tions diminish the extent of the whistle-blower’s substantial contribution to theaction. Thus, the Whistleblower Officewill instead consider the whistleblower’scontribution to the tax noncompliance as afactor that may justify a decrease withinthe 15-to-30 percent award percentagerange. For example, this factor may applyif a whistleblower engaged in planning orinitiating activities, but not both, that di-minished the whistleblower’s substantialcontribution to the action with which theIRS proceeded. This factor will not, how-ever, be applied to reduce an award incases in which the Whistleblower Officedetermines that the threshold for plannedand initiated has been met. If the thresholdfor planned and initiated is met, theplanned and initiated framework will beapplied, and the final regulations havebeen clarified accordingly.

Award for Less Substantial Contribution

Section 7623(b)(2) provides for a re-duced award when the Whistleblower Of-fice determines that the action was basedprimarily on disclosures of specific alle-

gations resulting from a judicial or admin-istrative hearing, a governmental report,hearing, audit, or investigation, or thenews media, unless the whistleblower wasthe original source of the information. Un-der the proposed regulations, if theWhistleblower Office determined that anaction was based principally on disclo-sures of specific allegations resulting frompublic source information then theWhistleblower Office will determine anaward of no more than 10 percent of thecollected proceeds resulting from the ac-tion, unless the whistleblower was theoriginal source of the information. Theproposed regulations provided that theWhistleblower Office would make the de-termination based on the extent to whichthe public source information described atax violation or facts and circumstancesfrom which a tax violation could be rea-sonably inferred. Under the proposed reg-ulations, public source information in-cluded a judicial or administrativehearing, a government report, hearing, au-dit, or investigation, or the news media.

Treasury and the IRS received twocomments on this proposed rule. Onecommenter suggested that public sourceinformation should be limited to the typesof information specified in the statute.This commenter disagreed with the pro-posed regulations’ use of the word “in-cluding” and expressed concern that thislanguage would allow the WhistleblowerOffice to expand on the statutory list ofpublic sources. This commenter also sug-gested that the regulations should excludepublic source information that is onlyavailable by request. Another commenterdisagreed with the application of the orig-inal source test in the proposed regula-tions. This commenter suggested thatrather than looking to whether the whistle-blower was the original source of the pub-lic source information, the regulationsshould instead look to whether the IRStakes action based on the information pro-vided, and if so, should treat the whistle-blower as the original source of the infor-mation. Both commenters expressedconcern that the proposed regulations didnot accurately apply the specific allega-tion requirement from the statute, and oneof the two commenters further suggestedthat the regulations should employ an or-dinary, lay person standard if a “reason-


able inference” test is retained as a sub-stitute to the “specific allegation”requirement in the statute.

In response to the first commenter’sconcerns, the final regulations remove theterm “public source information” and the“including” language and instead relysolely on the list of statutory sources. Indetermining that the final regulationsshould rely solely on the statutory list,Treasury and the IRS also decline to placeadditional limitations on the statutory lan-guage, for example, excluding informa-tion available only upon request. The finalregulations also clarify the application ofthe original source test and the specificallegation requirement by more clearlytracking the language of the statute. Thefinal regulations clarify that the reason-able inference test does not replace thespecific allegation requirement, but in-stead provides guidance on how theWhistleblower Office will apply the stat-ute’s specific allegation requirement.Changes were also made to the example toillustrate the operation of the reasonableinference test.

Reduction in Award and Denialof Award

Under the proposed regulations, theWhistleblower Office will make a thresh-old determination of whether a whistle-blower planned and initiated the underly-ing acts, and, if this threshold is met, thenthe Whistleblower Office will categorizeand evaluate the extent of the whistle-blower’s planning and initiating of theunderlying acts, based on the applicationof factors listed in § 301.7623–4(c)(3)(iv)to the facts contained in the administrativeclaim file, to determine the amount of theappropriate reduction, if any.

Commenters on this issue generally ex-pressed concern that the threshold deter-mination for planned and initiated is toobroad and could discourage potentialwhistleblowers from coming forward.These commenters suggested that the reg-ulations should adopt the “principal archi-tect” approach used in evaluating claimsunder the False Claims Act. Two of thecommenters expressed concern that thestandard at § 301.7623–4(c)(3)(ii)(C),which asked whether the whistleblowerknew or had reason to know that there

were tax implications to planning and ini-tiating the underlying act, was too broad.One of these commenters suggested thatinstead, the standard should be whetherthe whistleblower knew or had reason toknow that tax noncompliance could resultfrom the planning and initiating of theunderlying act. Similarly, one commentersuggested that the standard should bewhether the individual knew or had reasonto know that there were “unlawful” or“improper” tax implications. Some com-menters suggested that the language at§ 301.7623–4(c)(3)(ii)(C) should specifi-cally exclude a whistleblower who per-formed any of the underlying activities atthe direction of a senior employee or man-ager. One commenter suggested that in-cluding the word “drafted” in the defini-tion of “planned” created the possibilitythat an employee drafting a document atthe direction of superiors could fall withinthe definition. This commenter also sug-gested that including the term “promoted”in the definition of “initiated” could in-clude someone involved well after thescheme was actually initiated. One com-menter suggested that the primary, signif-icant, or moderate categories are not sup-ported by the statute, and risk beingimplemented in a way that a whistle-blower can be something other than aprincipal architect. Finally, two comment-ers offered suggestions for the examplesin the proposed regulations. The com-ments on the examples focused on theapplication of the planned and initiatedstandard rather than on the application ofthe computational framework. One com-ment specifically suggested that the exam-ples should provide guidance about whatit means to plan and initiate, rather thanguidance on the application of the compu-tational framework.

The final regulations do not adopt a“principal architect” approach to the ap-plication of section 7623(b)(3), based inpart on the statutory language, which doesnot require a single planner and initiatorbut instead provides for the possibility ofmultiple planners and initiators. Morethan one individual may plan and initiatethe actions that lead to a tax underpay-ment or violation, whether as co-plannersor as planners of independent actions thateach led to the underpayment or violation.However, the terms “plan” and “initiate”

suggest some voluntary action on the partof the individual. Thus, where an individ-ual is acting under the direction and con-trol of a supervisor, he or she should notbe considered as planning or initiating.For example, the planned and initiatedstandard is not intended to apply to ajunior associate acting under the directionof a partner. Nonetheless, the applicationof these rules is dependent on the relevantfacts and circumstances of each case and,at some point, an associate or other em-ployee becomes experienced enough toact sufficiently on his or her own to beconsidered a planner and initiator. Thefinal regulations modify the examples toclarify the treatment of junior employees.

In addition, in response to the com-menters’ concern that the standard at§ 301.7623–4(c)(3)(ii)(C) was too broad,the final regulations change “knew or hadreason to know there were tax implica-tions” to “knew or had reason to knowthat a tax underpayment or a violation ofthe internal revenue laws could result, ”consistent with the full range of tax mat-ters—from underpayments of tax to vio-lations of the internal revenue laws—de-scribed in section 7623(a).

As the commenters noted, section7623(b)(3) does not provide categories forplanned and initiated. It does, however,provide that after a determination is madethat an individual planned and initiated,“the Whistleblower Office may appropri-ately reduce such award.” The final regu-lations retain the primary, significant, ormoderate categories to ensure that anyappropriate reduction is made through theapplication of an established framework.The regulations’ use of these categories,like the use of the fixed percentage andcriteria approach for determining awardsin substantial contribution and less sub-stantial contribution cases, is intended topromote consistency, fairness, and trans-parency in an award determination pro-cess that is inherently subjective. As withthe positive and negative factors, the IRSwill continue to provide explanations tostaff and examples, as appropriate andneeded. Treasury and the IRS recognizethe value that all whistleblowers, includ-ing those who participate in the actionsthat led to the underpayment, may pro-vide, and the final regulations balance thegoal of incentivizing whistleblowers with


the plain language of the statute by pro-viding for a sliding scale of reductions toan award for planning and initiating.

Eligible Affiliated Whistleblowers

As discussed earlier in this preamble,Treasury and the IRS decided not to in-corporate the proposed rule for eligibleaffiliated whistleblowers at § 301.7623–4(c)(4) in the final regulations because itis inconsistent with the rule that prohibitsa whistleblower from submitting a claimon behalf of another individual.

Multiple Whistleblowers

Section 7623 does not address whethermultiple whistleblowers may receive anaward from the same collected proceeds.The proposed regulations provided rulesfor determining awards when two or moreindependent claims, based on different in-formation, relate to the same collectedproceeds. In these situations, the proposedregulations allowed the WhistleblowerOffice to determine multiple awards, lim-ited in aggregate amount to the maximumamount that could have been awarded to asingle whistleblower, rather than restrict-ing the determination to a single awardpayable to the first whistleblower that filesa claim for award or payable on someother basis.

Treasury and the IRS received twocomments on this issue. One commentersuggested that multiple whistleblowersshould not have to share an award. Theother commenter suggested that the firstwhistleblower should receive full creditfor their information and that laterwhistleblowers should only receive anaward for information that was not pro-vided by the first whistleblower. Afterconsideration of the comments, Treasuryand the IRS determined to leave open thepossibility of award payments for multiplewhistleblowers. This determination wasbased in part on the recognition that thetax administration process is a long andmulti-faceted one that may extend overthe course of many years and may involvemultiple substantial contributions fromdifferent sources. Given the unique natureof the tax administration process, Trea-sury and the IRS determined that it wouldnot be fair or appropriate to determine an

award only for the substantial contributionof whistleblowers who submit their infor-mation first-in-time. Accordingly, the pro-posed regulations are adopted withoutchange.

Payment of Awards

Section 7623 provides for payment ofan award to the individual that submitsinformation and makes a claim for award.Under the proposed regulation, the IRSwill pay any award under section 7623 toa whistleblower as promptly as circum-stances permit after there has been a finaldetermination of tax with respect to theaction(s) and after the Whistleblower Of-fice has determined the award and all ap-peals of the determination are final or thewhistleblower has executed an award con-sent form.

Treasury and the IRS received twocomments on this proposed rule. Onecommenter suggested that the final regu-lations should provide procedures for pay-ment of an award to attorney trust ac-counts. Another commenter suggestedthat whistleblowers should be allowed toassign or sell their claim for award. Theissues raised in these comments are be-yond the scope of the current regulationsand, accordingly, the regulations havebeen finalized as proposed.

Final Determination of Tax

Under the proposed regulations, theWhistleblower Office can only pay anaward determined pursuant to section7623 after there is a final determination oftax. A final determination of tax may bemade after the proceeds resulting from theaction(s) subject to the award determina-tion have been collected and either thestatutory period for filing a claim for re-fund has expired or the taxpayer(s) subjectto the action(s) and the IRS have agreedwith finality to the tax or other liabilitiesfor the period(s) at issue and the taxpay-er(s) has waived the right to file a claimfor refund.

Comments on this provision generallysuggested that the IRS should make a finaldetermination of tax as early as possible.The commenters suggested that theWhistleblower Office should make multi-ple partial payments on an award by mak-

ing a final determination of tax with re-spect to each tax year for each taxpayer.One commenter suggested that the regu-lations should require mandatory partialpayments of tax whenever a final determi-nation is possible. One commenter sug-gested that it would be inappropriate toaggregate action(s) for purposes of mak-ing a final determination of tax becausethis could delay awards. Other comment-ers suggested that awards should be paidprior to a final determination of tax. Onecommenter suggested that the definitionof final determination of tax should betriggered by each of the following events:the collection of proceeds by the IRS, theposting of a bond by a whistleblower, adetermination by the Secretary that pay-ment is in the best interests of the govern-ment, and the entering into of a closingagreement between the IRS and a partner-ship. Moreover, this commenter suggestedthat a taxpayer’s right to file a refund suitshould not be relevant to the definition, astaxpayers only file refund suits in a smallpercentage of cases.

Treasury and the IRS understand thecommenters’ view that whistleblowersshould receive awards as quickly as pos-sible. Under the statute, however, anaward cannot be made until there are col-lected proceeds, and the IRS has not col-lected proceeds with finality until the tax-payer no longer has a right to seek arefund of the amounts that constitute col-lected proceeds. The general rule set outin the proposed regulations and adopted inthese final regulations provides that a finaldetermination can be made when the pro-ceeds resulting from the action(s) subjectto the award determination have been col-lected and either the statutory period forfiling a claim for refund has expired or thetaxpayer(s) subject to the action(s) and theIRS have agreed with finality to the tax orother liabilities for the period(s) at issueand the taxpayer(s) have waived the rightto file a claim for refund. This general rulealready includes the commenter’s sugges-tion that, in many cases, a final determi-nation may occur when the IRS and thetaxpayer enter into a closing agreementand the taxpayer makes full payment ofthe liability. As a result, the regulationswere not revised in light of this comment.Recognizing that some claims result inmore than one action, the definition pro-


vides the Whistleblower Office with thediscretion to aggregate or disaggregate ac-tions arising out of a single claim, mean-ing that the Whistleblower Office can, inappropriate cases, make more than onefinal determination with respect to a singleclaim for an award. For example, theWhistleblower Office generally will ag-gregate two actions, for award determina-tion purposes, when the outcome of onewill have an effect on the amount of col-lected proceeds that will result from theother. As discussed earlier in this pream-ble, the final regulations include new lan-guage that explicitly allows for subse-quent determinations when the IRSproceeds based on the information pro-vided after having already paid, rejected,or denied an award. This rule is illustratedthrough the addition of a new example.

As noted, Treasury and the IRS de-clined, however, to provide for manda-tory, partial or ongoing payments ofawards in the final regulations, based onthe determination that issuing multiple ap-pealable final determinations as a rulewould impose an unreasonable burden onthe IRS and the Whistleblower Office.Accordingly, the final regulations’ ex-plicit statement that a final determinationof tax does not preclude a subsequent finaldetermination of tax is not intended to,and does not in any way, limit the discre-tion of the Whistleblower Office to aggre-gate or disaggregate actions for purposesof determining awards. The WhistleblowerOffice will continue to consider numerousfactors relating to efficient tax administra-tion in exercising this discretion, includingthe factors that it has previously identified ininstructions to staff, instructions which areavailable via the IRS’s website and that willbe incorporated into the IRM when it is nextupdated.

Deceased Whistleblowers

Existing Treas. Reg. § 301.7623–1(b)(3) allows an executor, administrator,or other legal representative to file a claimfor award for a deceased whistleblower, ifevidence is provided to show that the rep-resentative has legal authority to act onbehalf of the deceased. The proposed reg-ulations provided that when a whistle-blower dies before or during a whistle-blower administrative proceeding, the

Whistleblower Office will substitute anexecutor, administrator, or other legal rep-resentative on behalf of the deceasedwhistleblower for purposes of conductingthe whistleblower administrative proceed-ing. No comments were received on thisprovision. Because the proposed regula-tions’ use of the word “will” could be readto suggest that the regulations require sub-stitution, Treasury and the IRS changedthis word to “may” in the final regulations.Consistent with the regulations in effectunder section 7623 at the time of the 2006amendments to the statute, the Whistle-blower Office will substitute such partiesfor a deceased whistleblower only when aparty can make a proper showing that heor she is legally authorized to act for thedeceased. The Whistleblower Office hasno obligation to locate or determine a sub-stitute for a deceased whistleblower. Ac-cordingly, the final regulations providethat when a whistleblower dies before orduring a whistleblower administrativeproceeding, the Whistleblower Officemay substitute an executor, administrator,or other legal representative on behalf ofthe deceased whistleblower for purposesof conducting the whistleblower adminis-trative proceeding.

Tax Treatment of Awards

Under the proposed regulations, allawards are subject to current Federal taxreporting and withholding requirements.No comments were received on this pro-vision. Treasury and the IRS, however,added language to the final regulations toclarify that whistleblower awards are in-cludible in gross income.

Effective/Applicability Dates

Sections 301.7623–1, 301.7623–2,301.7623–3, and 301.6103(h)(4)–1 wereproposed to apply to information submit-ted on or after the date the rules are ad-opted as final regulations in the FederalRegister, and to claims for award undersections 7623(a) and 7623(b) that areopen as of that date. Likewise,§ 301.7623–4 was proposed to apply toinformation submitted on or after the datethe rules are adopted as final regulations,and to claims for award under section7623(b) that are open as of that date. Sec-

tion 301.7623–4 was not proposed to ap-ply to claims for award under section7623(a) that are open as of that date.

Treasury and the IRS received twocomments on the proposed effective dates.One commenter suggested that the pro-posed rules at § 301.7623–2 affect sub-stantive rights of whistleblowers andshould only be applicable to claims filedafter the adoption of the final regulations.The other commenter similarly suggestedthat the regulations should be prospectiveand apply only to submissions made afterthe regulations have been finalized.

The final regulations do not negativelyaffect substantive rights of whistleblowersbecause the proposed and final regulationslargely incorporate existing practices ad-hered to by the Whistleblower Office, andchanges from existing practices are de-signed to be favorable to whistleblowers.For example, the regulations provide forwhistleblower administrative proceed-ings, but as discussed earlier in this pre-amble, these proceedings are intended tobenefit whistleblowers, providing themwith additional due process and opportu-nities to participate in a whistlebloweraward determination. Finally, applyingtwo sets of rules to whistleblower pro-ceedings will be difficult for the Whistle-blower Office to administer. The effectivedates for the regulations will allow theWhistleblower Office to administer theWhistleblower Program in an efficientmanner. Accordingly, after consideringthe comments, Treasury and the IRS adoptthe proposed regulations without changes.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866, as supplemented by Executive Or-der 13563. Therefore, a regulatory assess-ment is not required. It has also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. It is hereby certified that these reg-ulations will not have a significant eco-nomic impact on a substantial number ofsmall entities. This certification is basedon the fact that these regulations will pri-marily affect individuals who file whistle-blower claims under section 7623. Ac-cordingly, a regulatory flexibility analysis


under the Regulatory Flexibility Act (5U.S.C. chapter 6) is not required. Pursuantto section 7805(f) of the Code, the noticeof proposed rulemaking preceding theseregulations was submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business, and no com-ments were received.


The principal author of these regula-tions is Melissa A. Jarboe of the Office ofthe Associate Chief Counsel (Procedureand Administration).

* * * * *

Adoption of Amendment to theRegulations

Accordingly, 26 CFR part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 is amended by removing the en-try for § 301.7623–1 and adding entries innumerical order for §§ 301.6103(h)(4)–1and 301.7623–1 through 301.7623–4 toread as follows:

Authority: 26 U.S.C. 7805.* * * * *Section 301.6103(h)(4)–1 also issued

under 26 U.S.C. 6103(h)(4) and 26 U.S.C.6103(q).

* * * * *Sections 301.7623–1 through

301.7623–4 also issued under 26 U.S.C.7623.

* * * * *Par. 2. Section 301.6103(h)(4)–1 is

added to read as follows:

§ 301.6103(h)(4)–1 Disclosure ofreturns and return information inwhistleblower administrativeproceedings.

(a) In general. A whistleblower admin-istrative proceeding (as described in§ 301.7623–3) is an administrative pro-ceeding pertaining to tax administrationwithin the meaning of section 6103(h)(4).

(b) Disclosures in whistleblower ad-ministrative proceedings. Pursuant to sec-tion 6103(h)(4) and paragraph (a) of this

section, the Director, officers, and em-ployees of the Whistleblower Office maydisclose returns and return information (asdefined by section 6103(b)) to a whistle-blower (or the whistleblower’s legal rep-resentative, if any) to the extent necessaryto conduct a whistleblower administrativeproceeding (as described in § 301.7623–3), including but not limited to—

(1) By communicating a preliminaryaward recommendation or preliminary de-nial letter to the whistleblower;

(2) By providing the whistleblowerwith an award report package;

(3) By conducting a meeting with thewhistleblower to review documents sup-porting the preliminary award recommen-dation; and

(4) By sending an award decision let-ter, award determination letter, or awarddenial letter to the whistleblower.

(c) Effective/applicability date. Thisrule is effective on August 12, 2014. Thisrule applies to information submitted onor after August 12, 2014, and to claims foraward under sections 7623(a) and 7623(b)that are open as of August 12, 2014.

Par. 3. Section 301.7623–1 is revisedto read as follows:

§ 301.7623–1 General rules, submittinginformation on underpayments of tax orviolations of the internal revenue laws,and filing claims for award.

(a) In general. In cases in whichawards are not otherwise provided for bylaw, the Whistleblower Office may pay anaward under section 7623(a), in a suitableamount, for information necessary for de-tecting underpayments of tax or detectingand bringing to trial and punishment per-sons guilty of violating the internal reve-nue laws or conniving at the same. Incases that satisfy the requirements of sec-tion 7623(b)(5) and (b)(6) and in whichthe Internal Revenue Service (IRS) pro-ceeds with an administrative or judicialaction based on information provided byan individual, the Whistleblower Officemust determine and pay an award undersection 7623(b)(1), (2), or (3). The awardsprovided for by section 7623 and thisparagraph must be paid from collectedproceeds, as defined in § 301.7623–2(d).

(b) Eligibility to file claim for award.(1) In general. Any individual, other than

an individual described in paragraph(b)(2) of this section, is eligible to file aclaim for award and to receive an awardunder section 7623 and §§ 301.7623–1through 301.7623–4.

(2) Ineligible whistleblowers. TheWhistleblower Office will reject anyclaim for award filed by an ineligiblewhistleblower and will provide writtennotice of the rejection to the whistle-blower. The following individuals are noteligible to file a claim for award or receivean award under section 7623 and§§ 301.7623–1 through 301.7623–4—

(i) An individual who is an employeeof the Department of Treasury or was anemployee of the Department of Treasurywhen the individual obtained the informa-tion on which the claim is based;

(ii) An individual who obtained theinformation through the individual’s offi-cial duties as an employee of the FederalGovernment, or who is acting within thescope of those official duties as an em-ployee of the Federal Government;

(iii) An individual who is or was re-quired by Federal law or regulation todisclose the information or who is or wasprecluded by Federal law or regulationfrom disclosing the information;

(iv) An individual who obtained or hadaccess to the information based on a con-tract with the Federal Government; or

(v) An individual who filed a claim foraward based on information obtainedfrom an ineligible whistleblower for thepurpose of avoiding the rejection of theclaim that would have resulted if the claimwas filed by the ineligible whistleblower.

(c) Submission of information andclaims for award. (1) Submitting informa-tion. To be eligible to receive an awardunder section 7623 and §§ 301.7623–1through 301.7623–4, a whistleblowermust submit to the IRS specific and cred-ible information that the whistleblowerbelieves will lead to collected proceedsfrom one or more persons whom thewhistleblower believes have failed tocomply with the internal revenue laws. Ingeneral, a whistleblower’s submissionshould identify the person(s) believed tohave failed to comply with the internalrevenue laws and should provide substan-tive information, including all availabledocumentation, that supports the whistle-blower’s allegations. Information that


identifies a pass-through entity will beconsidered to also identify all personswith a direct or indirect interest in theentity. Information that identifies a mem-ber of a firm who promoted another iden-tified person’s participation in a transac-tion described and documented in theinformation provided will be consideredto also identify the firm and all othermembers of the firm. Submissions thatprovide speculative information or that donot provide specific and credible informa-tion regarding tax underpayments or vio-lations of internal revenue laws do notprovide a basis for an award. If documentsor supporting evidence are known to thewhistleblower but are not in the whistle-blower’s control, then the whistleblowershould describe the documents or support-ing evidence and identify their location tothe best of the whistleblower’s ability. Ifall available information known to thewhistleblower is not provided to the IRSby the whistleblower, then the whistle-blower bears the risk that this informationmight not be considered by the Whistle-blower Office for purposes of an award.

(2) Filing claim for award. To claim anaward under section 7623 and §§ 301.7623–1through 301.7623–4 for information pro-vided to the IRS, a whistleblower must filea formal claim for award by completingand sending Form 211, “Application forAward for Original Information,” to theInternal Revenue Service, WhistleblowerOffice, at the address provided on theform, or by complying with other claimfiling procedures as may be prescribed bythe IRS in other published guidance. TheForm 211 should be completed in its en-tirety and should include the followinginformation—

(i) The date of the claim;(ii) The whistleblower’s name;(iii) The whistleblower’s address and

telephone number;(iv) The whistleblower’s date of birth;(v) The whistleblower’s taxpayer iden-

tification number; and(vi) An explanation of how the infor-

mation on which the claim is based cameto the attention and into the possession ofthe whistleblower, including, as available,the date(s) on which the whistlebloweracquired the information and a completedescription of the whistleblower’s present

or former relationship (if any) to person(s)identified on the Form 211.

(3) Under penalty of perjury. No awardmay be made under section 7623(b) un-less the information on which the award isbased is submitted to the IRS under pen-alty of perjury. All claims for award undersection 7623 and §§ 301.7623–1 through301.7623–4 must be accompanied by anoriginal signed declaration under penaltyof perjury, as follows: “I declare underpenalty of perjury that I have examinedthis application, my accompanying state-ment, and supporting documentation andaver that such application is true, correct,and complete, to the best of my knowl-edge.” This requirement precludes the fil-ing of a claim for award by a personserving as a representative of, or in anyway on behalf of, another individual.Claims filed by more than one whistle-blower (joint claims) must be signed byeach individual whistleblower under pen-alty of perjury.

(4) Perfecting claim for award. If awhistleblower files a claim for award thatdoes not include information describedunder paragraph (c)(2) of this section,does not contain specific and credible in-formation as described in paragraph (c)(1)of this section, or is based on informationthat was not submitted under penalty ofperjury as required by paragraph (c)(3) ofthis section, the Whistleblower Officemay reject the claim or notify the whistle-blower of the deficiencies and provide thewhistleblower an opportunity to perfectthe claim for award. If a whistleblowerdoes not perfect the claim for awardwithin the time period specified by theWhistleblower Office, then the Whistle-blower Office may reject the claim. If theWhistleblower Office rejects a claim, thenthe Whistleblower Office will provide no-tice of the rejection to the whistleblowerpursuant to the rules of § 301.7623–3(b)(3) or (c)(7). If the Whistleblower Of-fice rejects a claim for the reasons de-scribed in this paragraph, then thewhistleblower may perfect and resubmitthe claim.

(d) Request for assistance. (1) In gen-eral. The Whistleblower Office, the IRS,or IRS Office of Chief Counsel may re-quest the assistance of a whistleblower orthe whistleblower’s legal representative.Any assistance shall be at the direction

and control of the Whistleblower Office,the IRS, or the IRS Office of Chief Coun-sel assigned to the matter. See§ 301.6103(n)–2 for rules regarding writ-ten contracts among the IRS, whistleblow-ers, and legal representatives of whistle-blowers.

(2) No agency relationship. Submittinginformation, filing a claim for award, orresponding to a request for assistance doesnot create an agency relationship betweena whistleblower and the Federal Govern-ment, nor does a whistleblower or thewhistleblower’s legal representative act inany way on behalf of the Federal Govern-ment.

(e) Confidentiality of whistleblowers.Under the informant’s privilege, the IRSwill use its best efforts to protect the iden-tity of whistleblowers. In some circum-stances, the IRS may need to reveal awhistleblower’s identity, for example,when it is determined that it is in the bestinterests of the Government to use awhistleblower as a witness in a judicialproceeding. In those circumstances, theIRS will make every effort to notify thewhistleblower before revealing thewhistleblower’s identity.

(f) Effective/applicability date. Thisrule is effective on August 12, 2014. Thisrule applies to information submitted onor after August 12, 2014, and to claims foraward under sections 7623(a) and 7623(b)that are open as of August 12, 2014.

Par. 4. Section 301.7623–2 is added toread as follows:

§ 301.7623–2 Definitions.

(a) Action. (1) In general. For purposesof section 7623(b) and §§ 301.7623–1through 301.7623–4, the term actionmeans an administrative or judicial action.

(2) Administrative action. For purposesof section 7623(b) and §§ 301.7623–1through 301.7623–4, the term administra-tive action means all or a portion of anInternal Revenue Service (IRS) civil orcriminal proceeding against any personthat may result in collected proceeds, asdefined in paragraph (d) of this section,including, for example, an examination, acollection proceeding, a status determina-tion proceeding, or a criminal investiga-tion.


(3) Judicial action. For purposes ofsection 7623(b) and §§ 301.7623–1through 301.7623–4, the term judicial ac-tion means all or a portion of a proceedingagainst any person in any court that mayresult in collected proceeds, as defined inparagraph (d) of this section.

(b) Proceeds based on. (1) In general.For purposes of section 7623(b) and§§ 301.7623–1 through 301.7623–4, theIRS proceeds based on information pro-vided by a whistleblower when the infor-mation provided substantially contributesto an action against a person identified bythe whistleblower. For example, the IRSproceeds based on the information pro-vided when the IRS initiates a new action,expands the scope of an ongoing action, orcontinues to pursue an ongoing action,that the IRS would not have initiated, ex-panded the scope of, or continued to pur-sue, but for the information provided. TheIRS does not proceed based on informa-tion when the IRS analyzes the informa-tion provided or investigates a matterraised by the information provided.

(2) Examples. The provisions of para-graph (b)(1) of this section may be illus-trated by the following examples:

Example 1. Information provided to the IRSby a whistleblower, under section 7623 and§ 301.7623–1, identifies a taxpayer, describes anddocuments specific facts relating to the taxpayer’sforeign sales in Country A, and, based on thosefacts, alleges that the taxpayer was not entitled toa foreign tax credit relating to its foreign sales inCountry A. The IRS receives the informationafter having already initiated an examination ofthe taxpayer. The IRS’s audit plan includes for-eign tax credit issues but focuses on taxpayer’sforeign sales in Country B and does not specifi-cally address the taxpayer’s foreign sales inCountry A. Based on the information provided,the IRS expands the examination of the foreigntax credit issue to include consideration of theamount of foreign tax credit relating to the tax-payer’s foreign sales in Country A. For purposesof section 7623 and §§ 301.7623–1 through301.7623–4, the portion of the IRS’s examinationof the taxpayer relating to the foreign tax creditissue with respect to Country A is an administra-tive action with which the IRS proceeds based onthe information provided by the whistleblowerbecause the information provided substantiallycontributed to the action by causing the expan-sion of the IRS’s examination.

Example 2. Information provided to the IRSby a whistleblower, under section 7623 and§ 301.7623–1, identifies a taxpayer, describes anddocuments specific facts relating to the taxpayer’sactivities, and, based on those facts, alleges thatthe taxpayer owed additional taxes in Year 1. TheIRS proceeds with an examination of the tax-

payer for Year 1 based on the information pro-vided by the whistleblower. The IRS discoversthat the taxpayer engaged in the same activities inYear 2 and expands the examination to Year 2. Inthe course of the examination, the IRS obtains,through the issuance of Information DocumentRequests (IDRs) and summonses, additional factsthat are unrelated to the activities described inthe information provided by the whistleblower.Based on these additional facts, the IRS expandsthe scope of the examination of the taxpayer forboth Year 1 and Year 2. For purposes of section7623 and §§ 301.7623–1 through 301.7623–4, theportion of the IRS’s examination relating to theactivities described and documented in the infor-mation provided is an administrative action withwhich the IRS proceeds based on informationprovided by the whistleblower because the infor-mation provided substantially contributed to theaction by causing the expansion of the IRS’s ex-amination of Year 1 and Year 2. The portions ofthe IRS’s examination of the taxpayer in bothYear 1 and Year 2 relating to the additional factsobtained through the issuance of IDRs and sum-monses are not actions with which the IRS pro-ceeds based on the information provided by thewhistleblower because the information provideddid not substantially contribute to the action.

Example 3. Information provided to the IRSby a whistleblower, under section 7623 and§ 301.7623–1, identifies a taxpayer, describes anddocuments specific facts relating to the taxpayer’sactivities, and, based on those facts, alleges thatthe taxpayer owed additional taxes in Year 1. TheIRS receives the information after having alreadyinitiated an examination of the taxpayer for Year1. During the examination, the information isprovided to the Exam team and the Exam teamuses the information provided to confirm the cor-rectness of adjustments made based on other in-formation. Although the whistleblower’s infor-mation confirms the correctness of the IRS’sadjustments, the IRS does not rely on the whistle-blower’s information when it makes the adjust-ments, nor does the information cause the IRS toexpand the scope of its examination. The whistle-blower’s information merely supports informa-tion independently obtained by the IRS. For pur-poses of section 7623 and §§ 301.7623–1 through301.7623–4, the IRS’s examination is not an ad-ministrative action with which the IRS proceedsbased on information provided by the whistle-blower because the information provided did notsubstantially contribute to the action.

Example 4. Same facts as Example 3. Duringthe examination, however, the Exam team iden-tifies inconsistencies between the informationprovided by the whistleblower and other infor-mation already in the Exam team’s possession.The Exam team uses the information provided bythe whistleblower to make additional adjustmentsthat it would not have made based solely on theother information. For purposes of section 7623and §§ 301.7623–1 through 301.7623–4, the por-tion of the IRS’s examination relating to the ad-ditional adjustments is an administrative actionwith which the IRS proceeds based on informa-tion provided by the whistleblower because the

information provided substantially contributed tothe action.

(c) Related action. (1) In general. Forpurposes of section 7623(b) and§§ 301.7623–1 through 301.7623–4, theterm related action means an actionagainst a person other than the person(s)identified in the information provided andsubject to the original action(s), when—

(i) The facts relating to the underpay-ment of tax or violations of the internalrevenue laws by the other person are sub-stantially the same as the facts describedand documented in the information pro-vided (with respect to the person(s) sub-ject to the original action);

(ii) The IRS proceeds with the actionagainst the other person based on the spe-cific facts described and documented inthe information provided; and

(iii) The other, unidentified person isrelated to the person identified in the in-formation provided. For purposes of thisparagraph, an unidentified person is re-lated to the person identified in the infor-mation provided if the IRS can identifythe unidentified person using the informa-tion provided (without first having to usethe information provided to identify anyother person or having to independentlyobtain additional information).

(2) Examples. The provisions of para-graph (c)(1) of this section may be illus-trated by the following examples:

Example 1. Information provided to the IRSby a whistleblower, under section 7623 and§ 301.7623–1, identifies a taxpayer (Taxpayer 1),describes and documents specific facts relating toTaxpayer 1’s activities, and, based on those facts,alleges tax underpayments by Taxpayer 1. Theinformation provided also identifies an accoun-tant (CPA 1) and describes and documents spe-cific facts relating to CPA 1’s contribution to theactivities of Taxpayer 1 that the whistlebloweralleges resulted in tax underpayments. The IRSproceeds with an examination of Taxpayer 1based on the information provided by the whistle-blower. Using the information provided, the IRSobtains CPA 1’s client list and identifies two tax-payer/clients of CPA 1 (Taxpayer 2 and Taxpayer3) that appear to have engaged in activities sim-ilar to Taxpayer 1. The IRS proceeds with anexamination of Taxpayer 2 and finds that Tax-payer 2 engaged in the same activities as thosedescribed in the information provided with re-spect to Taxpayer 1. The IRS proceeds with anexamination of Taxpayer 3 and finds that Tax-payer 3 engaged in different activities from thosedescribed in the information provided with re-spect to Taxpayer 1. For purposes of section 7623and §§ 301.7623–1 through 301.7623–4, the ex-amination of Taxpayer 2 is a related action be-


cause it satisfies the conditions of paragraph(c)(1) of this section. The examination of Tax-payer 3 is not a related action because the rele-vant facts are not substantially the same as thefacts relevant to the examination of Taxpayer 1.

Example 2. Same facts as Example 1. Using theinformation provided by the whistleblower, theIRS identifies a co-promoter of CPA 1 (CPA 2)that appears to have engaged in activities similarto CPA 1. CPA 2 is not a member of CPA 1’s firm.The IRS subsequently obtains the client list ofCPA 2 and identifies a taxpayer/client of CPA 2(Taxpayer 4) that appears to have engaged inactivities similar to Taxpayer 1. The IRS proceedswith an examination of Taxpayer 4 and finds thatTaxpayer 4 engaged in the same activities as thosedescribed in the information provided with re-spect to Taxpayer 1, and that CPA 2 contributedto the activities in the same way as described inthe information provided with respect to CPA 1.The IRS proceeds with an examination of CPA2’s liability for promoter penalties under section6700 in connection with the activities described inthe information provided with respect to Tax-payer 1 and CPA 1. For purposes of section 7623and §§ 301.7623–1 through 301.7623–4, the ex-amination of CPA 2 is a related action because itsatisfies the conditions of paragraph (c)(1) of thissection. The examination of Taxpayer 4 is not arelated action because Taxpayer 4 was not relatedto a person identified in the information provided.CPA 2 was not identified in the information pro-vided and the IRS first had to identify CPA 2before identifying Taxpayer 4 and proceedingwith the examination of Taxpayer 4.

Example 3. Same facts as Example 1. An ac-countant (CPA 3) is a member of CPA 1’s firm.Using the information provided by the whistle-blower, the IRS obtains the client list of CPA 3and identifies a taxpayer/client of CPA 3 (Tax-payer 5) that appears to have engaged in activitiessimilar to Taxpayer 1. The IRS proceeds with anexamination of Taxpayer 5 and finds that Tax-payer 5 engaged in the same activities as thosedescribed in the information provided with re-spect to Taxpayer 1, and that CPA 3 contributedto the activities in the same way as described inthe information provided with respect to CPA 1.For purposes of section 7623 and §§ 301.7623–1through 301.7623–4, the examination of Tax-payer 5 is a related action because Taxpayer 5 isrelated to CPA 3, a person considered to be iden-tified in the information provided under§ 301.7623–1(c)(1), and the facts relating to Tax-payer 5 are substantially the same as the factsdescribed and documented in the informationprovided. An IRS examination of CPA 3’s liabil-ity for promoter penalties under section 6700,based on the facts described and documented inthe information provided with respect to Tax-payer 1 and CPA 1, is an administrative actionbased on the information provided.

Example 4. Information provided to the IRSby a whistleblower, under section 7623 and§ 301.7623–1, identifies a taxpayer (Taxpayer 1),describes and documents specific facts relating toTaxpayer 1’s activities, and, in particular, Tax-payer 1’s participation in a transaction. Based on

those facts, the whistleblower alleges that Tax-payer 1 owed additional taxes. The IRS proceedswith an examination of Taxpayer 1 based on theinformation provided by the whistleblower. TheIRS identifies the other parties to the transactiondescribed in the information provided (Taxpayer2 and Taxpayer 3). The IRS proceeds with exam-inations of Taxpayer 2 and Taxpayer 3 relating totheir participation in the transaction described inthe information provided. For purposes of section7623 and §§ 301.7623–1 through 301.7623–4, theIRS’s examinations of Taxpayer 2 and Taxpayer3 relating to the activities described and docu-mented in the information provided are relatedactions because they satisfy the conditions ofparagraph (c)(1) of this section.

(d) Collected proceeds. (1) In general.For purposes of section 7623 and§§ 301.7623–1 through 301.7623–4, theterms proceeds of amounts collected andcollected proceeds (collectively, collectedproceeds) include: tax, penalties, interest,additions to tax, and additional amountscollected because of the information pro-vided; amounts collected prior to receiptof the information if the information pro-vided results in the denial of a claim forrefund that otherwise would have beenpaid; and a reduction of an overpaymentcredit balance used to satisfy a tax liabilityincurred because of the information pro-vided. Collected proceeds are limited toamounts collected under the provisions oftitle 26, United States Code.

(2) Refund netting. (i) In general. Ifany portion of a claim for refund that issubstantively unrelated to the informationprovided is—

(A) Allowed, and(B) Used to satisfy a tax liability attrib-

utable to the information provided insteadof refunded to the taxpayer, then the al-lowed but non-refunded amount consti-tutes collected proceeds.

(ii) Example. The provisions of para-graph (d)(2)(i) of this section may be il-lustrated by the following example:

Example. Information provided to the IRS bya whistleblower, under section 7623 and§ 301.7623–1, identifies a corporate taxpayer(Corporation), describes and documents specificfacts relating to Corporation’s activities, and,based on those facts, alleges that Corporationowed additional taxes. Based on the informationprovided by the whistleblower, the IRS proceedswith an examination of Corporation and deter-mines adjustments that would result in an unpaidtax liability of $500,000. During the examination,Corporation informally claims a refund of$400,000 based on adjustments to items of incomeand expense that are wholly unrelated to the in-formation provided by the whistleblower. The

IRS agrees to the unrelated adjustments. The IRSnets the adjustments and determines a tax defi-ciency of $100,000. Thereafter, Corporationmakes full payment of the $100,000 deficiency.For purposes of section 7623 and §§ 301.7623–1through 301.7623–4, the collected proceeds in-clude the $400,000 informally claimed as a refundand netted against the adjustments attributableto the information provided, as well as the$100,000 paid by Corporation.

(3) Amended returns. Amounts col-lected based on amended returns consti-tute collected proceeds if—

(i) The IRS proceeds based on the in-formation provided;

(ii) As a result, the person subject tothe action(s) with which the IRS proceedsfiles amended returns; and

(iii) The amounts collected based onthe amended returns relate to the activitiesor facts described in the information pro-vided.

(4) Criminal fines. Criminal fines de-posited into the Victims of Crime Fundare not collected proceeds and cannot beused for payment of awards.

(5) Computation of collected proceeds.(i) In general. Pursuant to § 301.7623–4(d)(1), the IRS cannot make an awardpayment until there has been a final deter-mination of tax. For purposes of determin-ing the amount of an award under section7623 and §§ 301.7623–1 through301.7623–4, after there has been a finaldetermination of tax as defined in§ 301.7623–4(d)(2), the IRS will computethe amount of collected proceeds based onall information known with respect to thetaxpayer’s account, including with respectto all tax attributes, as of the date thecomputation is made.

(ii) Post-determination proceeds. If,based on all information known with re-spect to the taxpayer’s account as of thedate of the computation described in para-graph (d)(5)(i) of this section, there is apossibility that the IRS may collect addi-tional proceeds, then the WhistleblowerOffice will continue to monitor the case. Ifthe Whistleblower Office identifies addi-tional collected proceeds, then the IRSwill compute and pay accordingly.

(iii) Partial collection. If the IRS doesnot collect the full amount of taxes, pen-alties, interest, additions to tax, and addi-tional amounts assessed against the tax-payer, then any amounts that the IRS doescollect will constitute collected proceedsin the same proportion that the adjust-


ments attributable to the information pro-vided bear to the total adjustments.

(e) Amount in dispute and gross in-come. (1) In general. Section 7623(b) ap-plies with respect to any action againstany taxpayer in which the tax, penalties,interest, additions to tax, and additionalamounts in dispute exceed $2,000,000but, if the taxpayer is an individual, thenonly if the taxpayer’s gross income ex-ceeds $200,000 in at least one taxable yearsubject to the action.

(2) Amount in dispute. (i) In general.For purposes of section 7623(b)(5) and§§ 301.7623–1 through 301.7623–4, theterm amount in dispute means the greaterof the maximum total of tax, penalties,interest, additions to tax, and additionalamounts that resulted from the action(s)with which the IRS proceeded based onthe information provided, or the maxi-mum total of such amounts that werestated in formal positions taken by the IRSin the action(s). The IRS will compute theamount in dispute, for purposes of awarddeterminations described in § 301.7623–3(c)(6), when there has been a final deter-mination of tax as defined in § 301.7623–4(d)(2).

(ii) Examples. The provisions of para-graph (e)(2)(i) of this section may be il-lustrated by the following examples:

Example 1. Information provided to the IRSby a whistleblower, under section 7623 and§ 301.7623–1, identifies a corporate taxpayer, de-scribes and documents specific facts relating tothe taxpayer’s activities, and, based on thosefacts, alleges that the taxpayer owed additionaltaxes. The IRS proceeds with an examination ofthe taxpayer based on the information providedby the whistleblower; makes adjustments to itemsof income and expense and allows certain credits;and, ultimately, determines a deficiency againstthe taxpayer of $1,900,000 and issues the tax-payer a statutory notice of deficiency. The tax-payer petitions the notice to the United States TaxCourt. The Tax Court sustains the IRS’s positionresulting in a deficiency of $1,900,000. Followingthe final determination of tax, the IRS computesthat the total of tax, penalties, interest, additionsto tax, and additional amounts that resulted fromthe action was $2,500,000. For purposes of section7623 and §§ 301.7623–1 through 301.7623–4, theamount in dispute is $2,500,000.

Example 2. Same facts as Example 1, exceptthe IRS determines a deficiency of $1,500,000; theTax Court sustains the deficiency of $1,500,000;and, following the final determination of tax, theIRS computes that the total of tax, penalties, in-terest, additions to tax, and additional amountsthat resulted from the action was $1,750,000. Forpurposes of section 7623 and §§ 301.7623–1

through 301.7623–4, the amount in dispute is$1,750,000.

Example 3. Same facts as Example 1, exceptthe IRS determines a deficiency of $2,100,000; theTax Court redetermines a deficiency of$1,500,000; and, following the final determinationof tax, the IRS computes that the total of tax,penalties, interest, additions to tax, and additionalamounts that resulted from the action was$1,750,000. For purposes of section 7623 and§§ 301.7623–1 through 301.7623–4, the amount indispute is $2,100,000.

(3) Gross income. For purposes of sec-tion 7623(b)(5) and §§ 301.7623–1through 301.7623–4, the term gross in-come has the same meaning as providedunder section 61(a). The IRS will computethe individual taxpayer’s gross income,for purposes of award determinations de-scribed in § 301.7623–3(c)(6), when therehas been a final determination of tax asdefined in § 301.7623–4(d)(2).



§ 301.7623–3 Whistlebloweradministrative proceedings and appealsof award determinations.

(a) In general. The Whistleblower Of-fice will pay awards under section 7623(a)and determine and pay awards under sec-tion 7623(b) in whistleblower administra-tive proceedings pursuant to the rules ofthis section. The whistleblower adminis-trative proceedings described in this sec-tion are administrative proceedings per-taining to tax administration for purposesof section 6103(h)(4). See § 301.6103(h)(4)–1for additional rules regarding disclosuresof return information in whistleblower ad-ministrative proceedings. The Whistle-blower Office may determine awards forclaims involving multiple actions in a sin-gle whistleblower administrative proceed-ing. For purposes of the whistlebloweradministrative proceedings for rejectionsand denials, described in paragraphs(b)(3), (c)(7), and (c)(8) of this section,the Internal Revenue Service (IRS) mayrely on the whistleblower’s description ofthe amount owed by the taxpayer(s). TheIRS may, however, rely on other informa-

tion as necessary (for example, when thealleged amount in dispute is below the $2million threshold of section 7623(b)(5)(B),but the actual amount in dispute is abovethe threshold).

(b) Awards under section 7623(a). (1)Preliminary award recommendation. Incases in which the Whistleblower Officerecommends payment of an award undersection 7623(a), the Whistleblower Officewill communicate a preliminary awardrecommendation under section 7623(a)and §§ 301.7623–1 through 301.7623–4to the whistleblower by sending a prelim-inary award recommendation letter thatstates the Whistleblower Office’s prelim-inary computation of the amount of col-lected proceeds, recommended award per-centage, recommended award amount(even in cases when the application of§ 301.7623–4 results in a reduction of therecommended award amount to zero), anda list of the factors that contributed to therecommended award percentage. Thewhistleblower administrative proceedingdescribed in paragraphs (b)(1) and (2) ofthis section begins on the date theWhistleblower Office sends the prelimi-nary award recommendation letter. If thewhistleblower believes that the Whistle-blower Office erred in evaluating the in-formation provided, the whistleblower has30 days from the date the WhistleblowerOffice sends the preliminary award rec-ommendation to submit comments to theWhistleblower Office (this period may beextended at the sole discretion of theWhistleblower Office). The Whistle-blower Office will review all commentssubmitted timely by the whistleblower (orthe whistleblower’s legal representative, ifany) and pay an award, pursuant to para-graph (b)(2) of this section.

(2) Decision letter. At the conclusionof the process described in paragraph(b)(1) of this section, and when there is afinal determination of tax, as defined in§ 301.7623–4(d)(2), the WhistleblowerOffice will pay an award under section7623(a) and §§ 301.7623–1 through301.7623–4. The Whistleblower Officewill communicate the amount of theaward to the whistleblower in a decisionletter.

(3) Rejections and denials. If theWhistleblower Office rejects a claim foraward under section 7623(a), pursuant to


§ 301.7623–1(b) or (c), or if the IRS eitherdid not proceed based on information pro-vided by the whistleblower, as defined in§ 301.7623–2(b), or did not collect pro-ceeds, as defined in § 301.7623–2(d), thenthe Whistleblower Office will not applythe rules of paragraphs (b)(1) or (2) of thissection. The Whistleblower Office willprovide written notice to the whistle-blower of the rejection or denial of anyaward and, in the case of a rejection, thewritten notice will state the basis for therejection.

(c) Awards under section 7623(b). (1)Preliminary award recommendation. Forclaims under section 7623(b) other thanthose described in paragraphs (c)(7) and(c)(8) of this section (rejections and deni-als), the Whistleblower Office will pre-pare a preliminary award recommendationbased on the Whistleblower Office’s re-view of the administrative claim file andthe application of the rules of section 7623and §§ 301.7623–1 through 301.7623–4to the facts of the case. See paragraph(e)(2) of this section for a description ofthe administrative claim file. The whistle-blower administrative proceeding de-scribed in paragraphs (c)(1) through (6) ofthis section begins on the date theWhistleblower Office sends the prelimi-nary award recommendation letter. Thepreliminary award recommendation is nota determination letter within the meaningof paragraph (c)(6) of this section andcannot be appealed to Tax Court undersection 7623(b)(4) and paragraph (d) ofthis section. The preliminary award rec-ommendation will notify the whistle-blower that the IRS cannot determine orpay any award until there is a final deter-mination of tax, as defined in § 301.7623–4(d)(2).

(2) Contents of preliminary award rec-ommendation. The Whistleblower Officewill communicate the preliminary awardrecommendation under section 7623(b) tothe whistleblower by sending—

(i) A preliminary award recommenda-tion letter that describes the whistleblow-er’s options for responding to the prelim-inary award recommendation;

(ii) A summary report that states a pre-liminary computation of the amount ofcollected proceeds, the recommendedaward percentage, the recommendedaward amount (even in cases when the

application of section 7623(b)(2) or sec-tion 7623(b)(3) results in a reduction ofthe recommended award amount to zero),and a list of the factors that contributed tothe recommended award percentage;

(iii) An award consent form; and(iv) A confidentiality agreement.(3) Opportunity to respond to prelimi-

nary award recommendation. Thewhistleblower will have 30 days (this pe-riod may be extended at the sole discre-tion of the Whistleblower Office) from thedate the Whistleblower Office sends thepreliminary award recommendation letterto respond to the preliminary award rec-ommendation in one of the followingways—

(i) If the whistleblower takes no action,then the Whistleblower Office will makean award determination, pursuant to para-graph (c)(6) of this section;

(ii) If the whistleblower signs, dates,and returns the award consent form agree-ing to the preliminary award recommen-dation and waiving any and all adminis-trative and judicial appeal rights, then theWhistleblower Office will make an awarddetermination, pursuant to paragraph(c)(6) of this section;

(iii) If the whistleblower signs, dates,and returns the confidentiality agreement,then the Whistleblower Office will pro-vide the whistleblower with a detailedaward report, and an opportunity to re-view documents supporting the reportpursuant to paragraphs (c)(4) and (5) ofthis section, and any comments submittedby the whistleblower will be added to theadministrative claim file; or

(iv) If the whistleblower submits com-ments on the preliminary award recom-mendation to the Whistleblower Office,but does not sign, date, and return theconfidentiality agreement, then the com-ments will be added to the administrativeclaim file and reviewed by the Whistle-blower Office in making an award deter-mination, pursuant to paragraph (c)(6) ofthis section.

(4) Detailed report. (i) Contents of de-tailed report. If the whistleblower signs,dates, and returns the confidentialityagreement accompanying the preliminaryaward recommendation under section7623(b), pursuant to paragraph (c)(3) ofthis section, then the Whistleblower Of-fice will send the whistleblower—

(A) A detailed report that states a pre-liminary computation of the amount ofcollected proceeds, the recommendedaward percentage, and the recommendedaward amount, and provides a full expla-nation of the factors that contributed to therecommended award percentage;

(B) Instructions for scheduling an ap-pointment for the whistleblower (and thewhistleblower’s legal representative, ifany) to review information in the admin-istrative claim file that is not protected byone or more common law or statutoryprivileges; and

(C) An award consent form.(ii) Opportunity to respond to detailed

report. The whistleblower will have 30days (this period may be extended at thesole discretion of the Whistleblower Of-fice) from the date the Whistleblower Of-fice sends the detailed report to respond inone of the following ways—

(A) If the whistleblower takes no ac-tion, then the Whistleblower Office willmake an award determination, pursuant toparagraph (c)(6) of this section;

(B) If the whistleblower requests anappointment to review information fromthe administrative claim file that is notprotected from disclosure by one or morecommon law or statutory privileges, thena meeting will be arranged pursuant toparagraph (c)(5) of this section;

(C) If the whistleblower does not re-quest an appointment but does submitcomments on the detailed report to theWhistleblower Office, then the commentswill be added to the administrative claimfile and reviewed by the WhistleblowerOffice in making an award determinationpursuant to paragraph (c)(6) of this sec-tion; or

(D) If the whistleblower signs, dates,and returns the award consent form agree-ing to the preliminary award recommen-dation and waiving any and all adminis-trative and judicial appeal rights, then theWhistleblower Office will make an awarddetermination, pursuant to paragraph(c)(6) of this section.

(iii) Additional rules. The detailed re-port is not a determination letter withinthe meaning of paragraph (c)(6) of thissection and cannot be appealed to TaxCourt under section 7623(b)(4) and para-graph (d) of this section. The detailedreport will notify the whistleblower that


the IRS cannot determine or pay anyaward until there is a final determinationof tax, as defined in § 301.7623–4(d)(2).

(5) Opportunity to review documentssupporting award report recommenda-tions. Appointments for the whistleblower(and the whistleblower’s legal representa-tive, if any) to review information from theadministrative claim file that is not protectedfrom disclosure by one or more commonlaw or statutory privileges will be held at theWhistleblower Office in Washington, D.C.,unless the Whistleblower Office, in its solediscretion, decides to hold the meeting atanother location. At the appointment, theWhistleblower Office will provide for view-ing the information from the administrativeclaim file. The Whistleblower Office willsupervise the whistleblower’s review of theinformation and the whistleblower will notbe permitted to make copies of any docu-ments or other information. The whistle-blower will have 30 days (this period maybe extended at the sole discretion of theWhistleblower Office) from the date of theappointment to submit comments on the de-tailed report and the documents reviewed atthe appointment to the Whistleblower Of-fice. All comments will be added to theadministrative claim file and reviewed bythe Whistleblower Office in making anaward determination, pursuant to paragraph(c)(6) of this section.

(6) Determination letter. After thewhistleblower’s participation in thewhistleblower administrative proceeding,pursuant to paragraph (c) of this section,has concluded, and there is a final deter-mination of tax, as defined in § 301.7623–4(d)(2), a Whistleblower Office officialwill determine the amount of the awardunder section 7623(b)(1), (2), or (3), and§§ 301.7623–1 through 301.7623–4,based on the official’s review of the ad-ministrative claim file. The WhistleblowerOffice will communicate the award to thewhistleblower in a determination letter,stating the amount of the award. If, how-ever, the whistleblower has executed anaward consent form agreeing to theamount of the award and waiving thewhistleblower’s right to appeal the awarddetermination, pursuant to section7623(b)(4) and paragraph (d) of this sec-tion, then the Whistleblower Office willnot send the whistleblower a determina-tion letter and will make payment of the

award as promptly as circumstances per-mit.

(7) Rejections. A rejection is a deter-mination that relates solely to the whistle-blower and the information on the face ofthe claim that pertains to the whistle-blower. If the Whistleblower Office re-jects a claim for award under section7623(b), pursuant to § 301.7623–1(b) or(c), then the Whistleblower Office will notapply the rules of paragraphs (c)(1)through (6) of this section. The Whistle-blower Office will send to the whistle-blower a preliminary rejection letter thatstates the basis for the rejection of theclaim. The whistleblower administrativeproceeding described in this paragraph be-gins on the date the Whistleblower Officesends the preliminary rejection letter. Ifthe whistleblower believes that theWhistleblower Office erred in evaluatingthe information provided, the whistle-blower has 30 days from the date theWhistleblower Office sends the prelimi-nary rejection letter to submit commentsto the Whistleblower Office (this periodmay be extended at the sole discretion ofthe Whistleblower Office). The Whistle-blower Office will review all commentssubmitted timely by the whistleblower (orthe whistleblower’s legal representative, ifany) and, following that review, theWhistleblower Office will either providewritten notice to the whistleblower of therejection of the claim, including the basisfor the rejection, or apply the rules ofparagraphs (c)(1) through (c)(6) of thissection.

(8) Denials. A denial is a determinationthat relates to or implicates taxpayer in-formation. If, with respect to a claim foraward under section 7623(b), the IRS ei-ther did not proceed based on the infor-mation provided by the whistleblower, asdefined in § 301.7623–2(b), or did not col-lect proceeds, as defined in § 301.7623–2(d), then the Whistleblower Office willnot apply the rules of paragraphs (c)(1)through (6) of this section. The Whistle-blower Office will send to the whistle-blower a preliminary denial letter thatstates the basis for the denial of the claim.The whistleblower administrative pro-ceeding described in this paragraph beginson the date the Whistleblower Officesends the preliminary denial letter. If thewhistleblower believes that the Whistle-

blower Office erred in evaluating the in-formation provided, the whistleblower has30 days from the date the WhistleblowerOffice sends the preliminary denial letterto submit comments to the WhistleblowerOffice (this period may be extended at thesole discretion of the Whistleblower Of-fice). The Whistleblower Office will re-view all comments submitted timely bythe whistleblower (or the whistleblower’slegal representative, if any) and, followingthat review, the Whistleblower Office willeither provide written notice to thewhistleblower of the denial of any award,including the basis for the denial, or applythe rules of paragraphs (c)(1) through(c)(6) of this section.

(d) Appeal of award determination.Any determination regarding an awardunder section 7623(b)(1), (2), or (3) may,within 30 days of such determination, beappealed to the Tax Court.

(e) Administrative record. (1) In gen-eral. The administrative record comprisesall information contained in the adminis-trative claim file that is relevant to theaward determination and not protected byone or more common law or statutoryprivileges.

(2) Administrative claim file. The ad-ministrative claim file will include the fol-lowing materials relating to the action(s)to which the determination relates—

(i) The Form 211, “Application forAward for Original Information,” filed bythe whistleblower and all information pro-vided by the whistleblower (whether pro-vided with the whistleblower’s originalsubmission or through a subsequent con-tact with the IRS).

(ii) Copies of all debriefing notes andrecorded interviews held with the whistle-blower (and the whistleblower’s legal rep-resentative, if any).

(iii) Form(s) 11369, “ConfidentialEvaluation Report on Claim for Award,”including narratives prepared by the rele-vant IRS office(s), explaining the whistle-blower’s contributions to the actions anddocumenting the actions taken by the IRSin the case(s). The Form 11369 will referto and incorporate additional documentsrelating to the issues raised by the claim,as appropriate, including, for example,relevant portions of revenue agent reports,copies of agreements entered into with the


taxpayer(s), tax returns, and activity re-cords.

(iv) Copies of all contracts entered intoamong the IRS, the whistleblower, and thewhistleblower’s legal representative (ifany), and an explanation of the coopera-tion provided by the whistleblower (or thewhistleblower’s legal representative, ifany) under the contract.

(v) Any information that reflects ac-tions by the whistleblower that may havehad a negative impact on the IRS’s abilityto examine the taxpayer(s).

(vi) All correspondence and documentssent by the Whistleblower Office to thewhistleblower.

(vii) All notes, memoranda, and otherdocuments made by officers and employ-ees of the Whistleblower Office and con-sidered by the official making the awarddetermination.

(viii) All correspondence and docu-ments received by the Whistleblower Of-fice from the whistleblower (and thewhistleblower’s legal representative, ifany) in the course of the whistlebloweradministrative proceeding.

(ix) All other information consideredby the official making the award determi-nation.



§ 301.7623–4 Amount and payment ofaward.

(a) In general. The Whistleblower Of-fice will pay all awards under section7623(a) and determine and pay all awardsunder section 7623(b). For all awards un-der section 7623 and §§ 301.7623–1through 301.7623–4, the WhistleblowerOffice will—

(1) Analyze the claim by applying therules provided in paragraph (c) of thissection to the information contained in theadministrative claim file to determine anaward percentage; and

(2) Multiply the award percentage bythe amount of collected proceeds. If theaward determination arises out of a single

whistleblower administrative proceedinginvolving multiple actions, the Whistle-blower Office may determine separateaward percentages on an action-by-actionbasis and apply the separate award per-centages to the collected proceeds attrib-utable to the corresponding actions. TheInternal Revenue Service (IRS) will payall awards in accordance with the rulesprovided in paragraph (d) of this section.All relevant factors will be taken into ac-count by the Whistleblower Office in de-termining whether an award will be paidand, if so, the amount of the award. Noperson is authorized under this section tomake any offer or promise or otherwisebind the Whistleblower Office with re-spect to the amount or payment of anaward.

(b) Factors used to determine awardpercentage. (1) Positive factors. The ap-plication of the following non-exclusivefactors may support increasing an awardpercentage under paragraphs (c)(1) or (2)of this section—

(i) The whistleblower acted promptlyto inform the IRS or the taxpayer of thetax noncompliance.

(ii) The information provided identi-fied an issue or transaction of a type pre-viously unknown to the IRS.

(iii) The information provided identi-fied taxpayer behavior that the IRS wasunlikely to identify or that was particu-larly difficult to detect through the IRS’sexercise of reasonable diligence.

(iv) The information provided thor-oughly presented the factual details of taxnoncompliance in a clear and organizedmanner, particularly if the manner of thepresentation saved the IRS work and re-sources.

(v) The whistleblower (or the whistle-blower’s legal representative, if any) pro-vided exceptional cooperation and assis-tance during the pendency of the action(s).

(vi) The information provided identi-fied assets of the taxpayer that could beused to pay liabilities, particularly if theassets were not otherwise known to theIRS.

(vii) The information provided identi-fied connections between transactions, orparties to transactions, that enabled theIRS to understand tax implications thatmight not otherwise have been understoodby the IRS.

(viii) The information provided had animpact on the behavior of the taxpayer, forexample by causing the taxpayer topromptly correct a previously-reportedimproper position.

(2) Negative factors. The application ofthe following non-exclusive factors maysupport decreasing an award percentageunder paragraphs (c)(1) or (2) of this sec-tion—

(i) The whistleblower delayed inform-ing the IRS after learning the relevantfacts, particularly if the delay adverselyaffected the IRS’s ability to pursue anaction or issue.

(ii) The whistleblower contributed tothe underpayment of tax or tax noncom-pliance identified.

(iii) The whistleblower directly or in-directly profited from the underpaymentof tax or tax noncompliance identified, butdid not plan and initiate the actions thatled to the underpayment of tax or actionsdescribed in section 7623(a)(2).

(iv) The whistleblower (or the whistle-blower’s legal representative, if any) neg-atively affected the IRS’s ability to pursuethe action(s), for example by disclosingthe existence or scope of an enforcementactivity.

(v) The whistleblower (or the whistle-blower’s legal representative, if any) vio-lated instructions provided by the IRS,particularly if the violation caused the IRSto expend additional resources.

(vi) The whistleblower (or the whistle-blower’s legal representative, if any) vio-lated the terms of the confidentialityagreement described in § 301.7623–3(c)(2)(iv).

(vii) The whistleblower (or the whistle-blower’s legal representative, if any) vio-lated the terms of a contract entered intowith the IRS pursuant to § 301.6103(n)–2.

(viii) The whistleblower provided falseor misleading information or otherwiseviolated the requirements of section7623(b)(6)(C) or § 301.7623–1(c)(3).

(c) Amount of award percentage. (1)Award for substantial contribution. (i) Ingeneral. If the IRS proceeds with anyadministrative or judicial action based oninformation brought to the IRS’s attentionby a whistleblower, such whistleblowershall, subject to paragraphs (c)(2) and (3)of this section, receive as an award at least15 percent but not more than 30 percent of


the collected proceeds resulting from theaction (including any related actions) orfrom any settlement in response to suchaction. The amount of any award underthis paragraph depends on the extent ofthe whistleblower’s substantial contribu-tion to the action(s). See paragraph (c)(4)of this section for rules regarding multiplewhistleblowers.

(ii) Computational framework. Startingthe analysis at 15 percent, the Whistle-blower Office will analyze the administra-tive claim file using the factors listed inparagraph (b)(1) of this section to deter-mine whether the whistleblower merits anincreased award percentage of 22 percentor 30 percent. The Whistleblower Officemay increase the award percentage basedon the presence and significance of posi-tive factors. The Whistleblower Officewill then analyze the contents of the ad-ministrative claim file using the factorslisted in paragraph (b)(2) of this section todetermine whether the whistleblower mer-its a decreased award percentage of 15percent, 18 percent, 22 percent, or 26 per-cent. The Whistleblower Office may de-crease the award percentage based on thepresence and significance of negative fac-tors. Although the factors listed in para-graphs (b)(1) and (2) of this section aredescribed as positive and negative factors,the Whistleblower Office’s analysis can-not be reduced to a mathematical equa-tion. The factors are not exclusive and arenot weighted and, in a particular case, onefactor may override several others. Thepresence and significance of positive fac-tors may offset the presence and signifi-cance of negative factors. But the absenceof negative factors does not constitute apositive factor.

(iii) Examples. The operation of theprovisions of paragraph (c)(1)(ii) of thissection may be illustrated by the follow-ing examples. The examples are intendedto illustrate the operation of the computa-tional framework. The examples providesimplified descriptions of the facts relat-ing to the claims for award, the informa-tion provided, and the facts relating to theunderlying tax cases. The application ofsection 7623(b)(1) and paragraph(c)(1)(ii) of this section will depend on thespecific facts of each case.

Example 1. Facts. Whistleblower A, an em-ployee in Corporation’s sales department, sub-

mitted to the IRS a claim for award under section7623 and information indicating that Corpora-tion improperly claimed a credit in tax year 2006.Whistleblower A’s information consisted of nu-merous non-privileged documents relevant toCorporation’s eligibility for the credit. Whistle-blower A’s original submission also included ananalysis of the documents, as well as informationabout meetings in which the claim for credit wasdiscussed. When interviewed by the IRS, Whistle-blower A clarified ambiguities in the original sub-mission, answered questions about Corporation’sbusiness and accounting practices, and identifiedpotential sources to corroborate the information.

Some of the documents provided by Whistle-blower A were not included in Corporation’s gen-eral record-keeping system and their existencemay not have been easily uncovered through nor-mal IRS examination procedures. Corporationinitially denied the facts revealed in the informa-tion provided by Whistleblower A, which wereessential to establishing the impropriety of theclaim for credit. IRS examination of Corpora-tion’s return confirmed that the credit was im-properly claimed by Corporation in tax year2006, as alleged by Whistleblower A. Corporationagreed to the ensuing assessments of tax and in-terest and paid the liabilities in full.

Analysis. In this case, Whistleblower A pro-vided specific and credible information thatformed the basis for action by the IRS. Whistle-blower A provided information that was difficultto detect, provided useful assistance to the IRS,and helped the IRS sustain the assessment. Basedon the presence and significance of these positivefactors, viewed against all the specific facts rele-vant to Corporation’s 2006 tax year, the Whistle-blower Office could increase the award percent-age to 22 percent of collected proceeds. If,however, Whistleblower A’s claim reflected neg-ative factors, for example Whistleblower A vio-lated instructions provided by the IRS and theviolation caused the IRS to expend additionalresources, then the Whistleblower Office could,based on this negative factor, reduce the awardpercentage to 18 or 15 percent (but not to lowerthan 15 percent of collected proceeds).

Example 2. Facts. Whistleblower B, an em-ployee of Financial Advisory Firm 1 (Firm 1),submitted to the IRS a claim for award undersection 7623 and information indicating thatFirm 1 helped clients engage in activities thatwere intended to, and did, result in substantialtax underpayments. The activities were designedto avoid detection by the IRS, and prior IRSaudits of several clients of Firm 1 had failed todetect underpayments of tax. Whistleblower Blearned of the activities after being reassigned toa new position with Firm 1. Whistleblower Bprovided the information to the IRS soon after heunderstood the scope, nature and impact of theactivities. The information provided consisted ofnumerous documents containing client profilesand marketing strategies, as well as descriptionsof the transactions and structures used by Firm 1and its clients to obscure the clients’ identitiesand to generate the substantial tax underpay-ments. Whistleblower B also provided an analysis

of the documents, as well as information aboutmeetings in which the transactions and structureswere discussed. When interviewed by the IRS,Whistleblower B clarified ambiguities in the orig-inal submission, answered questions about Firm1’s execution of specific client transactions, andidentified potential sources to corroborate the in-formation provided. Whistleblower B also noti-fied the IRS of steps taken by Firm 1 to limit thedisclosure of information requested by the IRS,enabling the IRS to obtain full disclosure of theinformation through the targeted use of sum-monses.

Analysis. Ultimately, the IRS collected tax,penalties, and interest from Firm 1 and multipleclients. In addition, Treasury and the IRS issueda notice identifying the impropriety of the trans-actions and structures employed by Firm 1 andits clients. Whistleblower B provided specific andcredible information that formed the basis foraction by the IRS. The information providedidentified transactions that were difficult to de-tect. Whistleblower B acted promptly after heunderstood the activities at issue and he provideduseful assistance to the IRS. Whistleblower B’sassistance, and the information he provided,helped the IRS overcome the efforts made toobscure the activities and the clients’ identities.And the information provided by WhistleblowerB contributed to the decision to issue the notice,which may have a positive effect on client behav-ior and save IRS resources. Based on the presenceand significance of these positive factors, theWhistleblower Office could increase the awardpercentage to 30 percent of collected proceeds. IfWhistleblower B directly or indirectly profitedfrom Firm 1’s and the clients’ activities resultingin the tax underpayments, then the Whistle-blower Office could, based on this negative factor,reduce the award percentage to 26, 22, 18 percentor 15 percent (but not to lower than 15 percent ofcollected proceeds).

(2) Award for less substantial contri-bution. (i) In general. If the Whistle-blower Office determines that the actiondescribed in paragraph (c)(1) of this sec-tion is based principally on disclosures ofspecific allegations resulting from a judi-cial or administrative hearing; a govern-ment report, hearing, audit, or investiga-tion; or the news media, then theWhistleblower Office will determine anaward of no more than 10 percent of thecollected proceeds resulting from the ac-tion (including any related actions) orfrom any settlement in response to suchaction. If the whistleblower is the originalsource of the information from which thedisclosures of specific allegations re-sulted, however, then the award percent-age will be determined under paragraph(c)(1) of this section.


(ii) Computational framework. TheWhistleblower Office will analyze the ad-ministrative claim file to determine—

(A) Whether the claim involves spe-cific allegations regarding a tax underpay-ment or a violation of the internal revenuelaws that reasonably may be inferred tohave resulted from a judicial or adminis-trative hearing; a government report, hear-ing, audit, or investigation; or the newsmedia;

(B) Whether the action described inparagraph (c)(1) of this section was basedprincipally on the disclosure of the spe-cific allegations; and

(C) Whether the whistleblower was theoriginal source of the information thatgave rise to the specific allegations. If theWhistleblower Office determines that theaction was based principally on disclo-sures of specific allegations, as stated inparagraph (c)(2)(ii)(B) of this section, andthat the whistleblower was not the originalsource of the information, then, starting at1 percent, the Whistleblower Office willanalyze the administrative claim file usingthe factors listed in paragraph (b)(1) ofthis section to determine whether thewhistleblower merits an increased awardpercentage of 4 percent, 7 percent, or 10percent. The Whistleblower Office willthen determine whether the whistleblowermerits a decreased award percentage ofzero, 1 percent, 4 percent, or 7 percentusing the factors listed in paragraph (b)(2)of this section. The Whistleblower Officemay increase the award percentage basedon the presence and significance of posi-tive factors and may decrease (to zero) theaward percentage based on the presenceand significance of negative factors. Likethe analysis described in paragraph(c)(1)(ii) of this section, the Whistle-blower Office’s analysis cannot be re-duced to a mathematical equation. Thefactors are not exclusive and are notweighted and, in a particular case, onefactor may override several others. Thepresence and significance of positive fac-tors may offset the presence and signifi-cance of negative factors. But the absenceof negative factors does not constitute apositive factor.

(iii) Example. The operation of the pro-visions of paragraph (c)(2)(ii) of this sec-tion may be illustrated by the followingexample. The example is intended to il-

lustrate the operation of the computationalframework. The example provides a sim-plified description of the facts relating tothe claim for award, the information pro-vided, and the facts relating to the under-lying tax case(s). The application of sec-tion 7623(b)(2) and paragraph (c)(2)(ii) ofthis section will depend on the specificfacts of each case.

Example. Facts. Whistleblower A submitted tothe IRS a claim for award under section 7623 andinformation indicating that Taxpayer B was thedefendant in a criminal prosecution for embez-zlement. Whistleblower A’s information furtherindicated that evidence presented at TaxpayerB’s trial revealed Taxpayer B’s efforts to concealthe embezzled funds by depositing them in bankaccounts of entities controlled by Taxpayer B.Taxpayer B’s failure to pay tax on the embezzledfunds was not explicitly stated during the judicialhearing, but could be reasonably inferred fromthe facts and circumstances, including TaxpayerB’s efforts to conceal the funds.

Analysis. In this case, Whistleblower A’s in-formation is based principally on disclosures ofspecific allegations resulting from a judicial hear-ing. Absent information demonstrating that theinvestigation leading to the embezzlement chargewas based on information provided by Whistle-blower A, section 7623(b)(2) and paragraph (c)(2)of this section apply to the determination ofWhistleblower A’s award. In this case, there is noreason for the Whistleblower Office to increasethe applicable award percentage above 1 percent,the starting point for its analysis, given the ab-sence of positive factors. Accordingly, Whistle-blower A may receive an award of 1 percent ofcollected proceeds.

(3) Reduction in award and denial ofaward. (i) In general. If the Whistle-blower Office determines that a claim foraward is brought by a whistleblower whoplanned and initiated the actions, transac-tion, or events (underlying acts) that led tothe underpayment of tax or actions de-scribed in section 7623(a)(2), then theWhistleblower Office may appropriatelyreduce the amount of the award percent-age that would otherwise result under sec-tion 7623(b)(1) and paragraph (c)(1) ofthis section or section 7623(b)(2) andparagraph (c)(2) of this section, as appli-cable. The Whistleblower Office will denyan award if the whistleblower is convictedof criminal conduct arising from his or herrole in planning and initiating the under-lying acts.

(ii) Threshold determination. Awhistleblower planned and initiated theunderlying acts if the whistleblower—

(A) Designed, structured, drafted, ar-ranged, formed the plan leading to, orotherwise planned, an underlying act,

(B) Took steps to start, introduce, orig-inate, set into motion, promote or other-wise initiate an underlying act, and

(C) Knew or had reason to know thatan underpayment of tax or actions de-scribed in section 7623(a)(2) could resultfrom planning and initiating the underly-ing act.

(D) The whistleblower need not havebeen the sole person involved in planningand initiating the underlying acts. Awhistleblower who merely furnishes typ-ing, reproducing, or other mechanical as-sistance in implementing one or more un-derlying acts will not be treated asinitiating any underlying act. A whistle-blower who is a junior employee acting atthe direction, and under the control, of asenior employee will not be treated asinitiating any underlying act.

(E) If the Whistleblower Office deter-mines that a whistleblower has satisfiedthis initial threshold of planning and ini-tiating, the Whistleblower Office will thenreduce the award amount based on theextent of the whistleblower’s planningand initiating, pursuant to paragraph(c)(3)(iii) of this section.

(iii) Computational framework. Afterdetermining the award percentage thatwould otherwise result from the applica-tion of section 7623(b)(1) and paragraph(c)(1) of this section or section 7623(b)(2)and paragraph (c)(2) of this section, asapplicable, the Whistleblower Office willanalyze the administrative claim file tomake the threshold determination de-scribed in paragraph (c)(3)(ii) of this sec-tion. If the whistleblower is determined tohave planned and initiated the underlyingacts, then the Whistleblower Office willreduce the award based on the extent ofthe whistleblower’s planning and initiat-ing. The Whistleblower Office’s analysisand the amount of the appropriate reduc-tion determined in a particular case cannotbe reduced to a mathematical equation. Todetermine the appropriate award reduc-tion, the Whistleblower Office will—

(A) Categorize the whistleblower’srole as a planner and initiator as primary,significant, or moderate; and

(B) Appropriately reduce the awardpercentage that would otherwise result


from the application of section 7623(b)(1)and paragraph (c)(1) of this section orsection 7623(b)(2) and paragraph (c)(2) ofthis section, as applicable, by 67 percentto 100 percent in the case of a primaryplanner and initiator, by 34 percent to 66percent in the case of a significant plannerand initiator, or by 0 percent to 33 percentin the case of a moderate planner andinitiator. If the whistleblower is convictedof criminal conduct arising from his or herrole in planning and initiating the under-lying acts, then the Whistleblower Officewill deny an award without regard towhether the Whistleblower Office catego-rized the whistleblower’s role as a plannerand initiator as primary, significant, ormoderate.

(iv) Factors demonstrating the extentof a whistleblower’s planning and initiat-ing. The application of the following non-exclusive factors may support a determi-nation of the extent of a whistleblower’splanning and initiating of the underlyingacts—

(A) The whistleblower’s role as a plan-ner and initiator. Was the whistleblowerthe sole decision-maker or one of severalcontributing planners and initiators? Towhat extent was the whistleblower actingunder the direction and control of a super-visor?

(B) The nature of the whistleblower’splanning and initiating activities. Was thewhistleblower involved in legitimate taxplanning activities? Did the whistleblowertake steps to hide the actions at the plan-ning stage? Did the whistleblower commitany identifiable misconduct (legal, ethical,etc.)?

(C) The extent to which the whistle-blower knew or should have known thattax noncompliance could result from thecourse of conduct.

(D) The extent to which the whistle-blower acted in furtherance of the non-compliance, including, for example, ef-forts to conceal or disguise thetransaction.

(E) The whistleblower’s role in identi-fying and soliciting others to participate inthe actions reported, whether as parties toa common transaction or as parties to sep-arate transactions.

(v) Examples. The operation of the pro-visions of paragraphs (c)(3)(ii) and (iii) ofthis section may be illustrated by the fol-

lowing examples. These examples are in-tended to illustrate the operation of thecomputational framework. The examplesprovide simplified descriptions of thefacts relating to the claim for award, theinformation provided, and the facts relat-ing to the underlying tax case. The appli-cation of section 7623(b)(3) and para-graph (c)(3) of this section will depend onthe specific facts of each case.

Example 1. Facts. Whistleblower A is em-ployed as a junior associate in a law firm and isresponsible for performing research and draftingactivities for, and under the direction and controlof, partners of the law firm. Whistleblower Aperformed research on financial products forPartner B that Partner B used in advising a client(Corporation 1) on a financial strategy. AfterCorporation 1 executed the strategy, Whistle-blower A submitted a claim for award undersection 7623 along with information about thestrategy to the IRS. The IRS initiated an exami-nation of Corporation 1 based on WhistleblowerA’s information, determined deficiencies in taxand penalties, and ultimately assessed and col-lected the tax and penalties as determined.

Analysis. Whistleblower A did nothing to de-sign or set into motion Corporation 1’s activities.Whistleblower A did not know or have reason toknow that an underpayment of tax or actionsdescribed in section 7623(a)(2) could result fromthe research and drafting activities. Accordingly,as a threshold matter, Whistleblower A was not aplanner and initiator of Corporation 1’s strategy,and the award that would otherwise be deter-mined based on the application of section7623(b)(1) and paragraph (c)(1) of this section isnot subject to reduction under section 7623(b)(3)and paragraph (c)(3) of this section.

Example 2. Facts. Whistleblower C is em-ployed in the human resources department of acorporation (Corporation 2). Corporation 2tasked Whistleblower C with hiring a large num-ber of temporary employees to meet Corporation2’s seasonal business demands. Whistleblower Corganized, scheduled, and conducted job fairsand job interviews to hire the seasonal employees.Whistleblower C was not responsible for, had noknowledge of, and played no part in, classifyingthe seasonal employees for Federal income taxpurposes. Whistleblower C later discovered, how-ever, that Corporation 2 classified the seasonalemployees as independent contractors. After dis-covering the misclassification, Whistleblower Csubmitted a claim for award under section 7623along with non-privileged information describingthe employee misclassification to the IRS. TheIRS initiated an examination of Corporation 2based on Whistleblower C’s information, deter-mined deficiencies in tax and penalties, and ulti-mately assessed and collected the tax and penal-ties as determined.

Analysis. The award that would otherwise bedetermined based on the application of section7623(b)(1) and paragraph (c)(1) of this sectionwould not be subject to a reduction under section

7623(b)(3) and paragraph (c)(3) of this sectionbecause Whistleblower C did not satisfy the re-quirements of the threshold determination of aplanner and initiator. Whistleblower C did notknow and had no reason to know that her actionscould result in an underpayment of tax or actionsdescribed in section 7623(a)(2) or that Corpora-tion 2 would misclassify the employees as inde-pendent contractors.

Example 3. Facts. Whistleblower D is em-ployed as a supervisor in the finance departmentof a corporation (Corporation 3) and is responsi-ble for planning Corporation 3’s overall financialstrategy. Pursuant to the overall financial strat-egy, Whistleblower D and others at Corporation3, in good faith but incorrectly, planned tax-advantaged transactions. Whistleblower D andothers at Corporation 3 prepared documentsneeded to execute the transactions. After Corpo-ration 3 executed the transactions, WhistleblowerD reached the conclusion that the tax conse-quences claimed were incorrect and Whistle-blower D submitted a claim for award undersection 7623 along with non-privileged informa-tion about the transactions to the IRS. The IRSinitiated an examination of Corporation 3 basedon Whistleblower D’s information, determineddeficiencies in tax and penalties, and ultimatelyassessed and collected the tax and penalties asdetermined.

Analysis. The award that would otherwise bedetermined based on the application of section7623(b)(1) and paragraph (c)(1) of this sectionwould be subject to an appropriate reductionunder section 7623(b)(3) and paragraph (c)(3) ofthis section because Whistleblower D satisfies therequirements of the threshold determination of aplanner and initiator. Whistleblower D plannedthe transactions, prepared the necessary docu-ments, and knew that an underpayment of taxcould result from the transactions. WhistleblowerD was not the sole planner and initiator of Cor-poration 3’s transactions. Whistleblower D didnothing to conceal Corporation 3’s activities.Corporation 3 had a good faith basis for claimingthe disallowed tax benefits. On the basis of thosefacts, Whistleblower D was a moderate-levelplanner and initiator. Accordingly, the Whistle-blower Office will exercise its discretion to reduceWhistleblower D’s award by 0 to 33 percent.

Example 4. Facts. Same facts as Example 3,except that Whistleblower D independentlyplanned a high-risk tax avoidance transactionand prepared draft documents to execute thetransaction. Whistleblower D presented thetransaction, along with the draft documents, toCorporation 3’s Chief Financial Officer. Withoutthe further involvement of Whistleblower D, Cor-poration 3’s Chief Financial Officer, Chief Exec-utive Officer, and Board of Directors subse-quently approved the execution of thetransaction. After Corporation 3 executed thetransaction, Whistleblower D submitted a claimfor award under section 7623 along with non-privileged information about the transaction tothe IRS. The IRS initiated an examination ofCorporation 3 based on Whistleblower D’s infor-mation, determined deficiencies in tax and penal-


ties, and ultimately assessed and collected the taxand penalties as determined.

Analysis. The award that would otherwise bedetermined based on the application of section7623(b)(1) and paragraph (c)(1) of this sectionwould be subject to an appropriate reductionunder section 7623(b)(3) and paragraph (c)(3) ofthis section because Whistleblower D satisfies therequirements of the threshold determination of aplanner and initiator. Whistleblower D plannedthe transaction, prepared the necessary docu-ments, and knew that an underpayment of tax oractions described in section 7623(a)(2) could re-sult from the transaction. Working indepen-dently, Whistleblower D designed and took stepsto effectuate the transaction while knowing thatthe planning and initiating of the transaction waslikely to result in tax noncompliance. Whistle-blower D, however, did not approve the executionof the transaction by Corporation 3 and, there-fore, was not a decision-maker. On the basis ofthese facts, Whistleblower D was a significant-level planner and initiator. Accordingly, theWhistleblower Office will exercise its discretion toreduce Whistleblower D’s award by 34 to 66 per-cent.

Example 5. Facts. Whistleblower E is a finan-cial planner. Whistleblower E designed a finan-cial product that the IRS identified as an abusivetax avoidance transaction. Whistleblower E mar-keted the transaction to taxpayers, facilitatedtheir participation in the transaction, and, ini-tially, took steps to disguise the transaction. Afterseveral taxpayers had participated in the trans-action, Whistleblower E submitted a claim foraward under section 7623 along with non-privileged information to the IRS about the trans-action and the participating taxpayers. The IRSinitiated an examination of the identified taxpay-ers based on Whistleblower E’s information, de-termined deficiencies in tax and penalties, andultimately assessed and collected the tax and pen-alties as determined. Whistleblower E was notcriminally prosecuted.

Analysis. The award that would otherwise bedetermined based on the application of section7623(b)(1) and paragraph (c)(1) of this sectionwould be subject to an appropriate reductionunder section 7623(b)(3) and paragraph (c)(3) ofthis section because Whistleblower E satisfies therequirements of the threshold determination of aplanner and initiator. Whistleblower E designedthe financial product, marketed and facilitated itsuse by taxpayers, and knew that an underpay-ment of tax or actions described in section7623(a)(2) could result from the transaction.Whistleblower E was the sole designer of thetransaction, solicited clients to participate in thetransaction, and facilitated and attempted to con-ceal their participation in the transaction.Whistleblower E knew that the planning and ini-tiating of the taxpayers’ participation in thetransaction was likely to result in an underpay-ment of tax or actions described in section7623(a)(2). On the basis of these facts, Whistle-blower E was a primary-level planner and initi-ator. Accordingly, the Whistleblower Office will

exercise its discretion to reduce WhistleblowerE’s award by 67 to 100 percent.

(4) Multiple whistleblowers. If two ormore independent claims relate to thesame collected proceeds, then theWhistleblower Office may evaluate thecontribution of each whistleblower to theaction(s) that resulted in collected pro-ceeds. The Whistleblower Office will de-termine whether the information submit-ted by each whistleblower would havebeen obtained by the IRS as a result of theinformation previously submitted by anyother whistleblower. If the WhistleblowerOffice determines that multiple whistle-blowers submitted information that wouldnot have been obtained based on a priorsubmission, then the Whistleblower Of-fice will determine the amount of eachwhistleblower’s award based on the extentto which each whistleblower contributedto the action(s). The aggregate awardamount in cases involving two or moreindependent claims that relate to the samecollected proceeds will not exceed themaximum award amount that could haveresulted under section 7623(b)(1) or sec-tion 7623(b)(2), as applicable, subject tothe award reduction provisions of section7623(b)(3), if a single claim had beensubmitted.

(d) Payment of Award. (1) In general.The IRS will pay any award determinedunder section 7623 and §§ 301.7623–1through 301.7623–4 to the whistleblow-er(s) that filed the corresponding claim foraward. Payment of an award will be madeas promptly as the circumstances permit,but not until there has been a final deter-mination of tax with respect to the ac-tion(s), as defined in paragraph (d)(2) ofthis section, the Whistleblower Office hasdetermined the award, and all appeals ofthe Whistleblower Office’s determinationare final or the whistleblower has exe-cuted an award consent form agreeing tothe amount of the award and waiving thewhistleblower’s right to appeal the deter-mination.

(2) Final determination of tax. (i) Ingeneral. For purposes of §§ 301.7623–1through 301.7623–4, a final determina-tion of tax means that the proceeds result-ing from the action(s) subject to the awarddetermination have been collected and ei-ther the statutory period for filing a claimfor refund has expired or the taxpayer(s)

subject to the action(s) and the IRS haveagreed with finality to the tax or otherliabilities for the period(s) at issue and thetaxpayer(s) have waived the right to file aclaim for refund. A final determination oftax does not preclude a subsequent finaldetermination of tax if the IRS proceedsbased on the information provided follow-ing the payment, denial, or rejection of anaward.

(ii) Example. The provisions of para-graph (d)(2)(i) of this section, regardingsubsequent final determination of tax, maybe illustrated by the following example:

Example. Information provided to the IRS bya whistleblower, under section 7623 and§ 301.7623–1, identifies a taxpayer (Corporation1), describes and documents specific facts relatingto Corporation 1’s activities, and, based on thosefacts, alleges that Corporation 1 owed additionaltaxes in Year 1. The Whistleblower Office pro-cesses the incoming claim and provides the infor-mation to an IRS Operating Division (OperatingDivision 1). Operating Division 1 reviews theclaim and the allegations and ultimately decidesnot to proceed with an action against Corporation1. Operating Division 1 conveys its determinationnot to proceed with an action against Corporation1 to the Whistleblower Office on a Form 11369along with all of the relevant supporting docu-ments. The Whistleblower Office provides writtennotice to the whistleblower, denying any awardpursuant to § 301.7623–3(c)(8), and the whistle-blower does not appeal the notice to Tax Courtwithin 30 days.

Two months after the Whistleblower Officedenies the award, the Whistleblower Office rec-ognizes a potential connection between the infor-mation provided and a recently-initiated, ongo-ing, examination of a second taxpayer by a secondIRS Operating Division (Operating Division 2).The Whistleblower Office provides the informa-tion to Operating Division 2. Operating Division 2evaluates the information and proceeds with anaction against Taxpayer 2 based on the informa-tion provided. Ultimately, Operating Division 2assesses and collects taxes resulting from the ac-tion and totaling $3 million. Following the con-clusion of the whistleblower’s participation in awhistleblower administrative proceeding de-scribed in § 301.7623–3(c) and the expiration ofthe statutory period for filing a claim for refundby Taxpayer 2, the Whistleblower Office deter-mines the amount of the award and communi-cates the award to the whistleblower in a deter-mination letter. The whistleblower may appealthe notice to the Tax Court within 30 days.

(3) Joint Whistleblowers. If multiplewhistleblowers jointly submit a claim foraward, the IRS will pay any award inequal shares to the joint whistleblowersunless the joint whistleblowers specify adifferent allocation in a written agree-ment, signed by all the joint whistleblow-


ers and notarized, and submitted with theclaim for award. The aggregate awardpayment in cases involving joint whistle-blowers will be within the award percent-age range of section 7623(b)(1) or section7623(b)(2), as applicable, and subject tothe award reduction provisions of section7623(b)(3).

(4) Deceased Whistleblower. If awhistleblower dies before or during thewhistleblower administrative proceeding,the Whistleblower Office may substitutean executor, administrator, or other legal

representative on behalf of the deceasedwhistleblower for purposes of conductingthe whistleblower administrative proceeding.

(5) Tax treatment of award. All awardsare includible in gross income and subjectto current Federal tax reporting and with-holding requirements.

(e) Effective/applicability date. Thisrule is effective on August 12, 2014. Thisrule applies to information submitted onor after August 12, 2014, and to claims foraward under section 7623(b) that are openas of August 12, 2014.

John Dalrymple,Deputy Commissioner for

Services and Enforcement.

Approved: July 20, 2014


(Tax Policy).



Part III. Administrative, Procedural, and MiscellaneousClarification and Modificationof Notice 2013–29 andNotice 2013–60

Notice 2014–46

SECTION 1. PURPOSE

On January 2, 2013, the AmericanTaxpayer Relief Act of 2012, Pub. L. No.112–240, 126 Stat. 2313 (ATRA), modi-fied the definition of certain qualified fa-cilities under section 45(d) of the InternalRevenue Code (the Code) by replacing theplaced in service requirement with a be-ginning of construction requirement. Ac-cordingly, a taxpayer will be eligible toreceive the renewable electricity produc-tion tax credit (PTC) under section 45, orthe energy investment tax credit (ITC)under section 48 in lieu of the PTC, withrespect to such a facility if construction ofsuch facility began before January 1,2014.

Notice 2013–29, 2013–1 C.B. 1085,provides two methods to determine whenconstruction has begun on a qualified fa-cility: (i) a “physical work” test and (ii) afive percent safe harbor. Notice 2013–60,2013–2 C.B. 431, clarifies Notice2013–29 regarding (i) the determinationof whether a taxpayer satisfies either thecontinuous construction requirement orthe continuous efforts requirement ofthose methods with respect to a facility,(ii) the applicability of the “master con-tract” provision, and (iii) the ability totransfer a facility after construction hasbegun. This notice further clarifies No-tices 2013–29 and 2013–60 regarding (i)how to satisfy the physical work test and(ii) the effect of various types of transferswith respect to a facility after constructionhas begun. In addition, this notice modi-fies the application of the five percent safeharbor.

The guidance provided in this noticeapplies the rules of sections 45 and 48 asin effect on January 1, 2014. The InternalRevenue Service (Service) will not issueprivate letter rulings to taxpayers regard-ing the application of this notice or theapplication of the beginning of construc-tion requirement under sections 45(d) and

48(a)(5) as provided in Notice 2013–29and Notice 2013–60.

SECTION 2. BACKGROUND

A taxpayer may establish the begin-ning of construction by beginning physi-cal work of a significant nature as de-scribed in section 4 of Notice 2013–29(Physical Work Test). Alternatively, ataxpayer may establish the beginning ofconstruction by meeting the safe harborprovided in section 5 of Notice 2013–29(Safe Harbor). A taxpayer can satisfy theSafe Harbor with respect to a facility bydemonstrating, after the facility is placedin service, that five percent or more of thetotal cost of the facility was paid or in-curred before January 1, 2014. Both meth-ods require that a taxpayer make continu-ous progress towards completion onceconstruction has begun (as set forth insection 4.06 (Continuous ConstructionTest) and section 5.02 (Continuous EffortsTest) of Notice 2013–29, respectively).

In response to a significant number ofquestions received after the publication ofNotice 2013–29, the Treasury Departmentand the Service issued Notice 2013–60,which in part clarifies that the transfer of afacility after construction has begun willnot necessarily prevent a facility fromqualifying for the PTC or the ITC. Addi-tionally, section 3.02 of Notice 2013–60provides a method for taxpayers to satisfyeither the Continuous Construction Testor the Continuous Efforts Test. If a tax-payer places a facility in service beforeJanuary 1, 2016, the facility will be con-sidered to satisfy the Continuous Con-struction Test (for purposes of satisfyingthe Physical Work Test) or the Continu-ous Efforts Test (for purposes of satisfy-ing the Safe Harbor), regardless of theamount of physical work performed or theamount of costs paid or incurred with re-spect to the facility between December 31,2013, and January 1, 2016.

After the publication of Notice 2013–60, the Treasury Department and the Ser-vice received requests for further clarifi-cation regarding how to satisfy thePhysical Work Test as well as questionsregarding the effect of various types oftransfers with respect to a facility after

construction has begun. This notice clari-fies the application of the Physical WorkTest and the effect that certain transferswith respect to a facility after constructionhas begun will have on a taxpayer’s abil-ity to qualify for the PTC or the ITC. Inaddition, this notice modifies the applica-tion of the Safe Harbor for certain facili-ties with respect to which a taxpayer paidor incurred less than five percent, but atleast three percent, of the total cost of thefacility before January 1, 2014.

SECTION 3. PHYSICAL WORKTEST

The Physical Work Test requires that ataxpayer begin physical work of a signif-icant nature (as defined in section 4.02 ofNotice 2013–29) prior to January 1, 2014.This test focuses on the nature of the workperformed, not the amount or cost. Notice2013–29 describes several activities thatconstitute physical work of a significantnature. These activities are merely exam-ples and not an exclusive list of the activ-ities that will satisfy the Physical WorkTest. For example, section 4.02 of Notice2013–29 provides:

In the case of a facility for the production ofelectricity from a wind turbine, on-site physicalwork of a significant nature begins with thebeginning of the excavation for the foundation,the setting of anchor bolts into the ground, orthe pouring of the concrete pads of the foun-dation.

Section 4.05(1) of Notice 2013–29 provides:

Physical work on a custom-designed trans-former that steps up the voltage of electricityproduced at the facility to the voltage neededfor transmission is physical work of a signifi-cant nature with respect to the facility becausepower conditioning equipment is an integralpart of the activity performed by the facility.

Section 4.05(2) of Notice 2013–29 provides:

Roads that are integral to the facility are inte-gral to the activity performed by the facility;these include onsite roads that are used formoving materials to be processed (for example,biomass) and roads for equipment to operateand maintain the qualified facility. Startingconstruction on these roads constitutes physicalwork of a significant nature with respect to thefacility.

Beginning work on any one of the ac-tivities described above will constitutephysical work of a significant nature.


Section 4.04(3) of Notice 2013–29 pro-vides an example in which X, a developerof a 50 turbine wind farm, is found tosatisfy the beginning of construction re-quirement in part based on the stated factthat, in 2013, for 10 of the 50 turbines, Xexcavates the site for the foundations ofthe wind turbines and pours concrete forthe supporting pads. This example illus-trates the “single project” concept setforth in section 4.04(2) of Notice 2013–29and is not intended to indicate that there isa 20% threshold or minimum amount ofwork required to satisfy the PhysicalWork Test.

Assuming the work performed is of asignificant nature, there is no fixed mini-mum amount of work or monetary or per-centage threshold required to satisfy thePhysical Work Test.

As provided in section 4.01 of Notice2013–29 the Service will closely scruti-nize a facility, and may determine thatconstruction has not begun on a facilitybefore January 1, 2014, if a taxpayer doesnot maintain a continuous program ofconstruction as determined under section4.06 of Notice 2013–29 and section 3.02of Notice 2013–60.

SECTION 4. TRANSFERS WITHRESPECT TO A FACILITY

.01 In general. Certain of the defini-tions of a qualified facility provided insection 45(d) require that the constructionof the facility begin before January 1,2014. There is no statutory requirementthat the taxpayer that places the facility inservice also be the taxpayer that beginsconstruction of the facility. See Notice2013–60, section 5.01. Moreover, section48(a)(5)(D) defines “qualified property”(which may be eligible for the ITC in lieuof the PTC) as certain property that is“constructed, reconstructed, erected, oracquired by the taxpayer.” (Emphasisadded.) Thus, except as provided in sec-tion 4.03 of this notice, a fully or partiallydeveloped facility may be transferredwithout losing its qualification under thePhysical Work Test or the Safe Harbor forpurposes of the PTC or the ITC. For ex-ample, a taxpayer may acquire a facility(that consists of more than just tangiblepersonal property) from an unrelated de-veloper that had begun construction of thefacility prior to January 1, 2014, and

thereafter the taxpayer may complete thedevelopment of that facility and place it inservice. The work performed or amountpaid or incurred prior to January 1, 2014,by the unrelated transferor developer maybe taken into account for purposes of de-termining whether the facility satisfies thePhysical Work Test or Safe Harbor.

.02 Relocation of equipment by a tax-payer. A taxpayer also may begin con-struction of a facility in 2013 with theintent to develop the facility at a certainsite, but thereafter transfer equipment andother components of the facility to a dif-ferent site, complete its development, andplace it in service. The work performed oramount paid or incurred prior to January1, 2014, by such a taxpayer may be takeninto account for purposes of determiningwhether the facility satisfies the PhysicalWork Test or the Safe Harbor.

.03 Transfers of equipment betweenunrelated parties. In the case of a transferconsisting solely of tangible personalproperty (including contractual rights tosuch property under a binding writtencontract) to a transferee not related (de-fined for these purposes by reference tosection 197(f)(9)(C)) to the transferor, anywork performed or amount paid or in-curred by the transferor with respect tosuch property so transferred will not betaken into account with respect to thetransferee for purposes of the PhysicalWork Test or the Safe Harbor.

Example. Developer D intends to develop andoperate Facility K at a location to be determined.Prior to January 1, 2014, Developer D pays or incurs$60,000 to have tangible personal property integralto Facility K manufactured off-site pursuant to abinding written contract. Thereafter Developer Dincurs no further development costs and engages inno further development activity with respect to Fa-cility K. In January 2014, Developer D sells thetangible personal property to Developer E, a partyunrelated to Developer D. Developer E is developingand intends to operate Facility L, a facility located ona parcel of land owned by Developer E. Developer Eincorporates the tangible personal property acquiredfrom Developer D into Facility L. In October 2015,Developer E places Facility L in service on theparcel of land. The total cost of Facility L is$1,000,000.

Amounts paid or incurred by Developer D priorto January 1, 2014, for the tangible personal propertywill not be taken into account for purposes of satis-fying the Safe Harbor with respect to Facility L.However, if without regard to these components,Developer E has otherwise satisfied the PhysicalWork Test or the Safe Harbor with respect to FacilityL, Developer E will be eligible to claim the PTC

with respect to electricity generated by Facility Land sold to an unrelated party. In such a case, De-veloper E may alternatively elect to claim the ITC inlieu of the PTC.

SECTION 5. SAFE HARBOR

.01 Single project. If the amount a tax-payer paid or incurred before January 1,2014, with respect to the total cost of afacility that is a single project comprisedof multiple facilities (as described in sec-tion 4.04(2) of Notice 2013–29) is lessthan five percent of the total cost of thefacility at the time the facility is placed inservice, the Safe Harbor is not fully satis-fied. However, if a taxpayer paid or in-curred at least three percent of the totalcost of such a facility before January 1,2014, the Safe Harbor may be satisfiedand the PTC or ITC may be claimed withrespect to some, but not all, of the indi-vidual facilities (as described in section4.04(1) of Notice 2013–29) comprisingthe project. In this situation, a taxpayermay claim the PTC or ITC on any numberof individual facilities as long as the totalaggregate cost of those individual facili-ties at the time the project is placed inservice is not greater than twenty timesthe amount the taxpayer paid or incurredbefore January 1, 2014. The ContinuousEfforts Test of section 5.02 of Notice2013–29 must also be met to qualify forthe Safe Harbor.

.02 Single facility. If the amount a tax-payer actually paid or incurred before Jan-uary 1, 2014, with respect to the total costof a single facility that is not a singleproject comprised of multiple individualfacilities (as described in section 4.04(2)of Notice 2013–29), and that cannot beseparated into individual facilities, is lessthan five percent of the total cost of thefacility at the time the facility is placed inservice, then the taxpayer will not satisfythe Safe Harbor with respect to any por-tion of the facility.

.03 Examples – (a) Example 1. Developer incurs$30,000 in costs prior to January 1, 2014, to con-struct Project M, a five-turbine wind farm, that willbe operated as a single project (as described insection 4.04(2) of Notice 2013–29). In October2015, Developer places Project M in service. Thetotal cost of Project M is $800,000, with each turbinecosting $160,000. Although Developer did not payor incur five percent of the total cost of Project Mbefore January 1, 2014, Developer did pay or incurat least three percent of the total cost of Project Mbefore January 1, 2014. In addition, because Devel-


oper placed Project M in service before January 1,2016, Developer is deemed to satisfy the Contin-uous Efforts Test pursuant to section 3.02 of No-tice 2013– 60. Accordingly, Developer will betreated as satisfying the Safe Harbor with respectto three of the turbines of Project M, as their totalaggregate cost of $480,000 is not greater thantwenty times the $30,000 in costs incurred byDeveloper prior to January 1, 2014. Thus, Devel-oper may claim the PTC on electricity producedfrom three of the turbines of Project M or the ITCbased on $480,000, the cost of three of the tur-bines of Project M.

(b) Example 2. Developer incurs $25,000 in costsprior to January 1, 2014, to construct Facility N, anopen-loop biomass facility, partly comprised of oneboiler and one turbine generator that are functionallyinterdependent. In October 2015, Developer placesFacility N in service. The total cost of Facility N is$600,000. Because Developer did not pay or incurfive percent of the actual total cost of Facility Nbefore January 1, 2014, and because the boiler andturbine generator are integral parts of a single facilitythat is not a single project comprised of multiplefacilities (as described in section 4.04(2) of Notice2013–29), Developer will not satisfy the Safe Har-bor. However, if physical work of a significant na-ture began (within the meaning of section 4.01 ofNotice 2013–29, as clarified by section 3 of thisnotice) before January 1, 2014, Developer may beable to claim the PTC or the ITC with respect toFacility N.

SECTION 6. EFFECT ON OTHERDOCUMENTS

Notice 2013–29, 2013–1 C.B. 1085,and Notice 2013–60, 2013–2 C.B. 431,are clarified and modified.

SECTION 7. DRAFTINGINFORMATION

The principal author of this notice isJennifer C. Bernardini of the Office ofAssociate Chief Counsel (Passthroughs &Special Industries). For further informa-tion regarding this notice contact Ms. Ber-nardini on (202) 317-6853 (not a toll-freenumber).

Health InsuranceProviders Fee

Notice 2014–47

Section 1. PURPOSE

This notice provides guidance for the2014 fee year on how the Internal Reve-nue Service (IRS) and the Department ofTreasury (Treasury) will administer thedefinition of a covered entity for purposes

of the fee imposed by § 9010 of the Pa-tient Protection and Affordable Care Act(PPACA), Public Law 111–148 (124 Stat.119 (2010)), as amended by § 10905 ofPPACA, and as further amended by§ 1406 of the Health Care and EducationReconciliation Act of 2010, Public Law111–152 (124 Stat. 1029 (2010)) (collec-tively, the ACA). This notice applies onlyto the 2014 fee year. All references to§ 9010 are references to § 9010 of theACA.

Specifically, this notice resolves confu-sion as to the scope of the exclusions in§ 9010(c)(2) from the general definition ofthe term covered entity. Additionally, thisnotice clarifies that a controlled groupdoes not have to report for a controlledgroup member who would not qualify as acovered entity in the 2014 fee year if itwere a single-person covered entity.

Section 2. BACKGROUND

Section 9010(c)(1) defines the term“covered entity” to mean any entity thatprovides health insurance for any UnitedStates health risk during the calendar yearin which the fee is due (the fee year).

Generally, § 9010(c)(2) excludes fromthe definition of covered entity— (A) self-insured employers; (B) governmental en-tities; (C) certain nonprofit corporations;and (D) non-employer established§ 501(c)(9) entities.

Section 9010(c)(3) provides that forpurposes of § 9010(c), all persons treatedas a single employer under subsection (a)or (b) of § 52 of the Internal RevenueCode (Code), or subsection (m) or (o) of§ 414 shall be treated as a single coveredentity (or employer for purposes of§ 9010(c)(2)).

Section 57.2(c)(1) of the Health Insur-ance Providers Fee Regulations (Regula-tions) defines the term “controlled group”to mean a group of two or more persons,including at least one person that is acovered entity, that is treated as a singleemployer under § 52(a), 52(b), 414(m), or414(o) of the Code.

Section 57.2(c)(2) of the Regulationstreats a controlled group (as defined in§ 57.2(c)(1)) as a single covered entity forpurposes of the health insurance providersfee.

Section 57.2(d) defines the term datayear to mean the calendar year immedi-ately before the fee year.

Section 57.2(g) defines the term feeyear to mean the calendar year in whichthe fee must be paid to the government.

Section 3. DISCUSSION

For the 2014 fee year, the IRS andTreasury will not treat any entity as acovered entity if it is excluded from thedefinition of a covered entity because itqualifies for one of the exclusions under§ 9010(c)(2) for the entire 2013 data yearor qualifies for one of the exclusions un-der § 9010(c)(2) for the entire 2014 feeyear, which began on January 1, 2014.Since the IRS and Treasury will not treatsuch an entity as a covered entity, itshould not report its net premiums writtenfor the 2013 data year.

In addition, for the 2014 fee year, acontrolled group must report net premi-ums written only for those persons whoare controlled group members at the endof the day on December 31 of the 2013data year and who would qualify as acovered entity in the fee year if it were asingle-person covered entity. A controlledgroup should not report net premiumswritten for any controlled group memberwho would not qualify as a covered entityin the 2014 fee year if it were a single-person covered entity.

Such entity will be treated as a memberof the controlled group for other purposes,however, such as joint and several liabilityfor the fee amount allocated to the con-trolled group. Additional guidance will beissued in the future regarding the scope ofthe exclusions in § 9010(c)(2) from thegeneral definition of the term covered en-tity for fee years after the 2014 fee year.

Section 4. CORRECTIVE ACTIONS/APPLICABILITY

Any entity that needs to correct a pre-viously submitted Form 8963, “Report ofHealth Insurance Provider Information,”due to the clarification provided in thisnotice must do so by faxing the correctedForm 8963 to 877-797-0235 (a toll-freenumber) no later than Monday, August18, 2014. The IRS cannot process a Form8963 received after this date. This noticeapplies only to the 2014 fee year.


The IRS and Treasury recognize that en-tities will not know whether they qualify forone of the exclusions under § 9010(c)(2) forthe entire 2014 fee year until the end of2014. Entities that reasonably project thatthey will qualify for an exclusion under§ 9010(c)(2) for the entire 2014 fee yearmay submit a corrected Form 8963 on orbefore August 18, 2014, even though the2014 fee year is not yet over.

Section 5. DRAFTING INFORMATION

The principal author of this notice isNatalie Payne of the Office of the Asso-ciate Chief Counsel (Passthroughs & Spe-cial Industries). For further information re-garding this notice please contact Ms. Payneat (202) 317-6855 (not a toll-free number).

Update for WeightedAverage Interest Rates,Yield Curves, and SegmentRates

Notice 2014–48

This notice provides guidance on thecorporate bond monthly yield curve, thecorresponding spot segment rates used un-der § 417(e)(3), and the 24-month averagesegment rates under § 430(h)(2) of theInternal Revenue Code. In addition, thisnotice provides guidance as to the interestrate on 30-year Treasury securities under§ 417(e)(3)(A)(ii)(II) as in effect for planyears beginning before 2008 and the 30-year Treasury weighted average rate un-der § 431(c)(6)(E)(ii)(I). The rates in thisnotice reflect the application of§ 430(h)(2)(C)(iv), which was added bythe Moving Ahead for Progress in the 21stCentury Act, Public Law 112–141 (MAP–

21) and amended by section 2003 of theHighway and Transportation Funding Actof 2014 (HATFA).

YIELD CURVE AND SEGMENTRATES

Generally, except for certain plans undersections 104 and 105 of the Pension Protec-tion Act of 2006 and CSEC plans under§ 414(y), § 430 of the Code specifies theminimum funding requirements that applyto single-employer plans pursuant to § 412.Section 430(h)(2) specifies the interest ratesthat must be used to determine a plan’starget normal cost and funding target. Underthis provision, present value is generally de-termined using three 24-month average in-terest rates (“segment rates”), each of whichapplies to cash flows during specified peri-ods. To the extent provided under§ 430(h)(2)(C)(iv), these segment rates areadjusted by the applicable percentage of the25-year average segment rates for the periodending September 30 of the year precedingthe calendar year in which the plan yearbegins. However, an election may be madeunder § 430(h)(2)(D)(ii) to use the monthlyyield curve in place of the segment rates.

Notice 2007–81, 2007–44 I.R.B. 899,provides guidelines for determining themonthly corporate bond yield curve, andthe 24-month average corporate bond seg-ment rates used to compute the target nor-mal cost and the funding target. In accor-dance with the methodology specified inNotice 2007–81, the monthly corporatebond yield curve derived from July 2014data is in Table I at the end of this notice.The spot first, second, and third segmentrates for the month of July 2014 are, re-spectively, 1.26, 3.94, and 5.02.

The 24-month average segment ratesdetermined under § 430(h)(2)(C)(i)through (iii) must be adjusted pursuant to

§ 430(h)(2)(C)(iv) by the applicable per-centage of the corresponding 25-year av-erage segment rates. Section 2003(a) ofHATFA amended the applicable percent-ages under § 430(h)(2)(C)(iv). Thischange generally applies to plan years be-ginning on or after January 1, 2013. How-ever, pursuant to section 2003(e)(2) ofHATFA, a plan sponsor can elect not tohave the amendments made to the appli-cable percentages by section 2003 ofHATFA apply to any plan year beginningin 2013. These elections can be made ei-ther for all purposes or, alternatively, forpurposes of determining the adjustedfunding target attainment percentage un-der § 436. The 25-year average segmentrates for plan years beginning in 2012,2013, and 2014 were published in Notice2012–55, 2012–36 I.R.B. 332, Notice2013–11, 2013–11 I.R.B. 610, and Notice2013–58, 2013–40 I.R.B. 294, respectively.

For plan years beginning in years 2012through 2017, pursuant to the changesmade by HATFA, the applicable mini-mum percentage is 90% and the applica-ble maximum percentage is 110%. Theseapplicable percentages are referred to asHATFA applicable percentages. As de-scribed in the preceding paragraph, a spe-cial election is available for any plan yearbeginning in 2013 under which thischange made by HATFA can be disre-garded for all purposes or for limited pur-poses. To the extent such an election ismade, the applicable minimum percentagefor a plan year beginning in 2013 is 85%and the applicable maximum percentagefor that plan year is 115%. These applica-ble percentages are referred to asMAP–21 applicable percentages.

The 25-year segment rates and permis-sible corridors for plan years beginning in2013 are as follows:

First Second ThirdSegment Segment Segment

25-year average rates 5.81 7.23 7.95

Min 5.23 6.51 7.16

HATFA Permissible corridors to to to

Max 6.39 7.95 8.75

Min 4.94 6.15 6.76

MAP–21 Permissible corridors for electing plans to to to

Max 6.68 8.31 9.14


The 25-year segment rates and HATFA permissible corridors for plan years beginning in 2014 are as follows:

First Second ThirdSegment Segment Segment

25-year average rates 5.54 7.02 7.77

Min 4.99 6.32 6.99

HATFA Permissible corridors to to to

Max 6.09 7.72 8.55

The three 24-month average corporate bond segment rates applicable for August 2014 without adjustment for the 25-year averagesegment rate limits are as follows:

ApplicableMonth

FirstSegment

SecondSegment

ThirdSegment

August 2014 1.15 4.06 5.14

Based on § 430(h)(2)(C)(iv) as in effect prior to amendment by section 2003 of HATFA, the three 24-month averages applicablefor August 2014 adjusted for the MAP–21 applicable percentages of the corresponding 25-year average segment rates, for plan yearsbeginning in 2013, are as follows:

For PlanYears

BeginningIn

Adjusted 24-Month AverageSegment Rates, Based on ApplicablePercentage of 25-Year Average Rates

ApplicableMonth

FirstSegment

SecondSegment

ThirdSegment

2013 August 2014 4.94 6.15 6.76

Based on § 430(h)(2)(C)(iv) as amended by section 2003 of HATFA, the 24-month averages applicable for August 2014 adjustedfor the HATFA applicable percentages of the corresponding 25-year average segment rates, are as follows:

For PlanYears

BeginningIn

Adjusted 24-Month AverageSegment Rates, Based on the HATFA

Applicable Percentage of25-Year Average Rates

ApplicableMonth

FirstSegment

SecondSegment

ThirdSegment

2013 August 2014 5.23 6.51 7.16

2013 August 2014 4.99 6.32 6.99

For all prior applicable months withrespect to plan years beginning in 20131,and for all prior applicable months withrespect to plan years beginning in 2014,the unadjusted 24-month average segmentrates have been lower than the minimumpermissible values under the applicable

percentages as modified by HATFA.Therefore, with respect to plan years be-ginning in 2013, for applicable monthsSeptember 2012 through July 2014, thefirst, second, and third adjusted 24-monthaverage segment rates determined underthe applicable percentages as modified by

HATFA are equal to the adjusted segmentrates for the August 2014 applicablemonth that are listed in the table immedi-ately above for plan years beginning in2013. Similarly, with respect to plan yearsbeginning in 2014, for applicable monthsSeptember 2013 through July 2014, the

1As provided under § 430(h)(2)(E), for purposes of determining interest rates for a plan year, the applicable month with respect to plan years beginning in 2013 may be as early as September2012.


first, second, and third adjusted 24-monthaverage segment rates determined underthe applicable percentages as modified byHATFA are equal to the adjusted segmentrates for the August 2014 applicablemonth that are listed in the table immedi-ately above for plan years beginning in2014. The adjusted segment rates pub-lished in prior notices for these applicablemonths for plan years beginning in 2014do not apply, and the adjusted segmentrates published in prior notices for theseapplicable months for plan years begin-ning in 2013 apply only to the extentapplicable under an election, pursuant tosection 2003(e)(2) of HATFA, to applythe MAP–21 segment rates rather than the

HATFA segment rates. For a list of af-fected notices, see the section entitled Ef-fect On Other Documents, below.

30-YEAR TREASURY SECURITIESINTEREST RATES

Generally, for plan years beginning af-ter 2007, § 431 specifies the minimumfunding requirements that apply to mul-tiemployer plans pursuant to § 412. Sec-tion 431(c)(6)(B) specifies a minimumamount for the full-funding limitation de-scribed in section 431(c)(6)(A), based onthe plan’s current liability. Section431(c)(6)(E)(ii)(I) provides that the inter-est rate used to calculate current liability

for this purpose must be no more than 5percent above and no more than 10 per-cent below the weighted average of therates of interest on 30-year Treasury se-curities during the four–year period end-ing on the last day before the beginning ofthe plan year. Notice 88–73, 1988–2 C.B.383, provides guidelines for determiningthe weighted average interest rate. Therate of interest on 30-year Treasury secu-rities for July 2014 is 3.33 percent. TheService has determined this rate as theaverage of the daily determinations ofyield on the 30-year Treasury bond ma-turing in May 2044. The following rateswere determined for plan years beginningin the month shown below.

For Plan YearsBeginning in

30-YearTreasuryWeightedAverage

Permissible Range

Month Year 90% to 105%

August 2014 3.41 3.07 3.58

MINIMUM PRESENT VALUESEGMENT RATES

In general, the applicable interest ratesunder § 417(e)(3) are segment rates com-

puted without regard to a 24-month aver-age or adjustments based on a 25-yearaverage. Notice 2007–81 provides guide-lines for determining the minimum pres-ent value segment rates. Pursuant to that

notice, the minimum present value seg-ment rates determined for July 2014 are asfollows:

FirstSegment

SecondSegment

ThirdSegment

1.26 3.94 5.02

FUTURE GUIDANCE

The Treasury and the Service intend toissue additional guidance in the near fu-ture on other issues relating to the appli-cation of HATFA, including guidance re-lating to benefit restrictions, elections, andtransition issues.

EFFECT ON OTHER DOCUMENTS

The following Notices are modified:Notice 2013–11, 2013–11 I.R.B. 610,Notice 2013–23, 2013–16 I.R.B. 906,Notice 2013–28, 2013–19 I.R.B. 1039,Notice 2013–32, 2013–22 I.R.B. 1137,Notice 2013–37, 2013–26 I.R.B. 1269,

Notice 2013–46, 2013–31 I.R.B. 117,Notice 2013–52, 2013–35 I.R.B. 159,Notice 2013–58, 2013–40 I.R.B. 294,Notice 2013–66, 2013–46 I.R.B. 498,Notice 2013–75, 2013–49 I.R.B. 599,Notice 2013–85, 2013–52 I.R.B. 827,Notice 2014–8, 2014–5 I.R.B. 452,Notice 2014–13, 2014–10 I.R.B. 616,Notice 2014–16, 2014–14 I.R.B. 920,Notice 2014–27, 2014–18 I.R.B. 987,Notice 2014–34, 2014–23 I.R.B.

1069,Notice 2014–41, 2014–27 I.R.B. 97,Notice 2014–43, 2014–31 I.R.B. 249.

DRAFTING INFORMATION

The principal author of this notice isTony Montanaro of the Employee Plans,Tax Exempt and Government Entities Di-vision. However, other personnel from theInternal Revenue Service and the TreasuryDepartment participated in preparing this no-tice. Mr. Montanaro may be e-mailed [email protected].


Table IMonthly Yield Curve for July 2014

Derived from July 2014 Data

Maturity Yield Maturity Yield Maturity Yield Maturity Yield Maturity Yield

0.5 0.18 20.5 4.67 40.5 5.06 60.5 5.19 80.5 5.26

1.0 0.43 21.0 4.69 41.0 5.06 61.0 5.19 81.0 5.26

1.5 0.68 21.5 4.71 41.5 5.07 61.5 5.19 81.5 5.26

2.0 0.93 22.0 4.73 42.0 5.07 62.0 5.20 82.0 5.26

2.5 1.17 22.5 4.74 42.5 5.08 62.5 5.20 82.5 5.26

3.0 1.41 23.0 4.76 43.0 5.08 63.0 5.20 83.0 5.26

3.5 1.64 23.5 4.77 43.5 5.08 63.5 5.20 83.5 5.26

4.0 1.86 24.0 4.78 44.0 5.09 64.0 5.20 84.0 5.27

4.5 2.07 24.5 4.80 44.5 5.09 64.5 5.21 84.5 5.27

5.0 2.27 25.0 4.81 45.0 5.10 65.0 5.21 85.0 5.27

5.5 2.46 25.5 4.82 45.5 5.10 65.5 5.21 85.5 5.27

6.0 2.64 26.0 4.83 46.0 5.11 66.0 5.21 86.0 5.27

6.5 2.81 26.5 4.85 46.5 5.11 66.5 5.21 86.5 5.27

7.0 2.96 27.0 4.86 47.0 5.11 67.0 5.22 87.0 5.27

7.5 3.11 27.5 4.87 47.5 5.12 67.5 5.22 87.5 5.27

8.0 3.25 28.0 4.88 48.0 5.12 68.0 5.22 88.0 5.27

8.5 3.38 28.5 4.89 48.5 5.12 68.5 5.22 88.5 5.28

9.0 3.50 29.0 4.90 49.0 5.13 69.0 5.22 89.0 5.28

9.5 3.61 29.5 4.91 49.5 5.13 69.5 5.22 89.5 5.28

10.0 3.71 30.0 4.92 50.0 5.13 70.0 5.23 90.0 5.28

10.5 3.81 30.5 4.93 50.5 5.14 70.5 5.23 90.5 5.28

11.0 3.90 31.0 4.93 51.0 5.14 71.0 5.23 91.0 5.28

11.5 3.98 31.5 4.94 51.5 5.14 71.5 5.23 91.5 5.28

12.0 4.05 32.0 4.95 52.0 5.15 72.0 5.23 92.0 5.28

12.5 4.12 32.5 4.96 52.5 5.15 72.5 5.23 92.5 5.28

13.0 4.18 33.0 4.97 53.0 5.15 73.0 5.24 93.0 5.28

13.5 4.23 33.5 4.97 53.5 5.15 73.5 5.24 93.5 5.28

14.0 4.29 34.0 4.98 54.0 5.16 74.0 5.24 94.0 5.29

14.5 4.33 34.5 4.99 54.5 5.16 74.5 5.24 94.5 5.29

15.0 4.38 35.0 4.99 55.0 5.16 75.0 5.24 95.0 5.29

15.5 4.41 35.5 5.00 55.5 5.17 75.5 5.24 95.5 5.29

16.0 4.45 36.0 5.01 56.0 5.17 76.0 5.24 96.0 5.29

16.5 4.48 36.5 5.01 56.5 5.17 76.5 5.25 96.5 5.29

17.0 4.51 37.0 5.02 57.0 5.17 77.0 5.25 97.0 5.29

17.5 4.54 37.5 5.02 57.5 5.18 77.5 5.25 97.5 5.29

18.0 4.57 38.0 5.03 58.0 5.18 78.0 5.25 98.0 5.29

18.5 4.59 38.5 5.04 58.5 5.18 78.5 5.25 98.5 5.29

19.0 4.61 39.0 5.04 59.0 5.18 79.0 5.25 99.0 5.29

19.5 4.64 39.5 5.05 59.5 5.19 79.5 5.25 99.5 5.30

20.0 4.66 40.0 5.05 60.0 5.19 80.0 5.26 100.0 5.30


26 CFR 601.204:Changes in accounting periods andin methods of accounting.(Also Part I, §§ 446, 471, 481)

Rev. Proc. 2014–48

SECTION 1. PURPOSE

This revenue procedure provides theexclusive procedures by which a taxpayerobtains the consent of the Commissionerunder § 446(e) of the Internal RevenueCode to make certain changes within theretail inventory method to comply withfinal regulations under § 1.471–8 of theIncome Tax Regulations.

SECTION 2. BACKGROUND

.01 Under § 1.471–8, a taxpayer mayuse the retail inventory method to com-pute the value of ending inventory at ap-proximate cost (retail cost) or approxi-mate lower of cost or market (retailLCM), by multiplying the retail sellingprices of goods on hand at the end of thetaxable year by a cost complement ratio.The cost complement is the value of be-ginning inventory plus the cost of pur-chases divided by the retail selling pricesof beginning inventory and purchases. OnAugust 15, 2014, the Internal RevenueService (IRS) and Treasury Departmentpublished final regulations under§ 1.471–8 (TD 9688) clarifying a taxpay-er’s treatment of certain sales-based ven-dor allowances, margin protection pay-ments, permanent markups andmarkdowns, and temporary markups andmarkdowns when determining the costcomplement. The final regulations applyto taxable years beginning after December31, 2014.

.02 The final regulations clarify that ataxpayer using the retail inventory methodmay not reduce the numerator of the costcomplement by the amount of an allow-ance, discount, or price rebate that, under§ 1.471–3(e), must reduce only cost ofgoods sold.

.03 The final regulations provide that ataxpayer using retail LCM generally maynot reduce the numerator of the cost com-plement by the amount of an allowance,discount, or price rebate that is related toor intended to compensate for a reductionin the taxpayer’s retail selling price ofinventory (a margin protection payment).

.04 The final regulations clarify that ataxpayer using the retail inventory methodgenerally must adjust the denominator ofthe cost complement for all permanentmarkups and markdowns, but may notreduce the denominator for temporarymarkups or markdowns. A taxpayer usingretail LCM, however, generally does notadjust the denominator of the cost com-plement for markdowns.

.05 The final regulations provide analternative method for a taxpayer usingretail LCM to compute the cost comple-ment by reducing the numerator by theamount of margin protection payments ifthe taxpayer also reduces the denominatorof the cost complement by the amount ofthe reductions in retail selling price towhich the margin protection payments re-late (related markdowns).

.06 The final regulations provide a sec-ond alternative method for a taxpayer us-ing retail LCM to account for margin pro-tection payments when computing thecost complement. Under this method, ataxpayer that is able to determine theamount of its margin protection paymentsbut cannot determine the amount of therelated markdowns may compute the costcomplement by reducing the numerator bythe amount of margin protection paymentsand adjusting the denominator by theamount that, in conjunction with the re-duction of the numerator, maintains whatwould have been the cost complementpercentage before taking into account themargin protection payments and relatedmarkdowns.

.07 A taxpayer using one of the alter-native methods described in sections 2.05and 2.06 above must use that method forall cost complements.

.08 Sections 446(e) and 1.446–1(e)(2)state that, except as otherwise provided, ataxpayer must secure the consent of theCommissioner before changing a methodof accounting for federal income tax pur-poses. Section 1.446–1(e)(3)(ii) autho-rizes the Commissioner to prescribe ad-ministrative procedures providing thelimitations, terms, and conditions neces-sary to permit a taxpayer to obtain consentto change a method of accounting in ac-cordance with § 446(e).

.09 Rev. Proc. 2011–14, 2011–1 C.B.330, provides procedures for a taxpayer toobtain automatic consent of the Commis-

sioner to change to a method of account-ing described in the Appendix.

.10 Section 481(a) requires the adjust-ments necessary to prevent amounts frombeing duplicated or omitted when a tax-payer’s taxable income is determined un-der a method of accounting different fromthe method used to determine taxable in-come for the preceding taxable year. Seesection 2.05(1) of Rev. Proc. 2011–14.

.11 When a change in method of ac-counting is made on a cut-off basis, ingeneral, only the items arising on or afterthe beginning of the year of change areaccounted for under the new method ofaccounting. See section 2.06 of Rev. Proc.2011–14.

SECTION 3. SCOPE

This revenue procedure applies to ataxpayer using the retail inventory methodthat wants to change its method of ac-counting to comply with the final regula-tions under § 1.471–8.

SECTION 4. CHANGES INMETHOD OF ACCOUNTING

Rev. Proc. 2011–14 is modified to addnew section 21.16 of the APPENDIX, toread as follows:

.16 Retail inventory method.(1) Description of change. This change

applies to a taxpayer using the retail in-ventory method that wants to make one ofthe following changes—

(a) From adjusting to not adjusting thenumerator of the cost complement by theamount of an allowance, discount, or pricerebate that is required under § 1.471–3(e)to reduce only cost of goods sold;

(b) From adjusting to not adjusting thedenominator of the cost complement fortemporary markups and markdowns;

(c) In the case of a retail LCM tax-payer:

(i) From adjusting to not adjusting thenumerator of the cost complement by theamount of a margin protection payment;

(ii) From adjusting to not adjusting thedenominator of the cost complement forpermanent markdowns;

(iii) From using one method for com-puting the cost complement described in§ 1.471–8(b)(3) to using a differentmethod described in § 1.471–8(b)(3);


(d) In the case of a retail cost taxpayer,from not adjusting to adjusting the de-nominator of the cost complement for per-manent markups and markdowns;

(2) Certain scope limitations tempo-rarily inapplicable. The scope limitationsin section 4.02 (1) through (4) and (7) ofthis revenue procedure do not apply for ataxpayer’s first or second taxable yearsbeginning after December 31, 2014.

(3) Multiple changes. A taxpayer thatwants to make multiple changes under thissection 21.16 of the APPENDIX for thesame year of change should file a singleForm 3115.

(4) Manner of making change. A tax-payer making a change under this section21.16 of the APPENDIX for its first orsecond taxable year beginning after De-cember 31, 2014 may use either a § 481(a)adjustment as provided in sections 5.03and 5.04 of this revenue procedure or im-plement the change on a cut-off basis. If acut-off basis is used, the change appliesonly to the computation of ending inven-tories after the beginning of the year ofchange. See section 2.06 of this revenue

procedure for more information regardinga cut-off basis. A § 481(a) adjustment isneither permitted nor required if a changeis made on a cut-off basis.

(5) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for changes in methods of ac-counting under section 21.16 of this AP-PENDIX is “204.” See section 6.02(4) ofthis revenue procedure.

(6) Ogden copy of Form 3115 requiredin lieu of national office copy. A taxpayerchanging its method of accounting underthis section 21.16 of the APPENDIX mustfile a signed copy of its completed Form3115 with the IRS in Ogden, UT, in lieuof filing the national office copy, no ear-lier than the first day of the year of changeand no later than the date the taxpayerfiles the original Form 3115 with its fed-eral income tax return for the year ofchange. See sections 6.02(3)(a)(ii)(B)(providing the general rules) and6.02(7)(b) (providing the mailing address)of this revenue procedure.

(7) Contact information. For further in-formation regarding a change under thissection, contact Natasha M. Mulleneauxat 202–317–7007 (not a toll-free call).

SECTION 5. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2011–14 is modified to addnew section 21.16 to the APPENDIX.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective fortaxable years beginning after December31, 2014.

SECTION 7. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Natasha M. Mulleneaux ofthe Office of Associate Chief Counsel (In-come Tax and Accounting). For furtherinformation regarding this revenue proce-dure, contact Christopher Call at (202)317–7007 (not a toll-free number).


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

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling 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 thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded 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 isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, 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 namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the 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 ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial published 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.

Bulletin No. 2014–36 September 2, 2014i

Numerical Finding List1

Bulletins 2014–27 through 2014–36

Announcements:

2014-2, 2014-28 I.R.B. 1202014-28, 2014-34 I.R.B. 3912014-29, 2014-35 I.R.B. 452

Notices:

2014-40, 2014-27 I.R.B. 1002014-41, 2014-27 I.R.B. 972014-42, 2014-34 I.R.B. 3872014-43, 2014-31 I.R.B. 2492014-44, 2014-32 I.R.B. 2702014-45, 2014-34 I.R.B. 3882014-46, 2014-36 I.R.B. 5202014-47, 2014-36 I.R.B. 5222014-48, 2014-36 I.R.B. 523

Proposed Regulations:

REG-104579-13, 2014-33 I.R.B. 370REG-120756-13, 2014-31 I.R.B. 252REG-105067-14, 2014-34 I.R.B. 391REG-110948-14, 2014-30 I.R.B. 239REG-121542-14, 2014-28 I.R.B. 119REG-107012-14, 2014-33 I.R.B. 371REG-123286-14, 2014-33 I.R.B. 377REG-209459-78, 2014-31 I.R.B. 253

Revenue Procedures:

2014-26, 2014-27 I.R.B. 262014-27, 2014-27 I.R.B. 412014-29, 2014-28 I.R.B. 1052014-37, 2014-33 I.R.B. 3632014-38, 2014-29 I.R.B. 1322014-39, 2014-29 I.R.B. 1512014-40, 2014-30 I.R.B. 2292014-41, 2014-33 I.R.B. 3642014-42, 2014-29 I.R.B. 1932014-43, 2014-32 I.R.B. 2732014-44, 2014-32 I.R.B. 2742014-45, 2014-34 I.R.B. 3882014-46, 2014-33 I.R.B. 3672014-47, 2014-35 I.R.B. 3932014-48, 2014-36 I.R.B. 527

Revenue Rulings:

2014-14, 2014-27 I.R.B. 122014-19, 2014-32 I.R.B. 2662014-20, 2014-28 I.R.B. 1012014-21, 2014-34 I.R.B. 381

Treasury Decisions:

9664, 2014-32 I.R.B. 2549668, 2014-27 I.R.B. 1

Treasury Decisions—Continued:

9669, 2014-28 I.R.B. 1039670, 2014-29 I.R.B. 1219671, 2014-29 I.R.B. 1249672, 2014-30 I.R.B. 1969673, 2014-30 I.R.B. 2129674, 2014-30 I.R.B. 2259675, 2014-31 I.R.B. 2429676, 2014-32 I.R.B. 2609677, 2014-31 I.R.B. 2419678, 2014-32 I.R.B. 2629679, 2014-32 I.R.B. 2679680, 2014-32 I.R.B. 2549681, 2014-33 I.R.B. 3409682, 2014-33 I.R.B. 3429683, 2014-33 I.R.B. 3309684, 2014-33 I.R.B. 3459685, 2014-34 I.R.B. 3799686, 2014-34 I.R.B. 3829687, 2014-36 I.R.B. 4869688, 2014-36 I.R.B. 4829689, 2014-36 I.R.B. 456

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2014–01 through 2014–26 is in Internal Revenue Bulletin2014–26, dated June 30, 2014.

September 2, 2014 Bulletin No. 2014–36ii

Finding List of Current Actions onPreviously Published Items1

Bulletins 2014–27 through 2014–36

Announcements:

2012-11Supplemented byAnn. 2014-2, 2014-28 I.R.B. 120

2013-11Supplemented byAnn. 2014-2, 2014-28 I.R.B. 120

2010-41Obsoleted byRev. Proc. 2014-43, 2014-32 I.R.B. 273

Revenue Procedures:

1981-38Superseded byRev. Proc. 2014-42, 2014-29 I.R.B. 193

93-37Modified and Superseded byRev. Proc. 2014-43, 2014-32 I.R.B. 273

1981-38Modified byRev. Proc. 2014-42, 2014-29 I.R.B. 193


2002-55Revoked byRev. Proc. 2014-39, 2014-29 I.R.B. 151






Revenue Procedures—Continued:


2014-4Amplified byRev. Proc. 2014-40, 2014-30 I.R.B. 229







Notices:

2013-11Modified byNotice 2014-48, 2014-36 I.R.B. 523




2013-29Clarified byNotice 2014-46, 2014-36 I.R.B. 520



Notices—Continued:

2013-51Obsoleted byNotice 2014-42, 2014-34 I.R.B. 387


2013-60Clarified byNotice 2014-46, 2014-36 I.R.B. 520

2014-44Supplemented byNotice 2014-45, 2014-34 I.R.B. 388

Treasury Decisions:

2005-47Obsoleted byT.D. 9668 2014-27 I.R.B. 1





1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2014–01 through 2014–26 is in Internal Revenue Bulletin 2014–26, dated June 30, 2014.

Bulletin No. 2014–36 September 2, 2014iii

INDEXInternal Revenue Bulletins 2014–27 through2014–36

The abbreviation and number in parenthesis following the index entryrefer to the specific item; numbers in roman and italic type followingthe parentheses refer to the Internal Revenue Bulletin in which the itemmay be found and the page number on which it appears.

Key to Abbreviations:Ann AnnouncementCD Court DecisionDO Delegation OrderEO Executive OrderPL Public LawPTE Prohibited Transaction ExemptionRP Revenue ProcedureRR Revenue RulingSPR Statement of Procedural RulesTC Tax ConventionTD Treasury DecisionTDO Treasury Department Order

ADMINISTRATIVEAJCA–Section 6707 and the Penalty for Failure to Furnish

Information Regarding Reportable Transactions by MaterialAdvisors (TD 9686) 34, 382

Announcement to Discontinue the Internal Revenue BulletinIndex (Ann 27) 28, 120

Annual Filing Season Program (RP 42) 29, 193Disclosure to Census Bureau (REG–120756–13) 31, 252Disclosure to Census Bureau (TD 9677) 31, 241Information reporting by passport applicants (TD 9679) 32, 267Procedures to void backup withholding (RP 43) 32, 273Proposed Regulations:

26 CFR part 301 is amended, section 301.6103(j)(1)–1 isamended, section 301.6103(j)(1)–1T added (REG–120756–13) 31, 252

Regulations Governing Practice Before the Internal RevenueService (REG–138367–06) (TD 9668) 27, 1

Regulations:31 CFR 10.1, revised; 10.3, revised; 10.22, revised; 10.31, revised;

10.35, revised; 10.36, revised; 10.37, revised; 10.52, revised;10.81, revised; 10.82, revised; 10.91, revised. (TD 9668) 27, 1

26 CFR 301.6109–4, added; 1.6042–4, amended; 1.6043–4,amended; 1.6044–5, amended; 1.6045–2, amended; 1.6045–3,amended; 1.6045–4, amended; 1.6045–5, amended; 1.6049–6,amended; 1.6050A–1, amended; 1.6050E–1, amended;1.6050N–1, amended; 1.6050P–1, amended; 1.6050S–1, amend-ed; 1.6050S–3, amended (TD 9675) 31, 242

26 CFR part 301 is amended, section 301.6103(j)(1)–1 isamended, section 301.6103(j)(1)–1T added (TD 9677) 31, 241

26 CFR part 301, amended; 26 CFR 301.6039E–1 added (TD9679) 32, 267

26 CFR 301.6707–1, added; 301.6707–1T, removed; Rev.Proc. 2007–21, sections 4.04, 4.05, and 4.06 superseded;material advisor penalty for failure to furnish informationregarding reportable transactions (TD 9686) 34, 382

ADMINISTRATIVE—Cont.Substitute Forms Preparation for Certain Information Returns

(RP 27) 27, 41Substitute Forms Preparation for Certain Information Returns

(RP 44) 32, 274Truncated Taxpayer Identification Numbers (TD 9675) 31, 242

EMPLOYEE PLANSIndividual Retirement Account Rollover Limitations (REG–

209459–78) 31, 253Longevity Annuity Contracts (TD 9673) 30, 212Proposed Regulations:

26 CFR 408, Individual Retirement Accounts (REG–209459–78) 31, 253

Regulations:26 CFR 54.9815–2708, as amended (TD 9671) 29, 17426 CFR 1.401(a)(9)–5, amended; 1.401(a)(9)–6, amended;

1.403(b)–6, amended; 1.408–8, amended; 1.408A–6,amended; 1.6047–2, added (TD 9673) 30, 212

Rules relating to 90 day waiting period limitation (TD 9671) 29, 124Weighted average interest rates

Segment rates for June 2014 (Notice 41) 27, 97Segment rates for July 2014 (Notice 43) 31, 249Segment rates for August 2014 (Notice 48) 36, 523

EMPLOYMENT TAXExtending religious and family member FICA and FUTA excep-

tions to disregarded entities; regulations regarding the indoortanning services excise tax and disregarded entities (TD 9670)29, 121

Method of accounting for gains and losses on shares in certainmoney market funds; broker returns with respect to sales ofshares in money market funds (REG–107012–14) 33, 371

Publications:1223, General Rules and Specifications for Substitute Forms

W–2c and W–3c (RP29) 28, 1054436, General Rules and Specifications for Substitute Form 941

and Schedule B (Form 941), and Schedule R (RP 26) 27, 26Summons Interview Regulations Under Section 7602 (REG–

121542–14) (TD 9669) 28, 103Regulations:

26 CFR 301.7602–1 is amended to add new paragraph (b)(3)pertaining to summons interviews. (TD 9669) 28, 103

26 CFR 1.1361–4, amended; 1.1361–4T, removed;31.3121(b)(3)–1, amended; 31.3121(b)(3)–1T, removed;31.3127–1, added; 31.3127–1T, removed; 31.3306(c)(5)–1,amended; 31.3306(c)(5)–1T, removed; 301.7701–2, amended;301.7701–2T, removed; extending religious and family memberFICA and FUTA exceptions to disregarded entities; regulationsregarding the indoor tanning services excise tax and disregardedentities (TD 9670) 29, 121

26 CFR 1.446–7 added; 1.6045–1 amended; method of ac-counting for gains and losses on shares in certain moneymarket funds; broker returns with respect to sales of sharesin money market funds (REG–107012–14) 33, 371

September 2, 2014 Bulletin No. 2014–36iv

ESTATE TAXSection 2032A.—Valuation of Certain Farm, Etc., Real Property

(RR 21) 34, 381Summons Interview Regulations Under Section 7602 (REG–

121542–14) (TD 9669) 28, 103Regulations:

26 CFR 301.7602–1 is amended to add new paragraph (b)(3)pertaining to summons interviews. (TD 9669) 28, 103

EXCISE TAXBranded Prescription Drug Fee (REG–123286–14) 33, 377Branded Prescription Drug Fee (TD 9684) 33, 345Branded Prescription Drug Fee (Notice 42) 34, 387Extending religious and family member FICA and FUTA exceptions to

disregarded entities; regulations regarding the indoor tanning servicesexcise tax and disregarded entities (TD 9670) 29, 121

Section 9010 of the ACA; health insurance providers fee (Notice47) 36, 522

Summons Interview Regulations Under Section 7602 (REG–121542–14) (TD 9669) 28, 103

Regulations:26 CFR 301.7602–1 is amended to add new paragraph (b)(3)

pertaining to summons interviews. (TD 9669) 28, 10326 CFR 1.1361–4, amended; 1.1361–4T, removed;

31.3121(b)(3)–1, amended; 31.3121(b)(3)–1T, removed;31.3127–1, added; 31.3127–1T, removed;31.3306(c)(5)–1, amended; 31.3306(c)(5)–1T, removed;301.7701–2, amended; 301.7701–2T, removed; extendingreligious and family member FICA and FUTA exceptionsto disregarded entities; regulations regarding the indoortanning services excise tax and disregarded entities (TD9670) 29, 121

26 CFR 54.9815–2708, as amended (TD 9671) 29, 12126 CFR 51.2(e)(3), amended; (REG–123286–14) 33, 377

Rules relating to 90 day waiting period limitation (TD 9671) 29, 121

EXEMPT ORGANIZATIONSStreamlined Application for Recognition of Exemption Under

Section 501(c)(3) (RP 2014–40) 30, 229Streamlined process for 501(c)(3) recognition (REG–110948–

14) 30, 239Streamlined process for 501(c)(3) recognition (TD 9674) 30, 225Regulations:

26 CFR 1.501(c)–1 amended 1. 501(a)–1T added;1.501(c)(3)–1 amended, 1.501(c)(3)–1T added; and1.508–1 amended, 1.508–1T added (REG–110948–14)(TD 9674) 30, 225

GIFT TAXSummons Interview Regulations Under Section 7602 (REG–

121542–14) (TD 9669) 28, 103Regulations:

26 CFR 301.7602–1 is amended to add new paragraph (b)(3)pertaining to summons interviews (REG–121542–14) (TD9669) 28, 103

INCOME TAXAccounting method change, retail inventory method (RP 48) 36,

527AJCA–Section 6707 and the Penalty for Failure to Furnish

Information Regarding Reportable Transactions by MaterialAdvisors (TD 9686) 34, 382

Allocation and Apportionment of Interest Expense (TD 9676)32, 260

Awards for Information Relating to Detecting Underpayments ofTax or Violations of the Internal Revenue Laws (TD 9687) 36,486

Basis of indebtedness of S corporations to their shareholders (TD9682) 33, 342

Credit for carbon dioxide Sequestration (Notice 40) 27, 100Disciplinary actions involving attorneys, certified public accoun-

tants, enrolled agents, and enrolled actuaries, enrolled retire-ment plan agents, and appraisers (Ann 29) 35, 452

Disclosure to Census Bureau (REG–120756–13) 31, 252Disclosure to Census Bureau (TD 9677) 31, 241Dispositions of property subject to depreciation under section

168 (TD 9689) 36, 456FFI Agreement for Participating FFI and Reporting Model 2 FFI

(RP 38) 29, 132Foreign Earned Income Exclusion (Ann 28) 34, 391Foreign tax credit guidance under section 901 (m) (Notice 44)

32, 270Foreign tax credit guidance under section 901 (m) (Notice 45)

34, 388Information reporting by passport applicants (TD 9679) 32, 267Interest:

Investment:Federal short-term, mid-term, and long-term rates for: July

2014 (RR 2014–20) 28, 101Federal short-term, mid-term, and long-term rates for: Au-

gust 2014 (RR 19) 32, 266Money market funds and the wash sale rules (RP 45) 34, 388Premium Tax Credit (REG–104579–13) 33, 370Premium Tax Credit (RP 37) 33, 363Premium Tax Credit (RP 41) 33, 364Premium Tax Credit (TD 9683) 33, 330Production Tax Credit, Investment Tax Credit, Beginning of

Construction (Notice 46) 36, 520Proposed Regulations:

26 CFR part 301 is amended, section 301.6103(j)(1)–1 isamended, section 301.6103(j)(1)–1T added (REG–120756–13) 31, 252

26 C.F.R. 1.382–3(j)(17), modified; 1.382–3T(j)(17), added,segregation rules for public groups of shareholders (REG–105067–14) 34, 391

Publications:1223, General Rules and Specifications for Substitute Forms

W–2c and W–3c (RP 29) 28, 1054436, General Rules and Specifications for Substitute Form

941 and Schedule B (Form 941), and Schedule R (RP 26)27, 26

Qualified Intermediary (QI) Agreement (RP 39) 29, 151

Bulletin No. 2014–36 September 2, 2014v

INCOME TAX—Cont.Regulations:

31 CFR 10.1, revised; 10.3, revised; 10.22, revised; 10.31,revised; 10.35, revised; 10.36, revised; 10.37, revised;10.52, revised; 10.81, revised; 10.82, revised; 10.91, re-vised (TD 9668) 27, 1

26 CFR 301.7602–1 is amended to add new paragraph (b)(3)pertaining to summons interviews (REG–121542–14) (TD9669) 28, 103

26 CFR 1.45R–0, added; 1.45R–1, added; 1.45R–2, added;1.45R–3, added; 1.45R–4, added; 1.45R–5, added; taxcredit for employee health insurance expenses of smallemployers (TD 9672) 30, 196

26 CFR 301.6109–4, added; 1.6042–4, amended; 1.6043–4,amended; 1.6044–5, amended; 1.6045–2, amended;1.6045–3, amended; 1.6045–4, amended; 1.6045–5, amend-ed; 1.6049–6, amended; 1.6050A–1, amended; 1.6050E–1,amended; 1.6050N–1, amended; 1.6050P–1, amended;1.6050S–1, amended; 1.6050S–3, amended (TD 9675) 31, 242

26 CFR 1.67–4, amended (TD 9667) 32, 25426 CFR part 301 is amended, section 301.6103(j)(1)–1 is

amended, section 301.6103(j)(1)–1T added (TD 9677) 31, 24126 CFR 1.861–9 amended, 1.861–11 amended; (TD 9676) 32, 26026 CFR 1.1092(b)–6, added; 1.1092(b)–6T, removed;

1.1092(b)–3T, amended; (TD 9678) 32, 26226 CFR part 301, amended; 26 CFR 301.6039E–1 added (TD

9679) 32, 26726 CFR 1.174–2 amended; (TD 9680) 32, 25426 CFR 1.36B–2T, 26 CFR 1.36B–3T, 1.36B–4T, added; 26

CFR 1.36B–2, 26 CFR 1.36B–3\, 1.36B–4, amended; 26CFR 1.162(l)–1 and 26 CFR 1.162(l)–1T, added. (REG–104579–13) 33, 370

26 CFR 1.195–2, added; 26 CFR 1.708–1, amended; 26 CFR1.709–1, amended. (TD 9681) 33, 340

26 CFR 1.1366–2(a), added new paragraph (a)(2) and movedcurrent (a)(2) through (a)(6) to (a)(3) through (a)(7), re-spectively; basis of indebtedness of S corporations to theirshareholders (TD 9682) 33, 342

26 CFR 1.36B–2T, 26 CFR 1.36B–3T, 1.36B–4T added, 26CFR 1.36B–2, 26 CFR 1.36B–3\, 1.36B–4, amended, 26CFR 1.162(l)–1 and 26 CFR 1.162(l)–1T added, (TD9683) 33, 330

26 C.F.R. 1.382–3(j)(17), modified; 1.382–3T(j)(17), added,segregation rules for public groups of shareholders (TD9685) 34, 379

26 CFR 301.6707–1, added; 301.6707–1T, removed; Rev.Proc. 2007–21, sections 4.04, 4.05, and 4.06 superseded;material advisor penalty for failure to furnish informationregarding reportable transactions (TD 9686) 34, 382

26 CFR 301.7623–1, revised; 26 CFR 301.7623–4, added; 26CFR 301.7623–2, added; 26 CFR 301.6103(h)(4)–1, added26 CFR 301.7623–3, added; (TD 9687) 36, 486

26 CFR 1.471–8 amended (TD 9688) 36, 48226 CFR 1.168(i)–8 added; 1.165–2, 1.168(i)–0, 1.168(i)–1,

1.168(i)–7, 1.263(a)–3, 1.1016–3 amended; 1.168(i)–0T,1.168(i)–1T, 1.168(i)–8T removed; dispositions of propertysubject to depreciation under section 168 (TD 9689) 36, 456

INCOME TAX—Cont.Regulations Governing Practice Before the Internal Revenue

Service (REG–138367–06) (TD 9668) 27, 1Research and experimental expenditures (TD 9680) 32, 254Retail inventory method (TD 9688) 36, 482Tax Credit for Employee Health Insurance Expenses of Small

Employers (TD 9672) 30, 196Truncated Taxpayer Identification Numbers (TD 9675) 31, 242Section 67 Limitations on Estates or Trusts; Change of Effective

Date (TD 9664) 32, 254Section 5000A national average premium for a bronze level of

coverage (RP 46) 33, 367Segregation rules for public groups of shareholders, (REG–

105067–14) 34, 391Segregation rules for public groups of shareholders, (TD 9685)

34, 379Substitute Forms Preparation for Certain Information Returns

(RP 27) 27, 41Substitute Forms Preparation for Certain Information Returns

(RP 44) 32, 274Summons Interview Regulations Under Section 7602 (REG–

121542–14) (TD 9669) 28, 103Unamortized organization and syndication expenses following a

partnership technical termination (TD 9681) 33, 340Underpayment and overpayments, quarter beginning: July 1,

2014 (RR 14) 27, 12Unrealized gain or loss treatment upon establishment of an

identified mixed straddle (TD 9678) 32, 262Withholding Foreign Partnership and Trust Agreements (RP 47)

35, 393

SELF-EMPLOYMENT TAXExtending religious and family member FICA and FUTA excep-

tions to disregarded entities; regulations regarding the indoortanning services excise tax and disregarded entities (TD 9670)29, 121

Regulations:26 CFR 1.1361–4, amended; 1.1361–4T, removed;

31.3121(b)(3)–1, amended; 31.3121(b)(3)–1T, removed;31.3127–1, added; 31.3127–1T, removed;31.3306(c)(5)–1, amended; 31.3306(c)(5)–1T, removed;301.7701–2, amended; 301.7701–2T, removed; extendingreligious and family member FICA and FUTA exceptionsto disregarded entities; regulations regarding the indoortanning services excise tax and disregarded entities (TD9670) 29, 121

SPECIAL ANNOUNCEMENTAnnual Filing Season Program (RP 42) 29, 193Procedures to Avoid Backup Withholding (RP 43) 32, 273

September 2, 2014 Bulletin No. 2014–36vi

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

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