Bulletin No. 2007-50 December 10, 2007 …Bulletin No. 2007-50 December 10, 2007 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the

Bulletin No. 2007-50December 10, 2007

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

INCOME TAX

Rev. Rul. 2007–70, page 1158.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for December 2007.

Rev. Rul. 2007–72, page 1154.Diagnostic medical procedures. This ruling holds thatamounts paid by individuals for certain diagnostic and similarprocedures and devices are medical care expenses deductibleunder section 213 of the Code.

REG–127770–07, page 1171.Proposed regulations under section 860G of the Code expandthe list of permitted loan modifications to include certain mod-ifications of commercial mortgages. Changes to the regula-tions are necessary to better accommodate evolving commer-cial mortgage industry practices. These changes will affectlenders, borrowers, servicers, and sponsors of securitizationsof mortgages in REMICs.

Notice 2007–98, page 1160.This notice announces the phase-out of the qualified hybrid mo-tor vehicle credit and the new advanced lean burn technologymotor vehicle credit for passenger automobiles and light trucksmanufactured by American Honda Motor Company, Inc., thatare purchased for use or lease in the United States beginningon January 1, 2008.

Rev. Proc. 2007–70, page 1162.Optional standard mileage rates. This procedure an-nounces 50.5 cents as the optional rate for deducting oraccounting for expenses for business use of an automobile,

14 cents as the optional rate for use of an automobile as acharitable contribution, and 19 cents as the optional rate foruse of an automobile as a medical or moving expense for2008. The procedure also provides rules for substantiatingthe deductible expenses of using an automobile for busi-ness, moving, medical, or charitable purposes. Rev. Proc.2006–49 superseded.

Announcement 2007–112, page 1175.This announcement revises Revenue Procedure 2007–65,2007–45 I.R.B. 967, by adding the following language to Sec-tion 3: “The requirements set forth in this revenue procedurethat must be satisfied in order to qualify for the Safe Harbor,however, are not intended to provide substantive rules andare not to be used as audit guidelines,” and replacing “will notchallenge” with “will respect” in Section 6.

Announcement 2007–114, page 1176.This document announces that proposed Form 8926, Disqual-ified Corporate Interest Expense Disallowed Under Section163(j) and Related Information, is being posted to the IRSwebsite.

EMPLOYEE PLANS

Rev. Rul. 2007–71, page 1155.2008 covered compensation tables; permitted disparity.The covered compensation tables under section 401 of theCode for the year 2008 are provided for use in determiningcontributions to defined benefit plans and permitted disparity.

(Continued on the next page)

Finding Lists begin on page ii.

ADMINISTRATIVE

Announcement 2007–112, page 1175.This announcement revises Revenue Procedure 2007–65,2007–45 I.R.B. 967, by adding the following language to Sec-tion 3: “The requirements set forth in this revenue procedurethat must be satisfied in order to qualify for the Safe Harbor,however, are not intended to provide substantive rules andare not to be used as audit guidelines,” and replacing “will notchallenge” with “will respect” in Section 6.

December 10, 2007 2007–50 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.

2007–50 I.R.B. December 10, 2007

December 10, 2007 2007–50 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof December 2007. See Rev. Rul. 2007-70, page1158.

Section 213.—Medical,Dental, etc., Expenses26 CFR 1.213–1: Medical, dental, etc., expenses.

Diagnostic medical procedures. Thisruling holds that amounts paid by individ-uals for certain diagnostic and similar pro-cedures and devices are medical care ex-penses deductible under section 213 of theCode.

Rev. Rul. 2007–72

ISSUE

Are amounts paid by individuals fordiagnostic and certain similar proceduresand devices, not compensated by insur-ance or otherwise, medical care expensesdeductible under § 213(a) of the InternalRevenue Code?

FACTS

In the situations described below, thecosts paid by the taxpayers are not com-pensated by insurance or otherwise, andthe taxpayers are not experiencing anysymptoms of illness.

Situation 1

Taxpayer A undergoes an annual phys-ical examination, which is performed by aphysician. A pays for the physician’s ser-vices and laboratory tests.

Situation 2

Taxpayer B pays for a full-body elec-tronic scan, a relatively high-cost proce-dure, performed by a technician at a clinic.The scan examines the condition of B’sinternal organs and may identify diseaseor other abnormalities. B has not con-sulted a physician before undergoing the

procedure, which can be obtained withouta physician’s direction, or determined ifless expensive alternatives are available.

Situation 3

Taxpayer C buys a test kit and uses it todetermine whether she is pregnant.

LAW

Section 213(a) allows a deduction forexpenses paid during the taxable year, notcompensated for by insurance or other-wise, for medical care of the taxpayer,spouse, or dependent, to the extent that theexpenses exceed 7.5 percent of adjustedgross income. Medical care includesamounts paid for the diagnosis, cure,mitigation, treatment, or prevention ofdisease, or for the purpose of affecting anystructure or function of the body. Section213(d)(1)(A).

Medical care includes X-rays and lab-oratory and other diagnostic services.Amounts paid for obstetrical services aredeemed to be for the purpose of affectinga structure or function of the body andtherefore are paid for medical care. Sec-tion 1.213–1(e)(1)(ii) of the Income TaxRegulations.

“Diagnosis” is the determination of amedical condition, such as a disease, byphysical examination or study of symp-toms. Black’s Law Dictionary (8th ed.,2004). A diagnosis may encompass a de-termination that disease is absent. The de-termination of a medical condition may in-clude testing for changes in the functionsof the body, such as those resulting frompregnancy, that are unrelated to disease.

In determining whether an expense isfor either medical or personal reasons, therecommendation of a physician is impor-tant. Havey v. Commissioner, 12 T.C. 409,412 (1949). However, this determinationis unnecessary in the case of expenses foritems that are wholly medical in nature andserve no other function in everyday life.Stringham v. Commissioner, 12 T.C. 580,584 (court reviewed), aff’d 183 F.2d 579(6th Cir. 1950).

The amount of the deduction under§ 213 is not limited by a ceiling and,although additional costs for personal con-venience are not allowable, § 213 does notlimit the deduction to amounts paid forthe least expensive form of medical careavailable. Ferris v. Commissioner, 582F.2d 1112, 1116 (7th Cir. 1978).

ANALYSIS

In Situation 1, the amount A pays for theannual physical examination is for diagno-sis and qualifies as an expense for medicalcare even though A is not experiencing anysymptoms of illness.

In Situation 2, the amount B pays for thefull-body scan is for diagnosis and quali-fies as an expense for medical care eventhough B is not experiencing symptomsof illness and has not obtained a physi-cian’s recommendation before undergoingthe procedure. The procedure serves nonon-medical function and the expense isnot disallowed because of the high cost orpossible existence of less expensive alter-natives.

In Situation 3, the amount C pays forthe pregnancy test qualifies as an expensefor medical care even though its purpose isto test the healthy functioning of the bodyrather than to detect disease.

Therefore, the amounts paid by Taxpay-ers A, B, and C for the physical examina-tion, the full-body scan, and the pregnancytest kit are deductible under § 213(a), sub-ject to the 7.5 percent floor.

HOLDING

Amounts paid by individuals for diag-nostic and certain similar procedures anddevices, not compensated by insurance orotherwise, are medical care expenses de-ductible under § 213(a), subject to the lim-itations of that section.

DRAFTING INFORMATION

For further information regarding thisrevenue ruling, contact Dan Cassano at(202) 622–7900 (not a toll-free call).

2007–50 I.R.B. 1154 December 10, 2007

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of December 2007. SeeRev. Rul. 2007-70, page 1158.

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of December 2007. See Rev.Rul. 2007-70, page 1158.

Section 401.—QualifiedPension, Profit-Sharing,and Stock Bonus Plans26 CFR 1.401(l)–1: Permitted disparity in employer-provided contributions or benefits.

2008 covered compensation tables;permitted disparity. The covered com-pensation tables under section 401 of theCode for the year 2008 are provided foruse in determining contributions to definedbenefit plans and permitted disparity.

Rev. Rul. 2007–71

This revenue ruling provides ta-bles of covered compensation under

§ 401(l)(5)(E) of the Internal RevenueCode (the “Code”) and the Income TaxRegulations, thereunder, for the 2008 planyear.

Section 401(l)(5)(E)(i) defines coveredcompensation with respect to an employee,as the average of the contribution and ben-efit bases in effect under section 230 of theSocial Security Act (the “Act”) for eachyear in the 35-year period ending with theyear in which the employee attains socialsecurity retirement age.

Section 401(l)(5)(E)(ii) of the Codestates that the determination for any yearpreceding the year in which the employeeattains social security retirement age shallbe made by assuming that there is no in-crease in covered compensation after thedetermination year and before the em-ployee attains social security retirementage.

Section 1.401(l)–1(c)(34) defines thetaxable wage base as the contribution andbenefit base under section 230 of the Act.

Section 1.401(l)–1(c)(7)(i) defines cov-ered compensation for an employee as theaverage (without indexing) of the taxablewage bases in effect for each calendar yearduring the 35-year period ending with thelast day of the calendar year in which theemployee attains (or will attain) social se-curity retirement age. A 35-year period isused for all individuals regardless of theyear of birth of the individual. In deter-

mining an employee’s covered compensa-tion for a plan year, the taxable wage basefor all calendar years beginning after thefirst day of the plan year is assumed to bethe same as the taxable wage base in ef-fect as of the beginning of the plan year.An employee’s covered compensation fora plan year beginning after the 35-year pe-riod applicable under § 1.401(l)–1(c)(7)(i)is the employee’s covered compensationfor a plan year during which the 35-yearperiod ends. An employee’s covered com-pensation for a plan year beginning be-fore the 35-year period applicable under§ 1.401(l)–1(c)(7)(i) is the taxable wagebase in effect as of the beginning of theplan year.

Section 1.401(l)–1(c)(7)(ii) providesthat, for purposes of determining theamount of an employee’s covered com-pensation under § 1.401(l)–1(c)(7)(i), aplan may use tables, provided by the Com-missioner, that are developed by roundingthe actual amounts of covered compensa-tion for different years of birth.

For purposes of determining coveredcompensation for the 2008 year the taxablewage base is $102,000.

The following tables provide coveredcompensation for 2008:

ATTACHMENT I

2008 COVERED COMPENSATION TABLE

CALENDARYEAR OF

BIRTH

CALENDAR YEAR OFSOCIAL SECURITYRETIREMENT AGE

2008 COVEREDCOMPENSATION

TABLE II

1907 1972 $4,4881908 1973 4,7041909 1974 5,0041910 1975 5,3161911 1976 5,6641912 1977 6,0601913 1978 6,4801914 1979 7,0441915 1980 7,6921916 1981 8,4601917 1982 9,3001918 1983 10,2361919 1984 11,2321920 1985 12,2761921 1986 13,368

December 10, 2007 1155 2007–50 I.R.B.

ATTACHMENT I


CALENDARYEAR OF

BIRTH



TABLE II

1922 1987 14,5201923 1988 15,7081924 1989 16,9681925 1990 18,3121926 1991 19,7281927 1992 21,1921928 1993 22,7161929 1994 24,3121930 1995 25,9201931 1996 27,5761932 1997 29,3041933 1998 31,1281934 1999 33,0601935 2000 35,1001936 2001 37,2121937 2002 39,4441938 2004 43,9921939 2005 46,3441940 2006 48,8161941 2007 51,3481942 2008 53,9521943 2009 56,4841944 2010 58,9921945 2011 61,4761946 2012 63,9121947 2013 66,3241948 2014 68,5801949 2015 70,7641950 2016 72,8281951 2017 74,8201952 2018 76,7041953 2019 78,5401954 2020 80,3281955 2022 83,7001956 2023 85,3321957 2024 86,8801958 2025 88,3201959 2026 89,7121960 2027 91,0441961 2028 92,3041962 2029 93,4921963 2030 94,6561964 2031 95,7841965 2032 96,8281966 2033 97,7881967 2034 98,6281968 2035 99,3601969 2036 99,9841970 2037 100,4641971 2038 100,896

2007–50 I.R.B. 1156 December 10, 2007

ATTACHMENT I


CALENDARYEAR OF

BIRTH



TABLE II

1972 2039 101,3041973 2040 101,6401974 2041 101,868

1975 and Later 2042 102,000

2008 RoundedCovered

Compensation Table

Year of Birth CoveredCompensation

1937 39,0001938 - 1939 45,0001940 48,0001941 51,0001942 54,0001943 57,0001944 - 1945 60,0001946 63,0001947 66,0001948 69,0001949 - 1950 72,0001951 75,0001952 - 1953 78,0001954 81,0001955 - 1956 84,0001957 - 1958 87,0001959 - 1960 90,0001961 - 1962 93,0001963 - 1965 96,0001966 - 1970 99,0001971 and Later 102,000


The principal author of this revenueruling is Wayne Bradley of the EmployeePlans, Tax Exempt and Government Enti-ties Division. For further information re-garding this revenue ruling, please contactthe Employee Plans taxpayer assistancetelephone service at 1–877–829–5500,between the hours of 8:30 a.m. and4:30 p.m. Eastern time, Mondaythrough Friday (a toll-free number).Mr. Bradley may be reached via e-mail [email protected].

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs


Section 482.—Allocationof Income and DeductionsAmong Taxpayers


December 10, 2007 1157 2007–50 I.R.B.

Section 483.—Interest onCertain Deferred Payments


Section 642.—SpecialRules for Credits andDeductions


Section 807.—Rules forCertain Reserves


Section 846.—DiscountedUnpaid Losses Defined

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month

of December 2007. See Rev. Rul. 2007-70, page1158.

Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and othersections of the Code, tables set forth therates for December 2007.

Rev. Rul. 2007–70

This revenue ruling provides variousprescribed rates for federal income taxpurposes for December 2007 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current monthfor purposes of section 1274(d) of theInternal Revenue Code. Table 2 contains

the short-term, mid-term, and long-termadjusted applicable federal rates (adjustedAFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Table 5contains the federal rate for determiningthe present value of an annuity, an interestfor life or for a term of years, or a remain-der or a reversionary interest for purposesof section 7520. Finally, Table 6 containsthe 2008 interest rate for sections 846 and807.

REV. RUL. 2007–70 TABLE 1

Applicable Federal Rates (AFR) for December 2007

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 3.88% 3.84% 3.82% 3.81%110% AFR 4.26% 4.22% 4.20% 4.18%120% AFR 4.66% 4.61% 4.58% 4.57%130% AFR 5.05% 4.99% 4.96% 4.94%

Mid-term

AFR 4.13% 4.09% 4.07% 4.06%110% AFR 4.55% 4.50% 4.47% 4.46%120% AFR 4.97% 4.91% 4.88% 4.86%130% AFR 5.39% 5.32% 5.29% 5.26%150% AFR 6.23% 6.14% 6.09% 6.06%175% AFR 7.29% 7.16% 7.10% 7.06%

Long-term

AFR 4.72% 4.67% 4.64% 4.63%110% AFR 5.21% 5.14% 5.11% 5.09%120% AFR 5.68% 5.60% 5.56% 5.54%130% AFR 6.16% 6.07% 6.02% 5.99%

2007–50 I.R.B. 1158 December 10, 2007


Adjusted AFR for December 2007

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjustedAFR

3.40% 3.37% 3.36% 3.35%

Mid-term adjusted AFR 3.67% 3.64% 3.62% 3.61%

Long-term adjustedAFR

4.34% 4.29% 4.27% 4.25%


Rates Under Section 382 for December 2007

Adjusted federal long-term rate for the current month 4.34%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 4.49%


Appropriate Percentages Under Section 42(b)(2) for December 2007Appropriate percentage for the 70% present value low-income housing credit 8.03%

Appropriate percentage for the 30% present value low-income housing credit 3.44%


Rate Under Section 7520 for December 2007

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,or a remainder or reversionary interest 5.0%


Applicable rate of interest for 2008 for purposes of section 846 and 807 4.06%

Section 1288.—Treatmentof Original Issue Discounton Tax-Exempt Obligations


Section 7520.—ValuationTables


Section 7872.—Treatmentof Loans With Below-MarketInterest Rates


December 10, 2007 1159 2007–50 I.R.B.

Part III. Administrative, Procedural, and MiscellaneousPhase-out of Credit forNew Qualified Hybrid MotorVehicles and New AdvancedLean Burn Technology MotorVehicles

Notice 2007–98

SECTION 1. PURPOSE

This notice announces the creditphase-out schedule for new advancedlean burn technology motor vehicles andnew qualified hybrid passenger automo-biles and light trucks manufactured byAmerican Honda Motor Company, Inc.

SECTION 2. BACKGROUND

Section 30B(a)(2) of the Internal Rev-enue Code provides for a credit determinedunder § 30B(c) for certain new advancedlean burn technology motor vehicles. Sec-tion 30B(a)(3) provides for a credit de-termined under § 30B(d) for certain newqualified hybrid motor vehicles. Both thenew advanced lean burn technology motorvehicle credit and the new qualified hybridmotor vehicle credit begin to phase out fora manufacturer’s passenger automobilesand light trucks in the second calendarquarter after the calendar quarter in whichat least 60,000 of the manufacturer’s pas-senger automobiles and light trucks thatqualify for either credit have been sold foruse or lease in the United States (deter-mined on a cumulative basis for sales afterDecember 31, 2005). Taxpayers purchas-ing the manufacturer’s vehicles during thefirst two calendar quarters of the phase-outperiod may claim only 50 percent of theotherwise allowable credit. Taxpayers pur-chasing the manufacturer’s vehicles dur-ing the third and fourth quarters of the

phase-out period may claim only 25 per-cent of the otherwise allowable credit. Nocredit is available for vehicles purchasedafter the last day of the fourth quarter ofthe phase-out period.

Notice 2006–9, 2006–6 C.B. 413, pro-vides procedures for a vehicle manufac-turer (or, in the case of a foreign vehi-cle manufacturer, its domestic distributor)to certify to the Internal Revenue Service(Service) both (1) that a particular make,model, and model year of vehicle qualifiesfor either the advanced lean burn technol-ogy motor vehicle credit or the new quali-fied hybrid motor vehicle credit and (2) theamount of the credit allowable with respectto that vehicle.

Section 5.05 of Notice 2006–9 requiresa manufacturer (or, in the case of a foreignvehicle manufacturer, its domestic distrib-utor) that has received from the Service anacknowledgement of its certification for aparticular make, model, and model year ofvehicle to submit to the Service a reportof the number of qualified vehicles soldby the manufacturer (or, in the case of aforeign vehicle manufacturer, its domesticdistributor) to retail dealers during the cal-endar quarter. A qualified vehicle is de-fined for this purpose as any passenger au-tomobile or light truck that is a new ad-vanced lean burn technology motor vehi-cle or a new qualified hybrid motor vehi-cle.

In accordance with section 5.05 ofNotice 2006–9, American Honda MotorCompany, Inc. has submitted quarterlyreports that indicate that its cumulativesales of qualified vehicles to retail dealersreached the 60,000-vehicle limit duringthe calendar quarter ending September 30,2007. Accordingly, the credit for all newadvanced lean burn technology motor ve-hicles or new qualified hybrid passengerautomobiles or light trucks manufactured

by American Honda Motor Company, Inc.will begin to phase out on January 1, 2008.

SECTION 3. SCOPE OF NOTICE

This notice applies to any make, model,or model year of new advanced lean burntechnology motor vehicle or new qualifiedhybrid passenger automobile or light truckthat is—

(1) manufactured by American HondaMotor Company, Inc.; and

(2) purchased for use or lease in theUnited States on or after January 1, 2008.

SECTION 4. CREDIT AMOUNT

.01 In general. If a new advanced leanburn technology motor vehicle or newqualified hybrid passenger automobile orlight truck manufactured by AmericanHonda Motor Company, Inc. is purchasedfor use or lease after December 31, 2007,the allowable credit is as follows:

(1) For vehicles purchased for use orlease on or after January 1, 2008, and on orbefore June 30, 2008, the credit is 50 per-cent of the otherwise allowable amount de-termined under § 30B(c) or (d) (whicheveris applicable);

(2) For vehicles purchased for use orlease on or after July 1, 2008, and onor before December 31, 2008, the creditis 25 percent of the otherwise allowableamount determined under § 30B(c) or (d)(whichever is applicable); and

(3) For vehicles purchased for use orlease on or after January 1, 2009, no creditis allowable.

.02 Certified Vehicles. The followingtables set forth the credit available on orafter January 1, 2008, for hybrid motor ve-hicles for which American Honda MotorCompany, Inc. received an acknowledge-ment of its certification from the Serviceon or before November 19, 2007:

2007–50 I.R.B. 1160 December 10, 2007

Table 1

January 1, 2008 — June 30, 2008

Model Year Model Credit Amount

2005 Accord Hybrid AT $325

2005 Accord Hybrid Navi AT $325

2005 Civic Hybrid MT $850

2005 Civic Hybrid CVT $850

2005 Insight CVT $725

2006 Accord Hybrid AT with updatedcalibration

$650

2006 Accord Hybrid Navi AT with updatedcalibration

$650

2006 Accord Hybrid AT without updatedcalibration

$325

2006 Accord Hybrid Navi AT without updatedcalibration

$325


2006 Insight CVT $725





Table 2

July 1, 2008 — December 31, 2008


2005 Accord Hybrid AT $162.50

2005 Accord Hybrid Navi AT $162.50

2005 Civic Hybrid MT $425


2005 Insight CVT $362.50


$325


$325


$162.50


$162.50

December 10, 2007 1161 2007–50 I.R.B.








Table 3

On or After January 1, 2009




2005 Civic Hybrid MT $0.00

2005 Civic Hybrid CVT $0.00



$0.00


$0.00


$0.00


$0.00







The principal author of this notice isNicole R. Cimino of the Office of Asso-ciate Chief Counsel (Passthroughs & Spe-cial Industries). For further informationregarding this notice, contact Ms. Ciminoat (202) 622–3110 (not a toll-free call).

26 CFR 601.105: Examination of returns and claimsfor refund, credit, or abatement; determination ofcorrect tax liability.(Also Part I, §§ 62, 162, 170, 213, 217, 274, 1016;

1.62–2, 1.162–17, 1.170A–1, 1.213–1, 1.217–2,1.274–5, 1.1016–3.)

Rev. Proc. 2007–70

SECTION 1. PURPOSE

This revenue procedure updates Rev.Proc. 2006–49, 2006–47 I.R.B. 936, andprovides optional standard mileage ratesfor employees, self-employed individuals,or other taxpayers to use in computing

the deductible costs of operating an auto-mobile for business, charitable, medical,or moving expense purposes. This rev-enue procedure also provides rules underwhich the amount of ordinary and nec-essary expenses of local travel or trans-portation away from home that are paidor incurred by an employee are deemedsubstantiated under § 1.274–5 of the In-come Tax Regulations if a payor (the em-ployer, its agent, or a third party) pro-vides a mileage allowance under a reim-bursement or other expense allowance ar-

2007–50 I.R.B. 1162 December 10, 2007

rangement to pay for the expenses. Useof a method of substantiation describedin this revenue procedure is not manda-tory and a taxpayer may use actual allow-able expenses if the taxpayer maintainsadequate records or other sufficient evi-

dence for proper substantiation. The Inter-nal Revenue Service prospectively adjuststhe business and medical and moving stan-dard mileage rates annually (to the extentwarranted).

SECTION 2. SUMMARY OFSTANDARD MILEAGE RATES

.01 Standard mileage rates

(1) Business (section 5 below) 50.5 cents per mile

(2) Charitable contribution (section 7 below) 14 cents per mile

(3) Medical and moving (section 7 below) 19 cents per mile

.02 Determination of standard mileagerates. The business and medical and mov-ing standard mileage rates reflected in thisrevenue procedure are based on an annualstudy of the fixed and variable costs of op-erating an automobile conducted on behalfof the Service by an independent contrac-tor. The charitable contribution standardmileage rate is provided in § 170(i) of theInternal Revenue Code.

SECTION 3. BACKGROUND ANDCHANGES

.01 Section 162(a) allows a deductionfor all the ordinary and necessary expensespaid or incurred during the taxable yearin carrying on any trade or business. Un-der that provision, an employee or self-em-ployed individual may deduct the cost ofoperating an automobile to the extent thatit is used in a trade or business. However,under § 262, no portion of the cost of op-erating an automobile that is attributable topersonal use is deductible.

.02 Section 274(d) provides, in part,that no deduction is allowed under § 162with respect to any listed property (as de-fined in § 280F(d)(4) to include passen-ger automobiles and any other propertyused as a means of transportation) unlessthe taxpayer complies with certain sub-stantiation requirements. Section 274(d)further provides that regulations may pre-scribe that some or all of the substantiationrequirements do not apply to an expensethat does not exceed an amount prescribedby the regulations.

.03 Section 1.274–5(j), in part, grantsthe Commissioner of Internal Revenuethe authority to establish a method underwhich a taxpayer may use mileage ratesto substantiate, for purposes of § 274(d),the amount of the ordinary and necessaryexpenses of using a vehicle for local trans-

portation and transportation to, from, andat the destination while traveling awayfrom home.

.04 Section 1.274–5(g), in part, grantsthe Commissioner the authority to pre-scribe rules relating to mileage allowancesfor ordinary and necessary expenses ofusing a vehicle for local transportationand transportation to, from, and at thedestination while traveling away fromhome. Pursuant to this grant of authority,the Commissioner may prescribe rulesunder which the allowances, if in accor-dance with reasonable business practice,will be regarded as (1) equivalent to sub-stantiation, by adequate records or othersufficient evidence, of the amount of thetravel and transportation expenses for pur-poses of § 1.274–5(c), and (2) satisfyingthe requirements of an adequate account-ing to the employer of the amount of theexpenses for purposes of § 1.274–5(f).

.05 Section 62(a)(2)(A) allows an em-ployee, in determining adjusted gross in-come, a deduction for the expenses al-lowed by Part VI (§ 161 and following),subchapter B, chapter 1 of the Code, paidor incurred by the employee in connectionwith the performance of services as an em-ployee under a reimbursement or other ex-pense allowance arrangement with a payor.

.06 Section 62(c) provides that an ar-rangement will not be treated as a reim-bursement or other expense allowance ar-rangement for purposes of § 62(a)(2)(A) ifit—

(1) does not require the employee tosubstantiate the expenses covered by thearrangement to the payor, or

(2) provides the employee with the rightto retain any amount in excess of the sub-stantiated expenses covered under the ar-rangement.

Section 62(c) further provides thatthe substantiation requirements described

therein do not apply to any expense to theextent that, under the grant of regulatoryauthority in § 274(d), the Commissionerhas provided that substantiation is not re-quired for the expense.

.07 Under § 1.62–2(c), a reimburse-ment or other expense allowance arrange-ment satisfies the requirements of § 62(c)if it meets the requirements of businessconnection, substantiation, and returningamounts in excess of expenses as specifiedin the regulations. If an arrangement meetsthese requirements, all amounts paid underthe arrangement are treated as paid underan accountable plan and are excludedfrom income and wages. If an arrange-ment does not meet these requirements,all amounts paid under the arrangementare treated as paid under a nonaccountableplan and are included in the employee’sgross income, must be reported as wagesor compensation on the employee’s FormW–2, and are subject to the withholdingand payment of employment taxes. Sec-tion 1.62–2(e)(2) specifically providesthat substantiation of certain business ex-penses in accordance with rules prescribedunder the authority of § 1.274–5(g) willbe treated as substantiation of the amountof the expenses for purposes of § 1.62–2.Under § 1.62–2(f)(2), the Commissionermay prescribe rules under which an ar-rangement providing mileage allowancesis treated as satisfying the requirement ofreturning amounts in excess of expenses,even though the arrangement does notrequire the employee to return the por-tion of the allowance that relates to milesof travel substantiated and that exceedsthe amount of the employee’s expensesdeemed substantiated pursuant to rulesprescribed under § 274(d), provided theallowance is reasonably calculated notto exceed the amount of the employee’sexpenses or anticipated expenses and the

December 10, 2007 1163 2007–50 I.R.B.

employee is required to return any portionof the allowance that relates to miles oftravel not substantiated.

.08 Section 1.62–2(h)(2)(i)(B) providesthat if a payor pays a mileage allowanceunder an arrangement that meets the re-quirements of § 1.62–2(c)(1), the portion,if any, of the allowance that relates to milesof travel substantiated in accordance with§ 1.62–2(e), that exceeds the amount ofthe employee’s expenses deemed substan-tiated for the travel pursuant to rules pre-scribed under § 274(d) and § 1.274–5(g),and that the employee is not requiredto return, is subject to withholding andpayment of employment taxes. See§§ 31.3121(a)–3, 31.3231(e)–1(a)(5),31.3306(b)–2, and 31.3401(a)–4 of theEmployment Tax Regulations. Becausethe employee is not required to return thisexcess portion, the reasonable period oftime provisions of § 1.62–2(g) (relating tothe return of excess amounts) do not applyto this excess portion.

.09 Under § 1.62–2(h)(2)(i)(B)(4), theCommissioner may provide special rulesregarding the timing of withholding andpayment of employment taxes on mileageallowances.

.10 Sections 9.09 and 10.03 of thisrevenue procedure refer to Rev. Rul.2006–56, 2006–46 I.R.B. 874, whichdescribes circumstances when a payor’sreimbursement or other expense allowancearrangement evidences a pattern of abuseof the rules of § 62(c) and the regulationsthereunder.

SECTION 4. DEFINITIONS

.01 Standard mileage rate. The term“standard mileage rate” means the applica-ble amount provided by the Service for op-tional use by employees or self-employedindividuals in computing the deductiblecosts of operating automobiles (includingvans, pickups, or panel trucks) they own orlease for business purposes, or by taxpay-ers in computing the deductible costs ofoperating automobiles for charitable, med-ical, or moving expense purposes.

.02 Transportation expenses. The term“transportation expenses” means the ex-penses of operating an automobile for localtravel or transportation away from home.

.03 Mileage allowance. The term“mileage allowance” means a payment

under a reimbursement or other expenseallowance arrangement that is:

(1) paid with respect to the ordinary andnecessary business expenses incurred, orthat the payor reasonably anticipates willbe incurred, by an employee for transporta-tion expenses in connection with the per-formance of services as an employee of theemployer,

(2) reasonably calculated not to exceedthe amount of the expenses or the antici-pated expenses, and

(3) paid at the applicable standardmileage rate, a flat rate or stated schedule,or in accordance with any other Ser-vice-specified rate or schedule.

.04 Flat rate or stated schedule. Amileage allowance is paid at a flat rate orstated schedule if it is provided on a uni-form and objective basis with respect to theexpenses described in section 4.03 of thisrevenue procedure. The allowance maybe paid periodically at a fixed rate, at acents-per-mile rate, at a variable rate basedon a stated schedule, at a rate that com-bines any of these rates, or on any otherbasis that is consistently applied and in ac-cordance with reasonable business prac-tice. Thus, for example, a periodic pay-ment at a fixed rate to cover the fixedcosts (including depreciation (or lease pay-ments), insurance, registration and licensefees, and personal property taxes) of driv-ing an automobile in connection with theperformance of services as an employee ofthe employer, coupled with a periodic pay-ment at a cents-per-mile rate to cover thevariable costs (including gasoline and alltaxes thereon, oil, tires, and routine main-tenance and repairs) of using an automo-bile for those purposes, is an allowancepaid at a flat rate or stated schedule. Like-wise, a periodic payment at a variable ratebased on a stated schedule for different lo-cales to cover the costs of driving an auto-mobile in connection with the performanceof services as an employee is an allowancepaid at a flat rate or stated schedule.

SECTION 5. BUSINESS STANDARDMILEAGE RATE

.01 In general. The standard mileagerate for transportation expenses is 50.5cents per mile for all miles of use for busi-ness purposes.

.02 Use of the business standardmileage rate. A taxpayer may use the

business standard mileage rate with re-spect to an automobile that is either ownedor leased by the taxpayer. A taxpayergenerally may deduct an amount equalto either the business standard mileagerate times the number of business milestraveled or the actual costs (both fixed andvariable) paid or incurred by the taxpayerthat are allocable to traveling those busi-ness miles.

.03 Business standard mileage rate inlieu of fixed and variable costs. A deduc-tion using the business standard mileagerate is computed on a yearly basis and isin lieu of all fixed and variable costs of theautomobile allocable to business purposes(except as provided in section 9.06 of thisrevenue procedure). Items such as depre-ciation (or lease payments), maintenanceand repairs, tires, gasoline (including alltaxes thereon), oil, insurance, and licenseand registration fees are included in fixedand variable costs for this purpose.

.04 Parking fees, tolls, interest, andtaxes. Parking fees and tolls attributableto use of the automobile for business pur-poses may be deducted as separate items.Likewise, interest relating to the purchaseof the automobile as well as state and localpersonal property taxes may be deductedas separate items, but only to the extent al-lowable under § 163 or § 164, respectively.Section 163(h)(2)(A) expressly providesthat interest is nondeductible personalinterest if it is paid or accrued on indebt-edness properly allocable to the trade orbusiness of performing services as an em-ployee. Section 164 expressly providesthat state and local taxes that are paid oraccrued by a taxpayer in connection withan acquisition or disposition of propertyare treated as part of the cost of the ac-quired property or as a reduction in theamount realized on the disposition of theproperty. If the automobile is operated lessthan 100 percent for business purposes,an allocation is required to determine thebusiness and nonbusiness portion of thetaxes and interest deduction allowable.

.05 Depreciation. For owned automo-biles placed in service for business pur-poses, and for which the business stan-dard mileage rate has been used for anyyear, depreciation is considered to havebeen allowed at the rate of 16 cents permile for 2003 and 2004, 17 cents per milefor 2005 and 2006, 19 cents per mile for2007, and 21 cents per mile for 2008 for

2007–50 I.R.B. 1164 December 10, 2007

those years in which the business standardmileage rate was used. If actual costs wereused for one or more of those years, theserates do not apply to any year in which ac-tual costs were used. The depreciation de-scribed above reduces the basis of the au-tomobile (but not below zero) in determin-ing adjusted basis as required by § 1016.

.06 Limitations.(1) The business standard mileage rate

may not be used to compute the deductibleexpenses of (a) automobiles used for hire,such as taxicabs, or (b) five or more auto-mobiles owned or leased by a taxpayer andused simultaneously (such as in fleet oper-ations).

(2) The business standard mileage ratemay not be used to compute the deductiblebusiness expenses of an automobile leasedby a taxpayer unless the taxpayer uses ei-ther the business standard mileage rate ora fixed and variable rate allowance (FAVRallowance) (as provided in section 8 ofthis revenue procedure) to compute the de-ductible business expenses of the automo-bile for the entire lease period (includingrenewals). For a lease commencing onor before December 31, 1997, the “en-tire lease period” means the portion of thelease period (including renewals) remain-ing after that date.

(3) The business standard mileage ratemay not be used to compute the deductibleexpenses of an automobile for which thetaxpayer has (a) claimed depreciation us-ing a method other than straight-line for itsestimated useful life, (b) claimed a § 179deduction, (c) claimed the special depre-ciation allowance under § 168(k), or (d)used the Accelerated Cost Recovery Sys-tem (ACRS) under former § 168 or theModified Accelerated Cost Recovery Sys-tem (MACRS) under current § 168. By us-ing the business standard mileage rate, thetaxpayer has elected to exclude the auto-mobile (if owned) from MACRS pursuantto § 168(f)(1). If, after using the busi-ness standard mileage rate, the taxpayeruses actual costs, the taxpayer must usestraight-line depreciation for the automo-bile’s remaining estimated useful life (sub-ject to the applicable depreciation deduc-tion limitations under § 280F).

(4) The business standard mileage rateand this revenue procedure may not beused to compute the amount of the de-ductible automobile expenses of an em-ployee of the United States Postal Service

incurred in performing services involvingthe collection and delivery of mail on a ru-ral route if the employee receives qualifiedreimbursements (as defined in § 162(o))for the expenses. See § 162(o) for therules that apply to these qualified reim-bursements.

SECTION 6. RESERVED

SECTION 7. CHARITABLE ANDMEDICAL AND MOVING STANDARDMILEAGE RATES

.01 Charitable. Section 170(i) providesa standard mileage rate of 14 cents per milefor purposes of computing the charitablecontribution deduction for use of an auto-mobile in connection with rendering gratu-itous services to a charitable organizationunder § 170.

.02 Medical and moving. The standardmileage rate is 19 cents per mile for use ofan automobile (1) to obtain medical caredescribed in § 213, or (2) as part of a movefor which the expenses are deductible un-der § 217.

.03 Charitable or medical and movingstandard mileage rates in lieu of variableexpenses. A deduction computed using theapplicable standard mileage rate for chari-table, medical, or moving expense miles isin lieu of all variable expenses (includinggasoline and oil) of the automobile alloca-ble to those purposes. Costs for items suchas depreciation (or lease payments), insur-ance, and license and registration fees arenot deductible, and are not included in thecharitable or medical and moving standardmileage rates.

.04 Parking fees, tolls, interest, andtaxes. Parking fees and tolls attributableto the use of the automobile for charitable,medical, or moving expense purposes maybe deducted as separate items. Interestrelating to the purchase of the automobileand state and local personal property taxesare not deductible as charitable, medical,or moving expenses, but they may bededucted as separate items to the extentallowable under § 163 or § 164, respec-tively.

SECTION 8. FIXED AND VARIABLERATE ALLOWANCE

.01 In general.

(1) The ordinary and necessary ex-penses paid or incurred by an employeein driving an automobile owned or leasedby the employee in connection with theperformance of services as an employeeof the employer are deemed substantiated(in an amount determined under section 9of this revenue procedure) when a payorreimburses those expenses with a mileageallowance using a flat rate or stated sched-ule that combines periodic fixed andvariable rate payments that meet all therequirements of section 8 of this revenueprocedure (a FAVR allowance).

(2) The amount of a FAVR allowancemust be based on data that (a) is derivedfrom the base locality, (b) reflects retailprices paid by consumers, and (c) is rea-sonable and statistically defensible in ap-proximating the actual expenses employ-ees receiving the allowance would incur asowners of the standard automobile.

.02 Computation of FAVR allowance.(1) FAVR allowance. A FAVR al-

lowance includes periodic fixed paymentsand periodic variable payments. A payormay maintain more than one FAVR al-lowance. A FAVR allowance that uses thesame payor, standard automobile (or an au-tomobile of the same make and model thatis comparably equipped), retention period,and business use percentage is consideredone FAVR allowance, even though otherfeatures of the allowance may vary. AFAVR allowance also includes any op-tional high mileage payments; however,optional high mileage payments are in-cluded in the employee’s gross income,are reported as wages or other compen-sation on the employee’s Form W–2, andare subject to withholding and paymentof employment taxes when paid. See sec-tion 9.05 of this revenue procedure. Anoptional high mileage payment coversthe additional depreciation for a standardautomobile attributable to business milesdriven and substantiated by the employeefor a calendar year in excess of the annualbusiness mileage for that year. If an em-ployee is covered by the FAVR allowancefor less than the entire calendar year, theannual business mileage may be proratedon a monthly basis for purposes of thepreceding sentence.

(2) Periodic fixed payment. A periodicfixed payment covers the projected fixedcosts (including depreciation (or lease pay-ments), insurance, registration and license

December 10, 2007 1165 2007–50 I.R.B.

fees, and personal property taxes) of driv-ing the standard automobile in connectionwith the performance of services as an em-ployee of the employer in a base locality,and must be paid at least quarterly. A pe-riodic fixed payment may be computed by(a) dividing the total projected fixed costsof the standard automobile for all yearsof the retention period, determined at thebeginning of the retention period, by thenumber of periodic fixed payments in theretention period, and (b) multiplying theresulting amount by the business use per-centage.

(3) Periodic variable payment. A peri-odic variable payment covers the projectedvariable costs (including gasoline and alltaxes thereon, oil, tires, and routine main-tenance and repairs) of driving a standardautomobile in connection with the perfor-mance of services as an employee of theemployer in a base locality, and must bepaid at least quarterly. The rate of a pe-riodic variable payment for a computationperiod may be computed by dividing thetotal projected variable costs for the stan-dard automobile for the computation pe-riod, determined at the beginning of thecomputation period, by the computationperiod mileage. A computation period canbe any period of a year or less. Compu-tation period mileage is the total mileage(business and personal) a payor reason-ably projects a standard automobile willbe driven during a computation period and

equals the retention mileage divided by thenumber of computation periods in the re-tention period. For each business mile sub-stantiated by the employee for the com-putation period, the periodic variable pay-ment must be paid at a rate that does not ex-ceed the rate for that computation period.

(4) Base locality. A base locality isthe particular geographic locality or re-gion of the United States in which thecosts of driving an automobile in connec-tion with the performance of services asan employee of the employer are generallypaid or incurred by the employee. Thus,for purposes of determining the amountof fixed costs, the base locality is gen-erally the geographic locality or regionin which the employee resides. For pur-poses of determining the amount of vari-able costs, the base locality is generally thegeographic locality or region in which theemployee drives the automobile in connec-tion with the performance of services as anemployee of the employer.

(5) Standard automobile. A standardautomobile is the automobile selected bythe payor on which a specific FAVR al-lowance is based.

(6) Standard automobile cost. The stan-dard automobile cost for a calendar yearmay not exceed 95 percent of the sum of(a) the retail dealer invoice cost of the stan-dard automobile in the base locality, and(b) state and local sales or use taxes appli-cable on the purchase of the automobile.

Further, the standard automobile cost maynot exceed $27,500.

(7) Annual mileage. Annual mileage isthe total mileage (business and personal)a payor reasonably projects a standard au-tomobile will be driven during a calendaryear. Annual mileage equals the annualbusiness mileage divided by the businessuse percentage.

(8) Annual business mileage. Annualbusiness mileage is the mileage a payorreasonably projects a standard automobilewill be driven by an employee in connec-tion with the performance of services as anemployee of the employer during the cal-endar year, but may not be less than 6,250miles for a calendar year. Annual businessmileage equals the annual mileage multi-plied by the business use percentage.

(9) Business use percentage. A busi-ness use percentage is determined bydividing the annual business mileage bythe annual mileage. The business usepercentage may not exceed 75 percent.In lieu of demonstrating the reasonable-ness of the business use percentage basedon records of total mileage and businessmileage driven by the employees annually,a payor may use a business use percentagethat is less than or equal to the followingpercentages for a FAVR allowance thatis paid for the following annual businessmileage:

Annual business mileage Business use percentage

6,250 or more but less than 10,000 45 percent



20,000 or more 75 percent

(10) Retention period. A retention pe-riod is the period in calendar years selectedby the payor during which the payor ex-pects an employee to drive a standard auto-mobile in connection with the performanceof services as an employee of the employerbefore the automobile is replaced. Theperiod may not be less than two calendaryears.

(11) Retention mileage. Retentionmileage is the annual mileage multipliedby the number of calendar years in theretention period.

(12) Residual value. The residual valueof a standard automobile is the projectedamount for which it could be sold at theend of the retention period after beingdriven the retention mileage. The Ser-

vice will accept the following safe harborresidual values for a standard automobilecomputed as a percentage of the standardautomobile cost:

2007–50 I.R.B. 1166 December 10, 2007

Retention period Residual value

2-year 70 percent

3-year 60 percent

4-year 50 percent

.03 FAVR allowance in lieu of fixed andvariable costs.

(1) A reimbursement computed usinga FAVR allowance is in lieu of the em-ployee’s deduction of all the fixed andvariable costs paid or incurred by an em-ployee in driving the automobile in con-nection with the performance of servicesas an employee of the employer, exceptas provided in section 9.06 of this rev-enue procedure. Items such as deprecia-tion (or lease payments), maintenance andrepairs, tires, gasoline (including all taxesthereon), oil, insurance, license and reg-istration fees, and personal property taxesare included in fixed and variable costs forthis purpose.

(2) Parking fees and tolls attributable toan employee driving the standard automo-bile in connection with the performance ofservices as an employee of the employerare not included in fixed and variable costsand may be deducted as separate items.Similarly, interest relating to the purchaseof the standard automobile may be de-ducted as a separate item, but only to theextent that the interest is an allowable de-duction under § 163.

.04 Depreciation.(1) A FAVR allowance may not be paid

with respect to an automobile for which theemployee has (a) claimed depreciation us-ing a method other than straight-line for itsestimated useful life, (b) claimed a § 179deduction, (c) claimed the special depreci-ation allowance under § 168(k), or (d) usedACRS under former § 168 or MACRS un-der current § 168. If an employee usesactual costs for an owned automobile thathas been covered by a FAVR allowance,the employee must use straight-line depre-ciation for the automobile’s remaining es-timated useful life (subject to the applica-ble depreciation deduction limitations un-der § 280F).

(2) Except as provided in section8.04(3) of this revenue procedure, the totalamount of the depreciation component forthe retention period taken into account incomputing the periodic fixed payments

for that retention period may not exceedthe excess of the standard automobile costover the residual value of the standardautomobile. In addition, the total amountof the depreciation component may notexceed the sum of the annual § 280F lim-itations on depreciation (in effect at thebeginning of the retention period) that ap-ply to the standard automobile during theretention period.

(3) If the depreciation component of pe-riodic fixed payments exceeds the limi-tations in section 8.04(2) of this revenueprocedure, that section will be treated assatisfied in any year during which the to-tal annual amount of the periodic fixedpayments and the periodic variable pay-ments made to an employee driving 80 per-cent of the annual business mileage of thestandard automobile does not exceed theamount obtained by multiplying 80 per-cent of the annual business mileage of thestandard automobile by the business stan-dard mileage rate for that year (under sec-tion 5.01 of the applicable revenue proce-dure).

(4) The depreciation included in eachperiodic fixed payment portion of a FAVRallowance paid with respect to an automo-bile reduces the basis of the automobile(but not below zero) in determining ad-justed basis as required by § 1016. Seesection 8.07(2) of this revenue procedurefor the requirement that the employer re-port the depreciation component of a peri-odic fixed payment to the employee.

.05 FAVR allowance limitations.(1) A FAVR allowance may be paid

only to an employee who substantiates tothe payor for a calendar year at least 5,000miles driven in connection with the perfor-mance of services as an employee of theemployer or, if greater, 80 percent of theannual business mileage of that FAVR al-lowance. If the employee is covered bythe FAVR allowance for less than the en-tire calendar year, these limits may be pro-rated on a monthly basis.

(2) A FAVR allowance may not bepaid to a control employee (as defined

in § 1.61–21(f)(5) and (6), excludingthe $100,000 limitation in paragraph(f)(5)(iii)).

(3) An employer may not pay a FAVRallowance if at any time during a calendaryear a majority of the employees coveredby the FAVR allowance are managementemployees.

(4) An employer may not pay a FAVRallowance to any employee unless at alltimes during a calendar year at least fiveemployees in total are covered by FAVRallowances provided by the employer.

(5) A FAVR allowance may be paidonly with respect to an automobile (a)owned or leased by the employee receiv-ing the payment, (b) the cost of which, asa new vehicle (whether or not purchasednew by the employee), was at least 90 per-cent of the standard automobile cost takeninto account for purposes of determiningthe FAVR allowance for the first calendaryear the employee receives the allowancewith respect to that automobile, and (c) themodel year of which does not differ fromthe current calendar year by more than thenumber of years in the retention period.

(6) A FAVR allowance may not be paidwith respect to an automobile leased byan employee for which the employee hasused actual expenses to compute the de-ductible business expenses of the automo-bile for any year during the entire lease pe-riod. For a lease commencing on or beforeDecember 31, 1997, the “entire lease pe-riod” means the portion of the lease period(including renewals) remaining after thatdate.

(7) The insurance cost component ofa FAVR allowance must be based on therates charged in the base locality for in-surance coverage on the standard automo-bile during the current calendar year with-out taking into account rate-increasing fac-tors such as poor driving records or youngdrivers.

(8) A FAVR allowance may be paidonly to an employee whose insurance cov-erage limits on the automobile with respectto which the FAVR allowance is paid are at

December 10, 2007 1167 2007–50 I.R.B.

least equal to the insurance coverage lim-its used to compute the periodic fixed pay-ment under that FAVR allowance.

.06 Employee reporting. Within 30days after an employee’s automobile isinitially covered by a FAVR allowance,or is again covered by a FAVR allowanceif coverage has lapsed, the employee bywritten declaration must provide the payorwith the following information: (1) themake, model, and year of the employee’sautomobile, (2) written proof of the insur-ance coverage limits on the automobile,(3) the odometer reading of the automo-bile, (4) if owned, the purchase price ofthe automobile or, if leased, the price atwhich the automobile is ordinarily sold byretailers (the gross capitalized cost of theautomobile), and (5) if owned, whetherthe employee has claimed depreciationwith respect to the automobile using anyof the depreciation methods prohibited bysection 8.04(1) of this revenue procedureor, if leased, whether the employee hascomputed deductible business expenseswith respect to the automobile using actualexpenses. The information described in(1), (2), and (3) of the preceding sentencealso must be supplied by the employeeto the payor within 30 days after the be-ginning of each calendar year that theemployee’s automobile is covered by aFAVR allowance.

.07 Payor recordkeeping and reporting.(1) The payor or its agent must main-

tain written records setting forth (a) the sta-tistical data and projections on which theFAVR allowance payments are based, and(b) the information provided by the em-ployees pursuant to section 8.06 of thisrevenue procedure.

(2) Within 30 days of the end of eachcalendar year, the employer must pro-vide each employee covered by a FAVRallowance during that year with a state-ment that, for automobile owners, liststhe amount of depreciation included ineach periodic fixed payment portion of theFAVR allowance paid during that calen-dar year and explains that by receiving aFAVR allowance the employee has electedto exclude the automobile from the Mod-ified Accelerated Cost Recovery Systempursuant to § 168(f)(1). For automobilelessees, the statement must explain thatby receiving the FAVR allowance the em-ployee may not compute the deductiblebusiness expenses of the automobile using

actual expenses for the entire lease period(including renewals). For a lease com-mencing on or before December 31, 1997,the “entire lease period” means the portionof the lease period (including renewals)remaining after that date.

.08 Failure to meet section 8 require-ments. If an employee receives a mileageallowance that fails to meet one or moreof the requirements of section 8 of thisrevenue procedure, the employee may notbe treated as covered by any FAVR al-lowance of the payor during the period ofthe failure. Nevertheless, the expenses towhich that mileage allowance relates maybe deemed substantiated using the methoddescribed in sections 5, 9.01(1), and 9.02of this revenue procedure to the extent therequirements of those sections are met.

SECTION 9. APPLICATION

.01 If a payor pays a mileage allowancein lieu of reimbursing actual transportationexpenses incurred or to be incurred by anemployee, the amount of the expenses thatis deemed substantiated to the payor is ei-ther:

(1) for any mileage allowance otherthan a FAVR allowance, the lesser of theamount paid under the mileage allowanceor the applicable standard mileage ratein section 5.01 of this revenue proceduremultiplied by the number of business milessubstantiated by the employee; or

(2) for a FAVR allowance, the amountpaid under the FAVR allowance less thesum of (a) any periodic variable rate pay-ment that relates to miles in excess of thebusiness miles substantiated by the em-ployee and that the employee fails to re-turn to the payor although required to doso, (b) any portion of a periodic fixed pay-ment that relates to a period during whichthe employee is treated as not covered bythe FAVR allowance and that the employeefails to return to the payor although re-quired to do so, and (c) any optional highmileage payments.

.02 If the amount of transportation ex-penses is deemed substantiated under therules provided in section 9.01 of this rev-enue procedure, and the employee actuallysubstantiates to the payor the elements oftime, place (or use), and business purposeof the transportation expenses in accor-dance with paragraphs (b)(2) (travel awayfrom home) and (b)(6) (listed property,

which includes passenger automobiles andany other property used as a means oftransportation) of § 1.274–5T, and para-graph (c) of § 1.274–5, the employee isdeemed to satisfy the adequate account-ing requirements of § 1.274–5(f) as wellas the requirement to substantiate by ade-quate records or other sufficient evidencefor purposes of § 1.274–5(c). See also§ 1.62–2(e)(1) for the rule that, in order tosatisfy the substantiation requirement of anaccountable plan, an arrangement must re-quire business expenses to be substantiatedto the payor within a reasonable period oftime.

.03 An arrangement providing mileageallowances will be treated as satisfying therequirement of § 1.62–2(f)(2) with respectto returning amounts in excess of expensesas follows:

(1) For a mileage allowance (otherthan a FAVR allowance) paid only at acents-per-mile rate, the requirement toreturn excess amounts is treated as satis-fied if the employee is required to returnwithin a reasonable period of time (as de-fined in § 1.62–2(g)) any portion of theallowance that relates to miles of travelnot substantiated by the employee, eventhough the arrangement does not requirethe employee to return the portion of theallowance that relates to the miles of travelsubstantiated and that exceeds the amountof the employee’s expenses deemed sub-stantiated. For example, assume a payorprovides an employee an advance mileageallowance of $109.00 based on an antici-pated 200 business miles at 54.5 cents permile (at a time when the business standardmileage rate is 50.5 cents per mile), andthe employee substantiates 120 businessmiles. The requirement to return excessamounts is treated as satisfied if the em-ployee is required to return the portionof the allowance that relates to the 80unsubstantiated business miles ($43.60)even though the employee is not requiredto return the portion of the allowance($4.80) that exceeds the amount of the em-ployee’s expenses deemed substantiatedunder section 9.01 of this revenue pro-cedure ($60.60) for the 120 substantiatedbusiness miles. However, the $4.80 excessportion of the allowance is treated as paidunder a nonaccountable plan as discussedin section 9.05.

(2) For a mileage allowance (other thana FAVR allowance) paid other than only

2007–50 I.R.B. 1168 December 10, 2007

at a cents-per-mile rate, the requirementto return excess amounts is treated as sat-isfied if the employee is required to re-turn within a reasonable period of time(as defined in § 1.62–2(g)) any portionof the allowance that exceeds the prod-uct of the standard mileage rate and thenumber of miles of travel substantiated bythe employee. For example, assume apayor provides an employee an advancemileage allowance of $400 per month plus20 cents per mile based on an anticipated2000 miles for a total of $800 (at a timewhen the business standard mileage rateis 50.5 cents per mile), and the employeesubstantiates 1000 business miles. Therequirement to return excess amounts istreated as satisfied if the employee is re-quired to return $295, the portion of theallowance that exceeds the product of thestandard mileage rate and the miles sub-stantiated ($505).

(3) For a FAVR allowance, the require-ment to return excess amounts is treatedas satisfied if the employee is required toreturn within a reasonable period of time(as defined in § 1.62–2(g)), (a) the portion(if any) of the periodic variable paymentreceived that relates to miles in excess ofthe business miles substantiated by the em-ployee, and (b) the portion (if any) of a pe-riodic fixed payment that relates to a pe-riod during which the employee was notcovered by the FAVR allowance.

.04 An employee is not required toinclude in gross income the portion of amileage allowance received from a payorthat is less than or equal to the amountdeemed substantiated under section 9.01of this revenue procedure, provided theemployee substantiates in accordancewith section 9.02. See § 1.274–5T(f)(2)(i).Assuming that the remaining require-ments for an accountable plan providedin § 1.62–2 are satisfied, that portion ofthe allowance is treated as paid under anaccountable plan, is not reported as wagesor other compensation on the employee’sForm W–2, and is exempt from withhold-ing and payment of employment taxes.See § 1.62–2(c)(2) and (c)(4).

.05 An employee is required to includein gross income the portion of a mileageallowance received from a payor that ex-ceeds the amount deemed substantiatedunder section 9.01 of this revenue proce-dure, provided the employee substantiatesin accordance with section 9.02 of this rev-

enue procedure. See § 1.274–5T(f)(2)(ii).In addition, the excess portion of the al-lowance is treated as paid under a nonac-countable plan, is reported as wages orother compensation on the employee’sForm W–2, and is subject to withholdingand payment of employment taxes. See§ 1.62–2(c)(3)(ii), (c)(5), and (h)(2)(i)(B).

.06 If an employee’s substantiated ex-penses are less than the employee’s actualexpenses, the following rules apply:

(1) Except as otherwise provided insection 9.06(2) of this revenue procedurewith respect to leased automobiles, if theamount of the expenses deemed substan-tiated under the rules provided in section9.01 of this revenue procedure is less thanthe amount of the employee’s businesstransportation expenses, the employeemay claim an itemized deduction for theamount by which the business transporta-tion expenses exceed the amount that isdeemed substantiated, provided the em-ployee substantiates all the business trans-portation expenses (not just the excessover the business standard mileage rate),includes on Form 2106, Employee Busi-ness Expenses, the deemed substantiatedportion of the mileage allowance receivedfrom the payor, and includes in gross in-come the portion (if any) of the mileageallowance received from the payor thatexceeds the amount deemed substantiated.See § 1.274–5T(f)(2)(iii). However, forpurposes of claiming this itemized deduc-tion, substantiation of the amount of theexpenses is not required if the employeeis claiming a deduction that is equal to orless than the applicable standard mileagerate multiplied by the number of businessmiles substantiated by the employee minusthe amount deemed substantiated undersection 9.01 of this revenue procedure.The itemized deduction is subject to the2-percent floor on miscellaneous itemizeddeductions provided in § 67.

(2) An employee whose business trans-portation expenses with respect to a leasedautomobile are deemed substantiated un-der section 9.01(1) of this revenue proce-dure (relating to an allowance other than aFAVR allowance) may not claim a deduc-tion based on actual expenses under sec-tion 9.06(1) unless the employee does soconsistently beginning with the first busi-ness use of the automobile after December31, 1997. An employee whose businesstransportation expenses with respect to a

leased automobile are deemed substanti-ated under section 9.01(2) of this revenueprocedure (relating to a FAVR allowance)may not claim a deduction based on actualexpenses.

.07 An employee may deduct anamount computed pursuant to section5.01 of this revenue procedure only as anitemized deduction. This itemized deduc-tion is subject to the 2-percent floor onmiscellaneous itemized deductions pro-vided in § 67.

.08 A self-employed individual maydeduct an amount computed pursuant tosection 5.01 of this revenue procedure indetermining adjusted gross income under§ 62(a)(1).

.09 If a payor’s reimbursement orother expense allowance arrangement ev-idences a pattern of abuse of the rules of§ 62(c) and the regulations thereunder,all payments under the arrangement willbe treated as made under a nonaccount-able plan. See § 1.62–2(k) and Rev. Rul.2006–56. Thus, the payments are includedin the employee’s gross income, are re-ported as wages or other compensation onthe employee’s Form W–2, and are subjectto withholding and payment of employ-ment taxes. See § 1.62–2(c)(3), (c)(5), and(h)(2), and section 10.03 of this revenueprocedure.

SECTION 10. WITHHOLDING ANDPAYMENT OF EMPLOYMENT TAXES

.01 The portion of a mileage allowance(other than a FAVR allowance), if any,that relates to the miles of business travelsubstantiated and that exceeds the amountdeemed substantiated for those miles un-der section 9.01(1) of this revenue pro-cedure is treated as paid under a nonac-countable plan and is subject to withhold-ing and payment of employment taxes. See§ 1.62–2(h)(2)(i)(B).

(1) In the case of a mileage allowancepaid as a reimbursement, the excess de-scribed in section 10.01 of this revenueprocedure is subject to withholding andpayment of employment taxes in the pay-roll period in which the payor reimbursesthe expenses for the business miles sub-stantiated. See § 1.62–2(h)(2)(i)(B)(2).

(2) In the case of a mileage allowancepaid as an advance, the excess described insection 10.01 of this revenue procedure issubject to withholding and payment of em-

December 10, 2007 1169 2007–50 I.R.B.

ployment taxes no later than the first pay-roll period following the payroll period inwhich the business miles with respect towhich the advance was paid are substanti-ated. See § 1.62–2(h)(2)(i)(B)(3). If someor all of the business miles with respectto which the advance was paid are notsubstantiated within a reasonable periodof time and the employee does not returnthe portion of the allowance that relates tothose miles within a reasonable period oftime, the portion of the allowance that re-lates to those miles is subject to withhold-ing and payment of employment taxes nolater than the first payroll period follow-ing the end of the reasonable period. See§ 1.62–2(h)(2)(i)(A).

(3) In the case of a mileage allowancethat is not computed on the basis of afixed amount per mile of travel (for ex-ample, a mileage allowance that combinesperiodic fixed and variable rate payments,but that does not satisfy the requirementsof section 8 of this revenue procedure),the payor must compute periodically (noless frequently than quarterly) the amount,if any, that exceeds the amount deemedsubstantiated under section 9.01(1) of thisrevenue procedure by comparing the totalmileage allowance paid for the period tothe standard mileage rate in section 5.01of this revenue procedure multiplied by thenumber of business miles substantiated bythe employee for the period. Any excessis subject to withholding and payment ofemployment taxes no later than the firstpayroll period following the payroll pe-riod in which the excess is computed. See§ 1.62–2(h)(2)(i)(B)(4).

(4) For example, assume an employerpays its employees a mileage allowanceunder an arrangement that otherwise meetsthe requirements of an accountable planat a rate of 54.5 cents per mile (whenthe business standard mileage rate is 50.5

cents per mile). The employer does notrequire the return of the portion of the al-lowance that exceeds the business standardmileage rate for the business miles sub-stantiated (4.0 cents). In June, the em-ployer advances an employee $272.50 for500 miles to be traveled during the month.In July, the employee substantiates to theemployer 400 business miles traveled inJune and returns $54.50 to the employerfor the 100 business miles not traveled.The amount deemed substantiated for the400 miles traveled is $202.00 and the em-ployee is not required to return $16.00. Nolater than the first payroll period followingthe payroll period in which the 400 busi-ness miles traveled are substantiated, theemployer must withhold and pay employ-ment taxes on $16.00.

.02 The portion of a FAVR allowance,if any, that exceeds the amount deemedsubstantiated for those miles under section9.01(2) of this revenue procedure is sub-ject to withholding and payment of em-ployment taxes. See § 1.62–2(h)(2)(i)(B).

(1) Any periodic variable rate paymentthat relates to miles in excess of the busi-ness miles substantiated by the employeeand that the employee fails to return withina reasonable period, or any portion of a pe-riodic fixed payment that relates to a pe-riod during which the employee is treatedas not covered by the FAVR allowance andthat the employee fails to return within areasonable period, is subject to withhold-ing and payment of employment taxes nolater than the first payroll period follow-ing the end of the reasonable period. See§ 1.62–2(h)(2)(i)(A).

(2) Any optional high mileage paymentis subject to withholding and payment ofemployment taxes when paid.

.03 If a mileage allowance arrangementhas no mechanism or process to determinewhen an allowance exceeds the amount

that may be deemed substantiated and thearrangement routinely pays allowances inexcess of the amount that may be deemedsubstantiated without requiring actualsubstantiation of all the expenses or re-payment of the excess amount, the failureof the arrangement to treat the excess al-lowances as wages for employment taxpurposes causes all payments made underthe arrangement to be treated as made un-der a nonaccountable plan. See Rev. Rul.2006–56.

SECTION 11. EFFECTIVE DATE

This revenue procedure is effectivefor (1) deductible transportation expensespaid or incurred on or after January 1,2008, and (2) mileage allowances or re-imbursements paid to an employee orto a charitable volunteer (a) on or afterJanuary 1, 2008, and (b) with respect totransportation expenses paid or incurredby the employee or charitable volunteeron or after January 1, 2008.

SECTION 12. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2006–49 is superseded.


The principal author of this revenueprocedure is Bernard P. Harvey of the Of-fice of Associate Chief Counsel (IncomeTax and Accounting). For further infor-mation regarding this revenue procedure,contact Mr. Harvey at (202) 622–4930(not a toll-free call).

2007–50 I.R.B. 1170 December 10, 2007

Part IV. Items of General InterestNotice of ProposedRulemaking

Modifications of CommercialMortgage Loans Held bya Real Estate MortgageInvestment Conduit (REMIC)

REG–127770–07

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations that would expand thelist of permitted loan modifications to in-clude certain modifications of commercialmortgages. Changes to the regulations arenecessary to better accommodate evolvingcommercial mortgage industry practices.These changes will affect lenders, borrow-ers, servicers, and sponsors of securitiza-tions of mortgages in REMICs.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by February 7, 2008.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–127770–07),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–127770–07), Courier’s Desk, In-ternal Revenue Service, 1111 ConstitutionAvenue, N.W., Washington, DC, or sentelectronically via the Federal eRulemak-ing Portal at www.regulations.gov (IRSREG–127770–07).

FOR FURTHER INFORMATIONCONTACT: Concerning the pro-posed regulations, Diana Imholtz orSusan Thompson Baker, (202) 622–3930;concerning submissions of commentsand requests for a public hearing,Kelly D. Banks, (202) 622–7180 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information containedin this notice of proposed rulemaking hasbeen submitted to the Office of Manage-ment and Budget for review in accordancewith the Paperwork Reduction Act of 1995(44 U.S.C. 3507(d)). Comments on thecollection of information should be sent tothe Office of Management and Budget,Attn: Desk Officer for the Departmentof the Treasury, Office of Informationand Regulatory Affairs, Washington, DC20503, with copies to the Internal Rev-enue Service, Attn: IRS Reports Clear-ance Officer, SE:W:CAR:MP:T:T:SP,Washington, DC 20224. Comments onthe collection of information should bereceived by January 8, 2008.

Comments are specifically requestedconcerning:

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 techniquesor 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 this proposed regulation is in§1.860G–2(b)(7). This information isrequired in order to show that modifi-cations to mortgages permitted by theproposed regulation will not cause themodified mortgage to cease to be a quali-fied mortgage. The collection of informa-tion is voluntary to obtain a benefit. Thelikely respondents are businesses or otherfor-profit institutions.

Estimated total annual reporting bur-den: 3000 hours.

Estimated average annual burden hoursper respondent: 8.

Estimated annual frequency of re-sponses: 1.

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 requiredby 26 U.S.C. 6103.

Background

This document contains proposedamendments to 26 CFR part 1 under sec-tion 860G of the Internal Revenue Code(Code). The REMIC provisions undersections 860A through 860G provide for apass-through vehicle that issues multipleclasses of interests in pools of residen-tial and commercial mortgage loans. Allincome from the mortgage loans in theREMIC is taxed to the holders of the reg-ular and residual interests in the REMIC.Among the requirements for qualificationare that the mortgage loans held by theREMIC must consist of “qualified mort-gages” that are principally secured by aninterest in real property. All loans must beacquired on the startup day of the REMICor within three months thereafter, exceptthat the REMIC may exchange a defectiveloan for a “qualified replacement mort-gage” for up to two years.

Section 1.860G–2(b)(1) of the In-come tax regulations (the regulations)provides that, subject to certain excep-tions described in §1.860G–2(b)(3), ifan obligation is significantly modified,then the modified obligation is treated asone that was newly issued in exchangefor the unmodified obligation that it re-placed. If such a significant modificationoccurs after the obligation has been con-tributed to the REMIC and the modifiedobligation is not a qualified replacement

December 10, 2007 1171 2007–50 I.R.B.

mortgage, the modified obligation will notbe a qualified mortgage and the deemeddisposition of the unmodified obligationwill be a prohibited transaction under sec-tion 860F(a)(2). Section 1.860G–2(b)(2)defines a “significant modification” as anychange in the terms of an obligation thatwould be treated as an exchange of obli-gations under section 1001 and the relatedregulations. The treatment of specific loanmodifications as deemed exchanges is ad-dressed in §1.1001–3. Section 1.1001–3defines a loan modification and providesthat a modification that is significant willbe treated as a deemed exchange of theoriginal loan for a new loan.

Section 1.860G–2(b)(3) of the regula-tions sets forth four types of loan modifi-cations that are expressly permitted with-out regard to the section 1001 modificationrules. The four permitted modificationsare: (i) changes in the terms of the obli-gation occasioned by default or a reason-ably foreseeable default; (ii) assumption ofthe obligation; (iii) waiver of a due-on-saleclause or a due on encumbrance clause;and (iv) conversion of an interest rate by amortgagor pursuant to the terms of a con-vertible mortgage.

The present REMIC regulations wereadopted in 1992 at a time when the mort-gage-backed securities market involvedprimarily residential mortgage loans.Since that time, the securitization of com-mercial mortgage loans has become morecommon. The four types of modificationsthat are expressly permitted without re-gard to the section 1001 modification rulescover the most common changes affectingresidential mortgage loans, but may notcover the range of likely changes in com-mercial mortgage loans.

In Notice 2007–17, 2007–12 I.R.B.748, the IRS and Treasury Departmentsolicited input on whether the presentREMIC regulations should be amended topermit additional types of modificationsincurred in connection with the com-mercial mortgage loans. In response toNotice 2007–17, the IRS and TreasuryDepartment received three comments. See§601.601(d)(2)(ii)(b).

The first comment set forth a proposalto add six new types of permissible modi-fications: (1) a modification that releases,adds, substitutes or otherwise alters anyportion of the collateral for, a guaranteeof, or other form of credit enhancement

for the obligation, whether recourse ornonrecourse (other than an alteration thatcauses the obligation not to be principallysecured by an interest in real property); (2)a change in the obligation from recourse(or substantially all recourse) to nonre-course (or substantially all nonrecourse),or vice versa; (3) a change in the date onwhich the obligation may be prepaid ordefeased in whole or in part, or additionof a defeasance provision; (4) substitutionof a new obligor or addition or deletion ofa co-obligor on the obligation; (5) imposi-tion or waiver of a prepayment penalty orother fee; and (6) a change of the principalpayment schedule of a loan following avoluntary or involuntary prepayment ofprincipal. The second comment set forth aproposal to add two new types of permis-sible modifications relating to changes incollateral and defeasance that are substan-tially similar to proposals (1) and (3) ofthe first comment. In addition, the secondcomment set forth a proposal to revise theexisting exception for assumptions of theobligation to include any substitution ofa guarantor for a guarantee on, or otherform of credit enhancement for, an obliga-tion. The first and second comments alsoset forth examples of the most commonchanges to commercial loans requested bycommercial borrowers to assist the IRSand Treasury Department in understand-ing the particular business need served byeach proposed modification.

Finally, the third comment requestedthat the IRS and Treasury Department con-sider a prior proposal advocating a newstandard to measure materiality for modi-fications to loans held by a REMIC. Ratherthan adding specific types of loan modi-fications to the list of permitted modifi-cations, the prior proposal recommendedthat the REMIC regulations be revised toprovide that any change in the terms ofa qualified mortgage will not cause it tocease to be a qualified mortgage so long asthe change does not increase the principalamount or extend the maturity of the mort-gage.

IRS and Treasury Department person-nel, including personnel from Large &Mid-Size Business (LMSB) and LMSBDivision Counsel, reviewed all commentsand met with certain of the submittingparties to explore the proposals and theanalysis supporting those proposals. Afterconsideration of all comments received,

the IRS and Treasury Department believethat it is appropriate at this time to proposeamendments to the REMIC regulations topermit certain additional types of modifi-cations to commercial mortgages.

Explanation of Provisions

1. General

The proposed regulations are intendedto address the concerns raised by the com-mercial real estate industry that the exist-ing REMIC regulations do not adequatelyaccommodate legitimate business prac-tices existing in the commercial mortgagesecuritization market. Submitting partieshave indicated that the real property thatsecures a commercial mortgage loan istypically an active, income-generating,business property of the commercial loanborrower. Thus, in contrast to residentialmortgage loans, there is a greater need tomake ongoing changes to the terms of acommercial mortgage loan. For example,a borrower may request a release of a par-cel of land from the lien of the mortgage toeither sell or develop the land. Althoughthe mortgage continues to be principallysecured by an interest in real property fol-lowing the release, such a change underthe existing REMIC regulations mightcause the mortgage to cease to be a quali-fied mortgage.

The legislative history indicates thatREMICs “should be flexible enoughto accommodate most legitimate busi-ness concerns while preserving the de-sired certainty of income tax treatment.”S. Rep. No. 99–313, 99th Cong., 2dSess., at 792. The legislative history alsoindicates that a REMIC, to preserve itstax status, must consist of a substantiallyfixed pool of real estate mortgages andrelated assets and have “no powers to varythe composition of its mortgage assets.”S. Rep. No. 99–313, 99th Cong., 2d Sess.,at 791–792. Accordingly, the proposedregulations are intended to strike a balancebetween accommodating the legitimatebusiness concerns of the commercial realestate industry with the requirement that aREMIC remain a substantially fixed poolof mortgages and not be engaged in anactive lending business.

In weighing the business needs of theindustry against Congressional intent thata REMIC consist of a fixed pool of quali-

2007–50 I.R.B. 1172 December 10, 2007

fied mortgages that are principally securedby real property and whose income can beaccurately calculated as of the startup day,the IRS and Treasury Department appliedfour core concepts to each of the proposedmodifications. First, to minimize changesto REMIC cash flows after the startup day,the IRS and Treasury Department analyzedwhether a particular modification wouldbe likely to produce any significant gain orloss to the REMIC. Second, the IRS andTreasury Department considered whethera mortgage loan, if permitted to be mod-ified as requested by submitting parties,would remain principally secured by realproperty after the modification. Third, theIRS and Treasury Department examinedthe ability of the IRS to review and ad-minister compliance with the requirementsof a particular modification. Finally, theIRS and Treasury Department consideredthe business needs indicated by the indus-try for a borrower requesting a particularmodification to the terms of the loan andwhether that business need was adequatelyaddressed by the current regulations.

2. Proposed Modifications

In applying the four core concepts, theIRS and Treasury Department determinedthat proposals relating to changes in collat-eral, guarantees and credit enhancement ofan obligation and changes to the recoursenature of an obligation should be added tothe list of permitted exceptions under sec-tion 860G to the section 1001 modifica-tion rules. These changes would be per-mitted so long as the obligation contin-ues to be principally secured by an inter-est in real property. The proposed regula-tions also would clarify that a release of alien on real property collateral securing amortgage does not disqualify a mortgageso long as the mortgage continues to beprincipally secured by an interest in realproperty after giving effect to any releases,substitutions, additions or other alterationsto the collateral.

Section 1.860G–2(a)(1) of the currentregulations provides that an obligation isprincipally secured by an interest in realproperty if the fair market value of the realproperty that secures the obligation equalsat least 80 percent of the adjusted issueprice of the obligation. The current regula-tions require the 80-percent test to be sat-isfied either at the time the obligation was

originated or at the time the sponsor con-tributes the obligation to the REMIC. Toensure that a modified mortgage loan con-tinues to be principally secured by an in-terest in real property, the proposed regu-lations require the 80-percent test to be sat-isfied at the time the mortgage loan is mod-ified as determined by an appraisal per-formed by an independent appraiser.

To support their proposals, commen-tators provided examples of loan modifi-cation requests that arise with some fre-quency in commercial mortgage loan se-curitizations. The majority of those exam-ples involved requests to change the secu-rity or credit enhancement of an obligation.Accordingly, the IRS and Treasury Depart-ment expect that, by permitting changes tocollateral and changes to the recourse na-ture of an obligation without regard to thesection 1001 modification rules, the pro-posed regulations will resolve many of theindustry’s business concerns arising fromborrower requests to modify commercialmortgage loans.

3. Other Modifications

In balancing the competing interestsnoted in the preceding discussion, how-ever, the IRS and Treasury Department de-termined that the remainder of the changesrequested by commentators to accommo-date business needs of the industry couldnot be adopted in the proposed regulations.First, commentators set forth a proposal topermit changes to the date on which a com-mercial mortgage loan may be defeasedand to permit the addition of a defeasanceprovision where the original terms of themortgage loan do not otherwise provide.By defeasing a commercial mortgage loan,the borrower replaces the underlying realproperty collateral securing the mortgagewith government securities whose pay-ments match the mortgage’s payments.Section 1.860G–2(a)(8) of the current reg-ulations permits defeasance of a mortgageloan, under certain conditions, includingthe condition that the defeasance not occurwithin 2 years of the startup date of theREMIC. These conditions are intended toensure that the defeasance transaction isundertaken as part of a customary com-mercial transaction and not as part of anarrangement to collateralize a REMICwith obligations that are not real estatemortgages.

Commentators indicated that while de-feasance is currently the preferred meansby which a borrower can obtain an earlyrelease from liability on a commercialmortgage, the original terms of commer-cial loan documents do not always satisfythe current defeasance exception. Sub-mitting parties maintain that expandingthe borrower’s ability to defease does notviolate the policy against replacing realproperty securing a commercial mortgagewith other collateral so long as the de-feasance does not occur within two yearsof the startup date. The IRS and Trea-sury Department believe, however, thatthe current defeasance exception alreadyadequately accommodates the legitimatebusiness need of providing borrowers withthe ability to defease a mortgage loan ifcertain conditions are met. Expandingthe defeasance exception is not warrantedgiven Congress’ intent that REMICs con-sist of a substantially fixed pool of realestate mortgages and related assets.

Second, commentators set forth a pro-posal to expand the existing exception forassumptions of the obligation such that anychanges to the obligor on a commercialmortgage loan, including the addition ordeletion of a co-obligor, would be permit-ted. In general, a change to the obligor ona nonrecourse debt instrument is not a sig-nificant modification for purposes of thesection 1001 modification rules. The sub-mitting parties indicated that the vast ma-jority of commercial mortgage loans arenonrecourse. As a result, permitting a bor-rower to make changes to the obligor on acommercial mortgage would not generallycause the mortgage to cease to be a qual-ified mortgage. For this reason, the IRSand Treasury Department do not believethat expanding the existing exception forassumptions of the obligation is necessaryto address a business need of the industrythat was not already addressed by the cur-rent regulations.

Third, the commentators set forth aproposal to allow for the imposition orwaiver of a prepayment penalty. Theimposition or waiver of a prepaymentpenalty generally results in a change inyield on an obligation and can furtherresult in a significant modification under§1.1001–3(e)(2) of the regulations if theannual yield of the modified obligationvaries from the unmodified obligation bymore than the greater of 25 basis points

December 10, 2007 1173 2007–50 I.R.B.

or 5 percent of the yield of the unmodi-fied instrument. Commentators indicatedthat although there is an administrativeburden imposed on the servicer becausethe yield change computations are com-plicated and are performed frequently dueto borrower requests, the change in yieldresulting from an imposition or waiver ofa prepayment penalty does not generallycause a significant modification and doesnot cause the mortgage to cease to be aqualified mortgage. Accordingly, the IRSand Treasury Department do not believethat adoption of this proposal is necessaryto address a business need of the industrythat was not already addressed by the cur-rent regulations.

Fourth, commentators set forth a pro-posal to permit changes in the principalpayment schedule following a partial pre-payment of a mortgage. Commentators in-dicated that loan documents do not alwaysprovide for a reamortization or other ad-justment of a principal payment scheduleafter a partial principal payment on a loan.In general, a material deferral of scheduledprincipal payments is a significant modi-fication under the section 1001 modifica-tion rules. Section 1.1001–3(e)(3)(ii) ofthe regulations, however, provides a safeharbor period that begins on the originaldue date of the first deferred payment andextends for a period equal to the lesser of 5years or 50 percent of the original term ofthe obligation. In addition, a pro rata pre-payment of all of the remaining paymentson an obligation does not result in a modi-fication of the portion of the obligation thatremains outstanding.

In light of the safe harbor and the rulefor pro rata prepayments, it is not clear tothe IRS and Treasury Department whetherpermitting changes to the timing of princi-pal payments is necessary. In addition, it isnot clear whether a change in the principalpayment schedule of a commercial mort-gage loan could result in a change in yieldmore than the greater of 25 basis points or5 percent of the yield of the unmodifiedloan.

Finally, one commentator advocated anew standard to measure materiality formodifications to loans held by a REMICthat departs from the standards set forthunder section 1001. The IRS and Trea-sury Department continue to believe thatthe section 1001 standard should generally

govern modifications of mortgage loansheld by a REMIC. The IRS and TreasuryDepartment further believe that adding tothe list of exceptions expressly permittedwithout regard to the section 1001 modifi-cations strikes the appropriate balance be-tween accommodating the business needsof the industry with the requirement that aREMIC remain a substantially fixed poolof mortgages.

4. Interaction with Section 1001

The additional types of modificationspermitted by the proposed regulationswill exempt the modified obligation fromdeemed exchange treatment for purposesof §1.860G–2(b)(1) of the regulationsonly. For example, a commercial mort-gage loan that is modified from nonre-course to recourse and continues to beprincipally secured by an interest in realproperty will continue to be a qualifiedmortgage and will not be subject to theprohibited transaction tax under section860F(a)(2). Such a modification, how-ever, is significant under §1.1001–3 andwill be treated as a deemed exchange ofthe original mortgage loan for a new mort-gage loan for purposes of section 1001.Accordingly, any resulting gain or lossunder section 1001 must be included inthe computation of the REMIC’s taxableincome.

Effective Date

These regulations are proposed to ap-ply to modifications made to the terms ofan obligation on or after publication of thisdocument in the Federal Register as a Trea-sury decision.

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 also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to this regulation.

It is hereby certified that the collec-tion of information requirement in this reg-ulation will not have a significant eco-nomic impact on a substantial number ofsmall business entities. This certification

is based on the fact that the REMICs af-fected by this regulation will not be clas-sified as small business entities. Accord-ing to the Small Business Administrationdefinition of a “small business,” 13 C.F.R.121.201, a REMIC is classified under Sec-tor 52 (Finance and Insurance), Subsector525 (Funds, Trusts and Other Financial Ve-hicles) under the category “Other Finan-cial Vehicle”, NAICS code 525990, and isonly considered a small business entity if itaccumulates less than 6.5 million dollars inannual receipts. REMICs affected by thisregulation generally hold pools of com-mercial mortgage loans with an averageloan size of 18.1 million dollars, and havegreater than 6.5 million dollars in annualreceipts. Therefore, a Regulatory Flexibil-ity Analysis under the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) is not required.

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-ness.

Comments and Requests for PublicHearing

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

Drafting Information

The principal author of these proposedregulations is Diana Imholtz of the Of-fice of Associate Chief Counsel (Finan-cial Institutions and Products). Other per-sonnel from the IRS and Treasury Depart-ment participated, however, in their devel-opment.

* * * * *

2007–50 I.R.B. 1174 December 10, 2007

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 is amended by adding entries in nu-merical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.860A–0 also issued under 26

U.S.C. 860G(e).Section 1.860A–1 also issued under 26

U.S.C. 860G(e).Section 1.860G–2 also issued under 26

U.S.C. 860G(e). * * *Par. 2. Section 1.860A–0 is amended

by adding an entry for §1.860G–2(b)(7) toread as follows:

§1.860A–0 Outline of REMIC provisions.

* * * * *

§1.860G–2 Other rules.

* * * * *(b) * * *(7) Principally secured test; appraisal

requirement.

* * * * *Par. 3. Section 1.860A–1 is amended

by adding paragraph (b)(6) to read as fol-lows:

§1.860A–1 Effective dates and transitionrules.

* * * * *(b) * * *(6) Exceptions for certain modi-

fied obligations. Paragraphs (b)(3)(v),(b)(3)(vi) and (b)(7) of §1.860G–2 applyto modifications made to the terms of anobligation on or after the date of publi-cation of this document in the Federalregister as a Treasury decision.* * * * *

Par. 4. Section 1.860G–2 is amendedby:

1. Revising paragraphs (a)(8),(b)(3)(iii) and (b)(3)(iv).

2. Adding paragraphs (b)(3)(v),(b)(3)(vi) and (b)(7).

The additions and revisions read as fol-lows:

§1.860G–2 Other rules.

(a) * * *(8) Release of interest in real prop-

erty securing a qualified mortgage; de-feasance. If a REMIC releases its lienon real property that secures a qualifiedmortgage, that mortgage ceases to be aqualified mortgage on the date the lien isreleased unless —

(i) The REMIC releases its lien pur-suant to a modification described in para-graph (b)(3)(v) of this section addressingchanges to the collateral for, guarantees on,or other form of credit enhancement on amortgage; or

(ii) The mortgage is defeased in the fol-lowing manner —

(A) The mortgagor pledges substitutecollateral that consists solely of govern-ment securities (as defined in section2(a)(16) of the Investment Company Actof 1940 as amended (15 U.S.C. 80a–1));

(B) The mortgage documents allowsuch a substitution;

(C) The lien is released to facilitate thedisposition of the property or any othercustomary commercial transaction, andnot as part of an arrangement to collater-alize a REMIC offering with obligationsthat are not real estate mortgages; and

(D) The release is not within 2 years ofthe startup day.

* * * * *(b) * * *(3) * * *(iii) Waiver of a due-on-sale clause or a

due on encumbrance clause;(iv) Conversion of an interest rate by a

mortgagor pursuant to the terms of a con-vertible mortgage;

(v) A modification that releases, substi-tutes, adds or otherwise alters a substan-tial amount of the collateral for, a guaran-tee on, or other form of credit enhancementfor a recourse or nonrecourse obligation,so long as the obligation continues to beprincipally secured by an interest in realproperty following such release, substitu-tion, addition or other alteration; and

(vi) A change in the nature of the obli-gation from recourse (or substantially allrecourse) to nonrecourse (or substantiallyall nonrecourse), so long as the obligationcontinues to be principally secured by an

interest in real property following such achange.

* * * * *(7) Principally secured test; appraisal

requirement. For purposes of paragraph(b)(3)(v) and (vi) of this section, in deter-mining whether an obligation continues tobe principally secured by an interest in realproperty, the fair market value of the in-terest in real property securing the obliga-tion, determined as of the date of the mod-ification, must be equal to at least 80 per-cent of the adjusted issue price of the mod-ified obligation, determined as of the dateof the modification. For purposes of thistest, the fair market value of the interest inreal property securing the obligation mustbe determined by an appraisal performedby an independent appraiser.

* * * * *

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on November 8,2007, 8:45 a.m., and published in the issue of the FederalRegister for November 9, 2007, 72 F.R. 63523)

Wind Energy Partnerships

Announcement 2007–112

This announcement revises RevenueProcedure 2007–65, 2007–45 I.R.B. 967,by adding the following language to Sec-tion 3: “The requirements set forth in thisrevenue procedure that must be satisfiedin order to qualify for the Safe Harbor,however, are not intended to provide sub-stantive rules and are not to be used asaudit guidelines,” and replacing “will notchallenge” with “will respect” in Section6.

The principal authors of this announce-ment are Vishal R. Amin and Richard T.Probst of the Office of Associate ChiefCounsel (Passthroughs and Special In-dustries). For further information regard-ing this announcement, contact VishalR. Amin or Richard T. Probst at (202)622–3060 (not a toll-free call).

December 10, 2007 1175 2007–50 I.R.B.

Disqualified Corporate InterestExpense Disallowed UnderSection 163(j) and RelatedInformation

Announcement 2007–114

This announcement alerts the public tothe fact that a new proposed form, Form8926, Disqualified Corporate Interest Ex-pense Disallowed Under Section 163(j)and Related Information, is being postedon the IRS website. The proposed formrequires corporate taxpayers that eitherpaid or accrued any disqualified interestfor the taxable year or carried forwarddisallowed disqualified interest from priortaxable years under section 163(j) of theInternal Revenue Code to provide certaininformation relating to the determinationsand computations under section 163(j).

Section 163(j) imposes a limitation ondeductions for interest paid or accrued bycorporations to related persons where theinterest is exempt or partially exempt fromtaxation. Section 163(j) also applies to a

corporation that pays or accrues interest toan unrelated party if the interest is not sub-ject to a gross basis tax and the guarantor isa related person who is either a foreign per-son or a tax-exempt organization as well asto a taxable REIT subsidiary of a REIT thatpays or accrues interest to the REIT.

Section 424 of the American Jobs Cre-ation Act of 2004, Public Law 108–357,118 Stat. 1418 (October 22, 2004), man-dated that the Secretary of the Treasury ora delegate conduct a study of the effective-ness of provisions of the Internal RevenueCode of 1986 applicable to earnings strip-ping.

The Treasury Department has con-ducted a study of earnings stripping as di-rected by Congress and has issued a reportregarding its findings and recommenda-tions on this issue. The study recommendsthat the relevant tax forms be modified torequire more information about earningsstripping. Therefore, proposed Form 8926has been created to obtain information re-lating to the application of section 163(j).

Proposed Form 8926 solicits informa-tion relating to the determination and com-putation of a corporate taxpayer’s section163(j) limitation, including the determi-nation of the taxpayer’s debt-to-equityratio, net interest expense, adjusted tax-able income, excess interest expense,total disqualified interest for the taxyear and the amount of interest deduc-tion disallowed under section 163(j),as well as certain information with re-spect to the related persons receivingdisqualified interest. The proposed formwill be posted on the IRS website atwww.irs.gov/taxpros/topic/index.html un-der Draft Tax Forms.

The principal author of this announce-ment is Sheila Ramaswamy of the Officeof Associate Chief Counsel (Interna-tional). However, other personnel fromthe Treasury Department and the IRS par-ticipated in its development. For furtherinformation regarding this announce-ment, contact Sheila Ramaswamy at (202)622–3870 (not a toll-free call).

2007–50 I.R.B. 1176 December 10, 2007

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

December 10, 2007 i 2007–50 I.R.B.

Numerical Finding List1

Bulletins 2007–27 through 2007–50

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

2007-108, 2007-47 I.R.B. 1044

2007-109, 2007-47 I.R.B. 1045

2007-110, 2007-48 I.R.B. 1082

2007-111, 2007-49 I.R.B. 1153

2007-112, 2007-50 I.R.B. 1175

Announcements— Continued:

2007-114, 2007-50 I.R.B. 1176

Court Decisions:

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

2084, 2007-47 I.R.B. 1032

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

2007-91, 2007-48 I.R.B. 1069

2007-92, 2007-47 I.R.B. 1036

2007-93, 2007-48 I.R.B. 1072

2007-95, 2007-49 I.R.B. 1091

2007-96, 2007-49 I.R.B. 1091

2007-97, 2007-49 I.R.B. 1092

2007-98, 2007-50 I.R.B. 1160

Proposed Regulations:

REG-209020-86, 2007-48 I.R.B. 1075

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

Proposed Regulations— Continued:

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

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-127770-07, 2007-50 I.R.B. 1171

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

REG-133300-07, 2007-49 I.R.B. 1140

REG-134923-07, 2007-47 I.R.B. 1037

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

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.

2007–50 I.R.B. ii December 10, 2007

Revenue Procedures— Continued:

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

2007-67, 2007-48 I.R.B. 1072

2007-68, 2007-49 I.R.B. 1093

2007-69, 2007-49 I.R.B. 1137

2007-70, 2007-50 I.R.B. 1162

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

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

2007-67, 2007-48 I.R.B. 1047

2007-69, 2007-49 I.R.B. 1083

2007-70, 2007-50 I.R.B. 1158

2007-71, 2007-50 I.R.B. 1155

2007-72, 2007-50 I.R.B. 1154

Social Security Contribution and BenefitBase; Domestic Employee CoverageThreshold:

2007-92, 2007-47 I.R.B. 1036

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

Treasury Decisions— Continued:

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

9361, 2007-47 I.R.B. 1026

9362, 2007-48 I.R.B. 1050

9363, 2007-49 I.R.B. 1084

December 10, 2007 iii 2007–50 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2007–27 through 2007–50

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

96-13

Superseded by

Notice 2007-96, 2007-49 I.R.B. 1091

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

Notices— Continued:

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


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


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

Proposed Regulations— Continued:

REG-148393-06

Corrected by

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

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

97-27

Modified by

Rev. Proc. 2007-67, 2007-48 I.R.B. 1072

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

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.

2007–50 I.R.B. iv December 10, 2007

Revenue Procedures— Continued:

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

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

2006-49

Superseded by

Rev. Proc. 2007-70, 2007-50 I.R.B. 1162

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

2007-24

Superseded by

Rev. Proc. 2007-68, 2007-49 I.R.B. 1093

Revenue Rulings:

54-378

Clarified by

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

65-18

Revoked by

Rev. Rul. 2007-69, 2007-49 I.R.B. 1083

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

Revenue Rulings— Continued:

72-605

Amplified by

Rev. Rul. 2007-69, 2007-49 I.R.B. 1083

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

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

2001-62

Modified by

Rev. Rul. 2007-67, 2007-48 I.R.B. 1047

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

Revenue Rulings— Continued:

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

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

December 10, 2007 v 2007–50 I.R.B.

2007–50 I.R.B. December 10, 2007

December 10, 2007 2007–50 I.R.B.

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