Bulletin No. 2007-46November 13, 2007

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

SPECIAL ANNOUNCEMENT

Announcement 2007–106, page 1021.The announcement for the 2008 IRS Individual e-file Partner-ship Program will solicit applications from potential partnersfor participation in the program. The partnership opportuni-ties are a result of RRA 98, which authorized the IRS Commis-sioner to promote the benefits of and encourage the use ofe-file products and services through partnerships with variousentities that offer low-cost tax preparation and electronic filingof individual income tax returns for qualified taxpayers. Thoseapplicants that are accepted into the program will have a link(s)and offer description(s) for their products and services postedto IRS.gov (Partners Page).

INCOME TAX

Ct. D. 2083, page 986.Levies upon third party property to collect taxes owed byanother; wrongful levy action. The Supreme Court holdsthat the Trust missed section 7426(a)(1)’s deadline for chal-lenging a levy, and may not bring the challenge as a tax refundclaim under section 1346(a)(1).

REG–140206–06, page 1006.Proposed regulations under section 1441 of the Code provideguidance regarding the withholding and reporting obligationsof a withholding agent in the case of a self tender by a pub-licly traded corporation, when a determination is required un-der section 301 as to whether the distribution is treated as adividend or a distribution in part or full payment in exchangefor stock. A public hearing is scheduled for February 6, 2008.

REG–114125–07, page 1012.Proposed regulations under section 861 of the Code containchanges to existing final regulations regarding the source ofcompensation for labor or personal services.

Notice 2007–86, page 990.This notice provides additional transition relief, under section409A of the Code, that was scheduled to expire on December31, 2007. Generally, this notice extends relief to December31, 2008, except that reliance on the proposed regulations un-der section 409A is not permitted after December 31, 2007.Notice 2007–78 modified. Section 3 of Notice 2006–79 mod-ified and superseded.

Notice 2007–88, page 993.This notice requests public comment on a proposal to changethe process by which taxpayers obtain the consent of the Com-missioner of Internal Revenue to change a method of account-ing for federal income tax purposes.

EMPLOYEE PLANS

Notice 2007–86, page 990.This notice provides additional transition relief, under section409A of the Code, that was scheduled to expire on December31, 2007. Generally, this notice extends relief to December31, 2008, except that reliance on the proposed regulations un-der section 409A is not permitted after December 31, 2007.Notice 2007–78 modified. Section 3 of Notice 2006–79 mod-ified and superseded.

(Continued on the next page)

Announcements of Disbarments and Suspensions begin on page 1015.Finding Lists begin on page ii.

ESTATE TAX

Notice 2007–90, page 1003.This notice provides interim guidance and describes a changein IRS policy regarding section 6166 of the Code, Extension oftime for payment of estate tax where estate consists largely ofinterest in closely held business. The IRS will now determineon a case-by-case basis whether security will be required whena qualifying estate elects under section 6166 to pay all or apart of the estate tax in installments. This notice also informstaxpayers, tax practitioners, executors and other persons whorepresent estates of what factors the IRS will consider in de-termining whether an estate making the section 6166 electionwill be required to provide security.

TAX CONVENTIONS

Announcement 2007–107, page 989.The competent authorities of the United States and the UnitedKingdom hereby enter into the following agreement (“the Agree-ment”) regarding the definition of “first notification” under para-graph 1 of Article 26 (Mutual Agreement Procedure) of the Con-vention between the United States of America and the UnitedKingdom of Great Britain and Northern Ireland for the avoidanceof double taxation with respect to taxes on income signed atLondon on July 24, 2001 (“the Treaty”). The Agreement is en-tered into under paragraph 3 of Article 26 (Mutual AgreementProcedure).

ADMINISTRATIVE

Ct. D. 2083, page 986.Levies upon third party property to collect taxes owed byanother; wrongful levy action. The Supreme Court holdsthat the Trust missed section 7426(a)(1)’s deadline for chal-lenging a levy, and may not bring the challenge as a tax refundclaim under section 1346(a)(1).

Notice 2007–89, page 998.This notice provides interim guidance to employers and pay-ers on their reporting and wage withholding requirements forcalendar year 2007 with respect to deferrals of compensationand amounts includible in gross income under section 409A ofthe Code. The notice also provides interim rules on calculatingamounts includible in gross income under section 409A. No-tice 2005–1 modified.

November 13, 2007 2007–46 I.R.B.

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

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

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

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

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

The Bulletin is divided into four parts as follows:

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

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

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

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

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

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

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

2007–46 I.R.B. November 13, 2007

Place missing child here.

November 13, 2007 2007–46 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 1346.—Recoveryof Unconstitutional FederalTaxes

The Supreme Court holds that the Trust missedsection 7426(a)(1)’s deadline for challenging a levy,and may not bring the challenge as a tax refund claimunder section 1346(a)(1). See Court Decision 2083,page 986.

Section 7426.—CivilActions by Persons OtherThan Taxpayers

Ct. D. 2083

SUPREME COURT OF THEUNITED STATES

No. 05–1541 (2007)

EC TERM OF YEARSTRUST v. UNITED STATES

CERTIORARI TO THE UNITEDSTATES COURT

OF APPEALS FOR THE FIFTHCIRCUIT

April 30, 2007

Syllabus

Under 26 U.S.C. §7426(a)(1), if the In-ternal Revenue Service (IRS) levies upon athird party’s property to collect taxes owedby another, the third party may bring awrongful levy action against the UnitedStates, so long as such action is broughtbefore “the expiration of 9 months fromthe date of the levy,” §6532(c)(1). In con-trast, the limitations period for a tax re-fund action under 28 U.S.C. §1346(a)(1)begins with an administrative claim thatmay be filed within at least two years, andmay be brought to court within another twoyears after an administrative denial. TheIRS levied on a bank account in whichpetitioner (Trust) had deposited funds be-cause the IRS assumed that the Trust’s cre-ators had transferred assets to the Trust toevade taxes. The bank responded with acheck to the Treasury. Almost a year later,the Trust and others brought a §7426(a)(1)action claiming wrongful levies, but the

District Court dismissed the complaint be-cause it was filed after the 9-month limi-tations period had expired. After unsuc-cessfully pursing a tax refund at the ad-ministrative level, the Trust filed a refundaction under §1346(a)(1). The DistrictCourt held that a wrongful levy claim un-der §7426(a)(1) was the sole remedy pos-sible and dismissed, and the Fifth Circuitaffirmed.

Held: The Trust missed §7426(a)(1)’sdeadline for challenging a levy, andmay not bring the challenge as a taxrefund claim under §1346(a)(1). Section7426(a)(1) provides the exclusive remedyfor third-party wrongful levy claims. “[A]precisely drawn, detailed statute pre-emptsmore general remedies,” Brown v. GSA,425 U.S. 820, 834, and it braces the pre-emption claim when resort to a generalremedy would effectively extend the limi-tations period for the specific one, see id.at 833. If third parties could avail them-selves of §1346(a)(1)’s general tax refundjurisdiction, they could effortlessly evade§7426(a)(1)’s much shorter limitationsperiod. The Trust argues that becauseUnited States v. Williams, 514 U.S. 527,construed §1346(a)(1)’s general jurisdic-tional grant expansively enough to coverthird parties’ wrongful levy claims, treat-ing §7426(a)(1) as the exclusive avenuefor these claims would amount to a disfa-vored holding that §7426(a)(1) implicitlyrepealed §1346(a)(1)’s pre-existing juris-dictional grant. But this reads Williamstoo broadly. Williams involved a lien andwas decided on the specific understand-ing that no other remedy was open to theplaintiff. Here, the Trust challenges alevy and could have made a timely claimunder §7426(a)(1). Even if the presump-tion against implied repeals applied here,§7426(a)(1)’s 9-month limitations periodcannot be reconciled with the notion thatthe same challenge would be open under§1346(a)(1) for up to four years. Nor canthe two statutory schemes be harmonizedby construing §7426(a)(1)’s filing dead-line to cover only those actions seekingpre-deprivation remedies unavailable un-der §1346(a)(1). On its face, §7426(a)(1)applies to pre-deprivation and post-depri-vation claims alike. Pp. 4–7.

434 F.3d 807 affirmed.STEVENS, J., delivered the opinion for

a unanimous Court.

SUPREME COURT OF THEUNITED STATES

No. 05–1541 (2007)

EC TERM OF YEARSTRUST v. UNITED STATES

On WRIT OF CERTIORARI TO THEUNITED STATES COURT

OF APPEALS FOR THE FIFTHCIRCUIT

April 30, 2007

JUSTICE STEVENS delivered theopinion of the Court.

This is a challenge to the Internal Rev-enue Service’s levy upon the property of atrust, to collect taxes owed by another, anaction specifically authorized by 26 U.S.C.§7426(a)(1), but subject to a statutory fil-ing deadline the trust missed. The questionis whether the trust may still challenge thelevy through an action for tax refund un-der 28 U.S.C. §1346(a)(1). We hold that itmay not.

I

The Internal Revenue Code providesthat “[i]f any person liable to pay any taxneglects or refuses to pay the same afterdemand, the amount . . . shall be a lien infavor of the United States upon all prop-erty and rights to property, whether realor personal, belonging to such person.” 26U.S.C. §6321. “A federal tax lien, how-ever, is not self-executing,” and the IRSmust take “[a]ffirmative action . . . toenforce collection of the unpaid taxes.”United States v. National Bank of Com-merce, 472 U.S. 713, 720 (1985). One ofits “principal tools,” ibid., is a levy, whichis a “legally sanctioned seizure and saleof property,” Black’s Law Dictionary 926(8th ed. 2004); see also §6331(b) (“Theterm ‘levy’ as used in this title includesthe power of distraint and seizure by anymeans”).

2007–46 I.R.B. 986 November 13, 2007

To protect against a “‘wrongful’” im-position upon “property which is not thetaxpayer’s,” S. Rep. No. 1708, 89thCong., 2d Sess., 30 (1966), the FederalTax Lien Act of 1966 added §7426(a)(1),providing that “[i]f a levy has been madeon property . . . any person (other than theperson against whom is assessed the taxout of which such levy arose) who claimsan interest in . . . such property and thatsuch property was wrongfully levied uponmay bring a civil action against the UnitedStates in a district court. 80 Stat. 1143.The action must, however, be broughtbefore “the expiration of 9 months fromthe date of the levy.”1 §6532(c)(1). Thisshort limitations period contrasts with itscounterpart in a tax refund action under28 U.S.C. §1346(a)(1), which begins withan administrative claim that may be filedwithin at least two years, and may bebrought to court within another two afteran administrative denial.2 The demand forgreater haste when a third party contests alevy is no accident; as the Government ex-plained in the hearings before passage ofthe Act, “[s]ince after seizure of propertyfor nonpayment of taxes [an IRS] districtdirector is likely to suspend further col-lection activities against the taxpayer, it isessential that he be advised promptly if hehas seized property which does not belongto the taxpayer. Hearings on H.R. 11256and H.R. 11290 before the House Com-mittee on Ways and Means, 89th Cong., 2dSess., 57–58 (1966) (written statement ofStanley S. Surrey, Assistant Secretary ofthe Treasury); see also id. at 72 (statementof Laurens Williams, Chairman, SpecialCommittee on Federal Liens, AmericanBar Association) (“A short (9-month)statute of limitations is provided, becauseit is important to get such controversiesdecided quickly so the Government maypursue the taxpayer’s own property if itmade a mistake the first time”).

II

After Elmer W. Cullers, Jr., andDorothy Cullers established the EC Termof Years Trust in 1991, the IRS assessed

federal tax liabilities against them forwhat the Government claimed (and theTrust does not dispute, see Tr. of OralArg. 7) were unwarranted income taxdeductions in the 1980s. The Governmentassumed that the Cullerses had transferredassets to the Trust to evade taxes, and sofiled a tax lien against the Trust in August1999. The Trust denied any obligation,but for the sake of preventing disruptivecollection efforts by the IRS, it depositedfunds in a bank account, against which theIRS issued a notice of levy to the bankin September 1999. In October, the bankresponded with a check for over $3 millionto the United States Treasury.

Almost a year after that, the Trust(joined by several other trusts created bythe Cullerses) brought a civil action under26 U.S.C. §7426(a)(1) claiming wrongfullevies, but the District Court dismissed itbecause the complaint was filed after the9-month limitations period had expired,see §6532(c)(1). The court also notedthat tax refund claims under 28 U.S.C.§1346(a)(1) were not open to the plaintifftrusts because §7426 “‘affords the exclu-sive remedy for an innocent third partywhose property is confiscated by the IRSto satisfy another person’s tax liability.’”BSC Term of Years Trust v. United States,2001–1 USTC ¶50,174, p. 87,237, n. 1,87 AFTR 2d ¶2001–390, p. 2001–547, n.1 (WD Tex., 2000) (quoting Texas Comm.Bank Fort Worth, N.A. v. United States,896 F.2d 152, 156 (CA5 1990); emphasisdeleted). At first the Trust sought reviewby the Court of Appeals for the FifthCircuit, but then voluntarily dismissedits appeal. BSC Term of Years Trust v.United States, 87 AFTR 2d ¶2001–1039,p. 2001–2532 (2001).

After unsuccessfully pursuing a tax re-fund at the administrative level, the Trustfiled a second action, this one for a refundunder §1346(a)(1). The District Courtremained of the view that a claim for awrongful levy under §7426(a)(1) had beenthe sole remedy possible and dismissed.3

The Court of Appeals for the Fifth Circuitaffirmed.

Because the Ninth Circuit, on the con-trary, has held that §7426(a)(1) is not theexclusive remedy for third parties chal-lenging a levy, see WWSM Investors v.United States, 64 F.3d 456 (1995), wegranted certiorari to resolve the conflict,549 U.S. (2006). We affirm.

III

“In a variety of contexts, the Courthas held that a precisely drawn, detailedstatute pre-empts more general remedies.”Brown v. GSA, 425 U.S. 820, 834 (1976);see Block v. North Dakota ex rel. Boardof Univ. and School Lands, 461 U.S.273, 284–286 (1983) (adverse claimantsto real property of the United States maynot rely on “officer’s suits” or on othergeneral remedies because the Quiet TitleAct of 1972 is their exclusive recourse);see also Stonite Products Co. v. MelvinLloyd Co., 315 U.S. 561 (1942) (venue inpatent infringement cases is governed bya statute dealing specifically with patents,not a general venue provision). It bracesthe preemption claim when resort to ageneral remedy would effectively extendthe limitations period for the specific one.See Brown v. GSA, supra, at 833 (rejectingan interpretation that would “driv[e] outof currency” a narrowly aimed provision“with its rigorous . . . time limitations”by permitting “access to the courts underother, less demanding statutes”); see alsoRancho Palos Verdes v. Abrams, 544 U.S.113, 122–123 (2005) (concluding that 47U.S.C. §332(c) precludes resort to thegeneral cause of action under 42 U.S.C.§1983, in part because §332 “limits reliefin ways that §1983 does not” by requiringjudicial review to be sought within 30days); 544 U.S. at 130, n. (STEVENS, J.,concurring in judgment) (same).

Resisting the force of the better-fit-ted statute requires a good countervailingreason, and none appears here. Con-gress specifically tailored §7426(a)(1) tothird-party claims of wrongful levy, andif third parties could avail themselvesof the general tax refund jurisdiction of§1346(a)(1), they could effortlessly evade

1 This period can be extended for up to 12 months if the third party makes an administrative request for the return of the property wrongfully levied upon. See 26 U.S.C. §6532(c)(2).

2 Title 28 U.S.C. §1346(a)(1) gives district courts “jurisdiction, concurrent with the United States Court of Federal Claims,” over “[a]ny civil action against the United States for the recoveryof,” among other things, “any internal revenue tax alleged to have been erroneously or illegally assessed or collected.” A taxpayer may bring such an action within two years after the IRSdisallows the taxpayer’s administrative refund claim. See 26 U.S.C. Secs. 6532(a)(1)–(2); see also §7422(a) (requiring a taxpayer to file the administrative claim before seeking a refund incourt). An administrative refund claim must, in turn, be filed within two years from the date the tax was paid or three years from the time the tax return was filed, whichever is later. See§6511(a).

3 The District Court declined to dismiss the Trust’s claim on res judicata grounds, and the Government does not argue claim or issue preclusion in this Court, see Brief for United States 5, n. 2.

November 13, 2007 987 2007–46 I.R.B.

the levy statute’s 9-month limitations pe-riod thought essential to the Government’stax collection.

The Trust argues that in United Statesv. Williams, 514 U.S. 527 (1995), we con-strued the general jurisdictional grant of§1346(a)(1) expansively enough to coverthird parties’ wrongful levy claims. So, ac-cording to the Trust, treating §7426(a)(1)as the exclusive avenue for these claimswould amount to a disfavored holding that§7426(a)(1) implicitly repealed the pre-ex-isting jurisdictional grant of §1346(a)(1).See Radzanower v. Touche Ross & Co.,426 U.S. 148 (1976); Morton v. Mancari,417 U.S. 535 (1974).

But the Trust reads Williams toobroadly. Although we decided that§1346(a)(1) authorizes a tax-refund claimby a third party whose property was sub-jected to an allegedly wrongful tax lien,we so held on the specific understanding

that no other remedy, not even a timelyclaim under §7426(a)(1), was open to theplaintiff in that case. See Williams, supra,at 536–538. Here, on the contrary, theTrust challenges a levy, not a lien, andcould have made a timely claim under§7426(a)(1) for the relief it now seeksunder §1346(a)(1).4

And even if the canon against impliedrepeals applied here, the Trust still couldnot prevail. We simply cannot recon-cile the 9-month limitations period for awrongful levy claim under §7426(a)(1)with the notion that the same challengewould be open under §1346(a)(1) for up tofour years. See Posadas v. National CityBank, 296 U.S. 497, 503 (1936) (“[W]hereprovisions in the two acts are in irrecon-cilable conflict, the later act to the extentof the conflict constitutes an implied re-peal of the earlier one”). On this point,the Trust proposes that the two statutory

schemes can be “harmonized” by con-struing the deadline for filing §7426(a)(1)claims to cover only those actions seeking“pre-deprivation” remedies unavailableunder §1346(a)(1). See Reply Brief forPetitioner 6. But this reading would vio-late the clear text of §7426(a)(1), whichon its face applies to pre-deprivation andpost-deprivation claims alike. See 26U.S.C. §7426(a)(1) (“Such action may bebrought without regard to whether suchproperty has been surrendered to or soldby the Secretary”).

* * *The Trust missed the deadline for chal-

lenging a levy under §7426(a)(1), and maynot bring the challenge as a tax refundclaim under §1346(a)(1). The judgmentof the Court of Appeals is accordingly af-firmed.

It is so ordered.

4 It has been commonly understood that Williams did not extend §1346(a)(1) to parties in the Trust’s position. See 434 F.3d 807, 810 (CA5 2006) (case below) (“To construe Williams to allowan alternative remedy under §1346, with its longer statute of limitations period, would undermine the surety provided by the clear avenue to recovery under §7426” (citation omitted)); Dahnv. United States, 127 F.3d 1249, 1253 (CA10 1997) (“[T]here were no tax levies involved in [Williams]. Thus, the Court was concerned solely with the reach of §1346 per se; the exclusivityof a concurrent §7426 claim was never in issue. Indeed, the Court specifically emphasized the inapplicability of §7426 (or any other meaningful remedy) to reinforce its broad reading of§1346”); WWSM Investors v. United States, 64 F.3d 456, 459 (CA9 1995) (Brunetti, J., dissenting) (“The Supreme Court recognized Williams as a refund, not a wrongful levy, case, and [didnot] even hint that §7426 was not the exclusive remedy for a claimed wrongful levy”); Rev.Rul. 2005–49, 2005–2 Cum.Bull. 126 (“The rationale in Williams is inapplicable to wrongful levysuits because, Congress created an exclusive remedy under section 7426 for third persons claiming an interest in property levied upon by the [IRS]”); but see WWSM Investors, supra, at 459(majority opinion) (“[S]eizing money from WWSM’s bank account is functionally equivalent to what the IRS did in Williams — placing a lien on property in escrow under circumstanceswhich compelled Mrs. Williams to pay the IRS and discharge the lien”).

2007–46 I.R.B. 988 November 13, 2007

Part II. Treaties and Tax LegislationSubpart A.—Tax Conventions and Other Related Items

US-UK Agreement Definingthe Term “First Notification”Under Treaty Article 26(1)

Announcement 2007–107

The following is a copy of the Com-petent Authority Agreement (“the Agree-

ment”) entered into by the CompetentAuthorities of the United States and theUnited Kingdom regarding the definitionof “first notification” under paragraph 1 ofArticle 26 (Mutual Agreement Procedure)of the Convention between the UnitedStates of America and the United King-dom of Great Britain and Northern Ireland

for the avoidance of double taxation withrespect to taxes on income.

The text of the Agreement is as follows:

COMPETENT AUTHORITY AGREEMENT

The competent authorities of the United States and the United Kingdom hereby enter into the following agreement (“theAgreement”) regarding the definition of “first notification” under paragraph 1 of Article 26 (Mutual Agreement Procedure) ofthe Convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland for theavoidance of double taxation with respect to taxes on income signed at London on July 24, 2001 (“the Treaty”). The Agreement isentered into under paragraph 3 of Article 26 (Mutual Agreement Procedure).

It is understood that for the purposes of the Agreement the term “Article” refers to an Article of the Treaty.

Definition of “First Notification” under Article 26(1)

Paragraph 1 of Article 26 provides that

Where a person considers that the actions of one or both of the Contracting States result or will result for him intaxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided bythe domestic law of those States, present his case to the competent authority of the Contracting State of which he is aresident or national. The case must be presented within three years from the first notification of the action resultingin taxation not in accordance with the provisions of this Convention or, if later, within six years from the end of thetaxable year or chargeable period in respect of which that taxation is imposed or proposed. [Emphasis added].

The competent authorities of the United States and the United Kingdom have agreed that paragraph 1 of Article 26 of theConvention shall be interpreted in the way most favourable to the taxpayer, consistent with the approach set out in the OECDcommentary on the Model Tax Convention on Income and on Capital. In order to provide certainty for taxpayers and to ensureconsistent application of the provision, the date of “first notification of the action resulting in taxation not in accordance with theConvention” shall be treated as the date when all domestic remedies have been exhausted.

In the United Kingdom, this will be either the date of issue of a statutory notice required to conclude an assessment and/or anyrelated appeal procedures for the period of assessment in question, or a letter of acceptance by an officer of the Board of HMRevenue & Customs to settlement terms for the period in question.

In the United States, this will be the date of the later of: (1) an assessment pursuant to a notice of proposed adjustment or astatutory notice of deficiency; (2) when a closing agreement is accepted by the Secretary of the Treasury or his delegate; or (3)if the taxpayer is a party in an action in a US court regarding a redetermination of tax liability or requesting a refund of tax,when such action is finally resolved, including any appeal.

Upon signature by both Competent Authorities, this agreement shall have effect from the date of entry into force of theConvention, without regard to the taxable or chargeable period to which the matter relates.

Agreed to by the Undersigned competent authorities:

Date Date

Frank Y. NgU.S. Competent Authority

Diane HayU.K. Competent Authority

November 13, 2007 989 2007–46 I.R.B.

Part III. Administrative, Procedural, and MiscellaneousNotice of Additional 2008Transition Relief underSection 409A

Notice 2007–86

SECTION 1. PURPOSE

This notice provides additional tran-sition relief regarding the application ofsection 409A of the Internal RevenueCode to nonqualified deferred compensa-tion plans. Generally, this notice extendsto December 31, 2008, the transition reliefthat was scheduled to expire on December31, 2007, as provided in Notice 2006–79,2006–43 I.R.B. 763, and the preamble tothe final regulations under section 409A(72 Fed. Reg. 19234 (April 17, 2007))(the final regulations preamble). Thistransition relief revokes and supersedesthe transition relief provided in § III ofNotice 2007–78, 2007–41 I.R.B. 780, andmodifies the relief provided in § IV ofNotice 2007–78 related to employmentagreements, as described below. Thistransition relief does not affect the guid-ance provided in § IV of Notice 2007–78related to predetermined cashout features,or the guidance provided in § VI of Notice2007–78, related to the application of sec-tion 409A(b) (restrictions on certain trustsand other arrangements).

SECTION 2. BACKGROUND

Section 409A provides certain require-ments applicable to nonqualified deferredcompensation plans. If a plan does notmeet those requirements, participants inthe plan are required to immediately in-clude amounts deferred under the plan inincome and pay additional taxes on suchincome. Beginning with Notice 2005–1,2005–1 C.B. 274 , the Treasury Depart-ment and the IRS have issued several no-tices and other guidance providing transi-tion relief intended to permit and promotecompliance with the requirements of sec-tion 409A. The Treasury Department andthe IRS also issued proposed regulationsunder section 409A (70 Fed. Reg. 57930(Oct. 4, 2005)) (the proposed regulations),and final regulations under section 409A inApril 2007 (the final regulations).

On September 10, 2007, the TreasuryDepartment and the IRS issued Notice2007–78, granting certain transition re-lief intended to facilitate compliance withthe written plan requirements set forth inthe final regulations. See §1.409A–1(c).Commentators stated that although the No-tice 2007–78 transition relief was helpful,the transition relief in that notice did notadequately address the need for additionaltime for service recipients and serviceproviders to analyze all of their plans andmake informed and reasoned decisionsregarding the changes that would be nec-essary to bring existing arrangements intocompliance with the final regulations.This notice addresses these concerns bygenerally extending the transition reliefcurrently scheduled to expire on Decem-ber 31, 2007 through December 31, 2008.Section III of Notice 2007–78 is revokedand superseded by this notice.

SECTION 3. EXTENSION OFTRANSITION RELIEF

.01 Extension of Transition ReliefProvided in Notice 2006–79

Section 3 of Notice 2006–79 is mod-ified and superseded in accordance withparagraphs (A) and (B) of this § 3.01.

(A) General rule. During 2008, tax-payers are not required to comply with therequirements of the final regulations. In-stead, they are required to operate a non-qualified deferred compensation plan incompliance with the plan’s terms, to theextent consistent with section 409A andthe applicable guidance (including Notice2005–1). Where a provision of Notice2005–1 is inconsistent with the final regu-lations, taxpayers may rely upon either No-tice 2005–1 or the final regulations. To theextent an issue is not addressed in Notice2005–1 or other applicable guidance, tax-payers must apply a reasonable, good faithinterpretation of the statute. Reliance uponthe final regulations is treated as applyinga reasonable, good faith interpretation ofthe statute.

Taxpayers may not rely upon the provi-sions of the proposed regulations for peri-ods after December 31, 2007, except thattaxpayers may continue to rely on sec-tions II.E and VI.E of the preamble to the

proposed regulations (relating to the ap-plication of section 409A to partners andpartnerships) until further guidance is is-sued and sections XI.C (relating to changesin payment elections or conditions) andXI.H (relating to substitutions of non-dis-counted stock options and stock apprecia-tion rights for discounted stock options andstock appreciation rights) of the preambleto the proposed regulations continue to ap-ply to the extent provided in § 3 of Notice2006–79, as modified and superseded byparagraph (B) of this § 3.01.

(B) Section 3 of Notice 2006–79 modi-fied and superseded.

(1) Paragraphs .01, .02, .03 and .04 of§ 3 of Notice 2006–79 are modified andsuperseded to reflect the general rule pro-vided in paragraph (A) and to read as fol-lows:

.01. Amendment and operation of plansadopted on or before December 31, 2008

A plan adopted on or before December31, 2008 will not be treated as violat-ing section 409A(a)(2), (3) or (4) on orbefore December 31, 2008 if the plan isoperated through December 31, 2008 incompliance with the provisions of section409A and applicable provisions of Notice2005–1 and any other generally applicableguidance published with an effective dateprior to January 1, 2008, and the plan isamended on or before December 31, 2008to conform to the provisions of section409A and the final regulations under sec-tion 409A (70 Fed. Reg. 19234 (April17, 2007)) with respect to amounts subjectto section 409A. For such periods, to theextent an issue is not addressed in an appli-cable provision of Notice 2005–1 or othergenerally applicable guidance publishedwith an effective date prior to January 1,2008, the plan must be operated consistentwith a good faith, reasonable interpreta-tion of section 409A, and, to the extent notinconsistent therewith, the plan’s terms.For purposes of this notice, “generallyapplicable guidance published with an ef-fective date prior to January 1, 2008” doesnot include the final regulations.

Compliance with the proposed regu-lations is not required and compliancewith the final regulations before January1, 2009 is not required. However, for pe-riods before January 1, 2008, compliance

2007–46 I.R.B. 990 November 13, 2007

with the proposed regulations or the fi-nal regulations will constitute reasonable,good faith compliance with the statute.For periods after December 31, 2007 andbefore January 1, 2009, compliance withthe final regulations (but not the proposedregulations) will constitute reasonable,good faith compliance with the statute.To the extent that a provision of eitherthe proposed regulations or the final reg-ulations is inconsistent with a provisionof Notice 2005–1, or a provision of theproposed regulations is inconsistent with aprovision of the final regulations, for peri-ods before January 1, 2008, the plan maycomply with the provision of the proposedregulations, the final regulations or Notice2005–1. To the extent that a provision ofthe final regulations is inconsistent with aprovision of Notice 2005–1, after Decem-ber 31, 2007 and before January 1, 2009,the plan may comply with the provision ofthe final regulations or Notice 2005–1.

A plan will not be operating in goodfaith compliance if discretion provided un-der the terms of the plan is exercised in amanner that causes the plan to fail to meetthe requirements of section 409A. For ex-ample, if an employer retains the discretionunder the terms of the plan to delay or ex-tend payments under the plan in a mannerthat violates section 409A and exercisessuch discretion, the plan will not be con-sidered to be operated in good faith com-pliance with section 409A with regard toany plan participant. However, an exerciseof a right under the terms of the plan by aparticipant solely with respect to that par-ticipant’s benefits under the plan, in a man-ner that causes the plan to fail to meet therequirements of section 409A, will not beconsidered to result in the plan failing tobe operated in good faith compliance withrespect to other participants. For example,the request for and receipt of an immediatepayment permitted under the terms of theplan if the participant forfeits 20 percent ofthe participant’s benefits (a haircut) will beconsidered a failure of the plan to meet therequirements of section 409A with respectto that participant, but not with respect toall other participants under the plan.

.02. Change in payment elections orconditions on or before December 31,2008

The transition relief provided in sec-tion XI.C of the preamble to the proposedregulations generally continues to apply

through December 31, 2008, with certainclarifications described below, and subjectto limitations for certain discounted stockrights also described below. Accordingly,with respect to amounts subject to section409A, a plan may provide, or be amendedto provide, for new payment elections onor before December 31, 2008, with respectto both the time and form of payment ofsuch amounts and the election or amend-ment will not be treated as a change inthe time or form of payment under section409A(a)(4) or an acceleration of a pay-ment under section 409A(a)(3), providedthat the plan is so amended and electionsare made on or before December 31, 2008.With respect to an election or amendmentto change a time and form of paymentmade on or after January 1, 2006 and onor before December 31, 2006, the electionor amendment may apply only to amountsthat would not otherwise be payable in2006 and may not cause an amount tobe paid in 2006 that would not otherwisebe payable in 2006. With respect to anelection or amendment to change a timeand form of payment made on or afterJanuary 1, 2007 and on or before Decem-ber 31, 2007, the election or amendmentmay apply only to amounts that wouldnot otherwise be payable in 2007 andmay not cause an amount to be paid in2007 that would not otherwise be payablein 2007. With respect to an election oramendment to change a time and form ofpayment made on or after January 1, 2008and on or before December 31, 2008, theelection or amendment may apply onlyto amounts that would not otherwise bepayable in 2008 and may not cause anamount to be paid in 2008 that would nototherwise be payable in 2008. So, for ex-ample, where an amount would otherwisebe payable upon an event, such as a sep-aration from service, an election in 2008cannot change the amount that would bepayable in 2008 if the service providerseparated from service in 2008. In addi-tion, a deferral election may be made withrespect to an amount that is a short-termdeferral within the meaning of proposed§1.409A–1(b)(4), provided that the elec-tion is made before January 1, 2008 andbefore the year in which the amount wouldotherwise have been paid. Also, a deferralelection may be made with respect to anamount that is a short-term deferral withinthe meaning of final §1.409A–1(b)(4),

provided that the election is made beforeJanuary 1, 2009 and before the year inwhich the amount would otherwise havebeen paid.

This provision applies to elections oramendments by a service provider, a ser-vice recipient, or both a service providerand a service recipient. A service provideror service recipient may make more thanone change or amendment under this relief,provided that each such change or amend-ment is made in accordance with the dead-lines and conditions set forth in the ap-plicable transition relief. For example, aservice provider that in 2005 elected tochange the time and form of payment ofdeferred compensation to a lump sum pay-ment in 2010, may elect again in 2006,2007 or 2008 to change the time and formof payment in accordance with this para-graph. However, a service provider that in2005 elected to be paid an amount in 2008(and that did not change such election in2006 or 2007) may not in 2008 change thetime and form of payment to be paid in alater year.

Similarly, except as provided belowwith respect to certain discounted stockrights, an outstanding stock right thatprovides for a deferral of compensationsubject to section 409A may be amendedto provide for fixed payment terms con-sistent with section 409A, or to permitholders of such rights to elect fixed pay-ment terms consistent with section 409A,and such amendment or election will notbe treated as a change in the time and formof payment under section 409A(a)(4) oran acceleration of a payment under section409A(a)(3), provided that the option orright is so amended, and any elections aremade, on or before December 31, 2008.For this purpose, a stock right will not betreated as payable in a year solely becausethe stock right is exercisable during thatyear, if the stock right is also reasonablyexpected to be exercisable in a subsequentyear.

.03 Payments linked to qualified plansand certain other plans

The ability to link a payment electionunder a nonqualified deferred compensa-tion plan to an election under a qualifiedplan is extended through 2008. In addition,this relief is extended to payment electionsunder nonqualified deferred compensationplans that are linked to certain additionalemployer plans, including section 403(b)

November 13, 2007 991 2007–46 I.R.B.

annuities, section 457(b) eligible plans,and certain foreign broad-based plans.Accordingly, (i) for periods ending on orbefore December 31, 2007, an electionas to the time and form of a paymentunder a nonqualified deferred compensa-tion plan that is controlled by a paymentelection made by the service provider orbeneficiary of the service provider un-der a qualified employer plan describedin proposed or final §1.409A–1(a)(2), aplan that includes a trust described in sec-tion 402(d), a plan described in section1022(i)(1) or (2) of the Employee Retire-ment Income Security Act, or a foreignbroad-based plan described in proposed orfinal §1.409A–1(a)(3)(v), will not violatethe requirements of section 409A, pro-vided that the determination of the timeand form of the payment is made in accor-dance with the terms of the nonqualifieddeferred compensation plan that governpayment elections, as in effect on October3, 2004 and (ii) for periods ending afterDecember 31, 2007 and before January1, 2009, the rules discussed in (i) will beapplied by reference to the provisions ofthe final regulations only. For example,where a nonqualified deferred compensa-tion plan provides as of October 3, 2004,that the time and form of payment to aservice provider or beneficiary will be thesame time and form of payment elected bythe service provider or beneficiary undera qualified plan, it will not be a violationof section 409A for the plan administratorto make or commence payments underthe nonqualified deferred compensationplan on or after January 1, 2005, and on orbefore December 31, 2008, pursuant to thepayment election under the qualified plan.Notwithstanding the foregoing, other pro-visions of the Internal Revenue Code andcommon law tax doctrines continue toapply to any election as to the time andform of a payment under a nonqualifieddeferred compensation plan.

.04 Substitutions of non-discountedstock options and stock appreciation rightsfor discounted stock options and stock ap-preciation rights

Notice 2005–1, Q&A–18(d) providesthat it will not be a material modificationto replace a stock option or stock appre-ciation right otherwise providing for a de-ferral of compensation under section 409Awith a stock option or stock appreciationright that would not have constituted a de-

ferral of compensation under section 409Aif it had been granted upon the originaldate of grant of the replaced stock optionor stock appreciation right, provided thatthe cancellation and reissuance occurs onor before December 31, 2005. SectionXI.H of the preamble to the proposed reg-ulations extended the period during whichthe cancellation and reissuance may oc-cur until December 31, 2006, but only tothe extent a cancellation and reissuancein 2006 does not result in the cancella-tion of a deferral in exchange for cash orvested property in 2006. Except with re-spect to certain discounted stock rights de-scribed in § 3.07 of Notice 2006–79, theperiod during which the cancellation andreissuance may occur is extended until De-cember 31, 2008, but only to the extentsuch cancellation and reissuance in 2007does not result in the cancellation of a de-ferral in exchange for cash or vested prop-erty in 2007 and only to the extent suchcancellation and reissuance in 2008 doesnot result in the cancellation of a deferralin exchange for cash or vested property in2008. For example, a discounted optiongenerally may be replaced through De-cember 31, 2008 with an option that wouldnot have provided for a deferral of com-pensation, although the exercise of sucha discounted option after 2005 and beforethe cancellation and replacement generallywould result in a violation of section 409Aunless such exercise complied in operationwith the requirements of section 409A andthe applicable guidance.

Where replacement stock options orstock appreciation rights that would notconstitute deferred compensation subjectto section 409A are issued in accordancewith the conditions set forth in Notice2005–1, Q&A–18(d), the preamble to theproposed regulations and this notice, suchreplacement stock options or stock appre-ciation rights will be treated for purposesof section 409A as if granted on the grantdate of the original stock option or stockappreciation right. For a discussion of cer-tain methods that commentators proposedto use to compensate option holders forthe value of a lost discount, see sectionXI.H of the preamble to the proposed reg-ulations.

(2) Paragraph .06 of § 3 of Notice2006–79 is modified and superseded toread as follows:

.06 Other transition issues

Notice 2005–1, Q&A–21 provided re-lief with respect to certain initial deferralelections, generally providing that cer-tain requirements would not be applicableto elections made on or before March15, 2005. One of the conditions of therelief was that the plan be amended tocomply with the requirements of section409A in accordance with Notice 2005–1,Q&A–19. Notice 2005–1, Q&A–19 gen-erally required that plans be amendedby December 31, 2005. The March 15,2005 deadline for initial deferral electionswas not extended in the preamble to theproposed regulations; however, the planamendment requirement generally was ex-tended to December 31, 2006. Althoughthe initial deferral election relief containedin Notice 2005–1, Q&A–21 only referredto the requirements of Notice 2005–1,Q&A–19, the Treasury Department andthe IRS have become aware that manytaxpayers interpreted the extension ofthe plan amendment deadlines as flow-ing through to the requirements of Notice2005–1, Q&A–21. To avoid unintentionalnoncompliance in this area, the deadlinefor a plan to be amended to reflect useof the relief provided in Notice 2005–1,Q&A–21 is extended to December 31,2008. However, taxpayers retain the bur-den of demonstrating satisfaction of therequirement by showing that the defer-ral election was made by the March 15,2005 deadline, in accordance with the planterms in effect on or before December 31,2005 (other than a requirement to make adeferral election on or before March 15,2005). See Notice 2005–1, Q&A–21.

(3) Paragraphs .05 and .07 of § 3 ofNotice 2006–79 are not affected by thisnotice.

.02 Modification of Transition ReliefProvided in the Final RegulationsPreamble

The relief provided in sections XII andXIII of the final regulations preamble ismodified to reflect the extension of the No-tice 2006–79 transition relief through De-cember 31, 2008, and the guidance pro-vided in section XIV of the final regula-tions preamble is modified with respect toperiods after December 31, 2007, as fol-lows:

(A) General rule. Sections XII and XIIIof the final regulations preamble are ap-

2007–46 I.R.B. 992 November 13, 2007

plied by substituting references to Decem-ber 31, 2008 for references to December31, 2007, and substituting references toJanuary 1, 2009 for references to January1, 2008. However, references to April 10,2007 (the date of issuance of the final reg-ulations) and October 3, 2004 (the enact-ment date of the statute) are not modified.

(B) Section XII.C. With respect to thedetermination of the fair market value ofstock, the last sentence of the second para-graph of section XII.C of the final regu-lations preamble is modified to delete thewords “proposed or” so as to eliminate re-liance on the provisions of the proposedregulations.

(C) Section XII.D. With respect to pro-grams established before April 10, 2007where initial deferral elections have notbeen made by January 1, 2008, the tran-sition relief provided in the second para-graph of section XII.D of the final regu-lations preamble remains unchanged (thatis, no further transition relief is providedby this notice).

(D) Section XIV. The guidance pro-vided in section XIV of the final regula-tions preamble (Calculation and Timingof Income Inclusion Amounts, Reportingand Withholding) on the application ofsection 409A before January 1, 2008 isextended to apply before January 1, 2009except that paragraph A of such section isnot changed.

SECTION 4. EFFECT ON OTHERDOCUMENTS

Nothing in this notice is intended tolimit the scope or applicability of the tran-sition relief provided in Notice 2005–1, theproposed regulations or Notice 2006–79for periods before January 1, 2008. Thisnotice does not affect the guidance pro-vided in Notice 2006–33, 2006–1 C.B.754 (relating to the application of section409A(b)), Notice 2005–94, 2005–2 C.B.1208 (relating to reporting and wage with-holding for 2005) and Notice 2006–100,2006–51 I.R.B. 1109 (relating to reportingand wage withholding for 2006). Notwith-standing the section of the final regulationspreamble entitled “Effect on Other Docu-ments”, Notice 2005–1 is obsoleted onlyfor taxable years beginning on or afterJanuary 1, 2009, except for the followingsections of Notice 2005–1, which remaineffective after that date as modified by

any other applicable guidance: Q&A–6(application to arrangements covered bysection 457); Q&A–7 (application to ar-rangements between a partnership and apartner of the partnership); and Q&A–24through Q&A–38 (information reportingand withholding guidance).

Pursuant to this notice, Notice 2006–4,2006–3 C.B. 307 (relating to the applica-tion of section 409A to certain outstandingstock rights), is superseded by the finalregulations with respect to stock rightsissued in taxable years of the serviceprovider beginning after December 31,2008. Notice 2006–64, 2006–29 I.R.B. 88(relating to the acceleration of paymentsto comply with certain conflict of interestrules), is superseded by the final regu-lations effective for taxable years of theservice provider beginning after Decem-ber 31, 2008.

Section III of Notice 2007–78 is re-voked and superseded by this notice. Pur-suant to this notice, the penultimate para-graph and the first sentence of the finalparagraph of § IV.A of Notice 2007–78 aremodified by substituting references to De-cember 31, 2008 for references to Decem-ber 31, 2007. The guidance otherwise pro-vided in § IV of Notice 2007–78 is notaffected by this notice. Section 3 of No-tice 2006–79 is modified and supersededas provided in this notice. The guidanceand relief provided in the final regulationspreamble is modified as provided in thisnotice.

The Treasury Department and the IRSanticipate issuing guidance as soon as pos-sible with respect to the correction pro-gram and other matters discussed in § Vof Notice 2007–78 and this notice does notaffect that section. In addition, this noticedoes not affect the guidance provided in§ VI of Notice 2007–78.

SECTION 5. DRAFTINGINFORMATION

The principal authors of this noticeare Stephen Tackney and Bill Schmidt ofthe Office of Division Counsel/AssociateChief Counsel (Tax Exempt and Govern-ment Entities), although other TreasuryDepartment and IRS officials participatedin its development. For further infor-mation on the provisions of this notice,contact Stephen Tackney or Bill Schmidt

at (202) 927–9639 (not a toll-free num-ber).

Proposed Changes to theProcess for Obtaining theCommissioner’s Consentto Change a Method ofAccounting

Notice 2007–88

PURPOSE

This notice requests comments fromthe public regarding a proposal to changethe process by which taxpayers obtain theconsent of the Commissioner of InternalRevenue to change a method of account-ing for federal income tax purposes. Theproposal described in this notice is onepossible approach. The Internal RevenueService (IRS) is interested in consider-ing other possible approaches. Therefore,changes to the process, including any pilotprogram, will not become effective untilthe IRS considers public comments andsuggestions received in response to thisnotice and publishes guidance announcingchanges to the process.

BACKGROUND

A. The Existing Accounting MethodChange Process

Section 446(e) of the Internal RevenueCode requires taxpayers to obtain the con-sent of the Commissioner before changinga method of accounting for federal incometax purposes. A change in a method of ac-counting includes a change in the overallplan of accounting for gross income or de-ductions or a change in the treatment ofany item that involves the proper time forthe inclusion of the item in income or thetaking of the item as a deduction. Taxpay-ers request the Commissioner’s consent tochange a method of accounting by filinga Form 3115, Application for Change inAccounting Method, that describes the cur-rent and new methods of accounting, iden-tifies items that will be treated differentlyunder the new method of accounting, andincludes a computation of any adjustmentrequired by section 481(a).

The Commissioner has issued admin-istrative procedures instructing taxpayers

November 13, 2007 993 2007–46 I.R.B.

how and when to file Form 3115, andprescribing the terms and conditions nec-essary to obtain consent to change anaccounting method. These proceduresare contained principally in Rev. Proc.2002–9, 2002–1 C.B. 327, as modifiedand clarified by Announcement 2002–17,2002–1 C.B. 561, modified and amplifiedby Rev. Proc. 2002–19, 2002–1 C.B.696, and amplified, clarified and modifiedby Rev. Proc. 2002–54, 2002–2 C.B.432 (“automatic consent process”) andRev. Proc. 97–27, 1997–1 C.B. 680, asmodified and amplified by Rev. Proc.2002–19, as amplified and clarified byRev. Proc. 2002–54 (“nonautomatic con-sent process”).

1. The automatic consent processUnder the existing process, the Com-

missioner grants eligible taxpayers auto-matic consent to change to certain methodsof accounting, most of which are describedin the Appendix to Rev. Proc. 2002–9.A taxpayer that seeks to change to one ofthese methods must attach Form 3115 to itstimely filed (including extensions) originalincome tax return for the requested year ofchange and send a copy of the Form 3115to the IRS national office no later than thedate that the original Form 3115 is filedwith the federal income tax return for theyear of change. In general, a taxpayer, notunder audit, complying with all the appli-cable provisions of Rev. Proc. 2002–9 hasobtained the consent of the Commissionerto change its method of accounting and or-dinarily receives both “audit protection”and “ruling protection.” That is, the IRSwill not require the taxpayer to change itsmethod of accounting for the same item fora taxable year prior to the year of change(“audit protection”). The IRS also will notrequire the taxpayer to change or modifythe new method of accounting except incertain circumstances specifically enumer-ated in section 8 of Rev. Proc. 2002–9and, if the IRS does require the taxpayerto change or modify the new method ofaccounting, the required change or modi-fication to the new method of accountinggenerally will not be applied retroactively(“ruling protection”). In other words, thetaxpayer receives protection with respectto the use of the new method of account-ing in future years.

Rev. Proc. 2002–9 is the exclusiveprocedure for a taxpayer within the scopeof Rev. Proc. 2002–9 to obtain the con-

sent of the Commissioner before changinga method of accounting. Accordingly, ataxpayer that qualifies to make a changethrough the automatic consent processmay not opt to make the change under thenonautomatic consent process describedbelow. A user fee is not charged in theautomatic consent process.

The IRS national office reviews Forms3115 filed through the automatic consentprocess to determine whether the formis properly completed and whether thetaxpayer qualifies for automatic consent.If the IRS national office reviews a Form3115 and determines that the form is notproperly completed, or if supplementalinformation is needed, the IRS nationaloffice notifies the taxpayer, specifies theinformation that is needed, and permits thetaxpayer 30 days to furnish the necessaryinformation. If the IRS national officetentatively determines that the taxpayerhas changed its method of accountingwithout complying with all the applicableprovisions of Rev. Proc. 2002–9, the IRSnational office notifies the taxpayer of itstentative adverse determination and offersthe taxpayer a conference of right, if thetaxpayer has requested such a conference.In cases where the IRS national officeremains adverse after the conference ofright, it notifies the taxpayer that consentto make the change in method of account-ing is not granted.

2. The nonautomatic consent processChanges that do not qualify for auto-

matic consent must be requested under thenonautomatic consent process described inRev. Proc. 97–27. A taxpayer that seeksthe Commissioner’s consent to change amethod of accounting through the nonau-tomatic consent process must file Form3115 with the IRS national office duringthe taxable year in which the taxpayer de-sires to make the proposed change. Thereis a user fee for a nonautomatic consent re-quest (in general, the current fee is $2,500per request).

In processing a request for a change inmethod of accounting made through thenonautomatic consent process, the IRSnational office considers, among otherfactors, whether the requested method ofaccounting is legally permissible for thetaxpayer, whether the requested methodclearly reflects the taxpayer’s income, andwhether the taxpayer has appropriatelycomputed any adjustment required by

section 481(a). The processing of a tax-payer’s request for an accounting methodchange may involve requests for supple-mental information from the taxpayer,including requests for additional facts andclarification of how the taxpayer intendsto apply the requested method to particu-lar types of transactions. If supplementalinformation is needed, the IRS national of-fice notifies the taxpayer and the taxpayergenerally is permitted 21 days to furnishthe necessary information.

If the taxpayer’s requested accountingmethod change is approved by the IRS na-tional office, the taxpayer receives a let-ter ruling granting the taxpayer consent tomake the change subject to certain termsand conditions. The taxpayer also gen-erally receives audit protection and rulingprotection. In cases where the IRS na-tional office is tentatively adverse to thetaxpayer’s requested change in method ofaccounting, the IRS national office notifiesthe taxpayer of its tentative adverse deter-mination and offers the taxpayer a confer-ence of right, if the taxpayer has requestedsuch a conference. If the IRS national of-fice remains adverse after the conferenceof right, it notifies the taxpayer that con-sent to make the change in method of ac-counting is denied.

B. Reasons for Change

The IRS is concerned that certain as-pects of the existing accounting methodchange process make it a complex andinefficient means for taxpayers to obtainconsent to change an accounting method.These complexities and inefficiencies of-ten result in significant delays in the pro-cessing of accounting method change re-quests. The IRS believes that an effi-cient process that provides taxpayers witha means of obtaining timely consent tochange to a proper method of accountingis crucial to ensuring that taxpayers com-ply with the consent requirement of sec-tion 446(e). Accordingly, the IRS is con-sidering proposals to modify the account-ing method change process. In consideringany modifications to the existing process,the IRS will balance taxpayers’ need fortimely consent with the Commissioner’sresponsibility to ensure that the processcomports with the purpose underlying sec-tion 446(e).

2007–46 I.R.B. 994 November 13, 2007

Prior to the codification of sections446(e) and 481 in 1954, the regulationsimposed a “consent” requirement on tax-payers seeking a change in accountingmethod, the purpose of which was to givethe Commissioner the opportunity to insiston compensating adjustments to eliminatethe omissions and duplications of incomeand deductions that can result from achange in accounting method. Today, sec-tion 481(a) provides for such adjustments,thereby diminishing the role of the consentrequirement as a means for the Commis-sioner to mandate these adjustments. Theconsent requirement is recognized todayas serving broader policy aims, such aspromoting consistent accounting practicesand easing the administrative burden onthe Commissioner of detecting accountingmethod changes.

The IRS believes that the proposal con-tained in this notice fulfills the broad pol-icy aims of section 446(e). As under theexisting automatic consent and nonauto-matic consent processes, the IRS intendsto review all accounting method changerequests, and to focus on those that raisenovel or controversial accounting methodchange issues. The IRS expects that theproposal contained in this notice will sim-plify the consent process and reduce de-lays for most taxpayers, while preservingthe ability of the IRS to effectively moni-tor changes of accounting methods.

PROPOSAL

The IRS is considering whether tomodify the accounting method changeprocess so that the existing “automaticconsent” process and “nonautomatic con-sent” process are replaced with a systemunder which a taxpayer requests “standardconsent,” “specific consent” or “letter rul-ing consent.”

A. Standard Consent Process

1. In generalThe IRS anticipates that, under this pro-

posal, the majority of accounting methodchange requests would be made throughthe standard consent process. The pro-posed standard consent process is expectedto operate in a manner similar to the ex-isting automatic consent process — a tax-payer that timely files Form 3115 withits tax return and complies with the pro-cedures governing the process is granted

the Commissioner’s consent to change itsmethod of accounting. A change madeunder the standard consent process mustbe made under the published terms andconditions applicable to the standard con-sent process. No letter ruling would be is-sued by the IRS, and no user fee would becharged.

All changes in method of accountingthat are specifically identified in Rev.Proc. 2002–9 (or any successor), or otherautomatic consent guidance, would beeligible for consent under the standardconsent process. As is the case underthe existing automatic consent process,taxpayers changing to one of these specif-ically identified methods of accountingwould ordinarily obtain audit protectionand ruling protection. The IRS antici-pates that Rev. Proc. 2002–9 (or anysuccessor), and other automatic consentguidance, would be incorporated into theadministrative procedures that govern thestandard consent process. Consequently,the standard consent process would be theexclusive process available to taxpayerschanging to methods of accounting specif-ically identified in Rev. Proc. 2002–9(or any successor) and other automaticconsent guidance.

This proposal contemplates that thestandard consent process would be avail-able even for changes that are not identi-fied in Rev. Proc. 2002–9 (or any succes-sor), or other automatic consent guidance.That is, except for changes required to bemade under the proposed specific con-sent process (described below), a taxpayerthat timely files Form 3115 with its taxreturn and complies with the proceduresgoverning the standard consent processwould have the Commissioner’s consentto change to any permissible method of ac-counting for the requested year of change,including changes to methods of account-ing not specifically identified in Rev.Proc. 2002–9 (or any successor) or otherautomatic consent guidance. However,unlike the consent applicable to methodchanges specifically identified in Rev.Proc. 2002–9 (or any successor), or otherautomatic consent guidance, a taxpayer’schange of its method of accounting to amethod other than a method specificallyidentified in Rev. Proc. 2002–9 (or anysuccessor), or other automatic consentguidance, would receive only audit pro-tection for years prior to the requested year

of change and would not receive rulingprotection.

Although the proposal contemplatesthat taxpayers would file Form 3115 withtheir returns for the requested year ofchange, the IRS is considering an alter-native approach under which taxpayerswould be required to file Form 3115for changes to methods of accountingnot specifically identified in Rev. Proc.2002–9 (or any successor) or other au-tomatic guidance, by the last day of theninth month of the requested taxable yearof change. Requiring Form 3115 to befiled during the requested taxable yearof change, rather than with the tax returnfor the requested taxable year of change,would provide the IRS with time to con-sider the request before the taxpayer filesits return for the requested taxable year ofchange. The IRS requests comments onthis alternative approach.

The IRS expects that the standard con-sent process would give taxpayers whoseek consent under section 446(e) withoutruling protection the opportunity to obtainthis consent in a timely and efficient man-ner. The taxpayer’s filing of Form 3115would give the IRS adequate notice of thechange in accounting method. Further, thelack of ruling protection for changes thatare not specified in Rev. Proc. 2002–9 (orany successor), or other automatic consentguidance, puts the taxpayer in no worse aposition with regard to the new method ofaccounting as the taxpayer is in with re-gard to other items of income or deductionreported on the return. That is, the tax-payer’s use of the new method of account-ing is an issue that may be considered uponexamination.

2. IRS review of Forms 3115Under the proposal, the IRS would

screen accounting method change requestsfor completeness and for compliance withthe procedures governing the standardconsent process. Requests that are notsubstantially complete would be deniedconsent and the taxpayer would be notifiedthat consent is not granted. In contrast tothe procedures contained in section 10.02of Rev. Proc. 2002–9, under the pro-posal, the IRS does not intend to permittaxpayers to perfect requests that are notsubstantially complete prior to denyingconsent. As a consequence, a taxpayerwho submits a form that is not substan-tially complete would not receive consent

November 13, 2007 995 2007–46 I.R.B.

to change its method of accounting forthe proposed year of change and, thus,would not receive ruling protection oraudit protection. The IRS plans to issueguidelines and examples of what consti-tutes a substantially complete Form 3115.For example, a Form 3115 must includesufficient information about the currentand new methods of accounting to permitthe IRS to understand how the methodswork, and must identify legal authority(including any contrary authority) gov-erning the new method of accounting.However, minor omissions or errors onForm 3115 would not result in the denialof consent.

In addition to screening accountingmethod change requests for complete-ness, the IRS would review Forms 3115filed under the standard consent processto determine whether the new accountingmethod is permissible. In cases wherethe IRS agrees that the new method ispermissible, ordinarily no further actionwould be taken and the taxpayer wouldnot be advised that the review has takenplace. In cases where the IRS questionsthe propriety of the new method, the IRSmay correspond with the taxpayer to re-solve the matter. In some cases, resolutionmay require the taxpayer to provide addi-tional information about the change. If theIRS tentatively determines that the newmethod of accounting is impermissible,the IRS would notify the taxpayer of thetentative adverse determination and willordinarily offer the taxpayer a conference.In cases where the IRS remains adverseafter the conference, it would notify thetaxpayer that consent to make the changein method of accounting is not granted.

Under the existing accounting methodchange process, the IRS provides auditprotection for changes in method of ac-counting only if the request for change isgranted. The IRS is considering whether itwould be appropriate to provide audit pro-tection even in cases where consent is notgranted. Providing audit protection in suchcases may encourage taxpayers to seekconsent to change from improper methodsof accounting.

B. Specific Consent Process

The specific consent process is pro-posed to be available for only two cat-egories of accounting method changes:

(1) accounting method changes specifi-cally identified in published guidance asrequired to be made under the specificconsent process, and (2) changes that oth-erwise qualify under the standard consentprocess, but for which the taxpayer seeksdifferent terms and conditions or a waiverof certain scope limitations that apply tothe standard consent process. Each ofthese categories is discussed in furtherdetail below. The IRS expects that underthis proposal a user fee would apply to achange requiring specific consent.

1. Changes identified in publishedguidance

Under the proposal, the IRS wouldpublish guidance in the Internal Rev-enue Bulletin that lists specific accountingmethod changes that must be made usingthe specific consent process. The spe-cific accounting method changes listedin this published guidance would includethe types of changes that the IRS wantsto review in more depth and prior to thetaxpayer implementing the accountingmethod on its tax return. The IRS wouldupdate the proposed published list asnecessary to add or remove specific ac-counting method changes that are requiredto be made under the specific consentprocess. The IRS expects that, in gen-eral, the process for requesting specificconsent would be similar to the existingadvance consent process described in Rev.Proc. 97–27. That is, a taxpayer files aForm 3115 that is substantially complete(as discussed above in the description ofthe standard consent process) and awaitsa ruling from the IRS granting consentto the change. To give the IRS adequatetime to consider the request prior to thedue date of the taxpayer’s tax return forthe requested taxable year of change, theIRS expects to require taxpayers to fileForm 3115 by the last day of the ninthmonth of the requested taxable year ofchange, without the possibility of relieffor late requests under section 301.9100of the Regulations on Procedure and Ad-ministration. However, the IRS intendsto consider an otherwise qualified requestfiled after the last day of the ninth monthof a taxable year and before the beginningof the succeeding taxable year a timelyfiled request for the succeeding taxableyear.

If a taxpayer’s consent request isgranted, audit protection would apply

and ruling protection would usually apply.However, the IRS, in its discretion, maydecline to grant ruling protection in a par-ticular case.

2. Changes seeking modified terms andconditions or a waiver of certain scopelimitations

The specific consent process would alsoapply to any change that otherwise quali-fies for the standard consent process (in-cluding a change specifically identified inRev. Proc. 2002–9, or any successor, orother automatic consent guidance), but forthe fact that the taxpayer seeks a term andcondition different from those that applyto standard consent requests, or seeks awaiver of certain scope limitations that ap-ply to standard consent requests. For ex-ample, a taxpayer that filed a Form 3115under the standard consent process andseeks to make a subsequent change to thesame item within five years would be re-quired to request consent under this spe-cific consent process to make the subse-quent change. As provided in section 8.02of Rev. Proc. 97–27, the IRS may de-termine that, based on the unique factsof a particular case and in the interest ofsound tax administration, terms and con-ditions that differ from those that ordinar-ily apply are more appropriate for a par-ticular accounting method change. It isnot intended that under this proposal theIRS would change its policy concerningthe circumstances in which it will approvea request for modified terms and condi-tions. Taxpayers should be aware that it isonly in rare situations that the IRS agreesto a taxpayer’s request for terms and con-ditions different from those prescribed inpublished guidance.

To give the IRS adequate time to con-sider the request prior to the due date ofthe taxpayer’s tax return for the requestedtaxable year of change, the IRS expects torequire taxpayers to file Form 3115 by thelast day of the ninth month of the requestedtaxable year of change, without the possi-bility of relief for late requests under sec-tion 301.9100 of the Regulations on Pro-cedure and Administration. However, theIRS intends to consider an otherwise qual-ified request filed after the last day of theninth month of a taxable year and beforethe beginning of the succeeding taxableyear a timely filed request for the succeed-ing taxable year.

2007–46 I.R.B. 996 November 13, 2007

Under the proposal, in cases where theIRS agrees to the modified term and con-dition or the waiver of certain scope limi-tations, any consent would be granted un-der the standard consent process, gener-ally with audit protection and without rul-ing protection. That is, no ruling letterwould be issued; the IRS would simplyissue a waiver that permits the taxpayerto utilize the standard consent process tomake the change with the modified termand condition or with a waiver of the scopelimitation. In appropriate cases, the IRSwould limit audit protection where the tax-payer previously received audit protectionfor the same item under the standard con-sent process.

C. Letter Ruling Consent Process

The IRS recognizes that some taxpayerswho seek to change an accounting methodmay want the certainty of a letter ruling is-sued by the IRS national office concern-ing the propriety of a requested methodof accounting. Under the proposal, a tax-payer that seeks a change in accountingmethod other than a change that is specif-ically identified in Rev. Proc. 2002–9 (orany successor), or other automatic consentguidance, may request a letter ruling un-der Rev. Proc. 2007–1, 2007–1 I.R.B. 1,(or its successor). The IRS would applyRev. Proc. 2007–1 (or its successor) andRev. Proc. 2007–3, 2007–1 I.R.B. 108,(or its successor) in determining whetherto rule on a request filed under the letterruling consent process.

The IRS is concerned that requests foraccounting method changes made underthe existing advance consent process of-ten are not as well developed as requestsfor letter rulings generally. Under this pro-posal, a taxpayer utilizing the letter rulingconsent process must submit a fully devel-oped request, and that request would besubject to the same standard of factual andlegal development as a request for a let-ter ruling generally. Under this proposal, aletter ruling request would include, amongother information, a complete statement offacts, copies of documents pertinent to thetransaction, statements of supporting andcontrary authorities, examples of the appli-cation of the new method to the taxpayer’s

transaction and a completed Form 3115 asan attachment to the letter ruling request.As provided in Rev. Proc. 2007–1, taxpay-ers must provide any additional informa-tion requested by the IRS and, if a taxpayerdoes not submit the information within 21calendar days from the date of the request,the letter ruling request would be closedand the taxpayer would be notified in writ-ing.

Requests made under this letter rulingconsent process would be subject to thegenerally applicable user fee imposed onletter ruling requests, and not the user feecurrently imposed in the existing advanceconsent process. Further, the IRS intendsto require taxpayers to submit letter rul-ing consent requests by the last day of theninth month of the requested taxable yearof change, without the possibility of relieffor late requests under section 301.9100of the Regulations on Procedure and Ad-ministration. However, the IRS intends toconsider an otherwise qualified letter rul-ing request filed after the last day of theninth month of a taxable year and beforethe beginning of the succeeding taxableyear a timely filed letter ruling request forthe succeeding taxable year.

If the IRS national office rules favor-ably on the letter ruling request, it alsowould grant the taxpayer consent undersection 446(e) to change its method of ac-counting for the item that is the subject ofthe letter ruling request. Audit protectionand ruling protection would apply.

D. Pilot Program

The IRS intends to implement anychanges to the accounting method changeprocess on a pilot basis before makingpermanent changes to the process. TheIRS expects to open the pilot programto all taxpayers making an accountingmethod change within a specified pilotperiod. During the pilot period, the IRSwill continue to evaluate the process. TheIRS emphasizes that this notice does notestablish a pilot program. The IRS willconsider public comments received in re-sponse to this notice before establishinga pilot program in separate guidance. Inthe meantime, taxpayers must continue tofollow the existing procedures (e.g., Rev.

Proc. 97–27 and Rev. Proc. 2002–9) forobtaining consent to change an accountingmethod.

REQUEST FOR COMMENTS

The proposal contained in this notice isone way, but not the only way, that theaccounting method change process couldbe modified to improve efficiencies andreduce delays both for taxpayers and theIRS. The IRS requests public commentson this proposal and any other suggestionsfor modifying and improving the account-ing method change process. Any modi-fication to the accounting method changeprocess will not become effective until theIRS considers any public comments re-ceived and publishes additional guidanceannouncing changes to the process.

Written submissions in response tothis notice should be submitted no laterthan January 18, 2008, to Internal Rev-enue Service, CC:PA:LPD:RU (Notice2007–88), room 5203, P.O. Box 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand delivered be-tween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:RU (Notice 2007–88),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC 20224. Alternatively, submis-sions may be submitted via the Internet atNotice.Comments@irscounsel.treas.govin which case “Notice 2007–88” shouldbe in the subject line. All submissionswill be available for public inspection andcopying in their entirety. Therefore, sub-missions received by the IRS should notinclude taxpayer-specific information of aconfidential nature. Submissions shouldinclude the name and telephone number ofa person to contact.

DRAFTING INFORMATION

The principal authors of this notice areAndrew J. Keyso and Brenda D. Wilsonof the Office of Associate Chief Coun-sel (Income Tax & Accounting). For fur-ther information regarding this notice, con-tact Mr. Keyso or Ms. Wilson at (202)622–4800 (not a toll-free call).

November 13, 2007 997 2007–46 I.R.B.

Reporting and WageWithholding Under InternalRevenue Code § 409A

Notice 2007–89

I. PURPOSE

This notice provides guidance to em-ployers and payers on their reporting andwage withholding requirements for calen-dar year 2007 with respect to amounts in-cludible in gross income under § 409Aof the Internal Revenue Code. This no-tice also provides guidance to employersand payers on their reporting requirementswith respect to all deferrals of compen-sation under § 409A of the Internal Rev-enue Code for 2007. This notice doesnot affect the application of § 3121(v)(2)or an employer’s reporting obligations un-der § 31.3121(v)(2)–1 of the EmploymentTax Regulations. In addition, this noticeprovides guidance to service providers ontheir income tax reporting and tax pay-ment requirements with respect to amountsincludible in gross income under § 409Afor 2007. Generally, these requirementsfor 2007 reflect an extension to 2007 taxyears of the guidance provided in Notice2006–100 applicable to 2005 and 2006 taxyears.

II. BACKGROUND

A. The American Jobs Creation Act of2004

Section 885 of the American JobsCreation Act of 2004, Pub. Law No.108–357, 118 Stat. 1418 (the Act), added§ 409A, which provides, inter alia, thatall amounts deferred under a nonquali-fied deferred compensation plan for alltaxable years are currently includible ingross income to the extent not subjectto a substantial risk of forfeiture and notpreviously included in gross income, un-less certain requirements are met. Section885(b) of the Act amended the Code toimpose the following reporting and wagewithholding requirements with respectto deferrals of compensation within themeaning of § 409A.

• The Act amended §§ 6041 and 6051to require that an employer or payerreport all deferrals for the year undera nonqualified deferred compensation

plan on a Form W–2 (Wage and TaxStatement) or a Form 1099–MISC(Miscellaneous Income), regardless ofwhether such deferred compensationis includible in gross income under§ 409A(a).

• The Act amended § 3401(a) to pro-vide that the term “wages” includesany amount includible in the gross in-come of an employee under § 409A.

• The Act amended § 6041 to requirethat a payer report amounts includiblein gross income under § 409A that arenot treated as wages under § 3401(a).

B. Notice 2005–1

On December 20, 2004, the IRS issuedNotice 2005–1, 2005–1 C.B. 274, whichprovides guidance with respect to the ap-plication of § 409A. Additionally, in ac-cordance with the amendments made by§ 885(b) of the Act, Notice 2005–1 pro-vides the following with respect to report-ing and wage withholding requirementsfor deferred amounts:

• An employer reports to an employeethe total amount of deferrals for theyear under a nonqualified deferredcompensation plan in box 12 of FormW–2 using code Y. See Q&A–29.

• An employer reports amounts includi-ble in gross income under § 409A andin wages under § 3401(a) in box 1of Form W–2 as wages paid to theemployee during the year and subjectto income tax withholding. An em-ployer also reports such amounts inbox 12 of Form W–2 using code Z. SeeQ&A–33.

• A payer reports to a nonemployee thetotal amount of deferrals for the yearunder a nonqualified deferred com-pensation plan in box 15a of Form1099–MISC. See Q&A–30.

• A payer reports amounts includible ingross income under § 409A and nottreated as wages under § 3401(a) asnonemployee compensation in box 7of Form 1099–MISC. A payer also re-ports such amounts in box 15b of Form1099–MISC. See Q&A–35.

C. Final Regulations

On April 10, 2007, the IRS issued fi-nal regulations (T.D. 9321, 2007–14 I.R.B.865) regarding the application of § 409A,applicable for taxable years beginning onor after January 1, 2008. See 72 Fed. Reg.19234 (April 17, 2007). The regulationsgenerally incorporate and expand on theguidance provided in Notice 2005–1. Un-der Notice 2007–86, 2007–46 I.R.B. 990(November 13, 2007), taxpayers generallyare not required to comply with the fi-nal regulations until January 1, 2009, buttaxpayers may rely on the final regula-tions for periods before January 1, 2009.The final regulations generally supersedeNotice 2005–1 for periods beginning af-ter 2008. However, the regulations donot address reporting and withholding re-quirements, and accordingly do not su-persede Notice 2005–1, Q&A–24 throughQ&A–38, which address those issues. SeePreamble to the Final Regulations, Effecton Other Documents, 72 Fed. Reg. 19275.

D. Notice 2006–100

On November 30, 2006, the IRS is-sued Notice 2006–100, 2006–51 I.R.B.1109, which provided guidance to em-ployers and payers on their reporting andwithholding obligations with respect todeferrals of compensation and amountsincludible in gross income under § 409Aduring calendar years 2005 and 2006. Thenotice permanently waived employers’and payers’ reporting requirements under§§ 6041 and 6051 for calendar years 2005and 2006 with respect to annual deferralsof compensation within the meaning of§ 409A (Form W–2, Box 12, Code Y andForm 1099, Box 15a). The notice alsoprovided guidance regarding the calcu-lation of amounts includible in incomeunder § 409A, and the application of theemployer and payer reporting and with-holding requirements for such amountsunder § 409A (Form W–2, Box 12, CodeZ and Form 1099, Box 15b).

III. INTERIM EMPLOYER ANDPAYER REPORTING AND WAGEWITHHOLDING PROVISIONS

This section provides guidance on em-ployers’ and payers’ reporting and wagewithholding requirements for calendaryear 2007.

2007–46 I.R.B. 998 November 13, 2007

A. 2007 Annual Deferrals

1. Amounts Reportable on Form W–2

For calendar year 2007, an employeris not required to report amounts deferredduring the year under a nonqualifieddeferred compensation plan subject to§ 409A in box 12 of Form W–2 using codeY.

2. Amounts Reportable on Form1099–MISC

For calendar year 2007, a payer is notrequired to report amounts deferred dur-ing the year under a nonqualified deferredcompensation plan subject to § 409A inbox 15a of Form 1099–MISC.

B. 2007 Reporting and Withholding onAmounts Includible in Gross Incomeunder § 409A

Section 3401(a) provides that for in-come tax withholding purposes the term“wages” includes any amount includiblein gross income of an employee under§ 409A, and payment of such amount istreated as having been made in the taxableyear in which the amount is includiblein gross income. Thus, for calendar year2007, an employer must treat amountsincludible in gross income under § 409Aas wages for income tax withholding pur-poses. An employer is required to reportsuch amounts as wages paid on line 2of Form 941, Employer’s QUARTERLYFederal Tax Return, and in box 1 of FormW–2. An employer must also report suchamounts as § 409A income in box 12 ofForm W–2 using code Z. Amounts includi-ble in gross income under section § 409Aare supplemental wages for purposes ofdetermining the amount of income taxrequired to be deducted and withheld un-der § 3402(a), regardless of whether theemployer has paid the employee any reg-ular wages during the calendar year ofthe payment. See Publication 15 for thewithholding rules with respect to supple-mental wages. The amount required tobe withheld is not increased on accountof the additional income taxes imposedunder § 409A(a)(1)(B). Employees shouldthus be aware that estimated tax paymentsmay be required to avoid penalties under§ 6654.

For nonemployees, § 6041(g)(2) re-quires a payer to report to a nonemployeeany amount that is includible in gross in-come under § 409A that is not treated aswages under § 3401(a). Thus, for calendaryear 2007, a payer must report amountsincludible in gross income under § 409Aand not treated as wages under § 3401(a)as nonemployee compensation in box 7of Form 1099–MISC. A payer must alsoreport such amounts as § 409A income inbox 15b of Form 1099–MISC.

1. Calculation of Amounts Includible inIncome under § 409A(a) — In General

Section 409A(a)(1)(A)(i) provides thatif at any time during a taxable year a non-qualified deferred compensation plan failsto meet the requirements of § 409A(a)(2),(3) or (4), all compensation deferred un-der the plan for the taxable year and allpreceding taxable years shall be includiblein gross income for the taxable year to theextent not subject to a substantial risk offorfeiture and not previously included ingross income. Accordingly, for purposesof this notice, the amount includible ingross income under § 409A(a) and re-quired to be reported by the employeror payer equals the portion of the totalamount deferred under the plan that, asof December 31, 2007, is not subject toa substantial risk of forfeiture as definedin Notice 2005–1, Q&A–6, or the finalregulations, and has not been includedin income in a previous year, plus anyamounts of deferred compensation paidor made available to the service providerunder the plan during the calendar year2007. For purposes of this paragraph, anemployer or payer may treat an amountas previously included in income if prop-erly reported by the employer or payeron a 2005 or 2006 Form W–2, Form1099–MISC, or Form W–2c or correctedForm 1099–MISC. Thus, amounts prop-erly reported on a 2005 or 2006 Form W–2or Form 1099–MISC, or Form W–2c orcorrected Form 1099–MISC should notbe reported again on a 2007 Form W–2or Form 1099–MISC. For the definitionof a plan, including the plan aggregationrules, see Notice 2005–1, Q&A–9, and§ 1.409A–1(c).

Amounts includible in gross income un-der § 409A(a) include only amounts de-ferred that are subject to § 409A. Accord-

ingly, for purposes of this section III.B.1.,references to amounts deferred under aplan, including references to account bal-ances, refer solely to amounts deferred thatare subject to § 409A and not, for exam-ple, to amounts deferred that were earnedand vested prior to January 1, 2005 andthat are not otherwise subject to § 409Adue to the application of the effective dateprovisions. For rules regarding the appli-cation of the effective date provisions of§ 409A to nonqualified deferred compen-sation plans, see § 1.409A–6.

The provisions of this notice address-ing the calculation of the amounts includi-ble in income are intended as interim guid-ance only. The Treasury Department andthe IRS are currently formulating generalguidance with respect to the calculation ofthe amounts includible in income, as wellas other related issues. For informationregarding the submission of comments onthese topics, see section V. of this notice.

2. Wage Payment Date of AmountsIncludible in Income under § 409A(a)

Amounts includible in gross incomeunder § 409A(a) in 2007 that are eitheractually or constructively received (disre-garding the application of § 409A) by anemployee during the calendar year 2007,are considered a payment of wages by theemployer when received by the employeefor purposes of withholding, depositing,and reporting the income tax at source onwages under § 3401(a).

Amounts includible in gross incomeunder § 409A(a) in 2007 that are neitheractually nor constructively received (dis-regarding the application of § 409A) bythe employee during the calendar year2007, are treated as a payment of wageson December 31, 2007 for purposes ofwithholding, depositing, and reportingthe income tax at source on wages under§ 3401(a). If as of December 31, 2007the employer does not withhold incometax from the employee on such wages,or withholds less than the amount of in-come taxes required to be withheld under§ 3402 from the employee, the employeewill receive credit under § 31 for 2007 ifthe employer follows one of two possibleoptions. Under the first option, notwith-standing § 31.6205–1(c)(4), the employerwithholds or recovers from the employeethe amount of the undercollection after

November 13, 2007 999 2007–46 I.R.B.

December 31, 2007 and before Febru-ary 1, 2008, and reports as wages for thequarter ending December 31, 2007 suchamounts that were neither actually norconstructively received but are includiblein income under § 409A on Form 941for that quarter and in box 1 of the em-ployee’s Form W–2 for 2007. Under thesecond option, the employer pays the in-come tax withholding liability on behalfof the employee (without deduction fromthe employee’s wages or other reimburse-ment by the employee), and reports thegross amount of wages and the income taxwithholding liability for the quarter end-ing December 31, 2007 as including suchamounts that were neither actually norconstructively received but are includiblein income under § 409A, as well as theFederal Insurance Contributions Act, Fed-eral Unemployment Tax Act, and incometax withholding wages resulting frompaying the income tax on the employee’sbehalf, on Form 941 and Form 940, Em-ployer’s Annual Federal Unemployment(FUTA) Tax Return, and in box 1 of theemployee’s Form W–2 for 2007. SeeRev. Rul. 58–113, 1958–1 C.B. 362 andRev. Rul. 86–14, 1986–1 C.B. 304, formethods of computing gross wages whenpaying employment taxes on behalf of anemployee. In addition, for purposes ofthe deposit requirements associated withsuch wages, if the income tax withholdingliability with respect to such wages is paidto the IRS by the due date of the Form 941for the quarter ending December 31, 2007on which the wages are reported, thenthe amount of income tax withholdingliability will be considered to have beendeposited in accordance with the rules of§ 31.6302–1(c). Thus, penalties for failureto deposit taxes under § 6656 will not beimposed with respect to such amount.

3. 2007 Amounts Includible in Incomeunder § 409A(a)

The following sections provide guid-ance for calculating the total amountdeferred under the plan as of December31, 2007 for purposes of determining theamount required to be included in grossincome under § 409A(a) in accordancewith the rules described in section III.B.1.of this notice.

a. Account Balance Plans

For a plan that is an account balanceplan as defined in § 1.409A–1(c)(2)(i)(A)or (B), the amount deferred as of Decem-ber 31, 2007 equals the amount that wouldbe treated as an amount deferred under§ 31.3121(v)(2)–1(c)(1) on December 31,2007 if the entire account balance undersuch plan (including all principal amounts,adjusted for income, gain or loss cred-ited to the service provider’s account) asof December 31, 2007 were treated as aprincipal amount credited to the serviceprovider’s account on December 31, 2007.These same calculation rules apply for pur-poses of determining the amount reportedon Form 1099–MISC for calendar year2007 with respect to a nonemployee par-ticipating in an account balance plan. Forpurposes of this section, a plan described in§ 1.409A–1(c)(2)(i)(A) (elective accountbalance plan) is not aggregated with a plandescribed in § 1.409A–1(c)(2)(i)(B) (non-elective account balance plan).

b. Nonaccount Balance Plans —Amounts that are ReasonablyAscertainable

For a plan that is a nonaccount balanceplan as defined in § 1.409A–1(c)(2)(i)(C),where the amount deferred is reason-ably ascertainable within the meaning of§ 31.3121(v)(2)–1(e)(4), the amount de-ferred as of December 31, 2007 equalsthe present value of all future payments towhich the service provider has obtaineda legally binding right as of December31, 2007, calculated in accordance with§ 31.3121(v)(2)–1(c)(2) as if the ser-vice provider had obtained all of suchrights on December 31, 2007. Section31.3121(v)(2)–1(e)(4)(i)(B) provides thatan amount deferred is considered rea-sonably ascertainable on the first dateon which the amount, form, and com-mencement date of the benefit paymentsattributable to the amount deferred areknown, and the only actuarial or otherassumptions regarding future events orcircumstances needed to determine theamount deferred are interest and mortality.An amount does not fail to be reason-ably ascertainable if alternative forms orcommencement dates are available thatprovide an actuarially equivalent benefitto the normal benefit commencing at the

normal commencement date. In addition,an amount deferred does not fail to bereasonably ascertainable on a date merelybecause the exact amount of the bene-fit payable cannot readily be calculatedon that date or merely because the exactamount of the benefit payable dependson future changes in the cost of living. Ifthe exact amount of the benefit payabledepends on future changes in the cost ofliving, the amount deferred must be deter-mined using a reasonable assumption asto the future changes in the cost of living.These same rules apply for purposes ofdetermining the amount reported on Form1099–MISC for calendar year 2007 withrespect to a nonemployee participating ina nonaccount balance plan.

c. Amounts Deferred Under StockRights Covered by § 409A

For a plan that provides stock rightsas defined in § 1.409A–1(c)(2)(i)(H), theamount deferred as of December 31, 2007equals the amount that the service providerwould be required to include in income ifthe stock rights were immediately exercis-able and exercised on December 31, 2007.In general, this will mean with respect to astock right outstanding as of December 31,2007, the amount deferred as of December31, 2007 equals the fair market value of theunderlying stock less the sum of the exer-cise price and any amount paid by the ser-vice provider for the stock right.

d. Other Deferred Amounts

For all deferred amounts not addressedin section III.B.2.a., b., or c. of this no-tice, the amount deferred as of December31, 2007 must be determined under a rea-sonable, good faith application of a rea-sonable, good faith method. For this pur-pose, a reasonable, good faith applicationof a reasonable, good faith method gener-ally must reflect reasonable, good faith as-sumptions with respect to any contingen-cies as to the timing or amount of any pay-ment. Generally, the use of an assumptionwith respect to a contingency that results inthe amount deferred being the lowest po-tential value of the future payment will bepresumed not to be a reasonable, good faithassumption unless clear and convincingevidence demonstrates that the assumptionis reasonable. For example, where a pay-ment may be made in more than one form,

2007–46 I.R.B. 1000 November 13, 2007

the assumption that the payment will bemade in the least valuable form will bepresumed not to be a reasonable, goodfaith assumption unless clear and convinc-ing evidence demonstrates otherwise. Theassumptions concerning time and form ofpayment set out in § 1.409A–6(a)(3)(i) (re-lating to calculation of the grandfatheredbenefit in a nonaccount balance plan) willconstitute reasonable, good faith assump-tions for this purpose. If a portion of a de-ferred amount can be calculated under sec-tion III.B.2.a., b., or c. of this notice, a rea-sonable, good faith method of calculationwill in fact be a combination of two meth-ods. The method applicable under sectionIII.B.2.a., b., or c. of this notice must beapplied to the portion, and the balance ofthe deferred amount must be determinedunder a reasonable good faith method.

4. Amounts Includible in Income under§ 409A(b)

Section 409A(b)(1) provides generallythat in the case of assets set aside (directlyor indirectly) in a trust (or other arrange-ment determined by the Secretary) for pur-poses of paying deferred compensation un-der a nonqualified deferred compensationplan, such assets shall be treated as prop-erty transferred in connection with the per-formance of services for purposes of § 83whether or not such assets are available tosatisfy claims of general creditors at thetime set aside if such assets (or such trustor other arrangement) are located outsideof the United States, or at the time trans-ferred if such assets (or such trust or otherarrangement) are subsequently transferredoutside of the United States.

Section 409A(b)(2) provides that in thecase of compensation deferred under anonqualified deferred compensation plan,there is a transfer of property within themeaning of § 83 with respect to such com-pensation as of the earlier of the date onwhich the plan first provides that assetswill become restricted to the provisionof benefits under the plan in connectionwith a change in the employer’s financialhealth, or the date on which assets areso restricted, whether or not such assetsare available to satisfy claims of generalcreditors.

Section 409A(b)(3) provides that if,during a restricted period with respect toa single-employer defined benefit pension

plan, assets are set aside or reserved in, ortransferred to, a trust or other arrangementfor purposes of paying deferred compen-sation for an applicable covered employeeunder a nonqualified deferred compensa-tion plan of the plan sponsor or a memberof its controlled group, or a nonqualifieddeferred compensation plan of the plansponsor or a member of its controlledgroup provides that assets will becomerestricted to the provision of benefits, orassets are so restricted, in connection withsuch restricted period (or similar financialmeasure determined by the Secretary), theassets are treated as a transfer of propertyfor purposes of § 83 whether or not suchassets are available to satisfy claims ofgeneral creditors.

Section 409A(b)(4) provides that foreach taxable year that assets treated astransferred under § 409A(b) remain setaside in a trust or other arrangement sub-ject to § 409A(b)(1) or (2), any increasein value in, or earnings with respect to,such assets shall be treated as an additionaltransfer of property under this subsection(to the extent not previously included in in-come).

Notice 2006–33, 2006–1 C.B. 754,April 10, 2006, provides transitionguidance related to the application of§ 409A(b) to certain arrangements out-standing as of March 21, 2006. Under thatrelief, amounts transferred to trusts underthe arrangement on or before March 21,2006 that triggered the income inclusionand additional taxes under § 409A(b),or arrangements that otherwise triggeredthe income inclusion and additional taxesunder § 409A(b) on or before March 21,2006, generally are treated as not havingtriggered the inclusion or additional taxprovisions of § 409A(b), provided thatthe arrangements become compliant with§ 409A(b) by January 1, 2008. Section VIof Notice 2007–78, 2007–41 I.R.B. 780,and Notice 2007–86 provide that such re-lief is not extended beyond December 31,2007 and nothing in this notice is intendedto modify or extend that relief.

However, where amounts have beentransferred to a trust under an arrange-ment that triggers the income inclusionand additional taxes under § 409A(b), orthe arrangement otherwise triggers the in-come inclusion and additional taxes under§ 409A(b), and the transfer is not eligiblefor the relief in Notice 2006–33 (for ex-

ample because the transfer occurred afterMarch 21, 2006 or the arrangement is notmade compliant with § 409A(b) by Jan-uary 1, 2008), employers and payers mustmake a reasonable, good faith applicationof a reasonable, good faith method to de-termine the amount includible in incomefor purposes of reporting. In addition, em-ployers must treat the amount as wages forpurposes of § 3401. Amounts includiblein income under § 409A(b) that are noteligible for the relief in Notice 2006–33are treated as wages paid on the date thedeemed transfer of property under § 83described in § 409A(b) would be requiredto be included in income under the rules of§ 83, for purposes of withholding, deposit-ing and reporting the income tax at sourceon wages under § 3401(a). For amountsincludible in income under § 409A(b)that were eligible for the relief in Notice2006–33 (“grace period assets”) but areincludible in income under § 409A(b)because the arrangement is not madecompliant with § 409A(b) on or beforeDecember 31, 2007, Notice 2007–78 pro-vides that the date of the deemed transferof property is January 1, 2008.

C. Protection from Future AdditionalReporting or Withholding for 2007

An employer or payer who complieswith the rules of this notice regarding com-puting amounts includible in gross incomeunder § 409A and withholding and report-ing for calendar year 2007 will not be li-able for additional income tax withholdingor penalties, or be required to file a subse-quent corrected information return or fur-nish a corrected payee statement, as a re-sult of future published guidance with re-spect to the computation of amounts in-cludible in gross income under § 409A. Ifit is subsequently determined that the em-ployer did not apply the rules of this noticein determining amounts includible in grossincome under § 409A and in wages un-der § 3401(a) for calendar year 2007, anyrecalculation of these amounts will resultin additional liability for income tax with-holding under § 3403 for these years, plusany applicable penalties. In addition, anemployer or payer who does not apply therules of this notice in determining amountsincludible in gross income under § 409Aand in wages under § 3401(a) for calen-dar year 2007 will be required to file an

November 13, 2007 1001 2007–46 I.R.B.

original or a corrected information returnand furnish an original or a corrected payeestatement. For purposes of determiningany amount includible in income under§ 409A in a subsequent year, an amountwill not be treated as previously includedin income unless the amount has been re-ported appropriately on an information re-turn and payee statement, or has been in-cluded in income by the service providerin a previous year.

IV. SERVICE PROVIDERREQUIREMENTS WITH RESPECTTO AMOUNTS INCLUDIBLE INGROSS INCOME UNDER § 409A

This section provides guidance on ser-vice providers’ income tax reporting andtax payment requirements for calendaryear 2007 with respect to deferrals ofcompensation that are includible in grossincome under § 409A.

A. Amounts Required to be Includedin Income

A service provider must report as in-come and pay any taxes due relating toamounts includible in gross income under§ 409A for calendar year 2007. For pur-poses of determining the amount requiredto be included in income under § 409A,the same standards apply to a serviceprovider as apply to an employer or payerwhen calculating the amount required tobe reported as income, provided that anamount is treated as previously includedin income only if the amount has beenincluded in the service provider’s incomein a previous taxable year (regardlessof whether reported on a Form W–2 or1099–MISC). Accordingly, an employeeor other service provider must calculatethe amounts required to be included ingross income under the same methodsand standards as set forth in section III.Whether a service provider has compliedwith the requirements of this notice isdetermined independently of whether theemployer or payer has complied with therequirements of this notice. Thus, if theservice provider includes in income thesame amount reported by the employer orpayer, the service provider has not nec-essarily complied with the terms of thisnotice.

If the service provider does not reportand pay taxes due with respect to amountsincludible in gross income under § 409Afor calendar year 2007 in accordance withthe guidance contained in this notice, theIRS may assert additional income taxesand penalties under §§ 6651(a)(1) and (2),6654, and 6662 if it is determined that theamount of taxes reported and paid for cal-endar year 2007 was underreported or un-derpaid. Interest imposed under Chapter67 of the Code will apply to any under-payments of tax resulting from a serviceprovider’s failure to include amounts in-cludible in gross income under § 409A forcalendar year 2007. For purposes of de-termining the amount includible in incomeunder § 409A in a subsequent year, the ser-vice provider may treat an amount as pre-viously included in income only if the ser-vice provider has actually and properly in-cluded the amount in gross income in aprevious year.

B. Calculation of Additional Tax under§ 409A(a)(1)(B)(i)(I)

Section 409A(a)(1)(B)(i)(I) pro-vides that if compensation is requiredto be included in gross income under§ 409A(a)(1)(A), the tax imposed onsuch income is increased by the sumof two additional taxes equal to theamount of interest determined under§ 409A(a)(1)(B)(ii) plus an amount equalto 20% of the compensation which is re-quired to be included in gross income.Section 409A(a)(1)(B)(ii) provides thatthe amount of interest is the amount ofinterest at the underpayment rate plus 1percentage point on the underpaymentsthat would have occurred had the deferredcompensation been includible in grossincome for the taxable year in which firstdeferred or, if later, the first taxable year inwhich such deferred compensation is notsubject to a substantial risk of forfeiture.

Section 885(d)(1) of the Act providesthat § 409A generally applies to amountsdeferred after December 31, 2004. Sec-tion 885(d)(2)(B) of the Act provides thatamounts deferred in taxable years be-ginning before January 1, 2005, shall betreated as amounts deferred in a taxableyear beginning on or after such date ifthe plan under which the deferral is madeis materially modified after October 3,2004. Accordingly, for purposes of the

calculation of the additional tax under§ 409A(a)(1)(B)(ii), taxpayers may treatamounts deferred under a plan that wereoriginally deferred on or before January 1,2005 but became subject to § 409A due tothe material modification of the plan afterOctober 3, 2004 as deferred on January 1,2005.

V. REQUEST FOR COMMENTS

The provisions of this notice are in-tended as interim guidance only. TheTreasury Department and the IRS arecurrently formulating general guidancewith respect to the income inclusion re-quirements, the additional taxes, and thereporting and withholding requirements of§ 409A. The Treasury Department and theIRS request comments on all aspects ofthese requirements, including but not lim-ited to the topics addressed in this notice.

Comments must be submitted by Feb-ruary 13, 2008. All materials submittedwill be available for public inspection andcopying.

Comments may be submitted to In-ternal Revenue Service, CC:PA:LPD:RU(Notice 2007–89), Room 5203, PO Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may alsobe hand-delivered Monday through Fri-day between the hours of 8 a.m. and4 p.m. to the Courier’s Desk at 1111Constitution Avenue, NW, Washington,DC 20224, Attn: CC:PA:LPD:RU (No-tice 2007–89), Room 5203. Submissionsmay also be sent electronically via theinternet to the following email address:Notice.comments@irscounsel.treas.gov.Include the notice number (Notice2007–89) in the subject line.

VI. EFFECT ON OTHERDOCUMENTS

Notice 2005–1 is modified. Notice2006–100 is not affected by this notice.

VII. EFFECTIVE DATE

This notice is effective with respectto employers’ and payers’ reporting andwage withholding requirements and withrespect to service providers’ filing re-quirements and tax payment obligationsrelating to amounts includible in grossincome under § 409A for calendar year2007.

2007–46 I.R.B. 1002 November 13, 2007

VIII. DRAFTING INFORMATION

The principal author of this notice isDon M. Parkinson of the Office of Di-vision Counsel/Associate Chief Counsel(Tax Exempt and Government Entities),although other Treasury and IRS offi-cials participated in its development. Forfurther information on the provisionsof this notice addressing the calculationof the amount includible in income un-der § 409A, contact Stephen Tackneyat (202) 927–9639; for further informa-tion on other provisions of this notice,including the reporting and withholdingprovisions contained in this notice, con-tact Mr. Parkinson at (202) 622–6040 (nottoll-free numbers).

Security Under Section 6166Elections

Notice 2007–90

PURPOSE

The purpose of this notice is to alerttaxpayers, tax practitioners, executors andother persons who represent estates, that,in light of a recent Tax Court decision,the Internal Revenue Service is changingits policy and now will determine on acase-by-case basis whether security willbe required when a qualifying estate electsunder Internal Revenue Code section 6166to pay all or a part of the estate tax in in-stallments. This notice invites commentsfrom the public regarding the relevant fac-tors and appropriate standards for deter-mining whether security is deemed to benecessary (and thus will be required) toprotect the government’s interest in ob-taining full payment of the estate tax andinterest thereon when that liability is de-ferred under section 6166.

BACKGROUND

Under section 6166, an estate that meetsall of the requirements of the statute mayelect to pay the estate tax attributable to thedecedent’s interest in a closely held busi-ness in up to 10 equal, annual installments.The first of those annual payments mustbe made by the 5th anniversary of the duedate (determined without regard to any ex-tension) of the estate tax liability that is

not deferred under section 6166. An es-tate qualifies for a section 6166 electionif the value of the decedent’s interest inthe closely held business exceeds 35 per-cent of the adjusted gross estate, the dece-dent was a United States citizen or resi-dent at the time of his or her death, andthe estate made the election by attaching afull and complete notice of election with atimely filed federal estate tax return. I.R.C.§ 6166(a) and (d). If the estate qualifies forthe election, the estate pays a reduced rateof interest on the portion of estate tax de-ferred under section 6166; that interest ispayable annually during the entire defer-ral period, and in most instances, interestonly is paid during the first four years ofthe deferral period. I.R.C. §§ 6166(f) and6601(j). The deferred tax is payable in nomore than ten equal annual installments,beginning on a date that is not more thanfive years after the due date of the Fed-eral estate tax return, which is generallynine months from the date of death. I.R.C.§§ 6166(a)(1) and (3).

Under section 6324(a), a general fed-eral estate tax lien arises upon the dece-dent’s date of death and attaches for tenyears to all assets of the gross estate (ex-cept those used to pay certain expenses).This general federal estate tax lien maynot be extended beyond the ten-year periodfollowing the date of death. As a result,when an estate qualifies and elects undersection 6166 to pay estate tax over a periodof up to 14 years, the government’s inter-est in the deferred estate tax is secured bythe general federal estate tax lien for onlythe first nine years and three months of theinstallment payment period. (Although thelien runs from the date of death, the install-ment payment period generally runs fromthe normal payment due date, nine monthsafter the date of death, thus reducing thetime the general lien protects the govern-ment to nine years and three months). Dur-ing the final four years and nine monthsof the 14-year installment payment period,the government’s interest is no longer se-cured by the general estate tax lien. Inmost cases, approximately one-half of thetotal deferred estate tax still remains to bepaid during that final, unsecured portion ofthe deferral period.

Sections 6166(k)(1) and 6165, how-ever, permit the IRS to require a suretybond (not exceeding double the amountwith respect to which the extension is

granted) from an estate to ensure paymentof the deferred estate tax to be paid ininstallments under section 6166. In lieu ofthe requirement to post a surety bond, theexecutor may elect to grant the IRS a spe-cial extended estate tax lien (in the amountof the deferred amount plus any interest,additional amount, addition to tax, assess-able penalty, and costs attributable to thedeferred amount) to secure the govern-ment’s interest. I.R.C. §§ 6166(k)(2) and6324A. This special lien does not expireuntil the earlier of the date the estate taxis paid in full or the tax becomes uncol-lectible. I.R.C. §§ 6324A(d)(2), 6502, and6503(d).

In March 2000, the Treasury Inspec-tor General for Tax Administration recom-mended, in report 2000–30–059 “The In-ternal Revenue Service Can Improve theEstate Tax Collection Process,” that theIRS protect the government’s interest inestate tax deferred under section 6166. In2002 in response to that report, the IRSimplemented a policy requiring a suretybond, or in the alternative, a section 6324Aspecial lien, as a prerequisite to making thesection 6166 election. On April 12, 2007,in Estate of Roski v. Commissioner, 128T.C. 113 (2007), the Tax Court held that theIRS had abused its discretion by requiringthat all estates electing to pay the estate taxin installments under section 6166 mustprovide a bond (or alternatively a speciallien). The court found that it was Con-gress’s intent that the IRS determine, on acase-by-case basis, that the government’sinterest is at risk prior to requiring securityfrom an estate electing to pay the estate taxin installments under section 6166.

INTERIM PROVISIONS

The Treasury Department and the IRSare in the process of establishing standardsto be applied on a case-by-case basis in thefuture to identify those estates making anelection under section 6166 in which thegovernment’s interest in the deferred es-tate tax and the interest thereon is deemedto be sufficiently at risk to justify the re-quirement of a bond or special lien. TheTreasury Department and the IRS intend toissue regulations implementing those stan-dards and related procedures. Until thoseregulations are issued, however, the IRSwill evaluate the factors described belowand all other relevant facts to determine on

November 13, 2007 1003 2007–46 I.R.B.

a case-by-case basis whether, at any timeand from time to time during the deferralperiod, the government’s interest in the es-tate tax deferred under section 6166 and in-terest thereon is sufficiently at risk to jus-tify the requirement of a bond or speciallien.

In order to determine whether the gov-ernment’s interest in the deferred tax isadequately secured up to the amount al-lowed under sections 6165 and 6324A, theIRS will consider information contained inthe estate tax return, attachments to the re-turn, information obtained during exami-nation in audited cases, and any other rel-evant information described in paragraphs1 through 3 of the discussion of the factorsto be considered. Estates that have filedreturns that do not contain adequate in-formation to make this determination maybe contacted and required to provide ad-ditional financial information to the IRSfor purposes of making this determination.The IRS may terminate an estate’s elec-tion for failure to respond to such requestswithin a reasonable timeframe. If, afterthis individual evaluation and analysis, theIRS determines there is a sufficient creditrisk regarding the government’s collectionof the estate tax payments deferred undersection 6166 and the interest thereon, theIRS will notify the estate that it must pro-vide a bond or elect to provide a section6324A special lien in lieu of a bond. Ifthe estate then refuses to provide a bond ora section 6324A special lien, the IRS willterminate the estate’s section 6166 elec-tion. The estate may then seek reconsid-eration of the termination by the Officeof Appeals and, if the Office of Appealsupholds the IRS’s determination, the es-tate then will have the opportunity to pe-tition the Tax Court under section 7479for a declaratory judgment with regard towhether its section 6166 election may becontinued. I.R.C. § 7479; Rev. Proc.2005–33, 2005–1 C.B. 1231.

The factors the IRS will consider indetermining whether deferred installmentpayments of estate tax under section 6166pose a sufficient credit risk to the govern-ment to justify the requirement of a bond orspecial lien are described below. In mak-ing this determination, the IRS will con-sider all relevant facts and circumstances,in addition to the factors identified in thefollowing, non-exclusive list. No single

factor will be determinative, and not allfactors may be relevant to every estate.

1. Duration and stability of the busi-ness. This factor considers the nature ofthe closely held business on which the es-tate tax is deferred under section 6166 andof the assets of that business, the relevantmarket factors that will impact the busi-ness’s future success, its recent financialhistory, and the experience of its manage-ment, in an effort to predict the likelihoodof its success and survival through the de-ferred payment period. Facts relevant tothis factor are likely to appear primarily inthe appraisal and the financial statementsthat accompany the estate tax return. In-formation regarding any outstanding liens,judgments, or pending or anticipated law-suits or other claims against the business,if any, that are not disclosed in that doc-umentation should be provided by the es-tate with the election. The estate may berequired to furnish such information in re-sponse to an inquiry by the IRS.

2. Ability to pay the installments of taxand interest timely. This factor considershow the estate expects to be able to makethe annual payments of tax and interest asdue, and the objective likelihood of real-izing that expectation. Facts relevant tothis factor may include the nature of thebusiness’s significant assets and liabilities,and the business’s cash flow (both histori-cal and anticipated). If not sufficiently dis-closed in the documents attached to the es-tate tax return, the estate should submit rel-evant information with the election undersection 6166. The estate may be requiredto furnish such information in response toan inquiry by the IRS.

3. Compliance history. This factoraddresses the business’s history regardingcompliance with all federal tax paymentand tax filing requirements, in an effortto determine whether the business and itsmanagement respect and comply with alltax requirements on a regular basis. Thisfactor also addresses the estate’s compli-ance history with respect to federal taxpayment and filing requirements. The es-tate may use a sworn affidavit or other pro-bative documents to provide this informa-tion.

This notice is applicable to each estate:(1) that timely elects to pay the estate taxin installments under section 6166 and thattimely files a return on or after November13, 2007; (2) whose return was being clas-

sified, surveyed or audited by the IRS as ofApril 12, 2007; or (3) that is currently inthe deferred payment period but that hasnot yet provided a bond or special lien if(a) the general federal estate tax lien willexpire within two years from November13, 2007 or (b) the IRS reasonably believesthat the government’s interest in collectingthe deferred estate tax and interest thereonin full is sufficiently at risk to require abond or special lien.

REQUEST FOR COMMENTS

The Treasury Department and the IRSintend to issue regulations regarding theappropriate standards to be applied by theIRS in exercising its discretion with regardto whether a bond or special lien will berequired in order to avoid an IRS termi-nation of an estate’s election under sec-tion 6166, and invite interested personsto submit comments regarding such stan-dards and possible alternatives to a bondor special lien for providing security undersection 6166.

In particular, comments are requestedwith regard to the following issues:

1. What factors, in addition to or inplace of those stated above, should the IRSuse in determining whether to require se-curity from an estate electing to pay the es-tate tax in installments under section 6166?

2. How often during the section 6166installment payment period (or on whatoccurrences) should the IRS reevaluatewhether the estate poses a sufficient creditrisk to the government’s collection of thedeferred estate tax and related interest tojustify the requirement of a bond or speciallien?

3. What facts evident from a review ofthe estate tax return are likely to be reason-ably accurate predictors of either a futuredefault in or full payment of the deferredtax payments and related interest?

4. What additional financial informa-tion should the IRS require from an estateto assist in making the determination as towhether the estate poses a sufficient creditrisk to the government with regard to thedeferred estate tax and interest thereon tojustify requiring a bond or special lien?

5. For purposes of sections 6165 and6166(k), should the IRS define a suretybond under section 7101 to also includeother forms of security, and, if so, whatother forms of security, such as certain ir-

2007–46 I.R.B. 1004 November 13, 2007

revocable letters of credit from reputablefinancial institutions or United States Trea-sury Bonds, should be so included?

Comments are encouraged to be sub-mitted by January 14, 2008, to: InternalRevenue Service, CC:PA:LPD:PR (Notice2007–90), room 5203, P.O. Box 7604, BenFranklin Station, Washington, DC 20224.Submissions may be hand delivered Mon-day through Friday between the hours of

8 a.m. and 4 p.m. to: CC:PA:LPD:PR (No-tice 2007–90), Courier’s Desk, InternalRevenue Service, 1111 Constitution Av-enue, NW, Washington, DC. Alternatively,taxpayers may submit electronic com-ments directly to the IRS e-mail address:notice.comments@irscounsel.treas.gov.Please include “Notice 2007–90” in thesubject line of any electronic communica-tion.

DRAFTING INFORMATION

The principal author of this noticeis Laura Urich Daly of the Office ofAssociate Chief Counsel (Procedureand Administration). For further infor-mation regarding this notice, contactLaura Urich Daly at (202) 622–3600 (nota toll-free call).

November 13, 2007 1005 2007–46 I.R.B.

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

Withholding Procedures UnderSection 1441 for CertainDistributions to Which Section302 Applies

REG–140206–06

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document contains pro-posed regulations regarding a withholdingagent’s obligation to withhold and reporttax under Chapter 3 of the Internal Rev-enue Code when there is a distribution inredemption of stock of a corporation that isactively traded on an established financialmarket. Specifically, the proposed regula-tions provide an escrow procedure that awithholding agent must apply while mak-ing the determination under section 302 asto whether the distribution in redemptionof the stock held by a foreign shareholderis treated as a dividend subject to withhold-ing, or a distribution in part or full pay-ment in exchange for stock. These regu-lations would affect corporations that areactively traded on an established financialmarket and their shareholders. This docu-ment also provides a notice of public hear-ing on these proposed regulations.

DATES: Written or electronic commentsmust be received by January 16, 2008.Outlines of topics to be discussed at thepublic hearing scheduled for February 6,2008 at 10 a.m. must be received by Jan-uary 16, 2008.

ADDRESSES: Send submissions toCC:PA:LPD:PR (REG–140206–06),room 5203, Internal Revenue Ser-vice, PO Box 7604, Ben Franklin Sta-tion, Washington, DC 20044. Submis-sions may be hand delivered Mondaythrough Friday between the hours of8 a.m. and 4 p.m. to CC:PA:LPD:PR(REG–140206–06), Courier’s Desk, In-ternal Revenue Service, 1111 Constitution

Avenue, NW, Washington, DC, or sentelectronically, via the Federal eRulemak-ing Portal at www.regulations.gov (IRSREG–140206–06). The public hearingwill be held in room 2140, Internal Rev-enue Building, 1111 Constitution Avenue,NW, Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Kathryn Holman, (202)622–3440 (not a toll-free number); con-cerning submissions of comments, thehearing, and/or to be placed on the build-ing access list to attend the hearing, emailRichard.A.Hurst@irscounsel.treas.gov.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in this notice of proposed rulemak-ing have been submitted to the Office ofManagement and Budget for review inaccordance with the Paperwork Reduc-tion Act of 1995 (44 U.S.C. 3507(d)).Comments on the collections of infor-mation should be sent to the Office ofManagement and Budget, Attn: DeskOffice for the Department of the Treasury,Office of Information and RegulatoryAffairs, Washington, DC 20503, withcopies to the Internal Revenue Service,Attn: IRS Reports Clearance Officer,SE:W:CAR:MP:T:T:SP, Washington, DC20224. Comments on the collection ofinformation should be received by Jan-uary 16, 2008. Comments are specificallyrequested concerning:

Whether the proposed collection of in-formation is necessary for the proper per-formance of the functions of the InternalRevenue Service, including whether theinformation will have practical utility;

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

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

How the burden of complying with theproposed collections of information maybe minimized, including through the appli-cation of automated collection techniques

or other forms of information technology;and

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

The collection of informationin these proposed regulations is in§1.1441–3(c)(5)(iii). This information isrequired to allow a U.S. financial institu-tion that is applying the escrow procedureto properly comply with its withholdingand reporting obligations under sections1441, 1442 and 1443 in the case of adistribution made by a corporation withrespect to its stock that is actively tradedon an established financial market and thatrequires a determination under section 302as to whether the distribution is treatedas a dividend or a distribution in part orfull payment in exchange for stock. Thecollection of information is mandatory andthe respondents are nonresident aliens andforeign corporations.

Estimated total annual reporting bur-den: 1400 hours.

The estimated annual burden per re-spondent: 2 hours.

Estimated number of respondents: 700.Estimated annual frequency of re-

sponses: 5 times.An agency may not conduct or sponsor,

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

Books or records relating to a collectionof information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally, tax returns and tax returninformation are confidential as required by26 U.S.C. 6103.

Background

These proposed regulations,REG–140206–06, provide guidanceregarding the withholding and reportingobligations of a withholding agent underChapter 3 of the Internal Revenue Code(Code) in the case of a distribution inredemption of the stock of a corporationthat is actively traded on an establishedfinancial market within the meaning of§1.1092(d)–1 (publicly traded). In generalthe proposed regulations contemplate

2007–46 I.R.B. 1006 November 13, 2007

a transaction where a publicly tradedcorporation offers to purchase stock fromits shareholders (a self tender), wherethe amount of stock purchased and theshareholders involved in the transaction(the participating shareholders) dependon a number of factors, including eachshareholder’s willingness to sell some orall of its stock, and the terms set forthin the offer. The regulations would alsoapply to transactions described in section304(a)(2).

In the case of a self-tender, a corpora-tion may purchase stock from some or allof its shareholders and, as a result, eachparticipating shareholder’s percentageownership interest in the corporation mayincrease, decrease, or remain the same.Although the corporation’s self tender of-fer is denominated as an offer to purchaseshares, the tax consequences to the corpo-ration and any participating shareholderof the payment to such a shareholder, asdescribed in this preamble, depend onseveral factors. Further, where the par-ticipating shareholder is a foreign person,withholding under Chapter 3 of the Codemay or may not be required.

Sections 1441 and 1442 and§1.1441–1(b)(1) generally require a per-son that makes a payment of an “amountsubject to withholding” to a beneficialowner that is a foreign person to deductand withhold 30 percent of the paymentunless the payor can reliably associate thepayment with documentation upon whichthe payor can rely to treat the payment asmade to a beneficial owner that is a U.S.person or as made to a beneficial ownerthat is a foreign person entitled to a re-duced rate of withholding under the Code,regulations or an income tax treaty.

Section 1.1441–2(a) provides thatthe term amounts subject to withhold-ing means amounts from sources withinthe United States that constitute fixedor determinable annual or periodical in-come (FDAP) described in §1.1441–2(b)or other amounts subject to withholdingdescribed in §1.1441–2(c).

Section 1.1441–2(b)(1) provides thatFDAP includes all income described insection 61 of the Code, unless the item ofincome is described in §1.1441–2(b)(2).Section 1.1441–2(b)(2)(i) generally ex-cludes from FDAP gains derived from thesale of property. Thus, a distribution toa shareholder that is treated as gain from

the sale of stock is excluded from FDAP.Further, to the extent a distribution is a re-turn of capital, it is not gross income undersection 61, and thus also is not FDAP.

Section 302 provides rules for deter-mining when a distribution in redemptionof stock is treated as a distribution in partor full payment in exchange for stock.That section generally requires a com-parison of a shareholder’s overall interestin the corporation before the distributionand its overall interest in such corporationafter the distribution. See section 302(b).In conducting the comparison, the con-structive ownership rules of section 318generally apply. If the shareholder’s inter-est in the corporation has been sufficientlyreduced, then the distribution is treated as apayment in exchange for the shareholder’sstock under section 302(a). If the share-holder’s interest in the corporation has notbeen sufficiently reduced, the tax conse-quences of the distribution are determinedunder section 301, and such distribution isa dividend to the shareholder to the extentthe distribution is out of the distributingcorporation’s earnings and profits, thenapplied against and reduce the adjustedbasis of the stock, and finally treated asgain from the sale or exchange of property.See section 301(c).

When a publicly held corporationmakes a distribution in redemption ofits stock, a determination must be madeunder section 302 with respect to eachshareholder as to whether the redemptionis treated as a distribution of property towhich section 301 applies (potentiallyconstituting a dividend in whole or in part)or as a distribution in part or full paymentin exchange for stock. However, the in-formation necessary for each shareholderto make such a determination generallyis not available until after the transactionis completed because the redemption ofstock held by other shareholders must betaken into account. Further, because of theapplication of the constructive ownershiprules of section 318, when a distributionis made to a foreign shareholder, a with-holding agent will often not be in thebest position to make a determination asto whether the distribution to the foreignshareholder should be treated as a paymentin exchange for the shareholder’s stock ora dividend.

There are two revenue rulings that con-sider the issue of whether the interest of a

shareholder in a publicly held corporationhas been sufficiently reduced as a result ofa distribution to effect exchange treatmentunder section 302(a).

In Rev. Rul. 76–385, 1976–2 C.B.92, see §601.601(d)(2)(ii)(b), the IRSruled that a shareholder who actually andconstructively owned 0.0001118% of apublicly traded corporation’s stock be-fore a redemption, but only constructivelyowned 0.0001081% after the redemption,had experienced a “meaningful reductionin proportionate interest” in the corpora-tion under the principles of United Statesv. Davis, 397 U.S. 301 (1970), rehearingdenied, 397 U.S. 107 (1970). The share-holder’s interest in the corporation afterthe redemption therefore was approxi-mately 96.7% of the shareholder’s interestbefore the redemption, taking constructiveownership into account. Nevertheless, thereduction was considered meaningful, andso the distribution to the shareholder wastreated as not essentially equivalent to adividend under section 302(b)(1) and as apayment in exchange for the shareholder’sstock under section 302(a).

Consistent with Rev. Rul. 76–385, inRev. Rul. 81–289, 1981–2 C.B. 82, see§601.601(d)(2)(ii)(b), the IRS ruled that ashareholder who owned 0.2% of the com-mon stock of a publicly traded companybefore a redemption, and 0.2% of the com-mon stock in the company after the re-demption, did not satisfy the “meaning-ful reduction” standard of United Statesv. Davis, and that the redemption did notqualify for exchange treatment under sec-tion 302(a).

Under the analysis adopted in these rev-enue rulings, each minority shareholderwho participates in a self tender must com-pute its percentage ownership of the to-tal outstanding stock of the corporationbefore and after the transaction. If af-ter the transaction the shareholder’s per-centage ownership is less than it was be-fore the transaction, the shareholder gener-ally has experienced a “meaningful reduc-tion” in the shareholder’s proportionate in-terest in the corporation, and the transac-tion, at least with respect to that share-holder, is considered a distribution in ex-change for the stock under section 302(a)and not a distribution of property to whichsection 301 applies. This result occurseven if another participating shareholder inthe same self tender experiences no change

November 13, 2007 1007 2007–46 I.R.B.

or an increase in its percentage ownershipof the corporation, and, therefore, is con-sidered to receive a distribution of propertyto which section 301 applies. See also sec-tion 302(b)(2), (3), and (4).

Section 1.1441–3(c) requires a cor-poration making a distribution with re-spect to its stock to a foreign shareholder,as well as any intermediary (such asa broker) making a payment of sucha distribution, to withhold on the en-tire amount of the distribution, unlessit elects to reduce the amount of with-holding under §1.1441–3(c). Section1.1441–3(c)(2)(i)(B) provides that a dis-tributing corporation or intermediary mayelect to not withhold on a distributionto the extent it represents a distributionin part or full payment in exchange forstock. Section 1.1441–3(c)(2)(i) providesthat a corporation or intermediary makesthe election by reducing the amount ofwithholding at the time that the paymentis made. However, a withholding agentcannot avail itself of this election unlessit knows the extent to which a distribu-tion represents a payment in exchange forstock under section 302(a). As previouslynoted, in the context of a distribution inredemption of stock held in a publiclytraded corporation, the withholding agentgenerally will not have this informationunless, at the time of the redemption, ithas obtained information from each par-ticipating shareholder regarding actualand constructive ownership of stock forpurposes of the foregoing analysis.

The Treasury Department and the IRSare aware that, in the context of transac-tions involving distributions in redemptionof stock held by foreign persons wheresuch stock is actively traded on an es-tablished financial market, the means ofcompliance with sections 1441, 1442, and1443 is varied. The Treasury Departmentand the IRS believe that the discretionpermitted by the current regulations, andthe resulting different treatment of similartransactions is not appropriate. Accord-ingly, these proposed regulations providethe procedure (“escrow procedure”) tobe followed by U.S. withholding agentsto satisfy the withholding, reporting anddeposit requirements of the regulationsunder sections 1441, 1442, and 1443 withrespect to any payment of a corporate dis-tribution in redemption of stock made to

a foreign account holder with respect tocertain self tenders.

Explanation of Provisions

The proposed regulations set forth anescrow procedure for withholding agentsto follow in the case of a payment madeafter December 31, 2008 of a corporatedistribution in redemption of stock thatis actively traded on an established fi-nancial market within the meaning of§1.1092(d)–1 (section 302 payment).

In general, the proposed regulationsrequire a U.S. financial institution (with-holding agent) to set aside in an escrowaccount 30 percent (or the applicable div-idend rate provided under a treaty) of theamount of the section 302 payment. Thewithholding agent is then required to pro-vide information to the foreign beneficialowner regarding the distribution, includ-ing the total number of the distributingcorporation’s shares outstanding beforeand after the distribution. The withhold-ing agent must also provide a writtenstatement explaining the conditions underwhich the section 302 payment will betreated as a dividend or a payment in ex-change for stock (including an explanationof the constructive ownership rules undersection 318). In the written explanationprovided to the foreign beneficial owner,the withholding agent must request thatthe beneficial owner provide a written cer-tification to the withholding agent within60 days as to whether the distribution iseither a dividend or a payment in exchangefor stock.

The certification to be provided by theforeign beneficial owner must contain,among other requirements, the beneficialowner’s name and account number, a cer-tification that the distribution is a paymentin exchange for stock or is a dividend,and the number of shares actually andconstructively owned by the beneficialowner before and after the distribution.The beneficial owner’s certification mustbe signed under penalties of perjury.

A withholding agent may generally relyon a certification received from a foreignbeneficial owner in determining its section1441 obligations with respect to paymentsfor such beneficial owner’s stock. How-ever, if the withholding agent knows orhas reason to know that the certification is

unreliable or incorrect, or the withholdingagent does not receive a certification froma foreign beneficial owner, the withhold-ing agent is required to treat the amount setaside in escrow as tax withheld on the 61st

day, and deposit that amount pursuant tothe applicable regulations.

Although a qualified intermediary (QI)may, and a withholding foreign part-nership and a withholding foreign trust(WP/WT) must, assume primary with-holding responsibility under section 1441and receive payments without any with-holding by the U.S. financial institution,under the proposed regulations, in thecase of a section 302 payment, the QI orWP/WT cannot assume primary withhold-ing responsibility and receive the paymentin gross. The QI or WP/WT must applythe procedure described in this preambleand provide the U.S. financial institutionwith a withholding statement that detailsthe appropriate rate of withholding andinformation reporting for amounts paidto the QI or WP/WT. In addition, if thereis a chain of QIs or WPs/WTs this pro-cedure must be followed at each level inthe chain. The U.S. financial institutionshall treat beneficial owners that are U.S.non-exempt recipients, and that hold stockin the distributing corporation throughQIs, WPs/WTs, NQIs and flow-throughs,in accordance with the section 302 pay-ment certifications obtained from thoseU.S. non-exempt recipients and shall in-struct foreign intermediaries and foreignflow-through entities to do the same.

These proposed regulations would ap-ply for redemptions of stock that are madeafter December 31, 2008. However, awithholding agent may, at its option, relyon these proposed regulations for a re-demption of stock that occurs before Jan-uary 1, 2009.

The Treasury Department and the IRSare aware that withholding agents servevarious customer bases: some may main-tain accounts for a small number of ac-count holders, others may maintain ac-counts for a much greater number of ac-count holders. Comments are requestedon alternatives to the escrow proceduredescribed in this proposed regulation forwithholding agents that maintain accountsfor large numbers of customers.

2007–46 I.R.B. 1008 November 13, 2007

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required.

It has been determined that section553(b) of the Administrative ProcedureAct (5 U.S.C. chapter 5) does not apply tothese regulations.

These regulations impose a collectionof information on small entities, and theRegulatory Flexibility Act (5 U.S.C. chap-ter 6) applies. This rule regulates secu-rities brokerages that have foreign cus-tomers that respond to a tender offer bya U.S. publicly traded corporation to pur-chase some of its stock from its share-holders. The Small Business Administra-tion (SBA) has established size standardsfor types of economic activities which areclassified based on the North American In-dustry Classification Codes (NAICS). Theregulations specifying size standards areset forth in Title 13, Code of Federal Regu-lations, part 121 (13 CFR part 121), SmallBusiness Size Regulations. The NAICSCode for a small securities brokerage isspecified at 13 CFR 121.201. Pursuant tosubsector 523120 of the NAICS, a smallsecurities brokerage is one with receiptsof less than 6.5 million dollars. Accord-ing to NAICS 523120, U.S. Census Bu-reau, Statistics of U.S. Business (2002),there are a total of 7,886 securities bro-kerages of which 7,113 generate revenueless than $5 million and 224 generate rev-enue between $5 million and $10 million.It is estimated that 7,213 of the securi-ties brokerages are considered small busi-nesses. The IRS requests information re-garding the number of transactions thesesmall securities brokerages engage in eachyear involving self tenders by public cor-porations. In the case of a tender offer bya publicly held corporation, it is estimatedthat a brokerage clerk would spend twohours preparing the paperwork and veri-fying the computations required to accu-rately withhold with respect to foreign cus-tomers. According to the Bureau of LaborStatistics, the mean hourly wage of a bro-kerage clerk is $18.34, so it is estimatedthat it will cost a small securities broker-age $36.68 per transaction. This cost isnot significant when compared to the an-nual revenue of the small securities broker-

age. Pursuant to section 605(b) of the Reg-ulatory Flexibility Act, 5 U.S.C. §605, theChief Counsel certifies that this rule willnot have a significant economic impact ona substantial number of small entities. TheIRS invites specific comments on the eco-nomic impact of compliance from mem-bers of the public who believe there willbe a significant economic impact on smallbusinesses that are regulated by this rule.Pursuant to section 7805(f) of the Inter-nal Revenue Code, this regulation has beensubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-nesses.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signed origi-nal and eight (8) copies) or electronic com-ments that are submitted timely to the IRS.The IRS and the Treasury Department re-quest comments on the clarity of the pro-posed rules and how they can be made eas-ier to understand. All comments will beavailable for public inspection and copy-ing.

A public hearing has been scheduled forFebruary 6, 2008, beginning at 10 a.m. inroom 2140 of the Internal Revenue Build-ing, 1111 Constitution Avenue, NW, Wash-ington, DC. Due to building security pro-cedures, visitors must enter at the 12th

street entrance. In addition, all visitorsmust present photo identification to enterthe building. Because of access restric-tions, visitors will not be admitted beyondthe immediate entrance area more than 30minutes before the hearing starts. For in-formation about having your name placedon the building access list to attend thehearing, see the “FOR FURTHER INFOR-MATION CONTACT” section of this pre-amble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wishto present oral comments at the hearingmust submit electronic or written com-ments, and an outline of the topics to bediscussed, and the time to be devoted toeach topic (signed original and eight (8)copies) by January 16, 2008. A period of10 minutes will be allotted to each personfor making comments. An agenda show-ing the scheduling of the speakers will be

prepared after the deadline for receivingoutlines has passed. Copies of the agendawill be available free of charge at the hear-ing.

Drafting Information

The principal author of these proposedregulations is Kathryn Holman, Office ofAssociate Chief Counsel (International).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR Part 1 is proposedto be amended 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 1.1441–3 is amended as

follows:1. A sentence is added at the end of

paragraph (c)(2)(i)(B).2. Paragraph (c)(5) is added.3. A sentence is added at the end of

paragraph (d)(1).The additions read as follows.

§1.1441–3 Determination of amounts tobe withheld.

* * * * *(c) * * *(2) * * *(i) * * *(B) * * * The preceding sentence shall

not apply to a public section 302 distribu-tion to which paragraph (c)(5) applies.

* * * * *(5) Special rules for certain distribu-

tions to which section 302 applies—(i)Withholding responsibility— (A) Generalrule. A corporation that makes a publicsection 302 distribution, or any inter-mediary (described in §1.1441–1(c)(13))making a payment of such a distribution, isrequired to withhold under section 1441,1442 or 1443 on the entire amount ofthe distribution unless the provisions ofparagraph (c)(5)(iii) of this section havebeen applied. The provisions of paragraph

November 13, 2007 1009 2007–46 I.R.B.

(c)(2)(i)(B) or (d)(1) of this section do notapply to a public section 302 distribution.

(B) Effective/applicability date. Therules of this paragraph (c)(5) apply to pub-lic section 302 distributions made after De-cember 31, 2008.

(ii) Definitions. Solely for purposes ofthis paragraph (c)(5), the following defini-tions shall apply:

(A) Public section 302 distributionmeans a distribution by a corporation inredemption of its stock for which there isan established financial market within themeaning of §1.1092(d)–1.

(B) Section 302 payment means pay-ment of a public section 302 distribution.

(C) Distributing corporation means acorporation making or treated as making apublic section 302 distribution.

(iii) Escrow procedure—(A) Applica-tion—(1) In general. The escrow proce-dure in this paragraph (c)(5)(iii) may beapplied only by an intermediary (describedin §1.1441–1(c)(13)) that is a U.S. finan-cial institution. A U.S. financial institu-tion making a section 302 payment to a for-eign account holder, and applying this es-crow procedure, is not required to withholdon the entire amount of a section 302 pay-ment under the general rule of paragraph(c)(5)(i).

(B) Escrow account—(1) In general. AU.S. financial institution shall set aside inan escrow account on the date it receivesa section 302 payment from a distribut-ing corporation with respect to stock ofa foreign account holder 30 percent (orthe applicable dividend rate provided by atax treaty for a qualifying foreign accountholder) of the amount and shall credit theforeign account holder’s account with thebalance of the section 302 payment.

(2) Qualified intermediaries. Theamount set aside, under paragraph(c)(5)(iii)(B)(1) of this section shall in-clude 30 percent (or the applicable div-idend rate provided by a treaty) of theamount paid to any qualified intermediary(QI) (whether or not the QI has assumedprimary withholding responsibility) andto any withholding foreign partnership orwithholding foreign trust (WP/WT).

(C) Request for section 302 paymentcertification. On or before the date it re-ceives the section 302 payment, the U.S.financial institution shall provide the fol-lowing information and instructions, inwriting, to the foreign beneficial owner—

(1) The total number of distributing cor-poration’s shares outstanding before andafter the public section 302 distribution;

(2) An explanation of the conditions un-der which the section 302 payment will betreated as a dividend or a payment in ex-change for stock for Federal income taxpurposes (including an explanation of anyapplicable constructive ownership rules);and

(3) A request that the beneficial ownerof the account provide a certification (sec-tion 302 payment certification), within 60days of the section 302 payment, statingwhether the section 302 payment is eithera dividend or a payment in exchange forstock under the Internal Revenue Code.

(D) Content of section 302 payment cer-tification. The section 302 payment certi-fication must include the following infor-mation:

(1) The beneficial owner’s name andaccount number.

(2) The distributing corporation’sname.

(3) The total shares of the distributingcorporation outstanding immediately be-fore and immediately after the public sec-tion 302 distribution.

(4) A certification from the beneficialowner that either—

(i) The section 302 payment is a pay-ment in exchange for stock because thebeneficial owner’s proportionate interesthas been reduced but not completely ter-minated;

(ii) The section 302 payment is a pay-ment in exchange for stock because thebeneficial owner’s interest in the distribut-ing corporation is completely terminated;or

(iii) The section 302 payment is a divi-dend.

(5) With respect to the certificationsin paragraph (c)(5)(iii)(D)(4)(i) and (ii) ofthis section, the number of shares actuallyand constructively owned by the beneficialowner before and after the distribution andthe beneficial owner’s percentage owner-ship before and after the distribution.

(6) A penalties of perjury statement.(7) The signature of the beneficial

owner and date of signature.(E) Receipt of section 302 payment

certification—(1) Payment in exchangefor stock. If, within the 60-day perioddescribed in paragraph (c)(5)(iii)(C)(3),the U.S. financial institution receives from

the foreign beneficial owner a section302 payment certification stating that thesection 302 payment is a payment in ex-change for stock, and if the U.S. financialinstitution does not know or have reasonto know that the information in the section302 payment certification is unreliableor incorrect, the U.S. financial institutionshall credit the account with the amountset aside with respect to the beneficialowner who provides the certification. Theentire amount paid (including the amountinitially set aside) shall be reported ascapital gains on Form 1042–S, ForeignPerson’s U.S. Source Income Subject toWithholding.

(2) Unreliable or incorrect exchangecertification. If the U.S. financial institu-tion knows or has reason to know that theinformation in the section 302 paymentcertification is unreliable or incorrect, theU.S. financial institution shall treat thepayment as a payment for which no sec-tion 302 payment certification has beenreceived and shall follow the withholdingand reporting procedures in paragraph(c)(5)(iii)(E)(4) of this section.

(3) Dividend. If, within the 60-day pe-riod, the U.S. financial institution receivesa section 302 payment certification fromthe foreign beneficial owner stating thatthe section 302 payment is a dividend,the U.S. financial institution shall treat theamount set aside as tax withheld as of thetime it receives the section 302 paymentcertification, and shall deposit that amountpursuant to the applicable regulations. Theentire amount paid shall be reported onForm 1042–S as dividends.

(4) No timely certification received. If,within the 60-day period, the U.S. finan-cial institution does not receive a section302 payment certification, or is treated un-der paragraph (c)(5)(iii)(E)(2) of this sec-tion as not receiving a section 302 paymentcertification, the U.S. financial institutionshall treat the amount set aside as tax with-held as of the 61st day, and shall depositthat amount pursuant to the applicable reg-ulations. The entire amount paid shall bereported on Form 1042–S as dividends.

(5) Late certification. If, after the60-day period has expired, the U.S. fi-nancial institution receives a section 302payment certification from a foreign ben-eficial owner that the section 302 paymentis a payment in exchange for stock andthe conditions stated in §1.1461–2(a) are

2007–46 I.R.B. 1010 November 13, 2007

satisfied, the U.S. financial institution mayapply the refund or offset procedures ofthat paragraph.

(6) Determination of incorrect treat-ment. If, after the 60-day period hasexpired, the U.S. financial institution de-termines that the section 302 paymentwas incorrectly treated as a distributionin exchange for stock, the proceduresset forth regarding underwithholding in§1.1461–2(b) are applicable.

(7) Undocumented beneficial owners.The U.S. financial institution shall with-hold at 30 percent on the entire amountpaid to a beneficial owner that is notproperly documented under §§1.1441–1,1.1441–5, etc. and that is presumed tobe a foreign person, whether or not theU.S. financial institution has received asection 302 payment certification fromsuch beneficial owner. The U.S. financialinstitution shall report the entire amountpaid on Form 1042–S as dividends.

(F) Amounts in excess of section 302payment. If the amount the U.S. financialinstitution credits to the account of the for-eign beneficial owner from the escrow ac-count includes an amount in excess of thesection 302 payment, such as interest ac-crued on the escrowed funds, the U.S. fi-nancial institution shall report and with-hold on such excess amount in accordancewith the rules under Chapter 3 of the Inter-nal Revenue Code.

(G) U.S. non-exempt recipients. TheU.S. financial institution shall treat ben-eficial owners that are U.S. non-exemptrecipients, and that hold stock in thedistributing corporation through QIs,WPs/WTs, NQIs and flow-throughs, inaccordance with the section 302 pay-ment certifications obtained from thoseU.S. non-exempt recipients and shall in-struct foreign intermediaries and foreignflow-through entities to do the same.

(H) Notice to distributing corporation.The U.S. financial institution shall notifythe distributing corporation, in writing, bythe filing date of Form 1042–S, of the ag-gregate amount of the section 302 paymentthat the U.S. financial institution has re-ported on Forms 1042–S as capital gains,and the aggregate amount of the section302 payment that it has reported on Forms1042–S as dividends.

(I) Application of Escrow Procedureto Qualified Intermediaries. As providedin paragraph (c)(5)(iii)(A) of this sec-

tion, only the U.S. financial institutionmay establish an escrow account and theamounts set aside in the escrow accountshall include 30 percent (or the applica-ble treaty rate applicable to dividends)on payments made to a direct accountholder that is a QI (including a QI thathas assumed primary withholding respon-sibility). Under the procedure describedin paragraph (c)(5)(iii)(I)(3), a QI shallprovide the U.S. financial institution witha withholding statement as required inthe QI Agreement. If there is a chain ofQIs, each QI in the chain shall apply theprocedure. The procedures described inthis paragraph (I) shall be applied to with-holding foreign partnerships and with-holding foreign trusts within the meaningof §§1.1441–5(c)(2) and (e)(5)(v), re-spectively, in the same manner as theprocedures apply to a QI.

(1) Request for section 302 paymentcertification. The U.S. financial institutionshall provide the information and instruc-tions described in paragraph (c)(5)(iii)(C)of this section to the QI, and the QI shallprovide the same information and instruc-tions to its account holders including ac-count holders that are U.S. non-exempt re-cipients.

(2) Content of section 302 paymentcertification. The content of the section302 payment certification shall includethe information described in paragraph(c)(5)(iii)(D) of this section.

(3) Receipt of section 302 paymentcertification—(i) Payment in exchangefor stock. If, within the 60-day perioddescribed in paragraph (c)(5)(iii)(C), theQI receives from the beneficial owner asection 302 payment certification statingthat the section 302 payment is a paymentin exchange for stock and if the QI doesnot know or have reason to know that theinformation in the section 302 paymentcertification is unreliable or incorrect, theQI shall reflect such treatment in its with-holding statement provided to the U.S.financial institution, and, based upon thewithholding statement, the U.S. financialinstitution shall release payment from itsescrow and the QI shall credit the benefi-cial owner’s account with the amount setaside by the U.S. financial institution withrespect to the beneficial owner who pro-vided the certification. The entire amountpaid (including the amount initially set

aside) shall be reported on the QI’s pooledbasis Form 1042–S as capital gains.

(ii) Unreliable or incorrect exchangecertification. If the QI knows or has rea-son to know that the information in thesection 302 payment certification is unre-liable or incorrect, the QI shall treat thepayment as a payment for which no sec-tion 302 payment certification has beenreceived and shall follow the withhold-ing and reporting procedures in paragraph(c)(5)(iii)(I)(3)(iv) of this section.

(iii) Dividend. If, within the 60-day pe-riod, QI receives a section 302 paymentcertification stating that the section 302payment is a dividend, the QI shall reflectsuch treatment in its withholding statementand shall treat the payment as a dividendfor purposes of its reporting and withhold-ing responsibilities under the QI agree-ment. The entire amount paid shall be re-ported on its pooled basis Form 1042–S asdividends.

(iv) No timely certification received.If, within the 60-day period, the QI doesnot receive a section 302 payment cer-tification, or is treated under paragraph(c)(5)(iii)(I)(3)(ii) of this section as notreceiving a section 302 payment certifica-tion, the QI shall reflect such treatment inits withholding statement provided to theU.S. financial institution and shall treatthe payment as a dividend for purposesof its reporting and withholding respon-sibilities under the QI agreement. Theentire amount paid shall be reported on itspooled basis Form 1042–S as dividends.

(v) Late certification. If, after the60-day period has expired, the QI receivesa section 302 payment certification froma beneficial owner that the section 302payment is a payment in exchange forstock and the conditions stated in the QIagreement regarding the refund and offsetprocedures are satisfied, the QI may applysuch refund or offset procedures.

(vi) Determination of incorrect treat-ment. If, after the 60-day period has ex-pired, the QI determines that the section302 payment was incorrectly treated as adistribution in exchange for stock, the pro-cedures set forth regarding adjustments forunderwithholding in the QI agreement areapplicable.

(vii) Undocumented beneficial owners.The QI shall withhold at 30 percent on theentire amount paid to a beneficial ownerthat is not properly documented and that is

November 13, 2007 1011 2007–46 I.R.B.

presumed to be a foreign person, whetheror not the QI has received a section 302payment certification from such benefi-cial owner. The QI shall report the en-tire amount paid on its pooled basis Form1042–S as dividends.

(4) U.S. non-exempt recipients. TheQI shall treat direct account holders thatare U.S. non-exempt recipients, and thathold stock in the distributing corporation,in accordance with the section 302 pay-ment certifications obtained from thoseU.S. non-exempt recipients and shall in-struct foreign intermediaries and foreignflow-through entities to do the same.

(J) Intermediaries that are not qualifiedintermediaries. If the U.S. financial insti-tution has an account holder that is an inter-mediary that is not a QI (“NQI”), the U.S.financial institution shall apply the rulesof paragraph (c)(5)(iii)(J)(1) through (4) ofthis section. Where the provisions of thisparagraph (J) refer only to the U.S. finan-cial institution, they shall apply in the samemanner to a QI or WP/WT and where theyrefer to an NQI, they shall apply in thesame manner to a flow-through that is nota WP or WT.

(1) The U.S. financial institution shallprovide the information and instructionsdescribed in paragraph (c)(5)(iii)(C) of thissection to the NQI and the NQI shall pro-vide the same information and instructionsto its account holders.

(2) The content of the section 302payment certification shall include theinformation described in paragraph(c)(5)(iii)(D) of this section.

(3) The NQI shall provide the sec-tion 302 payment certification to the U.S.financial institution together with theotherwise required documentation and awithholding statement made in accordancewith the section 302 payment certification.

(4) The U.S. financial institution shalltreat the section 302 payment as a dividendor a payment in exchange for stock basedon the information and documentation pro-vided to it under paragraph (c)(5)(iii)(J)(3)of this section. The U.S. financial institu-tion shall withhold and report on a specificpayee basis in accordance with this infor-mation.

(d) * * * (1) * * * This paragraph doesnot apply to a public section 302 distribu-tion to which paragraph (c)(5) applies.

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on October 16,2007, 8:45 a.m., and published in the issue of the FederalRegister for October 17, 2007, 72 F.R. 58781)

Notice of ProposedRulemaking

Compensation for Labor orPersonal Services: Artists andAthletes

REG–114125–07

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed changes to existing final regulationsregarding the source of compensation forlabor or personal services. The proposedchanges are needed to clarify the determi-nation of source of compensation of a per-son, including an artist or athlete, who iscompensated for labor or personal servicesperformed at specific events. These pro-posed regulations affect such an individ-ual.

DATE: Written or electronic commentsand requests for a public hearing must bereceived by January 14, 2008.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–114125–07),room 5203, Internal Revenue Ser-vice, PO Box 7604, Ben Franklin Sta-tion, Washington, DC 20044. Submis-sions may be hand-delivered Mondaythrough Friday between the hours of8 a.m. and 4 p.m. to: CC:PA:LPD:PR(REG–114125–07), Courier’s Desk, In-ternal Revenue Service, 1111 ConstitutionAvenue, NW, Washington, DC, or sentelectronically via the Federal eRulemak-ing Portal at http://www.regulations.gov(IRS–REG–114125–07).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, David Bergkuist at (202)622–3850; concerning the submissions

of comments and requests for a hearing,Regina Johnson at (202) 622–7180 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments under 26 CFR part 1 un-der section 861 of the Internal RevenueCode (Code). On July 14, 2005, finalregulations that revised and amended§1.861–4 were published in the FederalRegister (70 FR 40663) as T.D. 9212,2005–2 C.B. 429. In these final reg-ulations, §1.861–4(b)(2)(ii)(C)(3) wasreserved with respect to compensationfor labor or personal services performedpartly within and partly without the UnitedStates by an artist or an athlete who is anemployee.

Section 861(a)(3) of the Internal Rev-enue Code provides that, subject to certainexceptions, compensation for labor or per-sonal services performed in the UnitedStates is gross income from sources withinthe United States. See also §1.861–4(a) ofthe regulations. Section 862(a)(3) of theCode provides that compensation for laboror personal services performed withoutthe United States is gross income fromsources without the United States. Section1.861–4(b) provides rules for determiningthe source of compensation for labor orpersonal services performed partly withinand partly without the United States. Sec-tion 1.861–4(b)(2)(i) provides rules fordetermining the source of compensationfor labor or personal services performedpartly within and partly without the UnitedStates by an individual other than as anemployee. Section 1.861–4(b)(2)(ii) pro-vides rules for determining the source ofcompensation for labor or personal ser-vices performed partly within and partlywithout the United States by an individualas an employee.

Under §1.861–4(b)(2)(ii), if an individ-ual performs labor or personal services asan employee, the source of the individual’scompensation is generally determined ona time basis, with certain fringe benefitssourced on a geographic basis. An indi-vidual may determine the source of his orher compensation as an employee for la-bor or personal services performed partlywithin and partly without the United States

2007–46 I.R.B. 1012 November 13, 2007

under an alternative basis if the individ-ual establishes to the satisfaction of theCommissioner that, under the facts and cir-cumstances of the particular case, the al-ternative basis more properly determinesthe source of the compensation than thegeneral rules of §1.861–4(b)(2)(ii). See§1.861–4(b)(2)(ii)(C)(1)(i). In addition,the Commissioner may, under the facts andcircumstances of the particular case, deter-mine the source of compensation that is re-ceived by an individual as an employee un-der an alternative basis if such compensa-tion is not for a specific time period, pro-vided that the Commissioner’s alternativebasis determines the source of compensa-tion in a more reasonable manner than thebasis used by the individual.

The final regulations at§1.861–4(b)(2)(ii)(C)(3) provided areservation with respect to the source ofcompensation for labor or personal ser-vices performed partly within and partlywithout the United States by an artist orathlete who is an employee. The preambleof T.D. 9212 indicated that it was intendedthat the rule for artists and athletes who areemployees, when issued, would requiresuch individuals to determine the propersource of their compensation for labor orpersonal services on the basis that mostcorrectly reflects the proper source ofincome under the facts and circumstancesof the particular case, consistent withcurrent law.

Explanation of Provisions

The proposed regulations wouldset forth a new “events basis” rule in§1.861–4(b)(2)(ii)(G) and make cer-tain other clarifying changes to theexisting final regulations. The pro-posed regulations also would remove§1.861–4(b)(2)(ii)(C)(3), which reservedwith respect to artists and athletes.

The amount of income received by aperson, including an individual who isan artist or an athlete, that is properlytreated as compensation from the perfor-mance of labor or personal services isdetermined based on all of the facts andcircumstances of the particular case. Pro-posed §1.861–4(b)(2)(ii)(G) specifies thatthe amount of compensation for labor orpersonal services determined on an eventbasis is the amount of the person’s com-pensation which, based on the facts and

circumstances, is attributable to the laboror personal services performed at the lo-cation of a specific event.

The IRS and the Treasury Departmenthave determined that the proper source ofcompensation received by a person, in-cluding an individual who is an artist orathlete, specifically for performing laboror personal services at an event is the lo-cation of the event. A basis that purportsto determine the source of compensationfrom the performance of labor or personalservices at a specific event, whether ona time basis or otherwise, by taking intoaccount the location of labor or personalservices performed in preparation for theperformance of labor or personal servicesat the specific event will generally not bethe basis that most correctly determines thesource of the compensation. This rule ap-plies to situations covered by §1.861–4(a)and (b).

Under §1.861–4(a), the source of com-pensation for labor or personal servicesperformed wholly within the United Statesis generally from sources within the UnitedStates. Therefore, if a person, includingan individual who is an artist or an athlete,is specifically compensated for performinglabor or personal services at an event in theUnited States, the source of such compen-sation is wholly within the United Statesbecause the labor or personal services wereperformed wholly at an event within theUnited States. The proposed regulationsstate that a basis that purports to deter-mine the source of such income on a timebasis by taking into account the locationof labor or personal services performed inpreparation for the performance of labor orpersonal services at the specific event willgenerally not be a more reasonable basisfor determining source of the compensa-tion. The proposed regulations add an ex-ample to §1.861–4(c) to illustrate the ap-plication of this rule.

Section 1.861–4(b) applies to instancesin which a person is compensated for per-forming labor or personal services at mul-tiple events, only some of which are withinthe United States, and at least a portionof the person’s compensation cannot bespecifically attributed to the person’s per-formance of labor or personal services ata specific location. If the person is not anindividual who is compensated as an em-ployee, the source of compensation for la-bor or personal services is determined on

the basis that most correctly reflects theproper source of that income under thefacts and circumstances of the particularcase. See §1.861–4(b)(1) and (2)(i). If aperson is compensated specifically for la-bor or personal services performed at mul-tiple events, the basis that most correctlyreflects the proper source of that incomeunder the facts and circumstances of theparticular case will generally be the loca-tion of the events. In addition, a basisthat purports to determine the source ofsuch income on a time basis by taking intoaccount the location of labor or personalservices performed in preparation for theperformance of labor or personal servicesat the specific event will generally not bethe basis that most correctly reflects theproper source of the compensation underproposed §1.861–4(b)(2)(ii)(G).

The Commissioner may, under the factsand circumstances of the particular case,determine the source of compensation thatis received by an individual as an em-ployee under an alternative basis if suchcompensation is not for a specific timeperiod, provided that the Commissioner’salternative basis determines the source ofcompensation in a more reasonable man-ner than the basis used by the individual.Compensation specifically for labor orpersonal services performed at a specificevent is not compensation for a specifictime period. The basis that most correctlyreflects the proper source of that incomewill generally be the location of the eventunder proposed §1.861–4(b)(2)(ii)(G).In addition, a basis that purports to de-termine the source of such income on afacts and circumstances basis by takinginto account the location of labor or per-sonal services performed in preparationfor the performance of labor or personalservices at the specific event will gen-erally not more properly determine thesource of the compensation under pro-posed §1.861–4(b)(2)(ii)(G).

These proposed regulations provide ex-amples to illustrate the event basis for de-termining the source of compensation ofan individual, including an artist or ath-lete, who is compensated specifically forperforming labor or personal services at anevent.

The revisions to §1.861–4(b)(1),(b)(2)(i), and (b)(ii)(C)(1)(i) and (ii) whichrefer to the event basis; the revisions in§1.861–4(b)(2)(ii)(C)(3), (b)(2)(ii)(E),

November 13, 2007 1013 2007–46 I.R.B.

and (b)(2)(ii)(F), (b)(2)(ii)(G), and (c); andnew Examples 7 through 11 of §1.861–4(c)would be effective for taxable years be-ginning after the date final regulations arepublished in the Federal Register.

Special Analysis

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It has also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulations.Because these regulations do not imposea collection of information on small enti-ties, the provisions of the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do not ap-ply. Pursuant to section 7805(f) of the In-ternal Revenue Code, this notice of pro-posed rulemaking has been submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Requests for a PublicHearing

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

Drafting Information

The principal author of these proposedregulations is David Bergkuist, Officeof the Associate Chief Counsel (Interna-tional). However, other personnel fromthe IRS and the Treasury Department par-ticipated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended 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 1.861–4 is amended by:1. Removing the heading for paragraph

(b)(1)(i).2. Redesignating paragraph (b)(1)(i) as

paragraph (b)(1).3. In the last sentence of newly des-

ignated paragraph (b)(1), adding the lan-guage “or on the event basis as defined inparagraph (b)(2)(ii)(G) of this section,” af-ter the language “paragraph (b)(2)(ii)(E) ofthis section,”.

4. In the last sentence of paragraph(b)(2)(i), adding the language “or onthe event basis as defined in paragraph(b)(2)(ii)(G) of this section,” after thelanguage “paragraph (b)(2)(ii)(E) of thissection,”.

5. In the first sentence of paragraph(b)(2)(ii)(C)(1)(i), adding the language “,including an event basis as defined in para-graph (b)(2)(ii)(G) of this section,” afterthe language “alternative basis” whereverthe language “alternative basis” appears inthe sentence.

6. In the first sentence of paragraph(b)(2)(ii)(C)(1)(ii), adding the language“event basis as defined in paragraph(b)(2)(ii)(G) of this section or other” afterthe language “partly without the UnitedStates under an”.

7. Removing paragraph(b)(2)(ii)(C)(3).

8. In the first sentence of paragraph(b)(2)(ii)(E), removing the language “in-dividual’s” and adding the language “per-son’s” in its place, removing the language“individual” and adding the language “per-son” in its place, and removing the lan-guage “his or hers” and adding the lan-guage “such person’s” in its place.

9. In the second sentence of paragraph(b)(2)(ii)(F), removing the language “anindividual” and adding the language “aperson” in its place.

10. Redesignating paragraphs (c) and(d) as new paragraphs (d) and (e), respec-tively.

11. Redesignating paragraph(b)(2)(ii)(G) as new paragraph (c).

12. Adding a new paragraph(b)(2)(ii)(G).

13. In the introductory language ofnewly-designated paragraph (c), remov-ing the language “paragraph (b)(2)(ii)” andadding the language “section” in its place.

14. Adding new Examples 7, 8, 9, and10 to newly-designated paragraph (c).

15. Redesignating paragraph (b)(1)(ii)Example, as new Example 11 innewly-designated paragraph (c), revis-ing the paragraph heading and removingparagraph (b)(1)(ii).

16. Adding a new sentence at the endof newly-designated paragraph (e) and re-vising the paragraph heading.

The additions read as follows:

§1.861–4 Compensation for labor orpersonal services.

* * * * *(b) * * *(2) * * *(ii) * * *(G) Event basis. The amount of com-

pensation for labor or personal servicesdetermined on an event basis is the amountof the person’s compensation which, basedon the facts and circumstances, is attrib-utable to the labor or personal servicesperformed at the location of a specificevent. The source of compensation for la-bor or personal services determined on anevent basis is the location of the specificevent. A basis that purports to determinethe source of compensation from the per-formance of labor or personal services ata specific event, whether on a time basisor otherwise, by taking into account thelocation of labor or personal services per-formed in preparation for the performanceof labor or personal services at the specificevent will generally not be the basis thatmost correctly determines the source ofthe compensation.

(c) Examples. * * *Example 7. P, a citizen and resident of Country

A, is paid by Company Z to make a presentation inthe United States in 2009. In 2010, Company Z paysP to make 10 presentations, four of which are in theUnited States and six of which are outside the UnitedStates. P is compensated separately by Company Zfor each presentation. For some presentations P re-ceives a flat fee from Company Z. For the remainingpresentations P receives compensation that is basedon a formula. Under the facts and circumstances ofthe particular case, the source of the compensation

2007–46 I.R.B. 1014 November 13, 2007

for each presentation is most correctly reflected onan event basis, as defined in paragraph (b)(2)(ii)(G)of this section. Because P is compensated separatelyfor each presentation, the source of P’s compensationfrom Company Z for the 2009 presentation withinthe United States and the four 2010 presentations inthe United States will be from sources in the UnitedStates. The amounts will be determined based on theflat fee or the formula as contractually determined.

Example 8. (i) Facts. Group B, a Country N cor-poration, is a musical group. All of the membersof Group B are citizens and residents of Country N.Group B has an employment arrangement with CorpY, a Country N corporation, to perform as directed byCorp Y. Corp Y and a tour promoter enter into a con-tract to provide the services of Group B to performin musical concerts in the United States and CountryM during a 45-day period. Under the contract, GroupB performs concerts in 15 cities, 10 of which are inthe United States. Prior to entering the United States,Group B spends 60 days rehearsing and preparing inCountry N. Under the contract with Corp Y, Group Breceives a flat fee of $10,000,000 for performing in all15 cities. The fee is based on expected revenues fromthe musical concerts. Each concert is expected to re-quire a similar amount and type of labor or personalservices by Group B. At the end of the tour, an analy-sis of the revenues from all of the concerts shows that80% of the total revenues from the tour were from theperformances within the United States.

(ii) Analysis. Under the facts and circumstancesbasis of paragraph (b)(1) of this section, the source ofthe compensation received under the contract is mostcorrectly reflected on an event basis, as defined inparagraph (b)(2)(ii)(G) of this section, with amountsdetermined based on the relative gross receipts at-tributable to the performances within and withoutthe United States. Thus, of the $10,000,000 ofcompensation included in Group B’s gross income,$8,000,000 ($10,000,000 X .80) is attributable to la-bor or personal services performed by Group B withinthe United States and $2,000,000 ($10,000,000 X.20) is attributable to the labor or personal servicesperformed by Group B without the United States.

Example 9. (i) Facts. A, a citizen and residentof Country M, is an employee of Corp X, a CountryM corporation. During 2008, Corp X is contractuallyobligated to provide A’s services to perform in a spe-cific athletic event in the United States. Under A’semployment contract with Corp X, A is required toperform at a professional level that requires trainingand other preparation prior to the event. A undertakesall of this preparation in Country M. Solely as a resultof A’s performance at the athletic event in the UnitedStates, A receives $2,000,000 from Corp X.

(ii) Analysis. The entire $2,000,000 received byA for performing labor or personal services at the ath-letic event in the United States is income from sourceswithin the United States on an event basis as definedin paragraph (b)(2)(ii)(G) of this section. A’s com-pensation is attributable entirely to labor or personalservices performed within the United States at theathletic event. It is inappropriate to conclude that thesource of A’s compensation for labor or personal ser-vices is performed partly within and partly withoutthe United States simply because A’s preparation forthe athletic event involved activities in Country M.

Example 10. (i) Facts. X, a citizen and residentof Country M, is employed under a standard player’scontract by a professional sports team (Team) thatplays its games both within and without the UnitedStates during its season. The term of the contract isfor twelve months beginning on October 1. Under thecontract, X’s salary could be paid in semi-monthly in-stallments beginning with the first game of the regu-lar season and ending with the final game played bythe Team. Alternatively, because the regular playingseason was shorter than the one-year period coveredby the contract, X had the option to receive his salaryover a twelve-month period. X elected this option. Inaddition, during the period of this employment con-tract, X, as an employee of Team, was required topractice at the direction of the Team as well as to par-ticipate in games. During 2008, X participated in allpractices and games of Team and received a salary.Team qualified for postseason games in 2008. X alsoreceived in 2008 additional amounts for playing inpreseason and postseason games for the Team.

(ii) Analysis. The salary paid to X by the Team isconsidered to be personal services compensation ofX that X received as an employee of the Team. Thesource of this compensation within the United Statesis determined under the time basis method describedin paragraph (b)(2)(ii)(A) of this section and accord-ingly is determined based upon the number of daysX performed services for the Team within the UnitedStates during 2008 over the total number of days thatX performed services for the Team during 2008. Thesource of the additional amounts X received for play-ing in preseason and postseason games is determinedunder the event basis method described in paragraph(b)(2)(ii)(G) of this section and accordingly is deter-mined based on the location where each such presea-son or postseason game was played.

Example 11. * * *

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

* * * The revisions in paragraphs (b)(1),(b)(2)(i), and (b)(2)(ii)(C)(1)(i) and(ii) of this section which refer to theevent basis; the revisions of paragraphs(b)(2)(ii)(C)(3), (b)(2)(ii)(E), (b)(2)(ii)(F),(b)(2)(ii)(G), and (c) of this section; andExamples 7 through 11 of paragraph (c)of this section apply to taxable years be-ginning after the date final regulations arepublished in the Federal Register.

Linda E. Stiff,Deputy Commissioner

for Services and Enforcement.

(Filed by the Office of the Federal Register on October 16,2007, 8:45 a.m., and published in the issue of the FederalRegister for October 17, 2007, 72 F.R. 58787)

Announcement of Disciplinary Actions InvolvingAttorneys, Certified Public Accountants, Enrolled Agents,and Enrolled Actuaries — Reinstatements, Suspensions,Censures, Disbarments, and ResignationsAnnouncement 2007-104

Under Title 31, Code of Federal Regu-lations, Part 10, attorneys, certified publicaccountants, enrolled agents, and enrolledactuaries may not accept assistance from,or assist, any person who is under disbar-ment or suspension from practice beforethe Internal Revenue Service if the assis-tance relates to a matter constituting prac-tice before the Internal Revenue Service

and may not knowingly aid or abet anotherperson to practice before the Internal Rev-enue Service during a period of suspen-sion, disbarment, or ineligibility of suchother person.

To enable attorneys, certified publicaccountants, enrolled agents, and enrolledactuaries to identify persons to whomthese restrictions apply, the Director, Of-

fice of Professional Responsibility, willannounce in the Internal Revenue Bulletintheir names, their city and state, their pro-fessional designation, the effective dateof disciplinary action, and the period ofsuspension. This announcement will ap-pear in the weekly Bulletin at the earliestpracticable date after such action and will

November 13, 2007 1015 2007–46 I.R.B.

continue to appear in the weekly Bulletinsfor five successive weeks.

Reinstatement To Practice Before the Internal RevenueService

Under Title 31, Code of Federal Reg-ulations, Part 10, The Director, Office ofProfessional Responsibility, may entertaina petition for reinstatement for any attor-

ney, certified public accountant, enrolledagent, or enrolled actuary censured, sus-pended, or disbarred, from practice beforethe Internal Revenue Service.

The following individuals’ eligibility topractice before the Internal Revenue Ser-vice has been restored:

Name Address Designation Date of Reinstatement

Dotson, Lewis S. Mattoon, IL Attorney April 8, 2007

Adams, Jr., Joseph T. Philadelphia, PA Enrolled Agent July 30, 2007

Cramer, George C. Chicago, IL CPA July 30, 2007

Garlikov, Mark B. Dayton, OH Attorney July 30, 2007

Grant, Elaine C. Woodway, WA Enrolled Agent July 30, 2007

Rubesh, Leland Gillette, WY CPA July 30, 2007

Schawe, Rudolph B. Brenham, TX Enrolled Agent July 30, 2007

Sobel, Herbert L. Elkins Park, PA CPA July 30, 2007

Welch, Frank G. Stamford, CT CPA July 30, 2007

Ferguson, Charles E. Naples, FL CPA July 31, 2007

Lim, Edgar E. St. Louis, MO Attorney July 31, 2007

Sneathen, Lowell D. Orange, CA CPA August 30, 2007

Smith, David B. Kettering, OH Enrolled Agent September 9, 2007

Young, Ronald B. Fairfield, CT CPA September 9, 2007

Sheiman, Alan P. Sherman Oaks, CA Enrolled Agent September 14, 2007

DiSiena, Frank E. Somers, NY CPA September 19, 2007

Leggio, Joseph J. Katonah, NY CPA September 24, 2007

2007–46 I.R.B. 1016 November 13, 2007

Consent Suspensions From Practice Before the InternalRevenue Service

Under Title 31, Code of Federal Regu-lations, Part 10, an attorney, certified pub-lic accountant, enrolled agent, or enrolledactuary, in order to avoid the institutionor conclusion of a proceeding for his orher disbarment or suspension from prac-tice before the Internal Revenue Service,

may offer his or her consent to suspensionfrom such practice. The Director, Officeof Professional Responsibility, in his dis-cretion, may suspend an attorney, certifiedpublic accountant, enrolled agent, or en-rolled actuary in accordance with the con-sent offered.

The following individuals have beenplaced under consent suspension frompractice before the Internal Revenue Ser-vice:

Name Address Designation Date of Suspension

Hunter, Richard Moweaqua, IL Enrolled Agent IndefinitefromJuly 16, 2007

Sheehy, William J. Northville, MI Attorney IndefinitefromJuly 16, 2007

Szwyd, Edward R. Housatonic, MA CPA IndefinitefromJuly 16, 2007

Lettieri, Louis E. Red Bank, NJ CPA IndefinitefromAugust 1, 2007

Stein, Jerold A. Alpharetta, GA CPA IndefinitefromAugust 1, 2007

Tutino, Philip R. East Hampton, NY CPA IndefinitefromAugust 1, 2007

Dorr, Mark A. Gillette, WY CPA IndefinitefromAugust 7, 2007

Nelson, Carole S. Riverside, CA Enrolled Agent IndefinitefromAugust 8, 2007

Siegel, Herbert New City, NY CPA IndefinitefromAugust 10, 2007

Taylor, Linda W. Las Vegas, NV CPA IndefinitefromAugust 15, 2007

Finkelstein, Meyer Staten Island, NY CPA IndefinitefromAugust 15, 2007

Schenck, Thomas M. Tampa, FL CPA IndefinitefromAugust 20, 2007

November 13, 2007 1017 2007–46 I.R.B.

Name Address Designation Date of Suspension

Shah, Sudhir P. Richardson, TX CPA IndefinitefromAugust 20, 2007

Bender, Elmer P. Missoula, MT CPA IndefinitefromAugust 31, 2007

Tselepis, John Jarrettsville, MD CPA IndefinitefromSeptember 5, 2007

Perez, Ricardo L. Cedar Lake, IN CPA IndefinitefromSeptember 10, 2007

Golden, Roberta A. Framington, MA Attorney IndefinitefromSeptember 13, 2007

Ward, Thomas R. St. Louis Park, MN Attorney IndefinitefromSeptember 13, 2007

Expedited Suspensions From Practice Before the InternalRevenue Service

Under Title 31, Code of Federal Regu-lations, Part 10, the Director, Office of Pro-fessional Responsibility, is authorized toimmediately suspend from practice beforethe Internal Revenue Service any practi-tioner who, within five years from the date

the expedited proceeding is instituted (1)has had a license to practice as an attor-ney, certified public accountant, or actuarysuspended or revoked for cause or (2) hasbeen convicted of certain crimes.

The following individuals have beenplaced under suspension from practice be-fore the Internal Revenue Service by virtueof the expedited proceeding provisions:

Name Address Designation Date of Suspension

Murphy, John F. Wellsboro, PA Attorney IndefinitefromJune 28, 2007

Aakre, Steven K. Hawley, MN Attorney IndefinitefromJuly 11, 2007

Brogan, Jane K. York, NE Attorney IndefinitefromJuly 11, 2007

Clark, Clifford A. Raleigh, NC CPA IndefinitefromJuly 11, 2007

Downing, Jr., Eugene W. Arlington, MA Attorney IndefinitefromJuly 11, 2007

2007–46 I.R.B. 1018 November 13, 2007

Name Address Designation Date of Suspension

Kahn, Arthur M. Woodstock, NY Attorney IndefinitefromJuly 11, 2007

Kossmeyer, Carl F. Town and Country, MO CPA IndefinitefromJuly 11, 2007

Lee, John C. Charlotte, NC Attorney IndefinitefromJuly 11, 2007

McAvoy, Donald L. Windermere, FL CPA IndefinitefromJuly 11, 2007

McCabe, Edwin A. Gloucester, MA Attorney IndefinitefromJuly 11, 2007

O’Donnell, Judith R. Westborough, MA Attorney IndefinitefromJuly 11, 2007

Taylor, John G. Lincoln, NE Attorney IndefinitefromJuly 11, 2007

Turner, D. Scott Mooresville, NC Attorney IndefinitefromJuly 11, 2007

Csaszar, James J. Columbus, OH CPA IndefinitefromJuly 13, 2007

Fischer, Mark W. Boulder, CO Attorney IndefinitefromJuly 16, 2007

Behunin, Michael N. Sandy, UT Attorney IndefinitefromAugust 8, 2007

Carpenter, Jr., Darwin R. Melbourne, FL CPA IndefinitefromAugust 23, 2007

Gresham, James L. Broken Arrow, OK CPA IndefinitefromAugust 23, 2007

Krezminski, Allen D. Milwaukee, WI Attorney IndefinitefromAugust 23, 2007

Neary, Hugh M. Ottumwa, IA Attorney IndefinitefromAugust 23, 2007

November 13, 2007 1019 2007–46 I.R.B.

Name Address Designation Date of Suspension

Weiss, Randy A. Potomac, MD Attorney IndefinitefromAugust 23, 2007

Whiddon, Edward L. Houston, TX CPA IndefinitefromAugust 23, 2007

Hazen, Robert D. Lindon, UT CPA IndefinitefromAugust 29, 2007

Schafer, III, Harry J. Edmond, OK CPA IndefinitefromSeptember 6, 2007

Pullin, Wendy F. San Antonio, TX CPA IndefinitefromSeptember 24, 2007

Suspensions From Practice Before the Internal RevenueService After Notice and an Opportunity for a Proceeding

Under Title 31, Code of Federal Reg-ulations, Part 10, after notice and an op-portunity for a proceeding before an ad-

ministrative law judge, the following indi-viduals have been placed under suspension

from practice before the Internal RevenueService:

Name Address Designation Effective Date

Newton, Douglas M. Fernandina Beach, FL CPA IndefinitefromJune 4, 2007

Snell, Barry A. Santa Monica, CA CPA IndefinitefromJune 6, 2007

Khoury, Naif S. Fort Smith, AR Attorney IndefinitefromJune 14, 2007

Bukovac, Jane Alexandria, VA Enrolled Agent IndefinitefromJune 29, 2007

Kreke, David J. Bartelso, IL Enrolled Agent IndefinitefromJuly 12, 2007

Dunkley, John D. San Antonio, TX Enrolled Agent IndefinitefromJuly 27, 2007

2007–46 I.R.B. 1020 November 13, 2007

Disbarments From Practice Before the Internal RevenueService After Notice and an Opportunity for a Proceeding

Under Title 31, Code of Federal Regu-lations, Part 10, after notice and an oppor-

tunity for a proceeding before an adminis-trative law judge, the following individu-

als have been disbarred from practice be-fore the Internal Revenue Service:

Name Address Designation Effective Date

Ruocchio, Robert Havertown, PA CPA June 11, 2007

Turner, John S. Paradise, CA Enrolled Agent June 15, 2007

Johnson, Ted R. Frankfort, IN Attorney July 30, 2007

Ayers, Dani D. Kelseyville, CA Enrolled Agent August 6, 2007

Request for Applications toParticipate in the 2008 IRSIndividual e-file PartnershipProgram

Announcement 2007–106

The Stakeholder Partnerships, Educa-tion and Communication (SPEC) organ-ization within the Internal Revenue Ser-vice (IRS) is continuing its efforts to es-tablish IRS e-file partnerships with vari-ous entities. The IRS is seeking non-mon-etary e-file partnerships for Filing Season2008. No applications for funding (mone-tary compensation) will be considered. Acommercial business, non-profit organiza-tion, state government or local governmentmay submit applications. Applications arenot solicited from other Federal govern-ment agencies. The program is an annualprogram and covers the period Januarythrough October 15, 2008. All prioryear partners must reapply for FilingSeason 2008.

BACKGROUND

The IRS Restructuring and ReformAct of 1998 (RRA 98) authorized theIRS Commissioner to promote the ben-efits of and encourage the use of e-fileservices. RRA 98 enables the IRS to en-ter into non-monetary partnerships withbusinesses to offer low cost income taxpreparation and electronic filing for quali-fied taxpayers.

Continued opportunities for growth inelectronic tax administration are evident.For Filing Season 2007, the IRS received

80 million electronically filed returns, anincrease of 9% over the previous year.Visit the IRS web site, http://www.irs.gov,for the most current results from marketresearch on individual taxpayers, includ-ing demographic data and psychographicstudies. This research includes attitudinalsurveys, customer satisfaction surveys,Public Service communications, trackingstudies and any focus group results.

The IRS accepts many forms and sched-ules for electronic filing. Visit the IRS.govfor a complete listing of accepted formsand schedules.

FILING SEASON 2008

For Filing Season 2008, the IRS willcontinue to focus on the 1040 series in-come tax returns covering “IRS e-file Us-ing a Tax Preparer” and “IRS e-file Us-ing a Personal Computer.” Additional em-phasis continues to be placed on the fol-lowing features: electronic signature op-tions, Federal/State e-file, and electronicpayment options for balance due and esti-mated payment options.

A major area of emphasis is to reachthose taxpayers who continue to file com-puter prepared paper returns (v-code). Re-search indicates that the number of v-codereturns continues to increase (76% of allv-code returns are prepared by paid prepar-ers). Emphasis should be placed on con-verting v-code filers to electronically filetheir returns through advertising the bene-fits of e-file.

Participants should also reach those in-dividuals eligible for the Earned IncomeTax Credit (EITC). It’s important to notethat military families may qualify for EITCsince supplemental payments and combat

pay are exempt from the income calcula-tions.

Participants are encouraged to focus onreducing the number of errors made onelectronically filed returns, including thosereturns claiming EITC. The “EITC Assis-tant” is an interactive web-based tool de-signed to help tax professionals determinewhether or not their clients are eligible forEITC, and why. The “EITC Assistant” isa step taken by the IRS to maximize tax-payer participation, minimize EITC errorswhile increasing compliance. You can findthe “EITC Assistant” on the IRS web siteat http://www.irs.gov/eitc.

The Hispanic population is the fastestgrowing minority segment in the U.S. Par-ticipants are encouraged to market theire-file services to this segment of the pop-ulation and offer the Spanish versions foronline filing and/or downloadable soft-ware.

The IRS expects all accepted partnersto market, promote and offer e-file productand services through October 15, 2008.The IRS will supply the partners withthe key marketing messages that supportelectronic filing during the Filing Sea-son (January through April 15, 2008) andpost-Filing Season (April through Octo-ber 15, 2008). These messages should beused in your promotion of electronic filingand displayed on the web sites of Partici-pants. Utilization of these messages willensure uniformity and maximize publicawareness. For additional information onthe various e-file programs, features, andmarket research, visit the IRS web site athttp://www.irs.gov.

Participants will receive hyperlinksfrom IRS.gov (Partners Page) — to the

November 13, 2007 1021 2007–46 I.R.B.

Participant’s web site. Potential Partici-pants may request links for the followingcategories:

• IRS e-file Partners for Taxpayers• IRS e-file Partners for Tax Profession-

als• IRS e-file Partners for Financial Insti-

tutions/Employers• IRS e-file Partners for Credit Card Pay-

ment Options

Safeguarding Taxpayer Data

The security of taxpayer accounts andpersonal information is a top priority forthe IRS. Tax professionals must imple-ment safeguards to protect taxpayer’sdata. It is not only the law, but it is goodbusiness practice, as it increases customerconfidence and trust. Refer to Publica-tion 4557, Safeguarding Taxpayer Data,A Guide for Your Business, which de-scribes the various security provisionsand rules that impact tax professionals.The document assists tax professionals inunderstanding their requirements for pro-tecting the privacy and confidentiality oftaxpayer data, and provides guidance onthe implementing the necessary securitycontrols within their business to satisfythese requirements. Publication 4557 canbe accessed at http://www.irs.gov.

PARTICIPATION STANDARDS &REQUIREMENTS

Participants will abide by the followingstandards and requirements, if applicable:

• The Participant was actively engagedin the electronic tax preparation andfiling industry in 2006 and 2007.

• The Participant will offer their taxpreparation and e-file services to theindividual taxpayer. The IRS will notpost advertisements offering both freetax preparation and free e-file on theIRS.gov Partners Page. Promotionon IRS.gov of free services, servicesthat include both free tax preparationand free e-filing, is reserved for FreeFile Alliance members only. Visitwww.freefilealliance.org to find outhow to become a member of the FreeFile Alliance or visit www.irs.gov formore details on free file.

• The Participant will market, promoteand offer e-file services through Octo-ber 15, 2008. The Participant should

use the key marketing messages, pro-vided by the IRS, for the promotionof Filing Season and Post Filing Sea-son electronic filing and place them onyour web site.

• The Participant (Electronic ReturnOriginator, Intermediate ServiceProvider, Software Developer, andTransmitter) must be in good standingwith the IRS, comply with the e-filerequirements stated in the IRS Rev-enue Procedure 2007–40 (announcedin IR Bulletin 2007–26 dated June25, 2007), current versions of Publi-cations 1345, 1345A, 3112, and passthe annual Suitability and ParticipantsAcceptance Testing (PATS) conductedby the IRS. You can find the IRS e-filetechnical publications on the IRS website at http://www.irs.gov.

• The Participant will comply with theprivacy provisions of 26 U.S.C. § 7216and U.S.C.§ 6103.

• The Participant will be required toprove and display third-party certifica-tions for the privacy/security/authen-ticity of its online service. The Par-ticipant’s web site should display thethird-party certification and privacyseals. Participants must use softwarethat will enable their web sites to statetheir privacy practices in a standardmachine-readable format that can beretrieved automatically and interpretedeasily by users.

• Participants will comply with the se-curity provisions in applicable De-partment of Treasury/IRS rules in-cluding, but not limited to, 31 C.F.R.Part 10, IRS Rev. Proc. 2005–60,current versions of IRS Publications1345, 1345A, and 3112, and 26 U.S.C.§ 7216. In addition, Participants mustcomply with the Federal Trade Com-mission’s Gramm-Leach-Bliley Actto protect the security of taxpayerinformation. Refer to Publication4557, Safeguarding Taxpayer Data,A Guide for Your Business, for guid-ance on various security rules andprovisions that impact tax profession-als. The document can be accessed athttp://www.irs.gov.

• The Participant will offer their prod-ucts and services to filers of the indi-vidual 1040 Series returns, includingcomplex returns, balance due returns,

Federal/State returns, and 1040EZ re-turns.

• The Participant will clearly disclose itscustomer service support options (in-cluding associated fees, if any) and pri-vacy policy on the landing page of itsweb site. Participants must providetaxpayers with a business contact pointby on-line form, email, mail, facsimileor telephone number which the Partic-ipant maintains and reviews.

• The Participant is encouraged tooffer the Spanish versions for onlinefiling and/or downloadable software.The Participant who offers Spanishversions for online filing and/or down-loadable software will have customerservice support to assist Hispanic tax-payers.

• The Participant will target v-codersand individuals eligible for EITC.

• The Participant will focus on reduc-ing the number of errors on electroni-cally prepared returns, including thosereturns claiming EITC.

• The Participant will offer a variety ofe-file features including the Self-Se-lect PIN, Electronic Payment Options,Federal/State e-file, Direct Deposit ofRefunds, etc.

• The Participant will be permitted onlyone (1) hyperlink on the IRS e-filePartners Page per category:

• IRS e-file Partners for Taxpayer• IRS e-file Partners for Tax Profes-

sionals• IRS e-file Partners for Financial In-

stitutions/Employers• IRS e-file Partners for Electronic

Payment Options

• The Participant will provide the IRSwith a description (not to exceed 200characters including spaces) for eachhyperlink placed on the IRS e-file Part-ners Page. The hyperlink descriptionmay describe multiple offers/services.

• The Participant will not have a URL(s)containing the word “IRS.”

• The Participant will be required to sup-ply the IRS with a link to their web sitein their application or no less than ten(10) business days before the site isexpected to go live (start date of elec-tronic filing). All sites must be exam-ined before they can be posted on theIRS e-file Partners Page. The purpose

2007–46 I.R.B. 1022 November 13, 2007

of the review is to ensure each Partici-pant’s web site complies with the stan-dards and requirements set forth in thisannouncement.

• The Participant will adhere to theIRS e-file rule for registration ofweb sites which enables IRS to morequickly identify fraud schemes, in-cluding phishing. Failure to do socould result in suspension or ex-pulsion from participation in IRSe-file. For more information, visithttp://www.irs.gov/efile/index.html.

• The Participant will adhere to industrybest practices to ensure the taxpayer re-turn information entrusted to them issecure and the privacy of such infor-mation is maintained. In any instancewhere a Participant contracts with aservice provider to obtain technologyservices, it will adhere to this standard.To the extent multiple Participants relyon a single service provider for frontor back office services (not ISP ser-vices), it is even more critical that suchtaxpayer security and privacy be main-tained with respect to others who sharethese services.

• A Participant’s web site will be func-tionally adequate and consistent withthe Participant’s offer in permitting ataxpayer to complete their return. Fail-ure to comply may result in the Partici-pant’s removal from the Partners Page.

• Whenever taxpayers are requested orrequired to provide their SSN, it mustbe part of a secure session. Participantsare not permitted to use SSNs as a re-quested field for registration purposesor for establishing a taxpayer accounton-line.

• The Participant will display the IRSe-file logo on the landing page of itsweb site. The e-file logo should be aclick-through to the IRS e-file land-ing page www.irs.gov/efile. If thee-file logo is displayed on other webpages in addition to the landing pageof the Participant, the logo(s) shouldbe a click-through to the IRS e-filelanding page. The e-file logo andguidelines can be downloaded fromhttp://www.irs.gov.

• The Participant’s web site will not con-tain inappropriate content. Participantweb sites must meet the following cri-teria:

• The site clearly relates to and com-plements existing information,products and services on IRS.gov.

• The site contains relevant and use-ful content that will benefit ourcustomers.

• The site contains accurate andtimely information.

• The site provides information at nocost. The Participant will not linkto sites whose primary purpose isto sell products or services (unlessit is part of an approved agreementwith IRS).

• The site has an excellent overallquality and professional image.

• The site is easy to navigate.• The site is a credible source for

information. The site must be freeof typos and errors so that it doesnot detract from the readability ofthe site.

• The site does not exhibit hate, bias,or discrimination.

• The site does not contain mislead-ing or unsubstantiated claims orconflict with the mission of theIRS.

• The Participant must provide taxpay-ers a method to obtain the status oftheir tax return. Taxpayers can be di-rected to “Where’s My Tax Refund?”located on the Homepage of the IRSweb site at http://www.irs.gov.

• The Participant will prominently dis-play on the landing page of its web sitethe promotion of income tax prepara-tion and electronic filing for individu-als eligible for EITC.

• The Participant is encouraged to offera monetary incentive (reduced returnpreparation and electronic filing costs)to attract taxpayers.

• The Participant will disclose limita-tions in the forms and schedules thatare likely to be needed to supporttheir offerings. The Participant shouldclearly display a listing of the formsand schedules that will be offeredeither visible or accessible from theParticipant’s landing page.

• The Participant will clearly disclose alisting of the States that their softwaresupports either visible or accessiblefrom the Participant’s landing page.

• The Participant is permitted to of-fer commercial products and services

consistent with obtaining the positiveconsent of the user as described in 26U.S.C. 7616 before offering fee-basedproducts and services not related to taxpreparation.

• The Participant will include a featurein their tax preparation software thatwill “time out” the session after nochanges are made for a period of timeconsistent with best practices approvedby privacy seal certification programs.

• The Participant that learns of an in-appropriate disclosure of a taxpayer’sreturn information to an unauthorizedPerson must report the unauthorizeddisclosure to the IRS immediately butno later than five (5) hours after de-tection; and immediately shut down itsprogram at the time of detection.

• The Participant will submit writtennotification (e.g., email) to the IRSof changes, additions and deletions toURLs, link descriptions, etc.

• The Participant will submit Perfor-mance Reports to the IRS Point ofcovering Filing Season and post FilingSeason activity. The reports will coverinformation such as e-file statistics,web site activity and anything else theIRS deems necessary. The IRS Pointof Contact will provide written report-ing instructions and requirements toaccepted Participants.

PERFORMANCE STANDARDS

• The IRS will have the accepted Par-ticipant’s hyperlink(s) available on theIRS web site for the start of electronicfiling, subject to the participant’s pass-ing of the annual Suitability, PATS test-ing, and web site review. Hyperlinkswill remain on the IRS e-file PartnersPage through October 15, 2008, or atthe discretion of the IRS.

• The IRS will randomize on a daily ba-sis the offers of the Participants listedon the IRS e-file Partners Page.

• The IRS may establish a link from theIRS e-file Partners Page to the Free Fileweb page and vice versa.

• The IRS will accept, if appropriate,the Participant’s written request forchanges/additions/deletions to a URL,link description, etc.

• The IRS will review the Participant’sweb site(s) at any time to ensure thatparticipation requirements are met.

November 13, 2007 1023 2007–46 I.R.B.

• The IRS will not endorse specific of-ferings or products, but will promotethe IRS e-file Partners Page. A “SiteDisclaimer” will be displayed upon ex-iting the IRS web site before the userenters the Participant’s web site.

PARTICIPATION TERMS

The IRS Individual e-file PartnershipProgram is an annual program, and allprospective Participants, including re-turning Participants, must reapply eachyear following the guidelines in the In-ternal Revenue Bulletin announcementadvertised on http://www.irs.gov. If theIRS determines that the Participant is notmeeting the “Participation Standards &Requirements,” the IRS may terminate itspartnership with the Participant and re-move the participant’s hyperlink(s) fromthe IRS e-file Partners Page.

• The Participant will notify the IRS im-mediately if it wishes to terminate itspartnership with the IRS. The notifica-tion should be submitted through emailto the IRS Point of Contact or sentto the Point of Contact’s address in-dicated below in “IRS Point of Con-tact/Application Submission.”

APPLICATION PROCESS

Applications should contain the follow-ing information, if applicable:

• Provide Primary and Secondary Pointsof Contact (name, title, address,cell/telephone number, fax numberand email address) for discussion ofyour application and program partici-pation.

• Identify the Applicant’s secure website.

• Identify the Applicant’s tax prepara-tion software and the States it will sup-port.

• Identify the IRS forms and schedulesthat support your offering(s).

• Include the Applicant’s ElectronicFiler Identification Number(s) (EFIN)and/or Electronic Transmitter Identifi-cation Number (ETIN).

• Indicate if the Applicant will offerthe Spanish versions for online filingand/or downloadable software. De-scribe customer service support forassisting Hispanic taxpayers.

• Identify the Applicant’s hyperlink(s)and provide a short description (notto exceed 200 characters includingspaces) of the services and productsto be promoted on the IRS e-file Part-ners Page. In addition, the Applicantshould provide the associated URL(s).The URL(s) cannot contain the word“IRS.” Indicate the category for eachhyperlink:

• IRS e-file Partners for Taxpayers• IRS e-file Partners for Tax Profes-

sionals• IRS e-file Partners for Financial In-

stitutions/Employers• IRS e-file Partners for Electronic

Payment Options

• Identify the Applicant’s third partyadministrators (i.e., VeriSign, Thawte,Truste) that certify the privacy/secu-rity/authenticity of its online serviceand provide certification that the Ap-plicant’s current status is active and ingood standing.

• Identify the Applicant’s communica-tion vehicle(s) (i.e., web site, market-ing/promotional products, etc.) to mar-ket and promote your products and ser-vices and IRS e-file. Describe the in-centives, discounts, offers, benefits totaxpayers or other specific approachesto increase e-file volumes.

• Describe steps the Applicant will taketo reach taxpayers that claim EITC.This can include marketing/promo-tional efforts, monetary incentives(reduced return preparation and elec-tronic filing costs).

• Describe steps the Applicant will taketo reduce errors on electronically filedreturns, including those returns claim-ing EITC.

• Certify the Applicant’s compliancewith the privacy and disclosure provi-sions of 26 U.S.C. 7216 and 26 U.S.C.6103.

• Certify the Applicant’s compliancewith the Federal Trade Commission’sGramm-Leach-Bliley (GLB) Act of1999, Financial Privacy Rule andSafeguard Rules.

IRS POINT OFCONTACT/APPLICATIONSUBMISSION

Applications to participate in theIRS Individual e-file PartnershipProgram should be submitted as aWord document through email at*WIe-filepartners@irs.gov. (Please makesure there is an asterisk (*) before the WI(Wage and Investment) when submittingan application.) An application may alsobe sent to:

Internal Revenue Service5000 Ellin RoadLanham, MD 20706Attention: Karen Bradley C4–132SE:W:CAR:SPEC:FO:IMS

If you wish to have a hyperlink(s)on the IRS e-file Partners Page for thestart of electronic filing, your applica-tion must be submitted by December 13,2007. If your application is received afterthe deadline, there is no guarantee that itwill be accepted by the IRS.

Any questions regarding the devel-opment of applications, the submis-sion of Performance Reports, or anyother type of contact for this programshould be directed to Karen Bradleyat (202) 283–7034 or through email to*WIe-filepartners@irs.gov. Please makesure there is an asterisk (*) before the WI(Wage and Investment) for any type ofemail contact.

APPLICATION EVALUATION

All applications will be evaluated basedon the required information provided tothe IRS and the applicant’s ability to ful-fill their responsibilities. Prior year perfor-mance will also be considered when evalu-ating applications from returning partners.

ACCEPTANCE/DENIAL OFAPPLICATION

If your application is accepted, youwill receive written notification from theIRS. If your application is denied, you willreceive written notification from the IRSwith an explanation of the denial.

e-Help

If you have any questions related toe-products/electronic filing, you can

2007–46 I.R.B. 1024 November 13, 2007

contact the e-Help Desk toll-free at1–866–255–0654. The e-Help desk assis-tors are ready to respond to non-account

related questions and issues. You can alsogo to http://www.irs.gov where the IRS

houses a variety of information which im-pacts the tax professional.

November 13, 2007 1025 2007–46 I.R.B.

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

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

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

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

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

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

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

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

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

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

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

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

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

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

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

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

2007–46 I.R.B. i November 13, 2007

Numerical Finding List1

Bulletins 2007–27 through 2007–46

Announcements:

2007-61, 2007-28 I.R.B. 84

2007-62, 2007-29 I.R.B. 115

2007-63, 2007-30 I.R.B. 236

2007-64, 2007-29 I.R.B. 125

2007-65, 2007-30 I.R.B. 236

2007-66, 2007-31 I.R.B. 296

2007-67, 2007-32 I.R.B. 345

2007-68, 2007-32 I.R.B. 348

2007-69, 2007-33 I.R.B. 371

2007-70, 2007-33 I.R.B. 371

2007-71, 2007-33 I.R.B. 372

2007-72, 2007-33 I.R.B. 373

2007-73, 2007-34 I.R.B. 435

2007-74, 2007-35 I.R.B. 483

2007-75, 2007-36 I.R.B. 540

2007-76, 2007-36 I.R.B. 560

2007-77, 2007-38 I.R.B. 662

2007-78, 2007-38 I.R.B. 663

2007-79, 2007-40 I.R.B. 749

2007-80, 2007-38 I.R.B. 667

2007-81, 2007-38 I.R.B. 667

2007-82, 2007-40 I.R.B. 749

2007-83, 2007-40 I.R.B. 752

2007-84, 2007-41 I.R.B. 797

2007-85, 2007-39 I.R.B. 719

2007-86, 2007-39 I.R.B. 719

2007-87, 2007-40 I.R.B. 753

2007-88, 2007-42 I.R.B. 801

2007-89, 2007-41 I.R.B. 798

2007-90, 2007-42 I.R.B. 856

2007-91, 2007-42 I.R.B. 857

2007-92, 2007-42 I.R.B. 857

2007-93, 2007-42 I.R.B. 858

2007-94, 2007-42 I.R.B. 858

2007-95, 2007-43 I.R.B. 894

2007-96, 2007-42 I.R.B. 859

2007-97, 2007-43 I.R.B. 895

2007-98, 2007-43 I.R.B. 896

2007-99, 2007-43 I.R.B. 896

2007-100, 2007-44 I.R.B. 922

2007-101, 2007-43 I.R.B. 898

2007-102, 2007-44 I.R.B. 922

2007-103, 2007-44 I.R.B. 923

2007-104, 2007-44 I.R.B. 924

2007-105, 2007-45 I.R.B. 984

2007-106, 2007-46 I.R.B. 1021

2007-107, 2007-46 I.R.B. 989

Court Decisions:

2083, 2007-46 I.R.B. 986

Notices:

2007-54, 2007-27 I.R.B. 12

2007-55, 2007-27 I.R.B. 13

2007-56, 2007-27 I.R.B. 15

2007-57, 2007-29 I.R.B. 87

2007-58, 2007-29 I.R.B. 88

2007-59, 2007-30 I.R.B. 135

2007-60, 2007-35 I.R.B. 466

2007-61, 2007-30 I.R.B. 140

2007-62, 2007-32 I.R.B. 331

2007-63, 2007-33 I.R.B. 353

2007-64, 2007-34 I.R.B. 385

2007-65, 2007-34 I.R.B. 386

2007-66, 2007-34 I.R.B. 387

2007-67, 2007-35 I.R.B. 467

2007-68, 2007-35 I.R.B. 468

2007-69, 2007-35 I.R.B. 468

2007-70, 2007-40 I.R.B. 735

2007-71, 2007-35 I.R.B. 472

2007-72, 2007-36 I.R.B. 544

2007-73, 2007-36 I.R.B. 545

2007-74, 2007-37 I.R.B. 585

2007-75, 2007-39 I.R.B. 679

2007-76, 2007-40 I.R.B. 735

2007-77, 2007-40 I.R.B. 735

2007-78, 2007-41 I.R.B. 780

2007-79, 2007-42 I.R.B. 809

2007-80, 2007-43 I.R.B. 867

2007-81, 2007-44 I.R.B. 899

2007-82, 2007-44 I.R.B. 904

2007-83, 2007-45 I.R.B. 960

2007-84, 2007-45 I.R.B. 963

2007-85, 2007-45 I.R.B. 965

2007-86, 2007-46 I.R.B. 990

2007-87, 2007-45 I.R.B. 966

2007-88, 2007-46 I.R.B. 993

2007-89, 2007-46 I.R.B. 998

2007-90, 2007-46 I.R.B. 1003

Proposed Regulations:

REG-107592-00, 2007-44 I.R.B. 908

REG-121475-03, 2007-35 I.R.B. 474

REG-128274-03, 2007-33 I.R.B. 356

REG-114084-04, 2007-33 I.R.B. 359

REG-149036-04, 2007-33 I.R.B. 365

REG-149036-04, 2007-34 I.R.B. 411

REG-101001-05, 2007-36 I.R.B. 548

REG-119097-05, 2007-28 I.R.B. 74

REG-128843-05, 2007-37 I.R.B. 587

REG-142695-05, 2007-39 I.R.B. 681

REG-143326-05, 2007-43 I.R.B. 873

REG-143397-05, 2007-41 I.R.B. 790

REG-147171-05, 2007-32 I.R.B. 334

REG-148951-05, 2007-36 I.R.B. 550

REG-163195-05, 2007-33 I.R.B. 366

Proposed Regulations— Continued:

REG-118886-06, 2007-37 I.R.B. 591

REG-128224-06, 2007-36 I.R.B. 551

REG-138707-06, 2007-32 I.R.B. 342

REG-139268-06, 2007-34 I.R.B. 415

REG-140206-06, 2007-46 I.R.B. 1006

REG-142039-06, 2007-34 I.R.B. 415

REG-144540-06, 2007-31 I.R.B. 296

REG-148393-06, 2007-39 I.R.B. 714

REG-103842-07, 2007-28 I.R.B. 79

REG-106143-07, 2007-43 I.R.B. 881

REG-113891-07, 2007-42 I.R.B. 821

REG-114125-07, 2007-46 I.R.B. 1012

REG-116215-07, 2007-38 I.R.B. 659

REG-118719-07, 2007-37 I.R.B. 593

REG-129916-07, 2007-43 I.R.B. 891

REG-138637-07, 2007-45 I.R.B. 977

Revenue Procedures:

2007-42, 2007-27 I.R.B. 15

2007-43, 2007-27 I.R.B. 26

2007-44, 2007-28 I.R.B. 54

2007-45, 2007-29 I.R.B. 89

2007-46, 2007-29 I.R.B. 102

2007-47, 2007-29 I.R.B. 108

2007-48, 2007-29 I.R.B. 110

2007-49, 2007-30 I.R.B. 141

2007-50, 2007-31 I.R.B. 244

2007-51, 2007-30 I.R.B. 143

2007-52, 2007-30 I.R.B. 222

2007-53, 2007-30 I.R.B. 233

2007-54, 2007-31 I.R.B. 293

2007-55, 2007-33 I.R.B. 354

2007-56, 2007-34 I.R.B. 388

2007-57, 2007-36 I.R.B. 547

2007-58, 2007-37 I.R.B. 585

2007-59, 2007-40 I.R.B. 745

2007-60, 2007-39 I.R.B. 679

2007-61, 2007-40 I.R.B. 747

2007-62, 2007-41 I.R.B. 786

2007-63, 2007-42 I.R.B. 809

2007-64, 2007-42 I.R.B. 818

2007-65, 2007-45 I.R.B. 967

2007-66, 2007-45 I.R.B. 970

Revenue Rulings:

2007-42, 2007-28 I.R.B. 44

2007-43, 2007-28 I.R.B. 45

2007-44, 2007-28 I.R.B. 47

2007-45, 2007-28 I.R.B. 49

2007-46, 2007-30 I.R.B. 126

2007-47, 2007-30 I.R.B. 127

2007-48, 2007-30 I.R.B. 129

2007-49, 2007-31 I.R.B. 237

2007-50, 2007-32 I.R.B. 311

2007-51, 2007-37 I.R.B. 573

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2007–1 through 2007–26 is in Internal Revenue Bulletin2007–26, dated June 25, 2007.

November 13, 2007 ii 2007–46 I.R.B.

Revenue Rulings— Continued:

2007-52, 2007-37 I.R.B. 575

2007-53, 2007-37 I.R.B. 577

2007-54, 2007-38 I.R.B. 604

2007-55, 2007-38 I.R.B. 604

2007-56, 2007-39 I.R.B. 668

2007-57, 2007-36 I.R.B. 531

2007-58, 2007-37 I.R.B. 562

2007-59, 2007-37 I.R.B. 582

2007-60, 2007-38 I.R.B. 606

2007-61, 2007-42 I.R.B. 799

2007-62, 2007-41 I.R.B. 767

2007-63, 2007-41 I.R.B. 778

2007-64, 2007-45 I.R.B. 953

2007-65, 2007-45 I.R.B. 949

2007-66, 2007-45 I.R.B. 956

Tax Conventions:

2007-75, 2007-36 I.R.B. 540

2007-88, 2007-42 I.R.B. 801

2007-107, 2007-46 I.R.B. 989

Treasury Decisions:

9326, 2007-31 I.R.B. 242

9327, 2007-28 I.R.B. 50

9328, 2007-27 I.R.B. 1

9329, 2007-32 I.R.B. 312

9330, 2007-31 I.R.B. 239

9331, 2007-32 I.R.B. 298

9332, 2007-32 I.R.B. 300

9333, 2007-33 I.R.B. 350

9334, 2007-34 I.R.B. 382

9335, 2007-34 I.R.B. 380

9336, 2007-35 I.R.B. 461

9337, 2007-35 I.R.B. 455

9338, 2007-35 I.R.B. 463

9339, 2007-35 I.R.B. 437

9340, 2007-36 I.R.B. 487

9341, 2007-35 I.R.B. 449

9342, 2007-35 I.R.B. 451

9343, 2007-36 I.R.B. 533

9344, 2007-36 I.R.B. 535

9345, 2007-36 I.R.B. 523

9346, 2007-37 I.R.B. 570

9347, 2007-38 I.R.B. 624

9348, 2007-37 I.R.B. 563

9349, 2007-39 I.R.B. 668

9350, 2007-38 I.R.B. 607

9351, 2007-38 I.R.B. 616

9352, 2007-38 I.R.B. 621

9353, 2007-40 I.R.B. 721

9354, 2007-41 I.R.B. 759

9355, 2007-37 I.R.B. 577

9356, 2007-39 I.R.B. 675

9357, 2007-41 I.R.B. 773

9358, 2007-41 I.R.B. 769

9359, 2007-45 I.R.B. 931

9360, 2007-43 I.R.B. 860

2007–46 I.R.B. iii November 13, 2007

Finding List of Current Actions onPreviously Published Items1

Bulletins 2007–27 through 2007–46

Announcements:

84-26

Obsoleted by

T.D. 9336, 2007-35 I.R.B. 461

84-37

Obsoleted by

T.D. 9336, 2007-35 I.R.B. 461

Notices:

89-110

Modified by

REG-142695-05, 2007-39 I.R.B. 681

99-6

Obsoleted as of January 1, 2009 by

T.D. 9356, 2007-39 I.R.B. 675

2002-45

Modified by

REG-142695-05, 2007-39 I.R.B. 681

2003-81

Modified and supplemented by

Notice 2007-71, 2007-35 I.R.B. 472

2005-1

Modified by

Notice 2007-89, 2007-46 I.R.B. 998

2006-1

Modified by

Notice 2007-70, 2007-40 I.R.B. 735

2006-43

Modified by

T.D. 9332, 2007-32 I.R.B. 300

2006-56

Clarified by

Notice 2007-74, 2007-37 I.R.B. 585

2006-79

Section 3 modified and superseded by

Notice 2007-86, 2007-46 I.R.B. 990

2006-89

Modified by

Notice 2007-67, 2007-35 I.R.B. 467

2007-3

Modified by

Notice 2007-69, 2007-35 I.R.B. 468

2007-26

Modified by

Notice 2007-56, 2007-27 I.R.B. 15

2007-78

Modified by

Notice 2007-86, 2007-46 I.R.B. 990

Proposed Regulations:

EE-16-79

Withdrawn by

REG-142695-05, 2007-39 I.R.B. 681

EE-130-86

Withdrawn by

REG-142695-05, 2007-39 I.R.B. 681

REG-243025-96

Withdrawn by

REG-142695-05, 2007-39 I.R.B. 681

REG-105964-98

Withdrawn by

REG-107592-00, 2007-44 I.R.B. 908

REG-117162-99

Withdrawn by

REG-142695-05, 2007-39 I.R.B. 681

REG-157711-02

Corrected by

Ann. 2007-74, 2007-35 I.R.B. 483

REG-119097-05

Hearing location change by

Ann. 2007-81, 2007-38 I.R.B. 667

REG-142695-05

Hearing location change by

Ann. 2007-91, 2007-42 I.R.B. 857

REG-148951-05

Corrected by

Ann. 2007-94, 2007-42 I.R.B. 858

REG-109367-06

Hearing scheduled by

Ann. 2007-66, 2007-31 I.R.B. 296

REG-128224-06

Hearing location change by

Ann. 2007-92, 2007-42 I.R.B. 857

Corrected by

Ann. 2007-95, 2007-43 I.R.B. 894

REG-138707-06

Corrected by

Ann. 2007-79, 2007-40 I.R.B. 749

Cancellation of hearing by

Ann. 2007-101, 2007-43 I.R.B. 898

REG-143601-06

Corrected by

Ann. 2007-71, 2007-33 I.R.B. 372

REG-143797-06

Cancellation of hearing by

Ann. 2007-85, 2007-39 I.R.B. 719

REG-148393-06

Corrected by

Ann. 2007-98, 2007-43 I.R.B. 896

Proposed Regulations— Continued:

REG-103842-07

Corrected by

Ann. 2007-77, 2007-38 I.R.B. 662

REG-116215-07

Corrected by

Ann. 2007-97, 2007-43 I.R.B. 895

Revenue Procedures:

90-12

Modified by

Rev. Proc. 2007-66, 2007-45 I.R.B. 970

90-27

Superseded by

Rev. Proc. 2007-52, 2007-30 I.R.B. 222

95-28

Superseded by

Rev. Proc. 2007-54, 2007-31 I.R.B. 293

97-14

Modified and superseded by

Rev. Proc. 2007-47, 2007-29 I.R.B. 108

98-48

Modified by

T.D. 9353, 2007-40 I.R.B. 721

2002-9

Modified and amplified by

Rev. Proc. 2007-48, 2007-29 I.R.B. 110Rev. Proc. 2007-53, 2007-30 I.R.B. 233

2002-41

Modified by

Rev. Proc. 2007-66, 2007-45 I.R.B. 970

2003-43

Supplemented by

Rev. Proc. 2007-62, 2007-41 I.R.B. 786

2004-42

Superseded by

Notice 2007-59, 2007-30 I.R.B. 135

2004-48

Supplemented by

Rev. Proc. 2007-62, 2007-41 I.R.B. 786

2005-16

Modified by

Rev. Proc. 2007-44, 2007-28 I.R.B. 54

2005-27

Superseded by

Rev. Proc. 2007-56, 2007-34 I.R.B. 388

2005-66

Clarified, modified, and superseded by

Rev. Proc. 2007-44, 2007-28 I.R.B. 54

2006-25

Superseded by

Rev. Proc. 2007-42, 2007-27 I.R.B. 15

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2007–1 through 2007–26 is in Internal Revenue Bulletin 2007–26, dated June 25, 2007.

November 13, 2007 iv 2007–46 I.R.B.

Revenue Procedures— Continued:

2006-27

Modified by

Rev. Proc. 2007-49, 2007-30 I.R.B. 141

2006-33

Superseded by

Rev. Proc. 2007-51, 2007-30 I.R.B. 143

2006-41

Superseded by

Rev. Proc. 2007-63, 2007-42 I.R.B. 809

2006-45

Modified and clarified by

Rev. Proc. 2007-64, 2007-42 I.R.B. 818

2006-53

Modified by

Rev. Proc. 2007-60, 2007-39 I.R.B. 679

2006-55

Superseded by

Rev. Proc. 2007-43, 2007-27 I.R.B. 26

2007-4

Modified by

Notice 2007-69, 2007-35 I.R.B. 468

2007-15

Superseded by

Rev. Proc. 2007-50, 2007-31 I.R.B. 244

Revenue Rulings:

54-378

Clarified by

Rev. Rul. 2007-51, 2007-37 I.R.B. 573

67-93

Obsoleted by

T.D. 9347, 2007-38 I.R.B. 624

69-141

Modified by

REG-142695-05, 2007-39 I.R.B. 681

74-299

Amplified by

Rev. Rul. 2007-48, 2007-30 I.R.B. 129

75-425

Obsoleted by

Rev. Rul. 2007-60, 2007-38 I.R.B. 606

76-278

Obsoleted by

T.D. 9354, 2007-41 I.R.B. 759

76-288

Obsoleted by

T.D. 9354, 2007-41 I.R.B. 759

76-450

Obsoleted by

T.D. 9347, 2007-38 I.R.B. 624

Revenue Rulings— Continued:

78-257

Obsoleted by

T.D. 9347, 2007-38 I.R.B. 624

78-369

Revoked by

Rev. Rul. 2007-53, 2007-37 I.R.B. 577

89-96

Amplified by

Rev. Rul. 2007-47, 2007-30 I.R.B. 127

92-17

Modified by

Rev. Rul. 2007-42, 2007-28 I.R.B. 44

94-62

Supplemented by

Rev. Rul. 2007-58, 2007-37 I.R.B. 562

2001-48

Modified by

T.D. 9332, 2007-32 I.R.B. 300

2002-41

Modified by

REG-142695-05, 2007-39 I.R.B. 681

2003-102

Modified by

REG-142695-05, 2007-39 I.R.B. 681

2005-24

Modified by

REG-142695-05, 2007-39 I.R.B. 681

2006-36

Modified by

REG-142695-05, 2007-39 I.R.B. 681

2006-57

Modified by

Notice 2007-76, 2007-40 I.R.B. 735

2007-54

Suspended by

Rev. Rul. 2007-61, 2007-42 I.R.B. 799

2007-59

Amplified by

Notice 2007-74, 2007-37 I.R.B. 585

Treasury Decisions:

8073

Removed by

T.D. 9349, 2007-39 I.R.B. 668

9321

Corrected by

Ann. 2007-68, 2007-32 I.R.B. 348Ann. 2007-78, 2007-38 I.R.B. 663

9330

Corrected by

Ann. 2007-80, 2007-38 I.R.B. 667

Treasury Decisions— Continued:

9332

Corrected by

Ann. 2007-83, 2007-40 I.R.B. 752Ann. 2007-84, 2007-41 I.R.B. 797

9334

Corrected by

Ann. 2007-93, 2007-42 I.R.B. 858

9340

Corrected by

Ann. 2007-102, 2007-44 I.R.B. 922

9353

Corrected by

Ann. 2007-103, 2007-44 I.R.B. 923

2007–46 I.R.B. v November 13, 2007

November 13, 2007 2007–46 I.R.B.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-tendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINSThe contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are

sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weeklyBulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of printand are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from theSuperintendent of Documents.

ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNETYou may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Under information for: select Businesses. Under

related topics, select More Topics. Then select Internal Revenue Bulletins.

INTERNAL REVENUE BULLETINS ON CD-ROMInternal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD-ROM). The CD-ROM can be

purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

HOW TO ORDERCheck the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,

detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two tosix weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE INTERNALREVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,we would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224

Internal Revenue ServiceWashington, DC 20224Official BusinessPenalty for Private Use, $300