INCOME TAX EMPLOYEE PLANS · income taxes withheld from wages and reporting and paying taxes under the Federal Insurance Contributions Act (FICA) (collectively, “employment taxes”)

Bulletin No. 2009-5February 2, 2009

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. 2009–3, page 382.Insurance companies; interest rate tables. Prevailingstate assumed interest rates are provided for the determina-tion of reserves under section 807 of the Code for contractsissued in 2008 and 2009. Rev. Rul. 92–19 supplemented.Rev. Rul. 2008–19 modified.

Rev. Rul. 2009–4, page 408.Section 1256 contracts marked to market. This rulingholds that Dubai Mercantile Exchange, which is a United ArabEmirates Authorized Market Institution, is a qualified board orexchange within the meaning of section 1256(g)(7)(C) of theCode.

T.D. 9438, page 387.REG–150066–08, page 423.Final, temporary, and proposed regulations under section 954of the Code relate to foreign base company sales income incases in which personal property sold by a controlled foreigncorporation is manufactured, produced, or constructed pur-suant to a contract manufacturing arrangement or by one ormore branches of the controlled foreign corporation. A publichearing on the proposed regulations is scheduled for April 20,2009.

Notice 2009–10, page 419.This notice serves to extend the application of the future regu-lations described in Notice 2008–91, 2008–43 I.R.B. 1001, toa third taxable year in certain cases and to extend Rev. Proc.2008–26, 2008–21 I.R.B. 1014, to calendar year 2009.

EMPLOYEE PLANS

Notice 2009–9, page 419.This notice provides guidance to financial institutions on thereporting rules applicable to required minimum distributions(RMDs) for 2009 in light of the enactment of the Worker, Re-tiree, and Employer Recovery Act of 2008. Section 201 ofthe Act waives any RMDs for 2009 from individual retirementarrangements (IRAs) and retirement plans that hold participantbenefits in individual accounts. This notice modifies the report-ing requirements applicable to RMDs from IRAs to reflect thewaiver of the RMD rules for 2009. Notice 2002–27 modified.

EMPLOYMENT TAX

T.D. 9440, page 409.REG–148568–04, page 421.Final, temporary, and proposed regulations under sections6011 and 6302 of the Code relate to the annual filing of fed-eral employment tax returns and requirements for employmenttax deposits. The regulations concern reporting and payingincome taxes withheld from wages and reporting and payingtaxes under the Federal Insurance Contributions Act (FICA)(collectively, “employment taxes”). The regulations generallyallow certain employers to file a Form 944, Employer’s AN-NUAL Federal Tax Return, rather than Form 941, Employer’sQUARTERLY Federal Tax Return.

(Continued on the next page)

Announcements of Disbarments and Suspensions begin on page 424.Finding Lists begin on page ii.

ADMINISTRATIVE

T.D. 9439, page 416.Final regulations under section 6103 of the Code relate todisclosures of corporate tax return information to the Bureauof Economic Analysis. The regulations authorize the IRS todisclose certain items of corporate tax return information tothe Secretary of Commerce for purposes of structuring UnitedStates national economic accounts and conducting related sta-tistical activities authorized by law.

Notice 2009–11, page 420.This notice provides that the February 17, 2009, due date forbrokers to furnish From 1099–B information to customers es-tablished under section 403 of the Energy Improvement andExtension Act of 2008 will apply to certain other tax informa-tion reportable for tax year 2008 if furnished to customers withForm 1099–B statements on an annual composite tax report-ing statement.

February 2, 2009 2009–5 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helping themunderstand and meet their tax responsibilities and by applying

the tax law with integrity and fairness to all.

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

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

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

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

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

The Bulletin is divided into four parts as follows:

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

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

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

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

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

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

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

2009–5 I.R.B. February 2, 2009

February 2, 2009 2009–5 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 446.—General Rulefor Methods of Accounting26 CFR 1.446–1: General rule for methods of ac-counting.

A revenue ruling holds that Dubai Mercantile Ex-change, which is a United Arab Emirates AuthorizedMarket Institution, is a qualified board or exchangewithin the meaning of section 1256(g)(7)(C) of theCode. See Rev. Rul. 2009-4, page 408.

Section 481.—AdjustmentsRequired by Changes inMethod of Accounting

A revenue ruling holds that Dubai Mercantile Ex-change, which is a United Arab Emirates AuthorizedMarket Institution, is a qualified board or exchangewithin the meaning of section 1256(g)(7)(C) of theCode. See Rev. Rul. 2009-4, page 408.

Section 807.—Rules forCertain Reserves

Insurance companies; interest ratetables. Prevailing state assumed interestrates are provided for the determination ofreserves under section 807 of the Code forcontracts issued in 2008 and 2009. Rev.Rul. 92–19 supplemented. Rev. Rul.2008–19 modified.

Rev. Rul. 2009–3

For purposes of § 807(d)(4) of the In-ternal Revenue Code, for taxable years be-ginning after December 31, 2007, this rul-ing supplements the schedules of prevail-ing state assumed interest rates set forthin Rev. Rul. 92–19, 1992–1 C.B. 227.This information is to be used by insurancecompanies in computing their reserves for(1) life insurance and supplementary totaland permanent disability benefits, (2) in-dividual annuities and pure endowments,and (3) group annuities and pure endow-ments. As § 807(d)(2)(B) requires that theinterest rate used to compute these reservesbe the greater of (1) the applicable federalinterest rate, or (2) the prevailing state as-sumed interest rate, the table of applicablefederal interest rates in Rev. Rul. 92–19 isalso supplemented.

Following are supplements to schedulesA, B, C, and D to Part III of Rev. Rul.92–19, providing prevailing state assumedinterest rates for insurance products withdifferent features issued in 2008 and 2009,and a supplement to the table in Part IV ofRev. Rul. 92–19, providing the applica-ble federal interest rates under § 807(d) for2008 and 2009. This ruling does not sup-plement Parts I and II of Rev. Rul. 92–19.

This is the seventeenth supplement tothe interest rates provided in Rev. Rul.92–19. Earlier supplements were pub-lished in Rev. Rul. 93–58, 1993–2 C.B.241 (interest rates for insurance prod-ucts issued in 1992 and 1993); Rev. Rul.94–11, 1994–1 C.B. 196 (1993 and 1994);Rev. Rul. 95–4, 1995–1 C.B. 141 (1994and 1995); Rev. Rul. 96–2, 1996–1 C.B.141 (1995 and 1996); Rev. Rul. 97–2,1997–1 C.B. 134 (1996 and 1997); Rev.Rul. 98–2, 1998–1 C.B. 259 (1997 and1998); Rev. Rul. 99–10, 1999–1 C.B.671 (1998 and 1999); Rev. Rul. 2000–17,2000–1 C.B. 842 (1999 and 2000); Rev.Rul. 2001–11, 2001–1 C.B. 780 (2000and 2001); Rev. Rul. 2002–12, 2002–1C.B. 624 (2001 and 2002); Rev. Rul.2003–24, 2003–1 C.B. 557 (2002 and2003); Rev. Rul. 2004–14, 2004–1 C.B.511 (2003 and 2004); Rev. Rul. 2005–29,2005–1 C.B. 1080 (2004 and 2005); Rev.Rul. 2006–25, 2006–1 C.B. 882 (May15, 2006) (2005 and 2006); Rev. Rul.2007–10, 2007–1 C.B. 660 (Mar. 5, 2007)(2006 and 2007); and Rev. Rul. 2008–19,2008–13 I.R.B. 669 (Mar. 31, 2008) (2007and 2008).

2009–5 I.R.B. 382 February 2, 2009

Part III. Prevailing State Assumed Interest Rates — Products Issued in Years After 1982.*

Schedule A

STATUTORY VALUATION INTEREST RATESBASED ON THE 1980 AMENDMENTS TO THE

NAIC STANDARD VALUATION LAW

A. Life insurance valuation:

Guarantee Duration (years) Calendar Year of Issue

2009 2008***

10 or fewer 4.50** 4.50

More than 10but not more than 20

4.25** 4.25

More than 20 4.00** 4.00

Source: Rates calculated from the monthly averages, ending June 30, 2008, of Moody’s Composite Yield on Seasoned CorporateBonds.

*The terms used in the schedules in this ruling and in Part III of Rev. Rul. 92–19 are those used in the Standard ValuationLaw; the terms are defined in Rev. Rul. 92–19.

**As these rates exceed the applicable federal interest rate for 2009 of 4.06 percent, the valuation interest rate to be used for thisproduct under § 807 is the applicable rate specified in this table.

***The valuation interest rates for life insurance contracts issued in 2008 as set forth in Schedule A of Rev. Rul. 2008–19,2008–13 I.R.B. 669 (Mar. 31, 2008) are corrected by the numbers set forth in this Schedule A.

February 2, 2009 383 2009–5 I.R.B.

Part III, Schedule B

STATUTORY VALUATION INTEREST RATESBASED ON THE 1980 AMENDMENTS TO THE

NAIC STANDARD VALUATION LAW

B. Single premium immediate annuities and annuity benefits involving life contingencies arising from other annuities with cashsettlement options and from guaranteed interest contracts with cash settlement options:

Calendar Year of Issue Valuation Interest Rate

2008 5.50*

Source: Rates calculated from the monthly averages, ending June 30, 2008, of Moody’s Composite Yield on Seasoned CorporateBonds (formerly known as Moody’s Corporate Bond Yield Average — Monthly Average Corporates). The terms used in thisschedule are those used in the Standard Valuation Law as defined in Rev. Rul. 92–19.

*As this prevailing state assumed interest exceeds the applicable federal interest rate for 2008 of 4.06 percent, the valuationinterest rate of 5.50 percent is to be used for this product under § 807.

2009–5 I.R.B. 384 February 2, 2009

Part III, Schedule C24 — 2008

STATUTORY VALUATION INTEREST RATESBASED ON NAIC STANDARD VALUATION LAW

FOR 2008 CALENDAR YEAR BUSINESSGOVERNED BY THE 1980 AMENDMENTS

C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis:

Valuation Interest Rate (%)For Plan Type

CashSettlementOptions?

FutureInterest

Guarantee?Guarantee Duration

(years) A B C

Yes Yes 5 or fewer 5.50* 5.00* 4.50*

More than 5, but notmore than 10

5.50* 5.00* 4.50*


5.00* 4.50* 4.25*

More than 20 4.25* 4.00 4.00

Yes No 5 or fewer 5.75* 5.00* 4.75*


5.50* 5.00* 4.75*


5.00* 4.75* 4.50*

More than 20 4.50* 4.25* 4.25*

No Yes or No 5 or fewer 5.50*


5.50* NOTAPPLICABLE


5.00*

More than 20 4.50*


*As these rates exceed the applicable federal interest rate for 2008 of 4.06 percent, the valuation interest rate to be used for thisproduct under § 807 is the applicable rate specified in the above table.

February 2, 2009 385 2009–5 I.R.B.

Part III, Schedule D24 — 2008

STATUTORY VALUATION INTEREST RATESBASED ON NAIC STANDARD VALUATION LAW

FOR 2008 CALENDAR YEAR BUSINESSGOVERNED BY THE 1980 AMENDMENTS

D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement optionsand that are valued on a change in fund basis:

Valuation Interest RateFor Plan Type

CashSettlementOptions?

FutureInterest

Guarantee?Guarantee Duration

(years) A B C

Yes Yes 5 or fewer 6.00 5.75 4.75


6.00 5.75 4.75


5.50 5.50 4.50

More than 20 5.00 5.00 4.25*

Yes No 5 or fewer 6.25 6.00 5.00


6.00 6.00 5.00


5.75 5.50 4.75

More than 20 5.00 5.00 4.50*


*As the applicable federal interest rate for 2008 of 4.06 percent is less than the prevailing state assumed interest rate, the valuationinterest rate to be used for this product under § 807 is the applicable rate specified in the above table.

2009–5 I.R.B. 386 February 2, 2009

Part IV. Applicable Federal Interest Rates.

TABLE OFAPPLICABLE FEDERAL INTEREST RATES

FOR PURPOSES OF § 807

Year Interest Rate

2008 4.06

2009 4.06

Sources: Rev. Rul. 2004–106, 2004–2 C.B. 893, for the 2005 rate; Rev. Rul. 2005–77, 2005–2 C.B. 1071, for the 2006 rate; Rev.Rul. 2006–61, 2006–2 C.B. 1028 (Dec. 11, 2006) for the 2007 rate; Rev. Rul. 2007–70, 2007–50 C.B. 1158 (Nov. 20, 2007) forthe 2008 rate; and Rev. Rul. 2008–53, 2008–49 I.R.B. 1231 (Nov. 19, 2008) for the 2009 rate.

EFFECT ON OTHER REVENUERULINGS

Rev. Rul. 92–19 is supplemented bythe addition to Part III of that ruling of pre-vailing state assumed interest rates under§ 807 for certain insurance products issuedin 2008 and 2009 and is further supple-mented by an addition to the table in PartIV of Rev. Rul. 92–19 listing applicablefederal interest rates. Parts I and II of Rev.Rul. 92–19 are not affected by this ruling.Rev. Rul. 2008–19 is modified in that thevaluation interest rates set forth in Sched-ule A of this ruling for contracts issued in2008 correct and replace those set forth inSchedule A of Rev. Rul. 2008–19.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Josephine H. Firehock of the Officeof Associate Chief Counsel (Financial In-stitutions and Products). For further infor-mation regarding this revenue ruling, con-tact her at (202) 622–3970 (not a toll-freecall).

Section 954.—Foreign BaseCompany Income26 CFR 1.954–3: Foreign base company sales in-come.

T.D. 9438

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Guidance Regarding ForeignBase Company Sales Income

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document contains fi-nal and temporary regulations that provideguidance relating to foreign base companysales income in cases in which personalproperty sold by a controlled foreign cor-poration is manufactured, produced, orconstructed pursuant to a contract manu-facturing arrangement or by one or morebranches of the controlled foreign corpora-tion. These regulations modify the foreignbase company sales income regulationsto address current business structuresand practices, particularly the growingimportance of contract manufacturingand other manufacturing arrangements.These regulations, in general, will af-fect controlled foreign corporations andtheir United States shareholders. The textof the temporary regulations also serves

as the text of the proposed regulations(REG–150066–08) set forth in the noticeof proposed rulemaking on this subject inthis issue of the Bulletin.

DATES: Effective Date: These regulationsare effective July 1, 2009.

Applicability Date: For dates ofapplicability, see §1.954–3(c) and§1.954–3T(e). The final regulations shallapply to taxable years of controlled for-eign corporations beginning after June30, 2009, and for taxable years of UnitedStates shareholders in which or with whichsuch taxable years of the controlled for-eign corporations end. The temporaryregulations shall apply to taxable years ofcontrolled foreign corporations beginningafter June 30, 2009, and for taxable yearsof United States shareholders in whichor with which such taxable years of thecontrolled foreign corporations end.

FOR FURTHER INFORMATIONCONTACT: Ethan Atticks, (202)622–3840 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On February 28, 2008, the IRS andthe Treasury Department published inthe Federal Register proposed regula-tions (REG–124590–07, 2008–16 I.R.B.801 [73 FR 10716], as corrected at73 FR 20201), which provided proposedamendments to §1.954–3, addressingthe treatment of contract manufacturingarrangements under the foreign basecompany sales income (FBCSI) rules.

February 2, 2009 387 2009–5 I.R.B.

Written comments were received inresponse to the notice of proposedrulemaking, and a public hearing on theproposed regulations was held on July 29,2008.

Section 954(d)(1) defines FBCSI tomean income derived by a controlledforeign corporation (CFC) in connectionwith: (1) the purchase of personal propertyfrom a related person and its sale to anyperson, (2) the sale of personal property toany person on behalf of a related person,(3) the purchase of personal property fromany person and its sale to a related personor (4) the purchase of personal propertyfrom any person on behalf of a relatedperson, provided (in all these cases) thatthe property is manufactured, produced,grown or extracted outside of the CFC’scountry of organization and is sold foruse, consumption or disposition outside ofsuch country.

The existing regulations further defineFBCSI and the applicable exceptions fromFBSCI, including the exceptions to theFBCSI rules for personal property that is:(1) manufactured, produced, constructed,grown, or extracted within the CFC’scountry of organization (same countrymanufacture exception); (2) sold for use,consumption or disposition within theCFC’s country of organization; and (3)manufactured, produced, or constructedby the CFC (the manufacturing excep-tion). See §1.954–3(a)(2)–(4).

The existing regulations set forthcertain tests to determine whether aCFC satisfies the manufacturing ex-ception: the “substantial transforma-tion test” of §1.954–3(a)(4)(ii) andthe “substantive test” and safe harborof §1.954–3(a)(4)(iii). For purposesof this preamble, the requirements of§1.954–3(a)(4)(ii) and 1.954–3(a)(4)(iii)will be referred to collectively as the“physical manufacturing test” and the sat-isfaction of either test will be described as“physical manufacturing.”

The proposed regulations provide athird test for satisfying the manufacturingexception, which may apply when a CFCis involved in the manufacturing processbut does not satisfy the physical manu-facturing test. In particular, the proposedregulations provide that a CFC will satisfythe manufacturing exception if the factsand circumstances evince that the CFCmakes a substantial contribution through

the activities of its employees to the man-ufacture, production, or construction ofpersonal property (substantial contribu-tion test). The proposed regulations alsopropose other modifications to the exist-ing regulations to address the treatmentof contract manufacturing arrangementsunder the FBCSI rules.

Written comments were received inresponse to the notice of proposed rule-making, and a public hearing was held onJuly 29, 2008. After consideration of allthe comments, the proposed regulations,as revised by this Treasury decision, areadopted as final and temporary regula-tions.

Summary of Comments andExplanation of Provisions

This Treasury decision contains fi-nal and temporary regulations relating toFBCSI. The temporary regulations con-tained in this Treasury decision also serveas the text of proposed regulations set forthin a notice of proposed rulemaking on thissubject in this issue of the Bulletin. Thepreamble to this Treasury decision willrefer to the proposed regulations publishedin the Federal Register on February 28,2008, as the proposed regulations. Thepreamble will refer to the regulations thatare published simultaneously as temporaryregulations in this Treasury decision andas proposed regulations in this issue of theBulletin as the temporary regulations.

A. Substantial Contribution Test

The proposed regulations provide thata CFC will satisfy the substantial contri-bution test with respect to personal prop-erty only if all the facts and circumstancesevince that the CFC makes a substantialcontribution through the activities of itsemployees to the manufacture of the prop-erty. Prop. Reg. §1.954–3(a)(4)(iv)(b)includes a non-exclusive list of activities(collectively, “indicia of manufacturing”)to be considered in determining whetherthe CFC satisfies the substantial contri-bution test with respect to the manufac-ture, production, or construction of the per-sonal property (manufacture of the per-sonal property) under all the facts and cir-cumstances.

1. General operation of substantialcontribution test

In response to the proposed regula-tions, commentators requested furtherelaboration of the general operation ofthe substantial contribution test. For ex-ample, commentators requested guidanceon the amount of activity performed bya CFC’s employees that would be neces-sary to “satisfy” each individual activitylisted among the indicia of manufacturing.Several commentators requested clarifi-cations that suggested they believed thata certain threshold of employee activitywas required before the activity would beconsidered in determining whether a CFCsatisfied the substantial contribution test.Commentators requested, for example,clarification as to whether the “vendorselection” activity is satisfied if the CFCprovides a contract manufacturer with anapproved list of vendors but allows thecontract manufacturer to make the finaldetermination regarding the vendors to beused.

Commentators also requested guid-ance on how the indicia of manufacturingshould be weighed in relation to oneanother and whether performing a cer-tain minimum number of activities wasrequired in order for the substantial con-tribution test to be satisfied. Others askedthat the regulations explain whether a CFCmust perform any particular activity in allcases to satisfy the substantial contributiontest (for example, whether a CFC mustalways perform oversight and direction ofthe manufacturing process to satisfy thesubstantial contribution test). Some com-mentators requested that the regulationsemphasize that the importance of eachactivity would vary by industry and bytaxpayer. Commentators also requestedthat the regulations make clear that a CFCneed not perform all of the indicia ofmanufacturing to establish a substantialcontribution, and that the weight given toactivities performed by employees of theCFC will depend on the economic signif-icance of those activities to the businessof the taxpayer with respect to the productbeing manufactured.

Although the proposed regulations pro-vide guidance on many of these issues,the IRS and the Treasury Departmentbelieve that additional guidance with re-spect to the application of the substantial

2009–5 I.R.B. 388 February 2, 2009

contribution test is warranted in light ofthe comments received. Consequently,§1.954–3(a)(4)(iv)(c) is added to the finalregulations to provide further clarificationon the application of the substantial con-tribution test. First, §1.954–3(a)(4)(iv)(c)clarifies that all CFC employee functionscontributing to the manufacture of thepersonal property will be considered inthe aggregate when determining whethera substantial contribution is made to themanufacture of the personal propertythrough the activities of a CFC’s em-ployees. Second, §1.954–3(a)(4)(iv)(c)clarifies that there is no single activitythat will be accorded more weight thanany other activity in every case or thatwill be required to be performed in allcases. Third, it clarifies that there is nominimum threshold with respect to func-tions performed by employees of a CFCbefore their functions with respect to agiven activity may be taken into accountas part of the substantial contributiontest. Therefore, all functions performedby a CFC’s employees are considered(and given appropriate weight) under thesubstantial contribution test, even if theCFC’s employees perform only some ofthe functions in connection with any oneactivity (for example, some, but not all,of the vendor selection) considered underthat test. The weight given to any func-tions performed by employees of the CFCwith respect to any activity will be basedon the economic significance of thosefunctions to the manufacture, production,or construction of the relevant personalproperty. Corresponding amendments andadditional examples have been added tothe final regulations to illustrate further theapplication of the substantial contributiontest. See §1.954–3(a)(4)(iv)(d).

Other commentators sought clarifica-tion as to the extent to which purely con-tractual assumptions of risk are consid-ered in a substantial contribution analy-sis. The IRS and the Treasury Departmentbelieve that no further clarification in thefinal regulations is necessary to addressthis point. Both the proposed and finalregulations provide that only activities ofthe CFC’s employees are considered in thesubstantial contribution analysis and, con-sequently, purely contractual assumptionsof risk are not considered in the substantialcontribution analysis.

In addition, commentators requestedthat the regulations clarify that more thanone person can provide a substantial con-tribution to the manufacturing processwith respect to a given product. In re-sponse to this comment, the IRS and theTreasury Department amended the reg-ulations to clarify that a CFC will notbe precluded from making a substantialcontribution to the manufacture of thepersonal property by the fact that otherpersons also make a substantial contri-bution to the manufacture, production,or construction of that property. Further,§1.954–3(a)(4)(iv)(d) Example 9 is addedto the final regulations to illustrate thatmore than one person can provide a sub-stantial contribution to the manufacture ofthe same property.

2. Indicia of manufacturing

The IRS and the Treasury Departmentreceived numerous comments with respectto the specific activities listed in the pro-posed regulation that are considered in de-termining whether a CFC makes a substan-tial contribution through its employees tothe manufacture, production, or construc-tion of personal property.

a. Oversight and Direction ofManufacturing

Commentators requested that the IRSand the Treasury Department clarify cer-tain issues related to the “oversight anddirection of the activities or process”pursuant to which personal property ismanufactured, produced, or constructed.Some commentators asked that the regula-tions provide that oversight and directionof the activities or process pursuant towhich personal property is manufactured,produced, or constructed be a prerequisitefor satisfying the substantial contributiontest. Other commentators requested thatthe IRS and the Treasury Department clar-ify that in certain industries a substantialcontribution can be made by a CFC with-out its employees engaging in significantoversight and direction of the activitiesor process pursuant to which personalproperty is manufactured, produced, orconstructed. Some commentators focusedon the fact that in an example in the pro-posed regulations the CFC was not treatedas making a substantial contribution to the

manufacture of personal property whenthe CFC did not “regularly exercise” over-sight and direction with respect to thecontract manufacturer. See Prop. Reg.§1.954–3(a)(4)(iv)(c) Example 1.

The importance of oversight and direc-tion of the activities or process pursuant towhich personal property is manufactured,produced, or constructed will vary basedon the facts and circumstances associatedwith the specific manufacture, production,or construction at issue. The IRS and theTreasury Department acknowledge thatoversight and direction of the activitiesor process pursuant to which personalproperty is manufactured, produced, orconstructed is likely to be an importantelement in many, but not all, substantialcontribution analyses. Thus, to addresstaxpayer comments, the examples in thefinal regulations are amended to makeclear that oversight and direction is nota prerequisite for satisfying the substan-tial contribution test and that in certainindustries a substantial contribution couldbe made by a CFC without its employeesengaging in oversight and direction of theactivities or process pursuant to which per-sonal property is manufactured, produced,or constructed. Finally, the examples inthe final regulations do not use the poten-tially confusing reference to “regularly”exercising oversight.

b. Material Selection, Vendor Selection,and Control of the Raw Materials,Work-in-process, and Finished Goods

Some commentators asked if other ac-tivities listed among the indicia of manu-facturing also represented means of exer-cising control of the raw materials, work-in-process and finished goods. The IRSand the Treasury Department acknowledgethat some of the activities in the indicia ofmanufacturing may overlap with other ac-tivities in that list. The final regulations re-quire a substantial contribution to the man-ufacture of the personal property throughthe activities of the CFC’s employees andnot satisfaction of any specific activity inthe indicia of manufacturing. Therefore,the IRS and the Treasury Department de-termined that it was not necessary to clar-ify whether any particular function mightreasonably be included under more thanone heading in the indicia of manufactur-ing. However, to provide further clarity,

February 2, 2009 389 2009–5 I.R.B.

the final regulations group material selec-tion, vendor selection, and control of theraw materials, work-in-process, and fin-ished goods as a single activity in the in-dicia of manufacturing.

Commentators asked whether the con-trol of the raw materials, work-in-process,and finished goods refers to the CFC hav-ing the contractual right to take possessionof the personal property, to have title to theproperty, or to have economic risk of losswith respect to the property. These com-mentators requested clarification regard-ing whether tax ownership of raw materi-als, work-in-process and finished goods isrequired to have control of the raw mate-rials, work-in-process, and finished goods.In connection with this question, commen-tators also asked whether a CFC can sat-isfy the substantial contribution test whenthe contract manufacturing arrangement isbuy-sell or “turnkey” (that is, when thecontract manufacturer purchases the rawmaterials).

Both the proposed and final regula-tions provide that only activities of theCFC’s employees are considered in thesubstantial contribution analysis. Thus,mere contractual rights, legal title, taxownership, or assumption of economicrisk are not considered in the substantialcontribution analysis. To provide greaterclarity, the final regulations revise Prop.Reg. §1.954–3(a)(4)(iv)(a), deleting thephrase “purchased by a controlled foreigncorporation” in the first sentence of Prop.Reg. §1.954–3(a)(4)(iv)(a) to eliminateany inference that a CFC needs to own theraw materials that are used in the manufac-turing process. In addition, examples inthe final regulations clarify that buy-sell orturnkey contract manufacturing arrange-ments may satisfy the substantial con-tribution test. See §1.954–3(a)(4)(iv)(d)Examples 3 and 9.

c. Management of Manufacturing Profitsand Management of Risk of Loss

Commentators requested clarificationregarding which functions would qualifyas “management of the manufacturingprofits” or “management of the risk ofloss.” Some commentators expressedconcerns regarding the term “manage-ment of the manufacturing profits.” Othercommentators suggested that it wouldadd clarity if “management of the risk

of loss” were deleted from Prop. Reg.§1.954–3(a)(4)(iv)(b)(1) and includedwith “management of manufacturing prof-its” in a single item in the indicia of manu-facturing. Some commentators expressedconcern that the term “management of therisk of loss” implicitly excluded all otherrisk management functions. One commen-tator expressed the view that the indiciaof manufacturing should include referenceto management of enterprise risk, otherthan risks pertaining exclusively to salesand marketing functions. Some com-mentators suggested that management ofthe manufacturing profits might refer tosuch activities as the management of risksrelated to the raw materials and the utiliza-tion of plant capacity, but others thought itmight encompass the finance function ofa company.

The IRS and the Treasury Departmentagree that further clarification is neededas to the functions that are intended to beincluded within what was labeled “man-agement of the manufacturing profits” and“management of the risk of loss” in theproposed regulations. The IRS and theTreasury Department intend that the sub-stantial contribution test recognize contri-butions made by a CFC’s employees to themanufacturing process through functionswhich help to ensure that a plant is run inan economically efficient manner, such asoptimization of plant capacity and reduc-tion of waste (for example, waste of rawmaterials). On the other hand, not all cor-porate managerial decisions are intendedto be considered in the substantial contri-bution test, because many such decisionsare not directly related to the manufactureof the personal property with respect towhich the substantial contribution analy-sis is being performed. For example, theIRS and the Treasury Department do notintend that corporate finance decisions beconsidered in the substantial contributiontest. Similarly, the IRS and the TreasuryDepartment do not intend that the generalmanagement of enterprise risk be consid-ered in the substantial contribution test.

The IRS and the Treasury Departmentconcluded that the term “management ofthe manufacturing costs or capacities”more accurately reflects the type of func-tions originally contemplated by “manage-ment of the manufacturing profits” in theproposed regulations and is also relatedto the types of functions contemplated

by the “management of the risk of loss.”Accordingly, the activity labeled “man-agement of the manufacturing profits” inthe proposed regulations is replaced in thefinal regulations with an activity entitled“management of manufacturing costs orcapacities.” Further, the final regulationsinclude a parenthetical list of functions(that is, managing the risk of loss, cost re-duction or efficiency initiatives associatedwith the manufacturing process, demandplanning, production scheduling, or hedg-ing raw material costs) to elaborate on themeaning of the activity.

d. Control of Logistics

Commentators asked for clarificationregarding the scope of logistical functionsthat will contribute towards a substantialcontribution by a CFC. This activity is in-tended to include, for example, arrangingfor delivery of raw materials to a contractmanufacturer, but to exclude, for example,delivery of finished goods to a customer.The final regulations provide further clar-ity on this issue by revising the activity toread “control of manufacturing related lo-gistics.”

e. Direction of the Development,Protection, and Use of Trade Secrets,Technology, Product Design, and DesignSpecifications, and Other IntellectualProperty Used in Manufacturing theProduct

Commentators noted that the “and” inthe description of this activity in the pro-posed regulations could be read to meanthat directing the “development, protec-tion, and use” of intellectual property areall required for this activity to be consid-ered in the substantial contribution anal-ysis. Commentators requested that theseactivities be stated in the disjunctive. TheIRS and the Treasury Department adoptedthis comment, replacing “and” with “or” inthe final regulations. This clarification isconsistent with providing that all functionsperformed by a CFC’s employees are con-sidered (and given appropriate weight) un-der the substantial contribution test. Thus,the CFC’s employees’ activities are con-sidered regardless of whether the CFC’semployees perform all or only some of thefunctions listed in any enumerated item inthe indicia of manufacturing.

2009–5 I.R.B. 390 February 2, 2009

The term “protection” is also deletedfrom the final regulations. The IRS andthe Treasury Department were concernedthat absent this clarification the final regu-lations could be read to provide that legalwork performed by a CFC’s in-house legalstaff was considered under the substantialcontribution test, including in cases where,for example, litigation success could beheavily correlated to profitability or busi-ness failure with respect to a product. Fur-ther, the IRS and the Treasury Departmentmodified the description of the activity inthe final regulations to clarify that devel-oping, or directing the use or developmentof, trade secrets, technology, or other in-tellectual property, are considered underthe substantial contribution test, but onlywhen activities of this nature are under-taken for the purpose of the manufactureof the personal property.

Commentators asked whether the intel-lectual property referred to in Prop. Reg.§1.954–3(a)(4)(iv)(b)(9) included market-ing intangibles. The activity as describedin both the proposed and final regulationsis with respect to intellectual property usedin the manufacture of the personal prop-erty. Thus, developing, or directing the useor development of, marketing intangiblesis not intended to be considered in the sub-stantial contribution test.

3. Anti-abuse rule and safe harbor

The IRS and the Treasury Departmentrequested comments on whether the sub-stantial contribution test should includean anti-abuse rule and safe harbor. Inparticular, comments were requested as towhether it would be appropriate to add ananti-abuse rule to prevent a CFC from sat-isfying the substantial contribution test incases in which a significant portion of thedirect or indirect contributions to the man-ufacture of personal property providedcollectively by the CFC and any relatedU.S. persons are provided by one or morerelated U.S. persons. Commentators rec-ommended that in determining whethera CFC makes a substantial contributionit should not be relevant whether otherpersons (whether U.S. or foreign, relatedor unrelated) contribute to the manufac-turing process. The IRS and the TreasuryDepartment agree with commentators thatthe substantial contribution test shouldfocus on whether the activities of the CFC

itself are substantial without comparingthose activities to those of other persons.Thus, the final regulations do not adoptsuch a rule. Examples in the final regula-tions also illustrate that the contributionsof other persons to the manufacture of aproduct are not relevant to the analysis ofwhether a CFC makes a substantial contri-bution to the manufacturing process. See§1.954–3(a)(4)(iv)(d) Examples 6, 7, and9.

The IRS and the Treasury Departmentalso requested comments as to whetherone or more safe harbors should be addedto the substantial contribution test of theproposed regulations. Some commenta-tors suggested that a CFC that contributesat least twenty percent of the costs of man-ufacturing personal property should bedeemed to have substantially contributedto its manufacture. Other commentatorssuggested that a safe harbor was only ap-propriate if it were made clear that sucha safe harbor would not function as aminimum standard and would be flex-ible enough to accommodate multipleindustries. Many other commentators rec-ommended that the IRS and the TreasuryDepartment not adopt a safe harbor. TheIRS and the Treasury Department con-cluded that no safe harbor could fairlyapply across the range of industries poten-tially subject to §1.954–3, and thereforeno safe harbor is provided in the finalregulations.

4. Definition of employee

The IRS and the Treasury Departmentrequested comments as to whether the re-quirement in the proposed regulations thatthe activities of the CFC be performedby its employees should take into accountcommercial arrangements where individu-als performing services for the CFC whilenot on its payroll are nevertheless con-trolled by employees of the CFC. Com-mentators requested that the regulationsexpand the definition of the term “em-ployee” to include various commercial oreconomic arrangements where individu-als who perform services for a CFC un-der the CFC’s direction and control arenot necessarily the CFC’s employees un-der local law. In particular, commentatorssuggested that the term “employee” couldbe defined for purposes of the substantialcontribution test using section 3121(d)(2).

Other commentators asked that the term“employee” be defined more broadly toinclude anyone in an agency relationshipwith a CFC.

The IRS and the Treasury Depart-ment agree that clarification of the term“employee” will promote more effec-tive application of these regulations. TheIRS and the Treasury Department alsoagree that activities performed by certainnon-payroll workers should be consideredin determining whether the CFC providesa substantial contribution through “itsemployees.” However, the IRS and theTreasury Department concluded that itwould be inappropriate to broaden thedefinition of employee to include anyonein an agency relationship with a CFC,because it could create unintended branchrule issues for taxpayers (for example, asa result of employees of a contract man-ufacturer being treated as employees ofthe CFC under such a definition). Thus,the final regulations provide that the termemployee means any individual who, un-der §31.3121(d)–1(c), has the status of anemployee for U.S. Federal tax purposes.This definition of the term “employee”may encompass certain seconded work-ers, part-time workers, workers on thepayroll of a related employment com-pany whose activities are directed andcontrolled by CFC employees, and con-tractors, so long as those individuals aredeemed to be employees of the CFC under§31.3121(d)–1(c). Consistent with com-mentators’ request, this definition of theterm employee may result in an individualbeing treated as an employee of two ormore entities simultaneously.

5. Product grouping

Commentators requested that the deter-mination of whether a CFC provides a sub-stantial contribution to the manufacture ofthe personal property be made on the ba-sis of a group or line of related productsrather than on a product-by-product basis.The IRS and the Treasury Department be-lieve that the substantial contribution testmust be met with respect to each prod-uct. Whether manufactured goods are sep-arate products or a single product for thispurpose is determined by reference to thedistinctions or lack thereof made by theCFC in its business operations and in itsbooks and records, rather than by reference

February 2, 2009 391 2009–5 I.R.B.

to a third party’s definition of a productor an industry product classification sys-tem, such as the Standard Industrial Clas-sification Code. The IRS and the Trea-sury Department recognize that some ac-tivities taken into account under the sub-stantial contribution test are not performedwith respect to each individual unit of aparticular product manufactured under acontract manufacturing arrangement. Sec-tion 1.954–3(a)(4)(iv)(d) Example 11 hasbeen added to the final regulations to ad-dress these comments.

6. Treatment of partnerships

Commentators requested that the regu-lations adopt principles to determine whenthe employees of a partnership should betreated as employees of the CFC for pur-poses of determining whether the CFC’srelative economic interest in the partner-ship should be relevant in determiningwhether the CFC satisfies the substantialcontribution test. The IRS and the Trea-sury Department concluded that this issuewas beyond the scope of this regulatoryproject. However, the IRS and the Trea-sury Department continue to study thisissue and welcome comments.

7. Rebuttable presumption

The proposed regulations provide arebuttable presumption that the CFC doesnot satisfy the substantial contribution testwhen the activities of a branch of the CFCsatisfy the physical manufacturing test.The presumption can only be rebutted ifthe taxpayer can prove to the satisfac-tion of the Commissioner that the CFCsatisfied the substantial contribution test.Commentators suggested that satisfactionof the physical manufacturing test andsatisfaction of the substantial contributiontest should be treated equally under theregulations. Commentators also expressedthe view that the standard required to rebutthe presumption was either too subjective,imposed an improperly high standard, orboth. They recommended that if a re-buttable presumption was retained, thestandard required to rebut the presumptionshould be clear and convincing evidence.

In response to the comments received,the IRS and the Treasury Department re-considered the ability to examine a CFC’sclaim that it substantially contributes tothe manufacture of the personal property

when the activities of its branch satisfy thephysical manufacturing test. Upon furtherstudy, the IRS and the Treasury Depart-ment concluded that the substantial contri-bution test can be administered without thebenefit of a rebuttable presumption that aCFC does not satisfy the substantial contri-bution test when the activities of a branchof the CFC satisfy the physical manufac-turing test. Thus, these final and temporaryregulations do not contain a rebuttable pre-sumption. The IRS and the Treasury De-partment took into account the request forparity of treatment with respect to satisfac-tion of the physical manufacturing test andthe substantial contribution test in reachingthis conclusion, as well as with respect toother aspects of the temporary regulations,as discussed further in Parts C and D of thispreamble.

8. Documentation

Some commentators requested guid-ance on how taxpayers should documenttheir activities for application of the sub-stantial contribution test. Because thenecessary documentation will vary by in-dustry and by taxpayer, the IRS and theTreasury Department believe that creat-ing general rules of documentation wouldprove impracticable and would not allowfor enough flexibility in application of thesubstantial contribution test. Accordingly,the final regulations do not include docu-mentation rules.

9. Automated manufacturing

Several comments were received con-cerning Prop. Reg. §1.954–3(a)(4)(iv)(c)Example 4. In Example 4, a CFC ownssoftware and network systems that re-motely and automatically (without humaninvolvement) order raw materials for useby the contract manufacturer, take cus-tomer orders and route them to the contractmanufacturer, and perform quality control.Although the CFC has a small number ofcomputer technicians monitoring the soft-ware and network systems, the softwareand network systems were developed byemployees of DP, the CFC’s domesticparent corporation. Those DP employeessupervise the CFC’s computer techni-cians, evaluate the results of the automatedmanufacturing business, make ongoingoperational decisions related to the per-formance of the manufacturing process,

redesign and update the products and themanufacturing process, and develop all ofthe upgrades and patches for the softwareand network systems owned by the CFC.The example concludes that the CFC doesnot provide a substantial contribution tothe manufacture of Product X.

Commentators expressed concern thatProp. Reg. §1.954–3(a)(4)(iv)(c) Exam-ple 4 did not recognize the importanceof automated manufacturing in modernbusiness practices. These commentatorsnoted that manufacturing processes areincreasingly automated and explained thatin some high technology industries, au-tomated manufacturing processes are theonly way to manufacture and test the qual-ity of certain products. In such industries,commentators noted that human involve-ment in various parts of the manufacturingprocess could be counterproductive. Somecommentators were concerned that Prop.Reg. §1.954–3(a)(4)(iv)(c) Example 4penalized such automated manufacturingprocesses under the substantial contribu-tion test.

The IRS and the Treasury Departmentagree that a CFC may provide a substantialcontribution to a largely automated man-ufacturing process through its employees.Section 1.954–3(a)(4)(iv)(d) Example 5contains the same facts as Prop. Reg.§1.954–3(a)(4)(iv)(c) Example 4. Underthose particular facts, substantial opera-tional responsibilities and decision makingby humans are required for the manufac-turing process; however, they are not per-formed by the CFC. To provide additionalguidance, the final regulations include anadditional example, §1.954–3(a)(4)(iv)(d)Example 6, which illustrates that a CFCwhose employees perform most of thefunctions that DP’s employees perform in§1.954–3(a)(4)(iv)(d) Example 5 makes asubstantial contribution to the manufac-turing process. This result applies eventhough DP’s employees also contributeto the manufacturing process. Section1.954–3(a)(4)(iv)(d) Example 7 furtherillustrates that the CFC can make a sub-stantial contribution through the activitiesof its employees regardless of whetherthe software and network systems werepurchased by the CFC. These examplesillustrate that the evaluation of whethera CFC makes a substantial contributionthrough its employees is determined basedon whether industry-sufficient substantial

2009–5 I.R.B. 392 February 2, 2009

contribution activities are conducted byemployees of the CFC.

B. The “Its” Argument

The proposed regulations clarify thatfor purposes of determining FBCSI a CFCqualifies for the manufacturing excep-tion only if the CFC, acting through itsemployees, manufactured, produced, orconstructed the relevant personal propertywithin the meaning of §1.954–3(a)(4)(i).In response to the proposed regulations,some commentators maintained that aCFC need not satisfy the physical man-ufacturing test or the substantial contri-bution test to exclude a sale from FBCSIas long as the personal property sold isnot the same as the property originallypurchased by the CFC.

The IRS and the Treasury Departmentbelieve, as described in the preamble tothe proposed regulations, that this posi-tion, commonly referred to as the “its” ar-gument, is contrary to existing law, andrepresents an incorrect reading of section954(d)(1). The final regulations accord-ingly maintain the rules provided in theproposed regulations regarding when per-sonal property sold by a CFC will be con-sidered to be other than the property pur-chased by the CFC.

C. Same Country Manufacture Exception

Commentators requested that the reg-ulations incorporate the substantial con-tribution test in the same country man-ufacture exception. The IRS and theTreasury Department generally agree withcommentators that if the substantial con-tribution test is sufficient to constitutethe manufacture of the personal propertywhere a CFC substantially contributes tothe manufacture, production, or construc-tion of that property, then it should beequally sufficient if those activities areperformed by a related person (as definedin section 954(d)(3)) in the CFC’s coun-try of organization. However, the IRSand the Treasury Department concludedthat the same country manufacture ex-ception would be difficult to administerand enforce in the case of a substantialcontribution performed by an unrelatedthird party. Commentators suggested thatthese concerns could be ameliorated iftaxpayers were required to maintain doc-umentation with respect to a third party’s

substantial contribution. The IRS andthe Treasury Department do not believea documentation requirement adequatelyaddresses these concerns because the IRSmay be unable to audit the third partyto verify if those substantial contributionactivities in fact took place. Therefore,the final regulations provide that the samecountry manufacture exception is avail-able to taxpayers in cases when a relatedperson provides a substantial contributionto the manufacture of the personal prop-erty in the CFC’s country of organization.The final regulations also retain the ruleprovided in the proposed regulations mod-ifying the application of the principles of§1.954–3(a)(4)(ii) and (a)(4)(iii) to reflectthat the personal property manufactured,produced, or constructed in the countryof organization of the selling corporationunder the principles of §1.954–3(a)(4)(ii)and (a)(4)(iii) will qualify for the samecountry exception regardless of whoseemployees engage in qualifying manufac-turing activities in that country.

D. Branch Rule

In addition to the amendments to§1.954–3(a), the proposed regulationsalso proposed amendments to the rules of§1.954–3(b) dealing with the applicationof the FBCSI rules to CFCs with branchesor similar establishments (the branch rule),particularly the rules dealing with man-ufacturing branches. For the remainderof this preamble, the word “branch” willbe used to refer to a “branch or similarestablishment.”

1. Branch definition

Some commentators requested that theregulations define the term “branch” forpurposes of the branch rule. These com-mentators suggested various definitionsfor the IRS and the Treasury Departmentto consider. Commentators suggested,for instance, that a branch be defined asa permanent establishment, as a businessactivity in a jurisdiction outside a CFC’scountry of organization that has separatebooks and records, or as a trade or businessoutside a CFC’s country of organization.Commentators pointed to precedents in thesection 367 and 987 regulations. Alterna-tively, some commentators requested thatthe regulations make clear that a de min-imis amount of activity outside of a CFC’s

country of organization (for example,traveling employees) does not constitutea branch. Other commentators warnedthat requiring too high a level of activityoutside of a CFC’s country of organiza-tion before a CFC was treated as having a“branch” would make it possible for a CFCorganized in a lower-tax jurisdiction tocontribute substantially to manufacturingactivities in a higher-tax jurisdiction with-out causing the CFC to operate througha branch. Still other commentators sug-gested that courts have concluded that theIRS and the Treasury Department lackthe regulatory authority to determine whatconstitutes a branch, and they may onlyaddress the consequences flowing fromthe existence of a branch.

The IRS and the Treasury Depart-ment determined that defining a branchwas beyond the scope of this regulatoryproject. However, the temporary regula-tions retain an example similar to Prop.Reg. §1.954–3(b)(1)(ii)(c)(3)(f) Exam-ple 3, which illustrates that employeesof a CFC that travel to a contract man-ufacturer’s location outside the CFC’scountry of organization do not necessarilygive rise to a branch in that location. See§1.954–3T(b)(1)(ii)(c)(3)(v) Example 6.See also Part D.3.b of this preamble.

2. Determination of hypothetical effectivetax rate

Commentators requested that the reg-ulations clarify that the tax rate dispar-ity tests contained in §§1.954–3(b)(1)(i)(b)and (b)(1)(ii)(b) take into account incen-tive tax rates and other similar foreign taxrelief available to a CFC in calculating thehypothetical effective tax rate of tax.

The IRS and the Treasury Departmentrecognize that the tax rate disparity testsshould take into account the actual tax ratepaid with respect to the sales income bythe selling branch or remainder and the hy-pothetical effective tax rate that would bepaid by the manufacturing branch (or re-mainder) on that sales income under thelaws of the country in which the manufac-turing branch is located (or, in the case ofa remainder, the country of organization ofthe CFC) if it were derived from sourceswithin that country. Thus, the IRS andthe Treasury Department agree that uni-formly available tax incentives are to beconsidered in determining the hypotheti-

February 2, 2009 393 2009–5 I.R.B.

cal effective tax rate to be used in apply-ing the tax rate disparity tests. In contrast,if a sales affiliate in the country of manu-facturing can theoretically receive certaintax relief by taking certain actions, for ex-ample, by applying for special treatmentpursuant to a ruling process, but the tax-payer has not affirmatively obtained suchtax relief for the manufacturing branch (orremainder), then the hypothetical effectivetax rate that would be paid by the manu-facturing branch (or remainder) were it toderive the sales income should be the ef-fective tax rate that would be applicablein that jurisdiction without such tax relief.The IRS and the Treasury Department be-lieve that no change to the text of the ex-isting regulations is necessary to addressthese points. However, §1.954–3T(b)(4)Example (8) is included in the temporaryregulations to illustrate that uniformly ap-plicable incentive tax rates are taken intoaccount in determining the hypothetical ef-fective tax rate.

The IRS and the Treasury Depart-ment concluded that other questions andrequests in this area, including furtherclarification of the methodology for cal-culation of hypothetical tax rates, andfor changes to the assumptions used inapplying the tax rate disparity tests anddetermining the hypothetical effective taxrate, are beyond the scope of this regula-tory project. However, the IRS and theTreasury Department continue to studythese questions and welcome comments.

3. Multiple manufacturing branch rules

a. Determination of the Location ofManufacturing

Under Prop. Reg. §1.954–3(b)(1)(ii)(c)(3), the relevant tax rate disparitytest is applied by giving satisfaction of thephysical manufacturing test precedenceover satisfaction of the substantialcontribution test when multiple branches,or one or more branches and the remainderof the CFC, perform manufacturingactivities with respect to the same itemof personal property. If more than onebranch (or one or more branches and theremainder of the CFC) each independentlysatisfies the physical manufacturingtest, then the branch or the remainderof the CFC located or organized in thejurisdiction that would impose the lowest

effective rate of tax is treated as thelocation of manufacturing, producing, orconstructing of the personal property forpurposes of applying the tax rate disparitytest (lowest-of-all-rates rule). If onlyone branch (or only the remainder of aCFC) independently satisfies the physicalmanufacturing test, then that branch (orremainder) is treated as the location ofmanufacturing, producing, or constructingof the personal property (location ofmanufacturing) for purposes of the tax ratedisparity test.

If none of the branches or the remain-der of the CFC independently satisfies thephysical manufacturing test, but the CFCas a whole satisfies the substantial contri-bution test, then the location of manufac-turing under the proposed regulations isthe location of the branch or the remain-der of the CFC that provides the predomi-nant amount of the CFC’s substantial con-tribution to the manufacture of the per-sonal property (predominant place rule). Ifa predominant amount of the CFC’s con-tribution to the manufacture of the per-sonal property is not provided by any onelocation, then the location of manufactur-ing for purposes of applying the manufac-turing branch tax rate disparity test underthe proposed regulations is that place (ei-ther the remainder of the CFC or one ofits branches) where manufacturing activitywith respect to that property is performedand which would impose the highest effec-tive rate of tax (highest-of-all-rates rule)when applying either §1.954–3(b)(1)(i)(b)or (b)(1)(ii)(b).

The IRS and the Treasury Depart-ment received multiple comments com-paring and contrasting the highest- andlowest-of-all-rates rules. For exam-ple, commentators asked why the low-est-of-all-rates rule should apply whenmore than one branch (or one or morebranches and the remainder of the CFC) in-dependently satisfy the physical manufac-turing test, whereas the highest-of-all-ratesrule should apply when none of thebranches or the remainder of the CFCindependently satisfies the physical man-ufacturing test but the CFC as a wholesatisfies the substantial contribution test.Commentators suggested that satisfactionof the physical manufacturing test andthe substantial contribution test should betreated equally under the regulations, andtherefore suggested having the same rule

in both circumstances. These commenta-tors proposed a lowest-of-all-rates rule orthe use of a weighted average of the taxrate of each branch or remainder of theCFC in both instances.

The IRS and the Treasury Departmentgenerally agreed with these comments.The IRS and the Treasury Departmentadopted taxpayers’ comment that thesame rule should apply consistently whena branch (or remainder) independentlysatisfies §1.954–3(a)(4)(i), regardless ofwhether it satisfies the physical manu-facturing test or the substantial contri-bution test. Therefore the rules set forthin the proposed regulations are modifiedin the temporary regulations to providethat the lowest-of-all-rates rule will ap-ply whenever a branch (or remainder)independently satisfies §1.954–3(a)(4)(ii),(iii), or (iv). However, providing parityof treatment for satisfaction of the physi-cal manufacturing test and the substantialcontribution test in respect of the low-est-of-all-rates rule is not sufficient todetermine the location of manufacturingin cases where a CFC satisfies the sub-stantial contribution test, yet no branch(or remainder) independently satisfies§1.954–3(a)(4)(iv).

Commentators questioned how totreat branches making contributions tothe manufacture of the personal prop-erty through the activities of employeeswhen no branch independently satisfies§1.954–3(a)(4)(iv). Some commentatorsexpressed concern that it would be diffi-cult to compare the relative contributionsof various locations to determine whichbranch or remainder of the CFC made apredominant contribution under the pre-dominant place rule. Other commentatorsrequested greater guidance regarding themeaning of predominant contribution.Many commentators suggested that thehighest-of-all-rates rule in the proposedregulations could lead to arbitrary resultswhen no predominant contributor couldbe identified.

The IRS and the Treasury Departmentgenerally agreed with these comments.Consequently, the temporary regulationsrevise the rules for determining the lo-cation of manufacture of the personalproperty when more than one branch (orone or more branches and the remain-der) contributes to the manufacture ofthe personal property but no branch (or

2009–5 I.R.B. 394 February 2, 2009

remainder) independently satisfies thephysical manufacturing test or the sub-stantial contribution test. The revised rulesare based on the principle that the branchrule should apply in situations where pur-chase or sale activities with respect tothe personal property are separated frommanufacturing activities conducted by theCFC such that a demonstrably greateramount of manufacturing activity withrespect to that property occurs in jurisdic-tions with tax rate disparity relative to thesales or purchase branch (or, in the caseof a purchasing or selling remainder, thedemonstrably greater amount of manufac-turing activity with respect to the personalproperty occurs in jurisdictions with taxrate disparity relative to the purchasing orselling remainder).

Under the temporary regulations, if ademonstrably greater amount of manufac-turing activity with respect to the personalproperty occurs in jurisdictions without taxrate disparity relative to the sales or pur-chase branch, the location of the sales orpurchase branch will be deemed to be thelocation of manufacture of the personalproperty. In that case, the purchase or salesactivities with respect to the property pur-chased or sold by or through the sales orpurchase branch of the CFC will not, forpurposes of determining FBCSI in con-nection with the sale of that property, bedeemed to have substantially the same taxeffect as if a branch were a wholly ownedsubsidiary corporation of the CFC. Other-wise, the location of manufacture of thepersonal property will be deemed to be thelocation of a manufacturing branch (or re-mainder) that has tax rate disparity relativeto the sales or purchase branch. In thatcase, the purchase or sales activities withrespect to the property purchased or soldby or through the sales or purchase branchof the CFC will be deemed to have sub-stantially the same tax effect as if a branchwere a wholly owned subsidiary corpora-tion of the CFC, and that branch will betreated as a separate corporation for pur-poses of applying the regulations.

The temporary regulations apply anal-ogous rules in the case of purchase orsales activity being conducted through thejurisdiction under the laws of which theCFC is organized. In such cases, how-ever, the analysis focuses on whether thedemonstrably greater amount of manufac-turing activity with respect to the personal

property occurs in jurisdictions that do ordo not have tax rate disparity relative tothe jurisdiction under the laws of whichthe CFC is organized. The temporaryregulations incorporate examples under§1.954–3T(b)(1)(ii)(c)(3)(v) to illustratethe application of these rules.

b. Location of Activities

The proposed regulations provide thatfor purposes of the multiple manufac-turing branch rules the location of anyactivity with respect to the manufacture ofthe personal property is where the CFC’semployees engage in such activity. Com-mentators suggested that in some casesthe proposed regulations left it unclear,for purposes of determining the locationof manufacturing, which jurisdiction wasaccorded credit for activities performed byan employee who is traveling temporarilyto a foreign jurisdiction. Some commenta-tors suggested that the location of activityrule should be removed or that the regula-tions should clarify that, for instance, theactivities of employees of a CFC based inthe jurisdiction under the laws of whichthe CFC is organized, even while travelingoutside the CFC’s country of organiza-tion, would generally be credited towardestablishing that the jurisdiction under thelaws of which the CFC is organized pro-vided a predominant amount of a CFC’ssubstantial contribution. The IRS and theTreasury Department believe the text of§1.954–3T(b)(1)(ii)(c)(3)(iv) makes clearthat when an employee travels to performactivities, those activities are credited tothe location in which the activities areconducted if there is a branch or remainderof the CFC in that jurisdiction. Section1.954–3T(b)(1)(ii)(c)(3)(v) provides ex-amples to further clarify this result.

Other commentators asked which loca-tion was accorded credit, if any, for ac-tivities performed by traveling employeesof the CFC while located in a country inwhich there is no branch or remainder ofthe CFC. The temporary regulations pro-vide that the location of any manufactur-ing activity is where the employees of theCFC perform that activity. Thus, the ac-tivities of employees while traveling to acountry where the CFC does not maintaina branch or remainder are not credited tothe branch or remainder where the trav-eling employees are regularly employed

for purposes of determining the locationof manufacture of the personal propertyunder the branch rule. Such activities,however, can be taken into account forpurposes of satisfying the manufacturingexception and the substantial contributiontest. See §1.954–3T(b)(1)(ii)(c)(3)(v) Ex-ample 6.

c. Clarifying Application of the Rule forDetermining the Remainder of the CFCWhen Activities are Performed in MultipleLocations

Prop Reg. §1.954–3(b)(2)(ii)(a) pro-vides that when treating the location ofsales or purchase income as a separatecorporation for purposes of determiningwhether FBCSI is realized, that separatecorporation will exclude any branch or theremainder of the CFC that would be treatedas a separate corporation, if the hypothet-ical tax rate imposed by the jurisdictionof each such branch or the remainder ofthe CFC were separately tested againstthe effective rate of tax imposed on thesales or purchase income under the rele-vant tax rate disparity test. Commentatorssuggested that the application of this rulefor determining the remainder of the CFCwhen activities are preformed in multi-ple locations is unclear. To clarify, thelanguage from the proposed regulationsis revised in the temporary regulations todescribe what is included in the remain-der, rather than what is excluded from theremainder, for purposes of determiningwhether there is FBCSI, after it is deter-mined that a manufacturing branch shouldreceive treatment as a separate corporationfor purposes of applying the regulations.See §1.954–3T(b)(2)(ii)(a).

As with the rule provided in the pro-posed regulations, this rule is intended toprovide that the activities of all branch lo-cations (or, in the case of a remainder,the activities in the jurisdiction under thelaws of which the CFC is organized) thatdo not have tax rate disparity relative tothe sales or purchase branch location (or,in the case of a purchasing or selling re-mainder, the jurisdiction under the lawsof which the CFC is organized) may betaken into account together with the activ-ities of the sales or purchase branch (or,in the case of a purchasing or selling re-mainder, activities of the remainder of theCFC in the jurisdiction under the laws of

February 2, 2009 395 2009–5 I.R.B.

which the CFC is organized) for purposesof applying the separate corporation anal-ysis required under the regulations and de-termining whether the sales income of thesales or purchase branch (or remainder) isFBCSI. Such determination will depend onwhether the substantial contribution test issatisfied by the combined activities of thesales or purchase branch (or remainder)and the other locations aggregated with thesales or purchase branch (or remainder).

4. Coordination of sales andmanufacturing branch rules

Commentators requested guidance onhow the sales or purchase branch rules in-teract with the manufacturing branch rules.The current manufacturing branch rulescontemplate the existence of a sales or pur-chase branch and a manufacturing branch.The rules provide that in such an instancethe sales or purchase branch is treated asthe remainder of the CFC for purposes ofapplying the tax rate disparity test. How-ever, the sales or purchase branch rulesof §1.954–3(b)(1)(i) of the existing regu-lations do not indicate that those rules donot apply in cases where the manufactur-ing branch rules are applied. Commenta-tors were concerned that the manufactur-ing branch rules would be applied in addi-tion to, rather than in lieu of, the sales orpurchase branch rules.

The IRS and the Treasury Depart-ment agree that if one or more salesor purchase branches are used in ad-dition to a manufacturing branch and§1.954–3T(b)(1)(ii)(c)(1) (use of oneor more sales or purchases branches inaddition to a manufacturing branch) isapplied with respect to income from thesale of an item of personal property, thenthe sales or purchasing branch rules donot also apply to determine whether thatincome is FBCSI. Therefore, the tempo-rary regulations clarify this point. See§1.954–3(b)(1)(i)(c).

5. Unrelated to unrelated transactions

Commentators suggested that there wasuncertainty as to whether a substantialcontribution to the manufacture, produc-tion, or construction of personal propertyby a CFC could cause the CFC to earnFBCSI in cases where, in the absenceof the substantial contribution test, sometaxpayers had taken the position that they

were outside the scope of the FBCSI rules.Some commentators expressed concernthat transactions that are not currentlysubject to the existing regulations may be-come subject to the regulations as a resultof the interaction of the substantial contri-bution test and the manufacturing branchrule. Other commentators suggested moregenerally that it was unclear if the sub-stantial contribution test might create abranch through which a CFC carries onactivities in a contract manufacturer’s ju-risdiction. Commentators suggested thattaxpayers should be exempted from thebranch consequences of the regulations byproviding that the manufacturing branchrule only apply if the CFC was relying onthe manufacturing exception for purposesof section 954(d)(1), or alternatively thatthe substantial contribution test should beelective. In this context, commentatorsnoted that placing a CFC’s substantialcontribution activities, which are per-formed outside the country where the salesactivities are performed, in a separatelyincorporated entity could prevent the CFCfrom having a branch that is subject to themanufacturing branch rule as a result ofsuch activities.

The IRS and the Treasury Departmentagree that taxpayers may be subject to theFBCSI rules as a result of CFC employ-ees performing indicia of manufacturingactivities through a branch outside thecountry of organization of a CFC. The IRSand the Treasury Department believe thisresult is clear in the proposed regulations,and therefore no modifications are madeto the text of the temporary regulationsto clarify further this result. The IRS andthe Treasury Department note that manycommentators criticized the proposed reg-ulations for drawing inappropriate distinc-tions between satisfaction of the physicalmanufacturing test and satisfaction of thesubstantial contribution test, and arguedthat updating the manufacturing excep-tion in the context of modern businessenterprise models required treating withequal importance and weight physicalmanufacturing and activities satisfyingthe substantial contribution test. The IRSand the Treasury Department adopted thiscomment in both the final regulations andthe temporary regulations and, accord-ingly, did not incorporate in the temporaryregulations an exception regarding activ-ities performed through a branch located

outside the country of organization of aCFC for cases in which, in the absenceof the substantial contribution test, sometaxpayers had taken the position that theywere outside the scope of the FBCSI rules.

One commentator noted that whilethere are strong policy reasons for the sub-stantial contribution test and the branchrules to apply in the case of “unrelated tounrelated” transactions, the IRS and theTreasury Department should consider aspecial delayed effective date to allow tax-payers in this position time to restructuretheir operations in light of the regulations.The commentator argued that such tax-payers had been outside the scope of theFBCSI rules prior to these regulationsand should be provided reasonable timeto restructure. For a discussion of theeffective date of the final and temporaryregulations, see Part F of this preamble.

6. Branch rule examples

Commentators expressed con-cern that the facts of Prop. Reg.§1.954–3(b)(1)(ii)(c)(3)(f) Example 4ascribed most substantial contribution ac-tivities to the remainder, but determinedthat the remainder had not met the sub-stantial contribution test. In the example,the remainder performs seven activitieslisted in the indicia of manufacturing ofthe proposed regulations, whereas BranchA performs only one activity (design) andBranch B performs only two activities.The example was intended to show that ina CFC’s particular industry, the weight ac-corded to the activities performed by eachbranch can be comparable, even thougha different number of activities occur indifferent locations, because the economicsignificance of the activities conducted ineach location is comparable. However,the IRS and the Treasury Department rec-ognize that the example may have causedconfusion for taxpayers. Therefore, the al-location of activities in Example 4 of Prop.Reg. §1.954–3(b)(1)(ii)(c)(3)(f) has beenrevised in §1.954–3T(b)(1)(ii)(c)(3)(v)Example 3. Moreover, Examples 4, 5, and6 of Prop. Reg. §1.954–3(b)(1)(ii)(c)(3)(f)have been restructured in the temporaryregulations to be consistent with the revi-sions to the branch rules.

Commentators also noted that Ex-ample 4 and Example 5 of Prop. Reg.§1.954–3(b)(1)(ii)(c)(3)(f) suggest that

2009–5 I.R.B. 396 February 2, 2009

income other than sales or purchasingincome may be FBCSI. These examplesare amended in the temporary regulationsto be consistent with section 954(d)(2),which provides that income attributableto the carrying on of purchase or salesactivities by a branch may be FBCSI.

Commentators requested that the IRSand the Treasury Department add an ex-ample to the regulations to illustrate howthe substantial contribution test and thebranch rules operate in cases involvingmultiple manufacturing branches and mul-tiple sales branches. The temporary reg-ulations include such an example. See§1.954–3T(b)(1)(ii)(c)(3)(v) Example 5.

The temporary regulations also includean example illustrating the operation ofthe location of manufacture rules under§1.954–3T(b)(1)(ii)(c)(3) and the appli-cation of the substantial contribution testwhen a tested manufacturing locationhas been determined to have tax rate dis-parity with a tested sales location. See§1.954–3T(b)(4) Example (9). Example(9) illustrates that a tested sales locationcan satisfy the substantial contributiontest for purposes of determining FBCSIonce it has been determined that a testedmanufacturing location should be treatedas a separate corporation for purposes ofdetermining FBCSI. Although a branchthat has tax rate disparity with the testedsales location is the tested manufactur-ing location, Example (9) concludes thatthe CFC does not have FBCSI from thesale of the personal property because,after applying the aggregation rules of§1.954–3T(b)(2)(ii)(a), the tested saleslocation satisfies §1.954–3(a)(4)(iv).

E. Conforming Amendments

Sections 1.954–3(a)(1)(i) and (c) of theexisting regulations contain cross-refer-ences to foreign base company shippingincome under §1.954–6. Section 954was amended by Public Law 108–357 in2004, and foreign base company shippingincome was removed as a separate cat-egory of foreign base company income.The final regulations are amended bydeleting both references to foreign basecompany shipping income to reflect the2004 amendment to section 954.

Section 1.954–3(a)(1)(i) of the existingregulations defines “related person” and“unrelated person” by an obsolete cross

reference to §1.954–1(e). The final regu-lations are amended to define “related per-son” and “unrelated person” with refer-ence to §1.954–1(f).

F. Effective Date

Several commentators requested thatthe new regulations provide for a delayedeffective date to allow taxpayers to imple-ment supply chain and structural changesthat may be required to satisfy the sub-stantial contribution test and the branchrules. The IRS and the Treasury Depart-ment agree that a delayed effective date isappropriate for taxpayers whose structuresrequire modification to accommodate thenew regulations. Accordingly, these fi-nal and temporary regulations will applyto taxable years of CFCs beginning afterJune 30, 2009, and for taxable years ofUnited States shareholders in which orwith which such taxable years of the CFCsend. Thus, the final and temporary reg-ulations will become applicable January1, 2010, for CFCs whose taxable year isthe calendar year. The temporary regula-tions will expire on or before December23, 2009. In addition, a taxpayer maychoose to apply these final and temporaryregulations retroactively with respect toits open taxable years. The taxpayer mayso choose if and only if the taxpayer andall members of the taxpayer’s affiliatedgroup apply both the final and temporaryregulations, in their entirety, to the earliesttaxable year of each controlled foreigncorporation that ends with or within anopen taxable year of the taxpayer and toall subsequent taxable years. A taxpayerthat chose, prior to December 24, 2008, toapply Prop. Reg. §1.954–3 (73 FR 10716as corrected at 73 FR 20201) in its entiretyto all of the taxpayer’s open taxable yearsin which or with which a taxable year of acontrolled foreign corporation of the tax-payer ended, may continue to apply Prop.Reg. §1.954–3 (73 FR 10716 as correctedat 73 FR 20201) in its entirety with respectto all of the taxpayer’s open taxable yearsthat begin prior to July 1, 2009.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessment

is not required. It has also been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations and becausethe regulations do not impose a collectionof information on small entities, the Regu-latory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Code, the notice of proposed rule-making that preceded these final and tem-porary regulations was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Drafting Information

The principal author of these regula-tions is Ethan Atticks of the Office ofAssociate Chief Counsel (International).However, other personnel from the IRSand the Treasury Department participatedin their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for26 CFR part 1 continues to read in part asfollows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.954–3 is amended by:1. Revising paragraphs (a)(1)(i),

(a)(1)(iii) Examples 1 and 2, (a)(2),(a)(4)(i), (a)(4)(ii), (a)(4)(iii), (a)(6)(i),and (c).

2. Adding paragraphs (a)(4)(iv) and(d).

3. Removing and reserving paragraphs(b)(1)(i)(c), (b)(1)(ii)(a), (b)(1)(ii)(c),(b)(2)(i)(b), (b)(2)(i)(d), (b)(2)(ii)(a),(b)(2)(ii)(b), (b)(2)(ii)(e) and (b)(4) Exam-ple (3).

The additions and revisions read as fol-lows:

§1.954–3 Foreign base company salesincome.

(a) * * *(1) In general—(i) General rules. For-

eign base company sales income of a con-trolled foreign corporation shall, except

February 2, 2009 397 2009–5 I.R.B.

as provided in paragraphs (a)(2), (a)(3)and (a)(4) of this section, consist of grossincome (whether in the form of profits,commissions, fees or otherwise) derived inconnection with the purchase of personalproperty from a related person and its saleto any person, the sale of personal propertyto any person on behalf of a related person,the purchase of personal property from anyperson and its sale to a related person, orthe purchase of personal property from anyperson on behalf of a related person. Seesection 954(d)(1). For purposes of thepreceding sentence, except as provided inparagraphs (a)(2) and (a)(4) of this section,personal property sold by a controlled for-eign corporation will be considered to bethe same property that was purchased bythe controlled foreign corporation regard-less of whether the personal property issold in the same form in which it was pur-chased, in a different form than the formin which it was purchased, or as a compo-nent part of a manufactured product. Thissection shall apply to the purchase and /or sale of personal property, whether ornot such property was purchased and / orsold in the ordinary course of trade or busi-ness, except that income derived in con-nection with the sale of tangible personalproperty will not be considered to be for-eign base company sales income if suchproperty is sold to a person that is not arelated person, as defined in §1.954–1(f),after substantial use has been made of theproperty by the controlled foreign corpo-ration in its trade or business. This sec-tion shall not apply to the excess of gainsover losses from sales or exchanges of se-curities or from futures transactions, to theextent such excess gains are includible inforeign personal holding company incomeof the controlled foreign corporation under§1.954–2; nor shall it apply to the sale ofthe controlled foreign corporation’s prop-erty (other than its stock in trade or otherproperty of a kind which would properlybe included in its inventory if on hand atthe close of the taxable year, or propertyheld primarily for sale to customers in theordinary course of its business) if substan-tially all the property of such corporation issold pursuant to the discontinuation of thetrade or business previously carried on bysuch corporation. The term “any person”as used in this paragraph (a)(1)(i) includesa related person as defined in §1.954–1(f).

* * * * *(iii) * * *Example 1. Controlled foreign corporation A, in-

corporated under the laws of foreign country X, isa wholly owned subsidiary of domestic corporationM. Corporation A purchases from M Corporation, arelated person, articles manufactured in the UnitedStates and sells the articles to P, an unrelated person,for delivery and use in foreign country Y. Gross in-come of A Corporation derived from the purchase andsale of the personal property is foreign base companysales income.

Example 2. Corporation A in Example 1 also pur-chases from P, an unrelated person, articles manufac-tured in country Y and sells the articles to foreign cor-poration B, a related person, for use in foreign countryZ. Gross income of A Corporation derived from thepurchase and sale of the personal property is foreignbase company sales income.

* * * * *(2) Property manufactured, produced,

constructed, grown, or extracted withinthe country in which the controlled foreigncorporation is created or organized. For-eign base company sales income does notinclude income derived in connection withthe purchase and sale of personal prop-erty (or purchase or sale of personal prop-erty on behalf of a related person) in atransaction described in paragraph (a)(1)of this section if the property is manufac-tured, produced, constructed, grown, orextracted in the country under the lawsof which the controlled foreign corpora-tion which purchases and sells the prop-erty (or acts on behalf of a related per-son) is created or organized. See section954(d)(1)(A). The principles set forth inparagraphs (a)(4)(ii) and (a)(4)(iii) of thissection apply under this paragraph (a)(2)in determining what constitutes the man-ufacture, production, or construction ofpersonal property, excluding the require-ment set forth in paragraph (a)(4)(i) of thissection that the provisions of paragraphs(a)(4)(ii) and (a)(4)(iii) of this section mayonly be satisfied through the activities ofemployees of the corporation manufactur-ing, producing, or constructing the per-sonal property. The principles of para-graph (a)(4)(iv) of this section apply underthis paragraph (a)(2) in determining whatconstitutes the manufacture, production, orconstruction of personal property but onlywhen the personal property is manufac-tured, produced, or constructed by a per-son related to the controlled foreign corpo-ration within the meaning of §1.954–1(f).The application of this paragraph (a)(2)

may be illustrated by the following exam-ples:

* * * * *(4) Property manufactured, produced,

or constructed by the controlled foreigncorporation—(i) In general. Foreign basecompany sales income does not includeincome of a controlled foreign corporationderived in connection with the sale of per-sonal property manufactured, produced,or constructed by such corporation. Acontrolled foreign corporation will havemanufactured, produced, or constructedpersonal property which the corporationsells only if such corporation satisfiesthe provisions of paragraph (a)(4)(ii),(a)(4)(iii), or (a)(4)(iv) of this sectionthrough the activities of its employees(as defined in §31.3121(d)–1(c) of thischapter) with respect to such property. Acontrolled foreign corporation will not betreated as having manufactured, produced,or constructed personal property whichthe corporation sells merely because theproperty is sold in a different form than theform in which it was purchased. For rulesof apportionment in determining foreignbase company sales income derived fromthe sale of personal property purchasedand used as a component part of propertywhich is not manufactured, produced, orconstructed, see paragraph (a)(5) of thissection.

(ii) Substantial transformation of prop-erty. If personal property purchased by aforeign corporation is substantially trans-formed by such foreign corporation priorto sale, the property sold by the sellingcorporation is manufactured, produced, orconstructed by such selling corporation.The application of this paragraph (a)(4)(ii)may be illustrated by the following exam-ples:

* * * * *(iii) Manufacture of a product when

purchased components constitute part ofthe property sold. If purchased propertyis used as a component part of personalproperty which is sold, the sale of theproperty will be treated as the sale of amanufactured product, rather than the saleof component parts, if the assembly orconversion of the component parts intothe final product by the selling corporationinvolves activities that are substantial innature and generally considered to con-stitute the manufacture, production, or

2009–5 I.R.B. 398 February 2, 2009

construction of property. Without limitingthis substantive test, which is dependenton the facts and circumstances of eachcase, the operations of the selling corpo-ration in connection with the use of thepurchased property as a component part ofthe personal property which is sold will beconsidered to constitute the manufactureof a product if in connection with suchproperty conversion costs (direct laborand factory burden) of such corporationaccount for 20 percent or more of the totalcost of goods sold. In no event, however,will packaging, repackaging, labeling,or minor assembly operations constitutethe manufacture, production, or construc-tion of property for purposes of section954(d)(1). The application of this para-graph (a)(4)(iii) may be illustrated by thefollowing examples:

* * * * *(iv) Substantial contribution to man-

ufacturing of personal property—(a) Ingeneral. If an item of personal propertywould be considered manufactured, pro-duced, or constructed (under the principlesof paragraph (a)(4)(ii) or (a)(4)(iii) of thissection) prior to sale by the controlled for-eign corporation had all of the manufac-turing, producing, and constructing activ-ities undertaken with respect to that prop-erty prior to sale been undertaken by thecontrolled foreign corporation through theactivities of its employees, then this para-graph (a)(4)(iv) applies. If this paragraph(a)(4)(iv) applies and if the facts and cir-cumstances evince that the controlled for-eign corporation makes a substantial con-tribution through the activities of its em-ployees to the manufacture, production,or construction of the personal propertysold, then the personal property sold bythe controlled foreign corporation is manu-factured, produced, or constructed by suchcontrolled foreign corporation.

(b) Activities. The determination ofwhether a controlled foreign corporationmakes a substantial contribution throughthe activities of its employees to the manu-facture, production, or construction of thepersonal property sold involves, but willnot necessarily be limited to, considerationof the following activities:

(1) Oversight and direction of the activ-ities or process pursuant to which the prop-erty is manufactured, produced, or con-

structed (under the principles of paragraph(a)(4)(ii) or (a)(4)(iii) of this section).

(2) Activities that are considered in,but that are insufficient to satisfy, thetests provided in paragraphs (a)(4)(ii) and(a)(4)(iii) of this section.

(3) Material selection, vendor selection,or control of the raw materials, work-in-process or finished goods.

(4) Management of manufacturingcosts or capacities (for example, man-aging the risk of loss, cost reduction orefficiency initiatives associated with themanufacturing process, demand planning,production scheduling, or hedging rawmaterial costs).

(5) Control of manufacturing related lo-gistics.

(6) Quality control (for example, sam-ple testing or establishment of quality con-trol standards).

(7) Developing, or directing the use ordevelopment of, product design and de-sign specifications, as well as trade secrets,technology, or other intellectual propertyfor the purpose of manufacturing, produc-ing, or constructing the personal property.

(c) Application of substantial contribu-tion test. When considering whether a con-trolled foreign corporation makes a sub-stantial contribution to the manufacture,production, or construction of the personalproperty, the performance of any activityin paragraph (a)(4)(iv)(b) of this sectionwill be taken into account. The perfor-mance or lack of performance of any par-ticular activity in paragraph (a)(4)(iv)(b)of this section, or of a particular numberof activities in (a)(4)(iv)(b) of this sec-tion, is not determinative. The weight ac-corded to the performance of any quantumof any activity (whether or not specifiedin paragraph (a)(4)(iv)(b) of this section)will vary with the facts and circumstancesof the particular business. See paragraph(a)(4)(iv)(d) Examples 8, 10 and 11 of thissection. In determining whether the activ-ities of the controlled foreign corporationconstitute a substantial contribution, thereis no minimum performance threshold be-fore an activity can be considered. Thefact that other persons make a substantialcontribution to the manufacture, produc-tion, or construction of the personal prop-erty prior to sale does not preclude thecontrolled foreign corporation from mak-ing a substantial contribution to the manu-facture, construction, or production of that

property through the activities of its em-ployees. See paragraph (a)(4)(iv)(d) Ex-ample 9 of this section.

(d) Examples. The rules of this para-graph (a)(4)(iv) are illustrated by the fol-lowing examples:

Example 1. No substantial contribution to manu-facturing. (i) Facts. FS, a controlled foreign corpora-tion, purchases raw materials from a related person.The raw materials are manufactured (under the prin-ciples of paragraph (a)(4)(ii) or (a)(4)(iii) of this sec-tion) into Product X by CM, an unrelated corporation,pursuant to a contract manufacturing arrangement.CM physically performs the substantial transforma-tion, assembly, or conversion outside of FS’s countryof organization. Product X is sold by FS for use out-side of FS’s country of organization. Under the termsof the contract, FS retains the right to control the rawmaterials, work-in-process, and finished goods, andthe right to oversee and direct the activities or processpursuant to which Product X is manufactured by CM.FS owns the intellectual property used in the manu-facturing process. However, FS does not exercise,through its employees, its powers to control the rawmaterials, work-in-process, or finished goods, and FSdoes not exercise its powers of oversight and direc-tion. Likewise, FS does not, through its employees,develop or direct the use or development of the in-tellectual property for the purpose of manufacturingProduct X.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. FS does not satisfythe test under this paragraph (a)(4)(iv) because it doesnot make a substantial contribution through the activ-ities of its employees to the manufacture of ProductX. Mere contractual rights to control materials, con-tractual rights to oversee and direct the manufacturingactivities or process pursuant to which the property ismanufactured, and ownership of intellectual propertyare not sufficient to satisfy this paragraph (a)(4)(iv).Therefore, under the facts and circumstances of thebusiness, FS is not considered to have manufacturedProduct X under paragraph (a)(4)(i) of this section.

Example 2. Substantial contribution to manufac-turing. (i) Facts. Assume the same facts as in Exam-ple 1, except for the following. FS, through its em-ployees, engages in product design and quality con-trol and controls manufacturing related logistics. Em-ployees of FS exercise the right to oversee and directthe activities of CM in the manufacture of Product X.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. Under the facts andcircumstances of the business, FS satisfies the test un-der this paragraph (a)(4)(iv) because it makes a sub-stantial contribution through the activities of its em-ployees to the manufacture of Product X. Therefore,FS is considered to have manufactured Product X un-der paragraph (a)(4)(i) of this section. The analysis

February 2, 2009 399 2009–5 I.R.B.

and conclusion would be the same if CM were relatedto FS because the relationship between CM and FS isirrelevant for purposes of applying paragraph (a)(4)of this section.

Example 3. Raw materials procured by contractmanufacturer. (i) Facts. FS, a controlled foreign cor-poration, enters into a contract with CM to manufac-ture (under the principles of paragraph (a)(4)(ii) or(a)(4)(iii) of this section) Product X. CM physicallyperforms the substantial transformation, assembly, orconversion required to manufacture Product X out-side of FS’s country of organization. Product X issold by FS for use outside of FS’s country of organi-zation. Employees of FS select the materials that willbe used to manufacture Product X. FS does not ownthe materials or work-in-process during the manufac-turing process. FS, through its employees, exercisesoversight and direction of the manufacturing processand provides quality control. FS manages the manu-facturing costs and capacities with respect to ProductX by managing the risk of loss and engaging in de-mand planning and production scheduling.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. Under the facts andcircumstances of the business, FS satisfies the test un-der this paragraph (a)(4)(iv) because it makes a sub-stantial contribution through the activities of its em-ployees to the manufacture of Product X. Therefore,FS is considered to have manufactured Product X un-der paragraph (a)(4)(i) of this section.

Example 4. Physical conversion by employees ofa person other than the contract manufacturer. (i)Facts. FS, a controlled foreign corporation organizedin Country M, purchases raw materials from a relatedperson. The raw materials are manufactured (un-der the principles of paragraph (a)(4)(ii) or (a)(4)(iii)of this section) into Product X by CM, an unrelatedcorporation, pursuant to a contract manufacturing ar-rangement. CM physically performs the substantialtransformation, assembly, or conversion required tomanufacture Product X outside of FS’s country of or-ganization. Product X is sold by FS for use outsideof FS’s country of organization. CM contracts withanother corporation for its employees in order to op-erate CM’s manufacturing plant and transform, as-semble, or convert the raw materials into Product X.Apart from the physical performance of the substan-tial transformation, assembly, or conversion of theraw materials into Product X, employees of FS per-form all of the other manufacturing activities requiredin connection with the manufacture of Product X (forexample, oversight and direction of the manufactur-ing process; vendor selection; control of raw materi-als, work-in-process, and finished goods; control ofmanufacturing related logistics; and quality control).

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. Under the facts andcircumstances of the business, FS satisfies the test un-der this paragraph (a)(4)(iv) because it makes a sub-

stantial contribution through the activities of its em-ployees to the manufacture of Product X. Therefore,FS is considered to have manufactured Product X un-der paragraph (a)(4)(i) of this section.

Example 5. Automated manufacturing super-vised by another person. (i) Facts. FS, a controlledforeign corporation, purchases raw materials froma related person. The raw materials are manufac-tured (under the principles of paragraph (a)(4)(ii) or(a)(4)(iii) of this section) into Product X by CM, anunrelated corporation selected by FS, pursuant to acontract manufacturing arrangement. CM physicallyperforms the substantial transformation, assembly, orconversion outside of FS’s country of organization.Product X is sold by FS to related and unrelatedpersons for use outside of FS’s country of organiza-tion. At all times, FS retains ownership of the rawmaterials, work-in-process, and finished goods. FSretains the right to oversee and direct the activitiesor process pursuant to which Product X is manu-factured by CM, but does not exercise, through itsemployees, its powers of oversight and direction. FSis the owner of sophisticated software and networksystems that remotely and automatically (withouthuman involvement) take orders, route them to CM,order raw materials, and perform quality control. FShas a small number of computer technicians whomonitor the software and network systems to ensurethat they are running smoothly and apply any nec-essary patches or fixes. The software and networksystems were developed by employees of DP, theU.S. corporate parent of FS. DP’s employees super-vise the computer technicians, evaluate the resultsof the automated manufacturing business, and makeongoing operational decisions, including decisionsrelated to acceptable performance of the manufactur-ing process, stoppages of that process, and decisionsrelated to product and manufacturing process design.DP’s employees develop and provide to FS all ofthe upgrades to the software and network systems.DP also has employees who direct and control otheraspects of the manufacturing process such as vendorand material selection, management of the manufac-turing costs and capacities, and the selection of CM.The need for DP’s employees to direct the activitiesof the FS employees and otherwise contribute tothe manufacturing process evinces that substantialoperational responsibilities and decision making arerequired to be exercised by parties other than CM inorder to manufacture Product X.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. Under the facts andcircumstance of the business, FS does not satisfy thetest under this paragraph (a)(4)(iv) because it does notmake a substantial contribution through the activitiesof its employees to the manufacture of Product X.Mere ownership of materials and intellectual propertyalong with contractual rights to exercise powers ofdirection and control are not sufficient to satisfy thisparagraph (a)(4)(iv). The employees of FS do not per-form the amount of activity necessary to constitute asubstantial contribution. FS is not considered to havemanufactured Product X under paragraph (a)(4)(i) ofthis section.

Example 6. Automated manufacturing supervisedby FS. (i) Facts. Assume the same facts as in Exam-ple 5, except for the following. FS, through its em-ployees, engages in the activities undertaken by DP’semployees in Example 5. DP’s employees also con-tribute to product and manufacturing process design,and provide support and oversight to FS in connectionwith functions performed by FS through its employ-ees.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. Under the facts andcircumstances of the business, FS satisfies the test un-der this paragraph (a)(4)(iv) because it makes a sub-stantial contribution through the activities of its em-ployees to the manufacture of Product X. This deter-mination does not require a comparison between theactivities of FS and the activities of DP. Selection ofthe contract manufacturer, even though not specifi-cally identified in paragraph (a)(4)(iv)(b) of this sec-tion, is considered under paragraph (a)(4)(iv)(c) ofthis section in determining whether FS makes a sub-stantial contribution to the manufacture of Product Xthrough its employees. FS is considered to have man-ufactured Product X under paragraph (a)(4)(i) of thissection.

Example 7. Automated manufacturing supervisedby FS with purchased intellectual property. (i) Facts.Assume the same facts as in Example 6, except for thefollowing. The software and network systems, andthe upgrades to those systems, were purchased by FSrather than developed by employees of FS.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. The lack of per-formance of software and network system develop-ment activities is not determinative under the factsand circumstances of the business. Therefore, FS sat-isfies the test under this paragraph (a)(4)(iv) becauseit makes a substantial contribution through the activ-ities of its employees to the manufacture of ProductX. This determination does not require a comparisonbetween the activities of FS and the activities of DP.FS is considered to have manufactured Product X un-der paragraph (a)(4)(i) of this section.

Example 8. Manufacture without intellectualproperty. (i) Facts. FS, a controlled foreign cor-poration, purchases raw materials from a relatedperson. The raw materials are manufactured (underthe principles of paragraph (a)(4)(ii) or (a)(4)(iii)of this section) into Product X by CM, an unrelatedcorporation, pursuant to a contract manufacturingarrangement. CM physically performs the substan-tial transformation, assembly, or conversion outsideof FS’s country of organization. Product X is soldby FS for use outside of FS’s country of organiza-tion. At all times, FS controls the raw materials,work-in-process, and finished goods. FS controls themanufacturing related logistics, manages the manu-facturing costs and capacities, and provides qualitycontrol with respect to CM’s manufacturing process

2009–5 I.R.B. 400 February 2, 2009

and product. No intellectual property of significantvalue is required to manufacture Product X. FS doesnot own any intellectual property underlying ProductX, or hold an exclusive or non-exclusive right tomanufacture Product X.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. Because use of in-tellectual property plays little or no role in the man-ufacture of Product X, it is irrelevant to the substan-tial contribution analysis under paragraph (a)(4)(iv)of this section. Under the facts and circumstancesof the business, FS satisfies the test under this para-graph (a)(4)(iv) because it makes a substantial con-tribution through the activities of its employees tothe manufacture of Product X. Therefore, FS is con-sidered to have manufactured Product X under para-graph (a)(4)(i) of this section.

Example 9. Substantial contribution by more thanone CFC. (i) Facts. FS1 and FS2, unrelated con-trolled foreign corporations, contract with CM, an un-related corporation, to manufacture (under the prin-ciples of paragraph (a)(4)(ii) or (a)(4)(iii) of this sec-tion) Product X. CM physically performs the substan-tial transformation, assembly, or conversion requiredto manufacture Product X outside of FS1’s and FS2’srespective countries of organization. Neither FS1 norFS2 owns the materials or work-in-process during themanufacturing process. Product X is sold by FS1and FS2 to persons related to FS1 and FS2, respec-tively, for disposition outside of FS1’s and FS2’s re-spective countries of organization. FS1, through itsemployees, designs Product X. FS1 directs the useof the product design and design specifications, andother intellectual property, for the purpose of man-ufacturing Product X. Employees of FS1 also selectthe materials that will be used to manufacture Prod-uct X, and the vendors that provide those materials.FS2, through its employees, designs the process formanufacturing Product X. FS2, through its employ-ees, manages the manufacturing costs and capacitieswith respect to Product X. FS1 and FS2 each providequality control and oversight and direction of CM’smanufacturing activities with respect to different as-pects of the manufacture of Product X.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS1 or FS2 through the activities of theiremployees, FS1 or FS2 would have satisfied the man-ufacturing exception contained in paragraph (a)(4)(ii)or (a)(4)(iii) of this section with respect to Product X.Therefore, this paragraph (a)(4)(iv) applies. The factthat other persons make a substantial contribution tothe manufacture of personal property does not pre-clude a controlled foreign corporation from makinga substantial contribution to the manufacture of per-sonal property through the activities of its employ-ees. In the analysis of whether FS1 or FS2 make asubstantial contribution to the manufacture of Prod-uct X, each company takes into account its individualactivities, including those of providing quality con-trol and oversight and direction of the manufactureof Product X. In addition, no threshold level of ac-tivity is required, including with respect to provid-ing quality control or oversight and direction of the

activities or process pursuant to which Product X ismanufactured, before FS1 and FS2 can take into ac-count their respective activities. Under the facts andcircumstances of the business, both FS1 and FS2 sat-isfy the test under this paragraph (a)(4)(iv) becauseeach independently makes a substantial contributionthrough the activities of its employees to the man-ufacture of Product X. Therefore, FS1 and FS2 areeach considered to have manufactured Product X un-der paragraph (a)(4)(i) of this section.

Example 10. Manufacture of products designedby CFC. (i) Facts. FS, a controlled foreign corpora-tion, purchases raw materials from a related person.The raw materials are manufactured (under the prin-ciples of paragraph (a)(4)(ii) or (a)(4)(iii) of this sec-tion) into Product X by CM, an unrelated corpora-tion, pursuant to a contract manufacturing arrange-ment. CM physically performs the substantial trans-formation, assembly, or conversion outside of FS’scountry of organization. Product X is sold by FS foruse outside of FS’s country of organization. Productsin the X industry are distinguished (and vary widelyin value) based on the raw materials used to makethe product and the product design. FS designs theproduct and selects the materials that CM will use tomanufacture Product X. FS also manages the manu-facturing costs and capacities. Product X can be man-ufactured from the raw materials to FS’s design spec-ifications without significant oversight and direction,quality control, or control of manufacturing relatedlogistics. The activities most relevant to the substan-tial contribution analysis under these facts are mate-rial selection, product design and management of themanufacturing costs and capacities.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. Under the facts andcircumstances of the business, FS makes a substan-tial contribution through the activities of its employ-ees to the manufacture of Product X. FS satisfies thetest under this paragraph (a)(4)(iv) because it makesa substantial contribution through the activities of itsemployees to the manufacture of Product X. There-fore, FS is considered to have manufactured ProductX under paragraph (a)(4)(i) of this section.

Example 11. Direction and oversight of manu-facturing and quality control through periodic visits.(i) Facts. FS, a controlled foreign corporation, pur-chases raw materials from a related person. The rawmaterials are manufactured (under the principles ofparagraph (a)(4)(ii) or (a)(4)(iii) of this section) intoProduct X by CM, an unrelated corporation, pursuantto a contract manufacturing arrangement. CM physi-cally performs the substantial transformation, assem-bly, or conversion outside of FS’s country of organ-ization. Product X is sold by FS for use outside ofFS’s country of organization. FS controls the raw ma-terial, work-in-process, and finished goods, managesthe manufacturing costs and capacities, and providesoversight and direction of the manufacture of Prod-uct X. Employees of FS visit CM’s manufacturing fa-cility for one week each quarter and perform qualitycontrol tests on a random sample of the units of Prod-uct X produced during the week. In the X industry,quarterly visits to a manufacturing facility by qual-

ified persons are sufficient to control the quality ofmanufacturing.

(ii) Result. If the manufacturing activities under-taken with respect to Product X prior to sale were un-dertaken by FS through the activities of its employ-ees, FS would have satisfied the manufacturing ex-ception contained in paragraph (a)(4)(ii) or (a)(4)(iii)of this section with respect to Product X. Therefore,this paragraph (a)(4)(iv) applies. Under the facts andcircumstances of the business, FS satisfies the test un-der this paragraph (a)(4)(iv) with respect to ProductX because it makes a substantial contribution throughthe activities of its employees to the manufacture ofProduct X. Therefore, FS is considered to have man-ufactured Product X under paragraph (a)(4)(i) of thissection.

* * * * *(6) Special rule applicable to distribu-

tive share of partnership income—(i) Ingeneral. To determine the extent to whicha controlled foreign corporation’s distribu-tive share of any item of gross incomeof a partnership would have been foreignbase company sales income if received byit directly, under §1.952–1(g), the prop-erty sold will be considered to be manu-factured, produced, or constructed by thecontrolled foreign corporation, within themeaning of paragraph (a)(4)(i) of this sec-tion, only if the manufacturing exceptionof paragraph (a)(4)(i) of this section wouldhave applied to exclude the income fromforeign base company sales income if thecontrolled foreign corporation had earnedthe income directly, determined by takinginto account only the activities of the em-ployees of, and property owned by, thepartnership.

* * * * *(b) * * *(1) * * *(i) * * *(c) [Reserved]. For further guidance,

see §1.954–3T(b)(1)(i)(c).(ii) * * *(a) [Reserved]. For further guidance,

see §1.954–3T(b)(1)(ii)(a).

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

see §1.954–3T(b)(1)(ii)(c).(2) * * *(i) * * *(b) [Reserved]. For further guidance,

see §1.954–3T(b)(2)(i)(b).

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

see §1.954–3T(b)(2)(i)(d).

* * * * *

February 2, 2009 401 2009–5 I.R.B.

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

see §1.954–3T(b)(2)(ii)(a).(b) [Reserved]. For further guidance,

see §1.954–3T(b)(2)(ii)(b).

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

see §1.954–3T(b)(2)(ii)(e).

* * * * *(4) * * *Example (3). [Reserved]. For further

guidance, see §1.954–3T(b)(4) Example(3).

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

graphs (a)(1)(i), (a)(1)(iii) Example 1,(a)(1)(iii) Example 2, (a)(2), (a)(4)(i),(a)(4)(ii), (a)(4)(iii), (a)(4)(iv) and (a)(6)(i)shall apply to taxable years of controlledforeign corporations beginning after June30, 2009, and for taxable years of UnitedStates shareholders in which or with whichsuch taxable years of the controlled for-eign corporations end.

(d) Application of regulations to earliertaxable years. A taxpayer may chooseto apply these regulations and the reg-ulations under §1.954–3T retroactivelywith respect to its open taxable years. Thetaxpayer may so choose if and only if thetaxpayer and all members of the taxpayer’saffiliated group (within the meaning of§1504(a)) apply both these regulations andthe regulations under §1.954–3T, in theirentirety, to the earliest taxable year of eachcontrolled foreign corporation that endswith or within an open taxable year ofthe taxpayer and to all subsequent taxableyears of the taxpayer.

Par. 3. Section 1.954–3T is added toread as follows:

§1.954–3T Foreign base company salesincome (temporary).

(a) through (b)(1)(i)(b) [Reserved]. Forfurther guidance, see §1.954–3(a) through(b)(1)(i)(b).

(c) Use of more than one branch. Ifa controlled foreign corporation carrieson purchasing or selling activities by orthrough more than one branch or sim-ilar establishment located outside thecountry under the laws of which suchcorporation is created or organized, then§1.954–3(b)(1)(i)(b) shall be applied sep-arately to the income derived by each

such branch or similar establishment (bytreating such purchasing or selling branchor similar establishment as if it were theonly branch or similar establishment ofthe controlled foreign corporation and asif any such other branches or similar es-tablishments were separate corporations)in determining whether the use of suchbranch or similar establishment has sub-stantially the same tax effect as if suchbranch or similar establishment were awholly owned subsidiary corporation ofthe controlled foreign corporation. Seeparagraph (b)(1)(ii)(c)(1) of this sectionfor rules applicable to a controlled for-eign corporation that carries on purchaseor sales activities by or through one ormore branches or similar establishmentsin addition to carrying on manufactur-ing activities by or through one or morebranches or similar establishments.

(ii) Manufacturing branch—(a) In gen-eral. If a controlled foreign corporationcarries on manufacturing, producing, con-structing, growing, or extracting activitiesby or through a branch or similar estab-lishment located outside the country un-der the laws of which such corporation iscreated or organized and the use of thebranch or similar establishment for suchactivities with respect to personal propertypurchased or sold by or through the re-mainder of the controlled foreign corpo-ration has substantially the same tax ef-fect as if the branch or similar establish-ment were a wholly owned subsidiary cor-poration of such controlled foreign corpo-ration, the branch or similar establishmentand the remainder of the controlled for-eign corporation will be treated as sepa-rate corporations for purposes of determin-ing foreign base company sales income ofsuch corporation. See section 954(d)(2).The provisions of this paragraph (b)(1)(ii)and §1.954–3(b)(1)(ii)(b) will apply onlyif the controlled foreign corporation (in-cluding any branches or similar establish-ments of such controlled foreign corpo-ration) manufactures, produces, or con-structs such personal property within themeaning of §1.954–3(a)(4)(i), or carries ongrowing or extracting activities with re-spect to such personal property.

(b) [Reserved]. For further guidance,see §1.954–3(b)(1)(ii)(b).

(c) Use of more than one branch—(1)Use of one or more sales or purchasebranches in addition to a manufacturing

branch. If, with respect to personal prop-erty manufactured, produced, constructed,grown, or extracted by or through a branchor similar establishment located outsidethe country under the laws of which thecontrolled foreign corporation is createdor organized, purchasing or selling activ-ities are carried on by or through morethan one branch or similar establishment,or by or through one or more branchesor similar establishments located outsidesuch country, of such corporation, then§1.954–3(b)(1)(ii)(b) shall be applied sep-arately to the income derived by each suchpurchasing or selling branch or similar es-tablishment (by treating such purchasingor selling branch or similar establishmentas though it alone were the remainder ofthe controlled foreign corporation) forpurposes of determining whether the useof such manufacturing, producing, con-structing, growing, or extracting branch orsimilar establishment has substantially thesame tax effect as if such branch or similarestablishment were a wholly owned sub-sidiary corporation of the controlled for-eign corporation. If this rule applies, thesales or purchase branch rules contained inparagraph (b)(1)(i)(c) of this section and§1.954–3(b)(1)(i) do not apply. The appli-cation of this paragraph (b)(1)(ii)(c)(1) isillustrated by the following example:

Example. All activities of controlled foreign cor-poration conducted through sales branches and man-ufacturing branch. (i) Facts. FS, a controlled foreigncorporation organized under the laws of country M,operates three branches. Branch A, located in coun-try A, manufactures Product X under the principlesof §1.954–3(a)(4)(i). Branch B, located in CountryB, sells Product X manufactured by Branch A to cus-tomers for use outside of Country B. Branch C, lo-cated in Country C sells Product X manufactured byBranch A to customers for use outside of Country C.FS does not conduct any manufacturing or selling ac-tivities apart from the activities of Branches A, B andC. Country M imposes an effective rate of tax on salesincome of 0%. Country A imposes an effective rateof tax on sales income of 20%. Country B imposes aneffective rate of tax on sales income of 20%. CountryC imposes an effective rate of tax on sales income of18%.

(ii) Result. Pursuant to this paragraph(b)(1)(ii)(c)(1), §1.954–3(b)(1)(ii)(b) is applied tothe sales income derived by Branch B by treatingBranch B as though it alone were the remainder of thecontrolled foreign corporation. The use of BranchB does not have the same tax effect as if Branch Bwere a wholly owned subsidiary of FS because thetax rate applicable to the income allocated to BranchB under §1.954–3(b)(1)(ii)(b) (20%) is not less than90 percent of, and at least 5 percentage points lessthan, the effective rate of tax which would apply tosuch income under the laws of Country A (20%),

2009–5 I.R.B. 402 February 2, 2009

the country in which Branch A is located. Section1.954–3(b)(1)(ii)(b) is applied separately to the salesincome derived by Branch C by treating Branch C asthough it alone were the remainder of the controlledforeign corporation. The use of Branch C doesnot have the same tax effect as if Branch C werea wholly owned subsidiary of FS because the taxrate applicable to the income allocated to Branch Cunder §1.954–3(b)(1)(ii)(b) (18%) is not less than 90percent of, and at least 5 percentage points less than,the effective rate of tax which would apply to suchincome under the laws of Country A (20%), the coun-try in which Branch A is located. Pursuant to thisparagraph (b)(1)(ii)(c)(1), the rules under paragraph(b)(1)(i)(c) of this section and §1.954–3(b)(1)(i) fordetermining whether a sales or purchase branch istreated as a separate corporation from the remainderof the controlled foreign corporation do not apply.

(2) Use of more than one branch tomanufacture, produce, construct, grow, orextract separate items of personal prop-erty. If a controlled foreign corporationcarries on manufacturing, producing, con-structing, growing, or extracting activitieswith respect to separate items of personalproperty by or through more than onebranch or similar establishment locatedoutside the country under the laws ofwhich such corporation is created or or-ganized, then paragraph (b)(1)(ii)(c) ofthis section and §1.954–3(b)(1)(ii)(b) willbe applied separately to each such branchor similar establishment (by treating suchmanufacturing branch or similar establish-ment as if it were the only such branchor similar establishment of the controlledforeign corporation and as if any othersuch branches or similar establishmentswere separate corporations) for purposesof determining whether the use of suchbranch or similar establishment has sub-stantially the same tax effect as if suchbranch or similar establishment were awholly owned subsidiary corporation ofthe controlled foreign corporation. The ap-plication of this paragraph (b)(1)(ii)(c)(2)is illustrated by the following example:

Example. Multiple branches that satisfy§1.954–3(a)(4)(i). (i) Facts. FS is a controlledforeign corporation organized in Country M. FS op-erates two branches, Branch A and Branch B locatedin Country A and Country B, respectively. BranchA and Branch B each manufacture separate items ofpersonal property (Product X and Product Y, respec-tively) within the meaning of §1.954–3(a)(4)(ii) or(iii). Raw materials used in the manufacture of Prod-uct X and Product Y are purchased by FS from anunrelated person. FS engages in activities in Coun-try M to sell Product X and Product Y to a relatedperson for use, disposition or consumption outsideof Country M. Employees of FS located in CountryM perform only sales functions. The effective rateimposed in Country M on the income from the sales

of Product X and Product Y is 10%. Country Aimposes an effective rate of tax on sales income of20%. Country B imposes an effective rate of tax onsales income of 12%.

(ii) Result. Pursuant to this paragraph(b)(1)(ii)(c)(2), §1.954–3(b)(1)(ii)(b) is applied sep-arately to Branch A and Branch B with respect tothe sales income of FS attributable to Product X(manufactured by Branch A) and Product Y (manu-factured by Branch B). Because the effective rate oftax on FS’s sales income from the sale of Product Xin Country M (10%) is less than 90% of, and at least5 percentage points less than, the effective rate of taxthat would apply to such income in the country inwhich Branch A is located (20%), the use of BranchA to manufacture Product X has substantially thesame tax effect as if Branch A were a wholly ownedsubsidiary corporation of FS. Because the effectiverate of tax on FS’s sales income from the sale ofProduct Y in Country M (10%) is not less than 90%of, and at least 5 percentage points less than, theeffective rate of tax that would apply to such incomein the country in which Branch B is located (12%),the use of Branch B to manufacture Product Y doesnot have substantially the same tax effect as if BranchB were a wholly owned subsidiary corporation ofFS. Consequently, only Branch A is treated as aseparate corporation apart from the remainder of FSfor purposes of determining foreign base companysales income from the sales of Product X.

(3) Use of more than one manufac-turing branch, or one or more manu-facturing branches and the remainderof the controlled foreign corporation, tomanufacture, produce, or construct thesame item of personal property—(i) Ingeneral. This paragraph (b)(1)(ii)(c)(3)applies to determine the location of man-ufacture, production, or construction ofpersonal property for purposes of apply-ing §1.954–3(b)(1)(i)(b) or (b)(1)(ii)(b)where more than one branch (or simi-lar establishment) of a controlled foreigncorporation, or one or more branches (orsimilar establishments) of a controlledforeign corporation and the remainder ofthe controlled foreign corporation, eachengage in manufacturing, producing, orconstructing activities with respect to thesame item of personal property which isthen sold by the controlled foreign cor-poration. The location of manufacture,production, or construction is determinedunder paragraph (b)(1)(ii)(c)(3)(ii) of thissection if one or more branches (or sim-ilar establishments), or the remainder ofthe controlled foreign corporation, inde-pendently satisfies §1.954–3(a)(4)(i) withrespect to an item of personal property.The location of manufacture, production,or construction is determined under para-graph (b)(1)(ii)(c)(3)(iii) of this section if

none of the branches (or similar establish-ments), or the remainder of the controlledforeign corporation, independently satis-fies §1.954–3(a)(4)(i) with respect to anitem of personal property, but the con-trolled foreign corporation as a wholemakes a substantial contribution to themanufacture, production or constructionof that property within the meaning of§1.954–3(a)(4)(iv). For purposes of thisparagraph (b)(1)(ii)(c)(3), the location ofany activity with respect to the manufac-ture, production, or construction of anitem of personal property is determinedunder paragraph (b)(1)(ii)(c)(3)(iv) of thissection. For purposes of this paragraph(b)(1)(ii)(c)(3), if multiple branches (orsimilar establishments) are located in asingle jurisdiction, then the activities ofthose branches will be aggregated for pur-poses of determining whether a branch orremainder of the controlled foreign corpo-ration satisfies §1.954–3(a)(4)(i).

(ii) Manufacture, production, or con-struction in one or more locations. If onlyone branch (or similar establishment),or only the remainder of a controlledforeign corporation, independently sat-isfies §1.954–3(a)(4)(i) with respect toan item of personal property, then thatbranch (or similar establishment) or theremainder of the controlled foreign cor-poration will be the location of manu-facture, production, or construction ofthat property for purposes of applying§1.954–3(b)(1)(i)(b) or (b)(1)(ii)(b) tothe income from the sale of that prop-erty. See paragraph (b)(1)(ii)(c)(3)(v)Example 1 of this section. If more thanone branch (or similar establishment),or one or more branches (or similar es-tablishments) and the remainder of thecontrolled foreign corporation, each inde-pendently satisfy §1.954–3(a)(4)(i) withrespect to an item of personal property,then the location of manufacture, produc-tion, or construction of that property forpurposes of applying §1.954–3(b)(1)(i)(b)or (b)(1)(ii)(b) will be the location ofthat branch (or similar establishment)or the jurisdiction under the laws ofwhich the remainder of the controlledforeign corporation is organized that sat-isfies §1.954–3(a)(4)(i) and that would,after applying §1.954–3(b)(1)(ii)(b) tosuch branch (or similar establishment) or§1.954–3(b)(1)(i)(b) to the remainder ofthe controlled foreign corporation, im-

February 2, 2009 403 2009–5 I.R.B.

pose the lowest effective rate of tax onthe income allocated to such branch or theremainder of the controlled foreign corpo-ration under such section (that is, either§1.954–3(b)(1)(i)(b) or (b)(1)(ii)(b)). Seeparagraph (b)(1)(ii)(c)(3)(v) Example 2 ofthis section.

(iii) No location independently sat-isfies manufacturing test. If none ofthe branches (or similar establishments)or the remainder of the controlled for-eign corporation independently satis-fies §1.954–3(a)(4)(i) with respect to anitem of personal property but the con-trolled foreign corporation as a wholemakes a substantial contribution to themanufacture, production, or construc-tion of that property within the mean-ing of §1.954–3(a)(4)(iv), then for pur-poses of applying §1.954–3(b)(1)(i)(b) or(b)(1)(ii)(b), the location of manufacture,production, or construction with respectto that property will be the “tested man-ufacturing location” unless the “testedsales location” provides a demonstra-bly greater contribution to the manu-facture, production, or construction ofthe property. The tested manufacturinglocation is the location of any branch(or similar establishment) or remain-der of the controlled foreign corpora-tion that contributes to the manufacture,production, or construction of the per-sonal property, if any, and that would,after applying §1.954–3(b)(1)(ii)(b) tosuch branch (or similar establishment)or §1.954–3(b)(1)(i)(b) to the remain-der of the controlled foreign corporation,be treated as a separate corporation andwould impose the lowest effective rateof tax on the income allocated to suchbranch (or similar establishment) or tothe remainder of the controlled foreigncorporation under such section (that is, ei-ther §1.954–3(b)(1)(ii)(b) or (b)(1)(i)(b)).The tested sales location is the locationwhere the branch (or similar establish-ment) or the remainder of the controlledforeign corporation purchases or sells thepersonal property. For purposes of thisparagraph (b)(1)(ii)(c)(3)(iii), the contri-bution to the manufacture, production, orconstruction of the personal property bythe tested sales location will be deemedto include the activities of any branch (orsimilar establishment) or remainder of thecontrolled foreign corporation that wouldnot be treated as a corporation separate

from the tested sales location after theapplication of §1.954–3(b)(1)(ii)(b) or(b)(1)(i)(b). For purposes of this para-graph (b)(1)(ii)(c)(3)(iii), the contributionof the tested manufacturing location to themanufacture, production, or constructionof the personal property will be deemedto include any activities of any branch(or similar establishment) or remainderof the controlled foreign corporation thatwould be treated as a corporation sepa-rate from the tested sales location afterthe application of §1.954–3(b)(1)(ii)(b)or (b)(1)(i)(b). Whether the tested saleslocation provides a demonstrably greatercontribution to the manufacture, pro-duction, or construction of the personalproperty is determined by weighing therelative contributions to the manufac-ture, production, or construction of thatproperty by the tested sales location andthe tested manufacturing location underthe facts and circumstances test providedin §1.954–3(a)(4)(iv). See paragraph(b)(1)(ii)(c)(3)(v) Examples 4, 5, and 6 ofthis section. If the tested sales locationprovides a demonstrably greater contri-bution to the manufacture, production,or construction of the personal propertythan the tested manufacturing locationor if there is no tested manufacturing lo-cation, then the tested sales location isthe location of manufacture, production,or construction of that property and therules of paragraph (b)(1)(ii)(a) of thissection and §1.954–3(b)(1)(i)(a) will notapply with respect to the sales incomerelated to that property and the use of thepurchasing or selling branch (or similarestablishment) or the purchasing or sell-ing remainder will not result in a branchbeing treated as a separate corporation forpurposes of paragraph (b)(2)(ii) of thissection or §1.954–3(b)(2)(ii).

(iv) Location of activity. For purposesof paragraph (b)(1)(ii)(c)(3) of this section,the location of any activity with respect tothe manufacture, production, or construc-tion of an item of personal property is thelocation where the employees of the con-trolled foreign corporation perform suchactivity. For example, the location of anyactivity concerning intellectual property isdetermined based on where employees ofthe controlled foreign corporation develop,or direct the use or development of, the in-tellectual property, not on the formal as-signment of that intellectual property.

(v) Examples. The following examplesillustrate the application of this paragraph(b)(1)(ii)(c)(3):

Example 1. Multiple branches contribute to themanufacture of a single product, only one branchsatisfies §1.954–3(a)(4)(i). (i) Facts. FS is a con-trolled foreign corporation organized in Country M.FS operates three branches, Branch A, Branch B,and Branch C, located respectively in Country A,Country B, and Country C. Branch A, Branch B,and Branch C each performs different manufacturingactivities with respect to the manufacture of ProductX. Branch A, through the activities of employeesof FS located in Country A, designs Product X.Branch B, through the activities of employees ofFS located in Country B, provides quality controland oversight and direction. Branch C, through theactivities of employees of FS located in CountryC, manufactures Product X (within the meaning of§1.954–3(a)(4)(ii) or (a)(4)(iii)) using the designsdeveloped by Branch A and under the oversight ofthe quality control personnel of Branch B. The activ-ities of Branch A and Branch B do not independentlysatisfy §1.954–3(a)(4)(i). Employees of FS locatedin Country M purchase the raw materials used inthe manufacture of Product X from a related personand control the work-in-process and finished goodsthroughout the manufacturing process. Employeesof FS located in Country M also manage the man-ufacturing costs and capacities related to ProductX. Further, employees of FS located in CountryM oversee the coordination between the branches.Employees of FS located in Country M sell ProductX to unrelated persons for use outside of CountryM. The sales income from the sale of Product X istaxed in Country M at an effective rate of tax of 10%.Country C imposes an effective rate of tax of 20%on sales income.

(ii) Result. Country C is the location of manufac-ture for purposes of applying §1.954–3(b)(1)(ii)(b)because only the activities of Branch C independentlysatisfy §1.954–3(a)(4)(i). The use of Branch C hassubstantially the same tax effect as if Branch C werea wholly owned subsidiary corporation of FS becausethe effective rate of tax on the sales income (10%)is less than 90% of, and at least 5 percentage pointsless than, the effective rate of tax that would applyto such income in the country in which Branch Cis located (20%). Therefore, sales of Product X bythe remainder of FS are treated as sales on behalf ofBranch C. In determining whether the remainder ofFS will qualify for the manufacturing exception under§1.954–3(a)(4)(iv), the activities of FS will includethe activities of Branch A or Branch B, respectively,if each of those branches would not be treated as aseparate corporation under §1.954–3(b)(1)(ii)(b), ifthat paragraph were applied independently to each ofBranch A and Branch B. See paragraph (b)(2)(ii)(a)of this section.

Example 2. Multiple branches satisfy§1.954–3(a)(4)(i) with respect to the same productsold by the controlled foreign corporation. (i) Facts.Assume the same facts as in Example 1, except forthe following. In addition to the design of ProductX, Branch A also performs in Country A othermanufacturing activities, including those ascribedto FS in Example 1, that are sufficient to qualify asmanufacturing under §1.954–3(a)(4)(iv) with respect

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to Product X. Country A imposes an effective rate oftax of 12% on sales income.

(ii) Result. Branch A and Branch C throughtheir activities each independently satisfy therequirements of §1.954–3(a)(4)(i). Therefore,§1.954–3(b)(1)(ii)(b) is applied by comparing theeffective rate of tax imposed on the income from thesales of Product X against the lowest effective rateof tax that would apply to the sales income in eitherCountry A or Country C if §1.954–3(b)(1)(ii)(b)were applied separately to Branch A and BranchC. Country A imposes the lower effective rate oftax, and therefore, Branch A is treated as the lo-cation of manufacture for purposes of applying§1.954–3(b)(1)(ii)(b). The effective rate of tax inCountry B is not considered because Branch B doesnot satisfy §1.954–3(a)(4)(i). Neither Branch A norBranch C is treated as a separate corporation becausethe effective rate of tax on the sales income of FSfrom the sale of Product X (10%) is not less than90% of, and at least 5 percentage points less than, theeffective rate of tax that would apply to such incomein the country in which Branch A is located (12%).Sales of Product X by the remainder of the controlledforeign corporation are not treated as made on behalfof any branch.

Example 3. Determining the location of man-ufacture when manufacturing activities performedby multiple branches and no branch independentlysatisfies §1.954–3(a)(4)(i). (i) Facts. FS, a con-trolled foreign corporation organized in Country M,purchases raw materials from a related person. Theraw materials are manufactured (under the princi-ples of §1.954–3(a)(4)(ii) or (a)(4)(iii)) into ProductX by CM, an unrelated corporation, pursuant to acontract manufacturing arrangement. CM physicallyperforms the substantial transformation, assembly,or conversion of the raw materials in Country C. FShas two branches, Branch A and Branch B, locatedin Country A and Country B respectively. BranchA, through the activities of employees of FS lo-cated in Country A, designs Product X. Branch B,through the activities of employees of FS located inCountry B, controls manufacturing related logistics,provides oversight and direction during the manu-facturing process, and controls the raw materials andwork-in-process. FS manages the manufacturingcosts and capacities related to the manufacture ofProduct X through employees located in CountryM. Further, employees of FS located in Country Moversee the coordination between the branches. Em-ployees of FS located in Country M also sell ProductX to unrelated persons for use outside of Country M.Country M imposes an effective rate of tax on salesincome of 10%. Country A imposes an effective rateof tax on sales income of 20%, and Country B im-poses an effective rate of tax on sales income of 24%.Neither the remainder of FS, nor any branch of FSindependently satisfies §1.954–3(a)(4)(i). However,under the facts and circumstances of the business,FS as a whole provides a substantial contribution tothe manufacture of Product X within the meaning of§1.954–3(a)(4)(iv).

(ii) Result. Based on the facts, neither the remain-der of FS (through the activities of its employeesin Country M) nor any branch of FS independentlysatisfies §1.954–3(a)(4)(i) with respect to ProductX, but FS, as a whole, provides a substantial con-tribution through the activities of its employees

to the manufacture of Product X. The remainderof FS, Branch A, and Branch B each provides acontribution through the activities of employees tothe manufacture of Product X. Therefore, FS mustdetermine the location of manufacture under para-graph (b)(1)(ii)(c)(3)(iii) of this section The testedsales location is Country M because the remainderof FS performs the selling activities with respect toProduct X. The location of Branch A is the testedmanufacturing location because the effective rateof tax imposed on FS’s sales income by Country M(10%) is less than 90% of, and at least 5 percent-age points less than, the effective rate of tax thatwould apply to such income in Country A (20%),and Country A has the lowest effective rate of taxamong the manufacturing branches that would, afterapplying §1.954–3(b)(1)(ii)(b), be treated as a sep-arate corporation. The activities of Branch B willbe included in the contribution of Branch A for pur-poses of determining the location of manufacture ofProduct X because the effective rate of tax imposedon the sales income by Country M (10%) is less than90% of, and at least 5 percentage points less than,the effective rate of tax that would apply to suchincome in Country B (24%). Under the facts andcircumstances of the business, the activities of theremainder of FS would not provide a demonstrablygreater contribution to the manufacture of Product Xthan the activities of Branch A and Branch B, consid-ered together. Therefore, the location of manufactureis Country A, the location of Branch A.

Example 4. Manufacturing activities performedby multiple branches, no branch independently sat-isfies §1.954–3(a)(4)(i), selling activities performedby remainder of the controlled foreign corporation,remainder contribution includes branch manufactur-ing activities. (i) Facts. The facts are the same as Ex-ample 3, except that the effective rate of tax on salesincome in Country B is 12%. In addition, under thefacts of the particular business, the activities of em-ployees of FS located in Country B and Country M,if considered together, would provide a demonstra-bly greater contribution to the manufacture of Prod-uct X than the activities of employees of FS locatedin Country A.

(ii) Result. Based on the facts, neither the re-mainder of FS (through activities of its employees inCountry M) nor any branch of FS independently sat-isfies §1.954–3(a)(4)(i) with respect to Product X, butFS, as a whole, provides a substantial contributionthrough the activities of its employees to the manu-facture of Product X. The remainder of FS, BranchA, and Branch B each provide a contribution throughthe activities of their employees to the manufacture ofProduct X. Therefore, FS must determine the locationof manufacture under paragraph (b)(1)(ii)(c)(3)(iii)of this section. The tested sales location is Coun-try M because the remainder of FS performs the sell-ing activities with respect to Product X. The locationof Branch A is the tested manufacturing location be-cause the effective rate of tax imposed on FS’s salesincome by Country M (10%) is less than 90% of, andat least 5 percentage points less than, the effective rateof tax that would apply to such income in Country A(20%), and Branch A is the only branch that would,after applying §1.954–3(b)(1)(ii)(b), be treated as aseparate corporation. The activities of Branch B willbe included in the contribution of the remainder of FSfor purposes of determining the location of manufac-

ture of Product X because the effective rate of tax im-posed on the sales income by Country M (10%) is notless than 90% of, and at least 5 percentage points lessthan, the effective rate of tax that would apply to suchincome in Country B (12%). Under a facts and cir-cumstances analysis, considered together, the activi-ties of Branch B and the remainder of FS would pro-vide a demonstrably greater contribution to the man-ufacture of Product X than the activities of BranchA. Therefore, the rules of paragraph (b)(1)(ii)(a) ofthis section will not apply and neither Branch A norBranch B will be treated as a separate corporation forpurposes of paragraph (b)(2)(ii) of this section and§1.954–3(b)(2)(ii).

Example 5. Manufacturing activities performedby multiple branches, no branch independently satis-fies §1.954–3(a)(4)(i), selling activities performed byremainder of the controlled foreign corporation anda sales branch. (i) Facts. The facts are the same asExample 3, except that selling activities are also per-formed by Branch D in Country D, and Country Dimposes a 16% effective rate of tax on sales income.In addition, under the facts and circumstances of thebusiness, the activities of employees of FS locatedin Country A and Country M, considered together,would provide a demonstrably greater contribution tothe manufacture of Product X than the activities ofemployees of FS located in Country B.

(ii) Result. Based on the facts, neither the re-mainder of FS nor any branch of FS independentlysatisfies §1.954–3(a)(4)(i) with respect to ProductX, but FS, as a whole, provides a substantial con-tribution through the activities of its employees tothe manufacture of Product X. The remainder of FS,Branch A, and Branch B each provide a contribu-tion through the activities of their employees to themanufacture of Product X. Therefore, FS must de-termine the location of manufacture under paragraph(b)(1)(ii)(c)(3)(iii) of this section. Further, pursuantto paragraph (b)(1)(ii)(c)(1) of this section, paragraph(b)(1)(ii)(c)(3)(iii) of this section must be appliedseparately to the sales income derived by the remain-der of FS and Branch D respectively. The resultswith respect to the remainder of FS in this Example6 are the same as in Example 3. However, paragraph(b)(1)(ii)(c)(3)(iii) of this section must also be ap-plied with respect to Branch D because Branch Dperforms selling activities with respect to Product X.Thus, for purposes of that sales income, the locationof Branch D is the tested sales location. The locationof Branch B is the tested manufacturing location be-cause the effective rate of tax imposed on the BranchD’s sales income by Country D (16%) is less than90% of, and at least 5 percentage points less than, theeffective rate of tax that would apply to such incomein Country B (24%), and Branch B is the only branchthat would, after applying §1.954–3(b)(1)(ii)(b), betreated as a separate corporation. The manufacturingactivities performed in Country M by the remainderof FS and the manufacturing activities performed inCountry A by Branch A will be included in BranchD’s contribution to the manufacture of Product X forpurposes of determining the location of manufactureof Product X with respect to Branch D’s sales incomebecause the effective rate of tax imposed on the salesincome by Country D (16%) is not less than 90% of,and at least 5 percentage points less than, the effec-tive rate of tax that would apply to such income inCountry M (10%) and Country A (20%). Under the

February 2, 2009 405 2009–5 I.R.B.

facts and circumstances of the business, the activitiesof Branch D, Branch A, and the remainder of FS,considered together, would provide a demonstrablygreater contribution to the manufacture of ProductX than the activities of Branch B. Therefore, therules of paragraph (b)(1)(ii)(a) of this section willnot apply to Branch D and neither Branch A norBranch D will be treated as a separate corporationfor purposes of paragraph (b)(2)(ii) of this sectionand §1.954–3(b)(2)(ii).

Example 6. Determining the location of manufac-ture when employees of remainder of controlled for-eign corporation travel to location of unrelated con-tract manufacturer to perform manufacturing activ-ities. (i) Facts. FS, a controlled foreign corpora-tion organized in Country M, purchases raw materialsfrom a related person. The raw materials are manu-factured (under the principles of §1.954–3(a)(4)(ii) or(a)(4)(iii)) into Product X by CM, an unrelated corpo-ration, pursuant to a contract manufacturing arrange-ment. CM physically performs the substantial trans-formation, assembly, or conversion of the raw materi-als in Country C. Employees of FS located in CountryM sell Product X to unrelated persons for use outsideof Country M. Employees of FS located in Country Mengage in product design, manage the manufacturingcosts and capacities with respect to Product X, and di-rect the use of intellectual property for the purpose ofmanufacturing Product X. Quality control and over-sight and direction of the manufacturing process areconducted in Country C by employees of FS who areemployed in Country M but who regularly travel toCountry C. Branch A, located in Country A, is theonly branch of FS. Product design with respect toProduct X conducted by employees of FS located inCountry A is supplemental to the bulk of the designwork, which is done by employees of FS located inCountry M. At all times, employees of Branch A con-trol the raw materials, work-in-process and finishedgoods. Employees of FS located in Country A alsocontrol manufacturing related logistics with respectto Product X. Country M imposes an effective rate oftax on sales income of 10%. Country A imposes aneffective rate of tax on sales income of 20%. Nei-ther the remainder of FS nor Branch A independentlysatisfies §1.954–3(a)(4)(i). However, under the factsand circumstance of the business, FS as a whole (in-cluding Branch A) provides a substantial contributionto the manufacture of Product X within the meaningof §1.954–3(a)(4)(iv).

(ii) Result. Based on the facts, neither the re-mainder of FS nor Branch A independently satisfies§1.954–3(a)(4)(i) with respect to Product X, butFS, as a whole, provides a substantial contributionthrough the activities of its employees to the man-ufacture of Product X. The remainder of FS andBranch A each provide a contribution through theactivities of employees to the manufacture of ProductX. Therefore, FS must determine the location ofmanufacture under paragraph (b)(1)(ii)(c)(3)(iii) ofthis section. The tested sales location is Country Mbecause the remainder of FS performs the sellingactivities with respect to Product X. The tested manu-facturing location is the location of Branch A becausethe effective rate of tax imposed on the remainder ofFS’s sales income by Country M (10%) is less than90% of, and at least 5 percentage points less than, theeffective rate of tax that would apply to such incomein Country A (20%), and Branch A is the only branch

that would, after applying §1.954–3(b)(1)(ii)(b),be treated as a separate corporation. Although theactivities of traveling employees are considered indetermining whether FS, as a whole, makes a sub-stantial contribution to the manufacture of ProductX under §1.954–3(a)(4)(iv), the activities of theemployees of FS that are performed in Country C arenot taken into consideration in determining whetherCountry M, the jurisdiction under the laws of whichFS is organized, is the location of manufacture underparagraph (b)(1)(ii)(c)(3)(iii) of this section. Activi-ties of employees performed outside the jurisdictionin which the controlled foreign corporation is orga-nized and outside a location in which the controlledforeign corporation maintains a branch or similarestablishment, are not considered in determining thelocation of manufacture. Under the facts and circum-stances of the business, the activities of employeesof FS performed in Country M do not provide ademonstrably greater contribution to the manufactureof Product X than the activities of employees of FSperformed in Country A. Therefore, the location ofmanufacture is Country A, the location of Branch A.

(4) Use of more than one branch tomanufacture, produce, construct, grow,or extract separate items of personalproperty. For purposes of paragraphs(b)(1)(ii)(c)(2) and (b)(1)(ii)(c)(3) of thissection, an item of personal property refersto an individual unit of personal propertyrather than a type or class of personalproperty.

(2) [Reserved]. For further guidance,see §1.954–3(b)(2).

(i) [Reserved]. For further guidance,see §1.954–3(b)(2)(i).

(a) Treatment as separate corporations.[Reserved]. For further guidance, see§1.954–3(b)(2)(i)(a).

(b) Activities treated as performed onbehalf of the remainder of corporation.With respect to purchasing or selling activ-ities performed by or through the branch orsimilar establishment, such purchasing orselling activities will—

(1) With respect to personal propertymanufactured, produced, or constructed bythe remainder of the controlled foreign cor-poration (or any branch treated as the re-mainder of the controlled foreign corpora-tion); or

(2) With respect to personal prop-erty (other than property described inparagraph (b)(2)(i)(b)(1) of this section)purchased or sold, or purchased and sold,by the remainder of the controlled for-eign corporation (or any branch treatedas the remainder of the controlled foreigncorporation), be treated on behalf of theremainder of the controlled foreign corpo-ration.

(c) [Reserved]. For further guidance,see §1.954–3(b)(2)(i)(c).

(d) Determination of hypothetical tax.To the extent applicable, the principlesof §1.954–1(d)(2) shall be used in deter-mining, under paragraph (b)(1)(i) of thissection and §1.954–3(b)(1)(i), the effec-tive rate of tax which would apply to theincome of the branch or similar estab-lishment under the laws of the country inwhich the controlled foreign corporationis created or organized, or in determining,under paragraph (b)(1)(ii) of this sectionand §1.954–3(b)(1)(ii), the effective rateof tax which would apply to the incomeof the branch or similar establishment un-der the laws of the country in which themanufacturing, producing, constructing,growing, or extracting branch or similarestablishment is located.

(e) [Reserved]. For further guidance,see §1.954–3(b)(2)(i)(e).

(ii) [Reserved]. For further guidance,see §1.954–3(b)(2)(ii).

(a) Treatment as separate corpora-tions. The branch or similar establish-ment will be treated as a wholly ownedsubsidiary corporation of the controlledforeign corporation, and such branch orsimilar establishment will be deemed tobe incorporated in the country in whichit is located. For purposes of applyingthe rules of this paragraph (b)(2)(ii) and§1.954–3(b)(2)(ii), a branch or similarestablishment of a controlled foreign cor-poration treated as a separate corporationpurchasing or selling on behalf of theremainder of the controlled foreign cor-poration under paragraph (b)(2)(ii)(b)of this section, or the remainder of thecontrolled foreign corporation treatedas a separate corporation purchasing orselling on behalf of a branch or similarestablishment of the controlled foreigncorporation under §1.954–3(b)(2)(ii)(c),will include any other branch or similarestablishment or remainder of the con-trolled foreign corporation that would notbe treated as a separate corporation (apartfrom the branch or similar establishmentof a controlled foreign corporation that istreated as performing purchasing or sell-ing activities on behalf of the remainder ofthe controlled foreign corporation underparagraph (b)(2)(ii)(b) of this section orthe remainder of the controlled foreigncorporation that is treated as performingpurchasing or selling activities on behalf

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of the branch or similar establishment un-der §1.954–3(b)(2)(ii)(c)) if the effectiverate of tax imposed on the income of thepurchasing or selling branch or similarestablishment, or purchasing or sellingremainder of the controlled foreign cor-poration, were tested under the principlesof §1.954–3(b)(1)(i)(b) or (b)(1)(ii)(b)against the effective rate of tax that wouldapply to such income if it were consideredderived by such other branch or similarestablishment or the remainder of the con-trolled foreign corporation.

(b) Activities treated as performed onbehalf of the remainder of corporation.With respect to purchasing or selling activ-ities performed by or through the branch orsimilar establishment, such purchasing orselling activities will—

(1) With respect to personal propertymanufactured, produced, or constructed bythe remainder of the controlled foreign cor-poration (or any branch treated as the re-mainder of the controlled foreign corpora-tion); or

(2) With respect to personal prop-erty (other than property described inparagraph (b)(2)(ii)(b)(1) of this section)purchased or sold, or purchased and sold,by the remainder of the controlled foreigncorporation (or any branch treated as theremainder of the controlled foreign corpo-ration), be treated as performed on behalfof the remainder of the controlled foreigncorporation.

(c) and (d) [Reserved]. For furtherguidance, see §1.954–3(b)(2)(ii)(c) and(d).

(e) Comparison with ordinary treat-ment. Income derived by a branch orsimilar establishment, or by the remain-der of the controlled foreign corporation,shall not be determined to be foreign basecompany sales income under paragraph(b) of this section or §1.954–3(b) if the in-come would not be so considered if it werederived by a separate controlled foreigncorporation under like circumstances.

(f) [Reserved]. For further guidance,see §1.954–3(b)(2)(ii)(f).

(3) [Reserved]. For further guidance,see §1.954–3(b)(3).

(4) Illustrations. The application of thisparagraph (b)(4) may be illustrated by thefollowing examples:

Examples (1) and (2). [Reserved]. Forfurther guidance, see §1.954–3(b)(4) Ex-amples (1) and (2).

Example (3). (i) Facts. Corporation E, a con-trolled foreign corporation incorporated under thelaws of foreign Country X, is a wholly owned sub-sidiary of Corporation D, also a controlled foreigncorporation incorporated under the laws of CountryX. Corporation E maintains Branch B in foreignCountry Y. Both corporations use the calendar yearas the taxable year. In 1964, Corporation E’s soleactivity, carried on through Branch B, consists of thepurchase of articles manufactured in Country X byCorporation D, a related person, and the sale of thearticles through Branch B to unrelated persons. Onehundred percent of the articles sold through Branch Bare sold for use outside Country X and 90 percent arealso sold for use outside of Country Y. The income ofCorporation E derived by Branch B from such trans-actions is taxed to Corporation E by Country X onlyat the time Corporation E distributes such income toCorporation D and is taxed on the basis of what thetax (a 40 percent effective rate) would have been ifthe income had been derived in 1964 by Corpora-tion E from sources within Country X from doingbusiness through a permanent establishment therein.Country Y levies an income tax at an effective rateof 50 percent on income derived from sources withinsuch country, but the income of Branch B for 1964is effectively taxed by Country Y at a 5 percent ratesince under the laws of such country, only 10 percentof Branch B’s income is derived from sources withinsuch country. Corporation E makes no distributionsto Corporation D in 1964.

(ii) Result. In determining foreign base companysales income of Corporation E for 1964, Branch B istreated as a separate wholly owned subsidiary corpo-ration of Corporation E, the 5 percent rate of tax be-ing less than 90 percent of, and at least 5 percentagepoints less than the 40 percent rate. Income derivedby Branch B, treated as a separate corporation, fromthe purchase from a related person (Corporation D),of personal property manufactured outside of Coun-try Y and sold for use, disposition, or consumptionoutside of Country Y constitutes foreign base com-pany sales income. If, instead, Corporation D wereunrelated to Corporation E, none of the income wouldbe foreign base company sales income because Cor-poration E would be purchasing from and selling tounrelated persons and if Branch B were treated as aseparate corporation it would likewise be purchasingfrom and selling to unrelated persons. Alternatively,if Corporation D were related to Corporation E, butBranch B manufactured the articles prior to sale un-der the principles of §1.954–3(a)(4)(iv), the incomewould not be foreign base company sales income be-cause Branch B, treated as a separate corporation,would qualify for the manufacturing exception under§1.954–3(a)(4).

Examples (4) through (7) [Reserved]. For furtherguidance, see §1.954–3(b)(4) Examples (4) through(7).

Example (8). Uniformly applicable incentive taxrate in one country. (i) Facts. FS is a controlledforeign corporation organized in Country M. FS op-erates one branch, Branch A, located in Country A.Branch A manufactures Product X within the mean-ing of §1.954–3(a)(4)(ii) or (a)(4)(iii). Raw materialsused in the manufacture of Product X are purchasedby FS from an unrelated person. FS engages in activ-ities in Country M to sell Product X to a related per-son for use outside of Country M. Employees of FS

located in Country M perform only sales functions.The effective rate imposed in Country M on the in-come from the sale of Product X is 10%. Country Agenerally imposes an effective rate of tax on incomeof 20%, but imposes a uniformly applicable incentiverate of tax of 10% on manufacturing income and re-lated sales income.

(ii) Result. The use of Branch A to manufactureProduct X does not have substantially the same tax ef-fect as if Branch A were a wholly owned subsidiarycorporation of FS because the effective rate of tax onFS’s sales income from the sale of Product X in Coun-try M (10%) is not less than 90% of, and at least 5 per-centage points less than, the effective rate of tax thatwould apply to such income in the country in whichBranch A is located (10%). Consequently, pursuantto §1.954–3(b)(1)(ii)(b), Branch A is not treated asa separate corporation apart from the remainder ofFS for purposes of determining foreign base companysales income.

Example (9). Manufacturing activities performedby multiple branches, no branch independently sat-isfies §1.954–3(a)(4)(i), selling activities performedby remainder of the controlled foreign corpora-tion, branch manufacturing activities included inremainder contribution. (i) Facts. FS, a controlledforeign corporation organized in Country M, hastwo branches, Branch A and Branch B, located inCountry A and Country B respectively. FS pur-chases raw materials from a related person. The rawmaterials are manufactured (under the principles of§1.954–3(a)(4)(ii) or (a)(4)(iii)) into Product X byCM, an unrelated corporation, pursuant to a con-tract manufacturing arrangement. CM physicallyperforms the substantial transformation, assembly,or conversion required to manufacture Product Xoutside of FS’s country of organization. FS managesthe manufacturing costs and capacities with respectto the manufacture of Product X through employeeslocated in Country M. Further, employees of FS lo-cated in Country M oversee the coordination betweenthe branches. Branch A, through the activities of em-ployees of FS located in Country A, designs ProductX, controls manufacturing related logistics, and con-trols the raw materials and work-in-process duringthe manufacturing process. Branch B, through theactivities of employees of FS located in Country B,provides quality control and oversight and directionduring the manufacturing process. Employees of FSlocated in Country M sell Product X to unrelatedpersons for use outside of Country M. Country Mimposes an effective rate of tax on sales income of10%. Country A imposes an effective rate of taxon sales income of 12%, and Country B imposesan effective rate of tax on sales income of 24%.None of the remainder of FS, Branch A, or Branch Bindependently satisfies §1.954–3(a)(4)(i). However,under the facts and circumstances of the business,FS, as a whole, provides a substantial contributionto the manufacture of Product X within the meaningof §1.954–3(a)(4)(iv). Under the facts and circum-stances of the business, the activities of the remainderof FS and Branch A, if considered together, wouldnot provide a demonstrably greater contribution tothe manufacture of Product X than the activities ofBranch B. Under the facts and circumstances of thebusiness, however, the activities of the employeesof the remainder of FS and Branch A, if considered

February 2, 2009 407 2009–5 I.R.B.

together, would constitute a substantial contributionto the manufacture of Product X.

(ii) Result. Based on the facts, neither the re-mainder of FS (through activities of its employeesin Country M) nor any branch of FS independentlysatisfies §1.954–3(a)(4)(i) with respect to ProductX, but FS, as a whole, provides a substantial con-tribution through the activities of its employees tothe manufacture of Product X. The remainder ofFS, Branch A, and Branch B each provide a con-tribution through the activities of employees to themanufacture of Product X. Therefore, FS must de-termine the location of manufacture under paragraph(b)(1)(ii)(c)(3)(iii) of this section. The tested saleslocation is Country M because the remainder of FSperforms the selling activities with respect to ProductX. The location of Branch B is the tested manu-facturing location because the effective rate of taximposed on FS’s sales income by Country M (10%)is less than 90% of, and at least 5 percentage pointsless than, the effective rate of tax that would apply tosuch income in Country B (24%); and Branch B isthe only manufacturing branch that would, after ap-plying §1.954–3(b)(1)(ii)(b), be treated as a separatecorporation. The manufacturing activities performedin Country A will be included in the contributionof the remainder of FS for purposes of determiningthe location of manufacture of Product X becausethe effective rate of tax imposed on the sales incomeby Country M (10%) is not less than 90% of, and atleast 5 percentage points less than, the effective rateof tax that would apply to such income in CountryA (12%). Under the facts and circumstances of thebusiness, the manufacturing activities of the remain-der of FS and Branch A, considered together, wouldnot provide a demonstrably greater contribution tothe manufacture of Product X than the activities ofBranch B. Therefore, the location of manufacture isCountry B, the location of Branch B. In determiningthat Country B is the location of manufacture, it wasdetermined that after applying §1.954–3(b)(1)(ii)(b)Branch B would be treated as a separate corpora-tion under paragraph (b)(1)(ii)(a) of this section forpurposes of determining foreign base company salesincome. To determine whether income from the saleof Product X is foreign base company sales income,the remainder of FS takes into account the activitiesof Branch A because, under paragraph (b)(2)(ii)(a)of this section, Branch A would not be treated as aseparate corporation apart from FS. The remainderof FS is considered to have manufactured Product Xunder §1.954–3(a)(4)(i) because the manufacturingactivities of the remainder of FS and Branch A,considered together, would make a substantial con-tribution to the manufacture of Product X within themeaning of §1.954–3(a)(4)(iv). Therefore, incomederived from the sale of Product X by the remainderof FS does not constitute foreign base company salesincome.

(c) [Reserved]. For further guidance,see §1.954–3(c).

(d) [Reserved]. For further guidance,see §1.954–3(d).

(e) Effective/applicability date oftemporary regulations. Paragraphs(b)(1)(i)(c), (b)(1)(ii)(a), (b)(1)(ii)(c),(b)(2)(i)(b), (b)(2)(ii)(a), (b)(2)(ii)(b),

(b)(2)(ii)(e), and (b)(4) Example (3), Ex-ample (8), and Example (9) of this sectionshall apply to taxable years of controlledforeign corporations beginning after June30, 2009, and for taxable years of UnitedStates shareholders in which or with whichsuch taxable years of the controlled for-eign corporations end.

(f) Application of temporary regula-tions to earlier taxable years. For theapplication of these temporary regula-tions retroactively with respect to taxableyears of controlled foreign corporationsand to open taxable years of United Statesshareholders in which or with which suchtaxable years of the controlled foreigncorporations end, see §1.954–3(d).

(g) Expiration date. The applicabilityof this section expires on or before Decem-ber 23, 2011.

Linda E. Stiff,Deputy Commissioner forServices and Enforcement.

Approved December 18, 2008.

Eric Solomon,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on December 24,2008, 8:45 a.m., and published in the issue of the FederalRegister for December 29, 2008, 73 F.R. 79334)

Section 1256.—Section1256 Contracts Markedto Market(Also §§ 446, 481, 7805; 1.446–1, 301.7805–1.)

Section 1256 contracts marked tomarket. This ruling holds that Dubai Mer-cantile Exchange, which is a United ArabEmirates Authorized Market Institution, isa qualified board or exchange within themeaning of section 1256(g)(7)(C) of theCode.

Rev. Rul. 2009–4

ISSUE

Is Dubai Mercantile Exchange, whichis a United Arab Emirates AuthorizedMarket Institution, a qualified board orexchange within the meaning of section1256(g)(7)(C) of the Internal RevenueCode?

LAW

Section 1256(g)(7) of the Code pro-vides that the term “qualified board or ex-change” means:

(A) a national securities exchangewhich is registered with the Securities andExchange Commission,

(B) a domestic board of trade desig-nated as a contract market by the Com-modity Futures Trading Commission, or

(C) any other exchange, board of trade,or other market which the Secretary deter-mines has rules adequate to carry out thepurposes of section 1256.

HOLDING

The Internal Revenue Service deter-mines that Dubai Mercantile Exchange,which is a United Arab Emirates Autho-rized Market Institution, is a qualifiedboard or exchange within the meaning ofsection 1256(g)(7)(C) of the Code.

EFFECTIVE DATE

Under the authority of section7805(b)(8) of the Code, this revenueruling is effective for Dubai MercantileExchange Contracts (commodity futurescontracts and futures contract options)entered into on or after February 1, 2009.

CHANGE IN METHOD OFACCOUNTING

A change in the treatment of DubaiMercantile Exchange Contracts to complywith this revenue ruling is a change inmethod of accounting within the mean-ing of sections 446 and 481 of the Codeand the regulations thereunder. The Com-missioner grants consent to taxpayers tochange to the section 1256 mark to marketmethod for the first taxable year duringwhich the taxpayer holds a Dubai Mercan-tile Exchange Contract that was enteredinto on or after February 1, 2009. Such ataxpayer need not file a Form 3115, Appli-cation for Change in Accounting Method.Dubai Mercantile Exchange Contracts thatwere entered into before February 1, 2009,are not covered by the change in methodfor which consent is granted. Becausethe change is being made on a “cut-off”basis, there is no potential omission orduplication of income or deductions, and

2009–5 I.R.B. 408 February 2, 2009

therefore no adjustment under section 481is required.


The principal author of this revenue rul-ing is K. Scott Brown of the Office ofAssociate Chief Counsel (Financial Insti-tutions and Products). For further infor-mation regarding this revenue ruling, con-tact Mr. Brown at (202) 622–7454 (not atoll-free call).

Section 6011.—GeneralRequirement of Return,Statement, or List26 CFR 31.6011(a)–1: Returns under Federal Insur-ance Contributions Act.

T.D. 9440


Employer’s Annual FederalTax Return and Modificationsto the Deposit Rules


ACTION: Final and temporary regula-tions.

SUMMARY: This document containstemporary regulations relating to the an-nual filing of Federal employment taxreturns and requirements for employmenttax deposits. These temporary regulationsrelate to sections 6011 and 6302 of theInternal Revenue Code (Code) concern-ing reporting and paying income taxeswithheld from wages and reporting andpaying taxes under the Federal InsuranceContributions Act (FICA) (collectively,“employment taxes”). These temporaryregulations generally allow certain em-ployers to file a Form 944, “Employer’sANNUAL Federal Tax Return,” rather thanForm 941, “Employer’s QUARTERLYFederal Tax Return.” In addition to rulesrelated to Form 944, the temporary regu-lations provide an additional method for

employers who file Form 941 to determinewhether the amount of accumulated em-ployment taxes is considered de minimis.The portions of this document that are finalregulations provide necessary cross-refer-ences to the temporary regulations. Thetext of these temporary regulations alsoserves as the text of the proposed regula-tions (REG–148568–04) set forth in thisissue of the Bulletin.

DATES: Effective Date: These regulationsare effective on December 29, 2008.

Applicability Date: For dates ofapplicability, see §§31.6011(a)–1T(g),31.6011(a)–4T(d), and 31.6302–1T(n).

FOR FURTHER INFORMATIONCONTACT: Audra Dineen, (202)622–4910 (not a toll-free number).


Background

These temporary regulations amendthe Regulations on Employment Taxesand Collection of Income Tax at Source(26 CFR part 31) under section 6011relating to the Federal employment taxreturn filing requirements and section6302 relating to the employment taxdeposit requirements. These temporaryregulations are part of the IRS’s effortto reduce taxpayer burden by permittingcertain employers to file one returnannually to report their employment taxliabilities instead of four quarterly returns.These temporary regulations affecttaxpayers that file Form 941, “Employer’sQUARTERLY Federal Tax Return,” Form944, “Employer’s ANNUAL Federal TaxReturn,” and any related Spanish-languagereturns or returns for U.S. possessions.

On January 3, 2006, a temporary reg-ulation (T.D. 9239, 2006–1 C.B. 401)relating to Form 944 (the 2006 temporaryregulation) was published in the FederalRegister (71 FR 11). A notice of proposedrulemaking (REG–148568–04, 2006–1C.B. 417) cross-referencing the temporaryregulations was published in the FederalRegister for the same day (71 FR 46) (the2006 proposed regulation). A correctionto the 2006 temporary regulation was pub-lished in the Federal Register on March17, 2006 (71 FR 13766). No requests fora public hearing were received; therefore,

no public hearing was held. Commentsresponding to the notice of proposed rule-making were received.

Those comments requested that use ofForm 944 be changed from mandatoryto voluntary and that the amount of theemployment tax liability used to deter-mine whether employers are eligible tofile Form 944 (the “eligibility threshold”)be increased. The Treasury Departmentand the IRS agree with the suggestion tomake Form 944 voluntary. The TreasuryDepartment and the IRS will continue toconsider whether to increase the eligibil-ity threshold. The final regulations allowthe eligibility threshold to be increasedthrough future guidance.

These temporary regulations continueto permit most employers who file Form944 to pay accumulated employment taxesannually when they file their returns andmodify the lookback period and de min-imis deposit rule for these employers. Inaddition to the rules related to Form 944,these temporary regulations provide an ad-ditional method for employers who fileForms 941 quarterly to determine whetherthe amount of accumulated employmenttaxes is considered de minimis. This safeharbor was originally proposed in the 2006proposed regulation.

Explanation of Provisions

Form 944 — Regulations ConcerningFiling Requirements Under Section 6011

These temporary regulations allowcertain employers to file an annual em-ployment tax return, Form 944, to reporttheir social security, Medicare, and with-held Federal income taxes rather than thequarterly Form 941. For these employers,Form 944 will replace Form 941 and re-duce their burden by reducing the numberof returns they are required to file eachyear. Form 944 will not replace Form 943,“Employer’s Annual Federal Tax Returnfor Agricultural Employees,” or ScheduleH (Form 1040), “Household EmploymentTaxes.” However, if an employer filesForm 944, the employer may choose toreport wages with respect to householdemployees on Form 944, instead of re-porting such wages on Schedule H (Form1040). Form 944 is generally due January31 of the year following the tax year forwhich the return is filed. If the employer

February 2, 2009 409 2009–5 I.R.B.

timely deposits all accumulated employ-ment taxes on or before January 31 ofthe year following the tax year for whichthe return is filed, the employer will have10 extra calendar days to file Form 944pursuant to §31.6071(a)–1(a).

Under the 2006 proposed and tempo-rary regulations, the IRS sent a notificationletter to qualified employers with an esti-mated employment tax liability of $1,000or less requiring them to participate in theEmployers’ Annual Federal Tax Program(Form 944) (hereinafter referred to as theForm 944 Program). Employers were eli-gible to opt out only if they estimated thattheir employment tax liability would ex-ceed the $1,000 threshold or if they wantedto e-file Forms 941 quarterly instead. Newemployers who estimated that their em-ployment tax liability would be $1,000 orless also were eligible to file Form 944.These employers were identified by theirresponses on Form SS–4, Application forEmployer Identification Number, and no-tified that they were required to file Form944 in the letter advising them of their em-ployer identification number. Employersthat were not identified by the IRS in ei-ther manner were able to contact the IRSif they thought they were qualified. Ifthe IRS determined they were qualified, itwould send confirmation to these employ-ers. Once employers received this letter,they were required to file Form 944 insteadof Forms 941.

Commentators suggested that Form944 should be voluntary instead of manda-tory. This benefits taxpayers because itallows them to choose the filing require-ment they prefer and to change from yearto year more easily. In addition, commen-tators suggested that the threshold shouldbe increased in order to allow more em-ployers to take advantage of Form 944 andto bring the threshold in line with the deminimis deposit rule amount, which is lessthan $2,500 as discussed more fully in thispreamble. Sections 31.6011(a)–1T(a)(5)and 31.6011(a)–4T(a)(4) have been re-vised to incorporate the suggestion tomake the program voluntary. Althoughthese temporary regulations do not adoptthe suggestion to increase the eligibilitythreshold, the Treasury Department andthe IRS will continue to consider this sug-gestion and may increase the threshold inthe future. To accommodate any potentialincrease to the threshold amount before fi-

nal regulations are issued, these temporaryregulations contain a provision that allowsthe IRS to increase the eligibility thresholdby guidance published in the Internal Rev-enue Bulletin. See §601.601(d)(2)(ii)(b).

Under §§31.6011(a)–1T(a)(5) and31.6011(a)–4T(a)(4) in effect for taxableyears beginning on or after January 1,2009, employers who estimate that theirannual employment tax liability will be$1,000 or less can contact the IRS to ex-press their desire to file Form 944 insteadof Forms 941 for a taxable year. Onlyupon such a request will the IRS send anotification letter to qualified employersconfirming that they may file Form 944for that taxable year. Once employers re-ceive this notice they must file Form 944and cannot file Forms 941 instead for ataxable year until they contact the IRS tochange their filing requirement to Form941 for that taxable year and receive con-firmation that their filing requirement hasbeen changed.

The IRS will issue guidance publishedin the Internal Revenue Bulletin inform-ing employers how they can contact theIRS to participate in the Form 944 Programand how they can elect out if they later de-cide that they want to file Forms 941 in-stead of Form 944. Under the 2006 reg-ulations, employers were only eligible toopt out if they estimated that their employ-ment tax liability would exceed the $1,000threshold or if they wanted to e-file Forms941 quarterly instead. Because the pro-gram is being made voluntary, beginningin tax year 2010, employers will be able toopt out for any reason if they follow pro-cedures to be provided in future guidance.Employers that have received notificationof their qualification to file Form 944, evenif the notification was received prior to thepublication of these regulations, must con-tinue to file Form 944 unless they properlyopt out of the Form 944 program.

In addition, a few clarifying revisionswere made to the regulations under section6011. First, §§31.6011(a)–1T(a) and31.6011(a)–4T(a) were clarified by addingreferences to §§31.6011(a)–1T(a)(5)and 31.6011(a)–4T(a)(4) to account forForm 944 in §§31.6011(a)–1T(a)(1)and 31.6011(a)–4T(a)(1). Sec-ond, §§31.6011(a)–1(a)(5) and31.6011(a)–4(a)(4) were revised to re-move the details regarding the proceduresto use for opting out of the Form 944

program and provide that the IRS willissue guidance published in the InternalRevenue Bulletin containing these proce-dures. The IRS will issue procedures inother forms of guidance published in theIRB regarding how to opt out of Form 944for taxable year 2009 and how to electto file Form 944 for taxable year 2010and beyond. This will allow the IRS toadminister the program more effectively,by having the flexibility to adjust theprocedures as necessary due to changes inthe program and taxpayer response.

Form 944 — Regulations ConcerningDeposit Requirements Under Section6302

These temporary regulations revise the2006 temporary regulation concerningrequirements for employers to make de-posits of employment taxes under section6302 and §31.6302–1 to make a few clar-ifying changes to §31.6302–1 related toForm 944. These temporary regulationscontinue to permit employers who fileForm 944 to deposit or pay their accumu-lated employment taxes annually whenthey file their Form 944 if they satisfy theprovisions of the de minimis deposit rule,as modified in §31.6302–1T(f)(4)(iii),rather than make monthly or semi-weeklydeposits. These temporary regulationscontinue to contain the exception in§31.6302–1T(c)(6) for employers whofiled Form 944 in the preceding year butwho no longer qualify because their an-nual employment tax liability exceeds theeligibility threshold.

Also, these temporary regulations con-tinue to provide a different lookbackperiod for Form 944 filers to use to deter-mine an employer’s status as a monthlyor semi-weekly depositor. The lookbackperiod was changed in the 2006 temporaryand proposed regulations because once anemployer begins to file annual Form 944returns, it may not be possible for the IRSto determine the employer’s aggregateamount of employment tax liability duringthe lookback period set forth in the existingregulations (12-month period ending thepreceding June 30) because the employermay not have filed any quarterly returnsduring that period. Under the 2006 tem-porary regulation, §31.6302–1T(b)(4)(i)provided that the lookback period for em-ployers who filed Form 944 during the

2009–5 I.R.B. 410 February 2, 2009

current, or preceding, calendar year is thesecond calendar year preceding the currentcalendar year. For example, the lookbackperiod for calendar year 2009 is calendaryear 2007.

In these temporary regulations,§31.6302–1T(b)(4)(i) is clarified to reflectthat the lookback period is the secondpreceding calendar year for employerswho filed Form 944 for either of the twoprevious calendar years, not just the oneprevious calendar year. This clarificationwas needed because an employer wouldnot have filed the requisite quarterly re-turns to use the other lookback period(12-month period ending June 30) if theyfiled Form 944 in either of the prior years.For example, if an employer filed Form944 in 2006 but not in 2007, the lookbackperiod for 2008 would be 2006, becausethey would not have filed quarterly returnsfor July through December 2006 and, thus,it would be impossible to use July 2006 —June 2007 as the lookback period.

Section 31.6302–1T(b)(4)(i) also is re-vised to clarify that the amount of tax re-ported during the lookback period is de-termined without regard to the employer’sfiling requirement. In other words, in thepreceding example, if an employer is re-quired to file Forms 941 for 2008 but filedForm 944 for the lookback period (2006),the amount of employment tax liability re-ported for the lookback period would bethe amount of employment tax the em-ployer reported on its Form 944 for 2006even though the employer will file Forms941 to report its 2008 liability. The reversealso is true. The employment tax liabilityreported for the lookback period (2006) ofan employer required to file Form 944 for2008 would be the sum of the liabilities itreported on its four Forms 941 for 2006.

In addition, §31.6302–1T(b)(4)(ii) isrevised by changing the term “supple-mental” to “adjusted” and deleting thereference to Form 941c, “SupportingStatement To Correct Information,” due tothe revisions to the process of adjustingemployment tax liability. Final regula-tions (T.D. 9405, 2008–32 I.R.B. 293)relating to employment tax adjustmentswere published in the Federal Register(73 FR 37371) on July 1, 2008. For pe-riods ending on or before December 31,2008, the employment tax liability re-ported on the original return includes anyprior period adjustments reported on that

return (for example, prior period adjust-ments supported by a Form 941c attachedto the return for a subsequent period). Forperiods beginning on or after January 1,2009, employers can no longer make priorperiod adjustments on a return. Instead,employers will use an adjusted return orclaim for refund to make corrections to theamounts reported on their original returns.Lastly, §31.6302–1T is revised by addingreferences to Form 944 in paragraphs(e)(2) and (g)(1).

Form 941 — New Deposit Rule SafeHarbor Under Section 6302

In addition to revising the 2006 tempo-rary regulation regarding Form 944, thesetemporary regulations incorporate the safeharbor for employers who file Forms 941that was included in the 2006 proposedregulation. The safe harbor helps smallemployers who file Form 941 and have anunexpected increase in their deposit liabil-ity for a quarterly return period. Thesetemporary regulations provide an alternatemethod for determining whether the em-ployer’s employment tax obligations arede minimis, which is based on the employ-ment taxes due for the prior return period.This special rule applies only to employersfiling quarterly tax returns and, therefore,does not apply to employers who file Form944.

Generally, deposits of taxes reportedon Form 941, “Employer’s QUARTERLYFederal Tax Return,” are due monthlyor semi-weekly. If an employer failedto make timely deposits of employmenttaxes, the employer, absent reasonablecause, is subject to the penalty for failure todeposit under section 6656. Prior to thesetemporary regulations, §31.6302–1(f)(4)(the de minimis deposit rule) provided that,for quarterly and annual return periods, ifthe aggregate amount of employment taxesfor the return period is less than $2,500and that amount was deposited or paidwith a timely filed return for that returnperiod, the amount was deemed to havebeen timely deposited and the employerwas not subject to the penalty for failure todeposit. Accordingly, employers who paidtheir employment taxes when they timelyfiled their quarterly returns were deemedto have timely deposited their taxes if theamount of taxes due was less than $2,500for that quarter. Similarly, employers

who paid their employment taxes whenthey timely filed their annual returns weredeemed to have timely deposited if theamount of taxes due was less than $2,500for the entire year.

Under these temporary regulations,pursuant to §31.6302–1T(f)(4)(i) and (ii),employers may pay their employmenttaxes when they timely file their quarterlyreturns and be deemed to have timely de-posited if the amount of the taxes due forthe current quarter or for the prior quarteris less than $2,500.

This special rule can be illustrated bythe following example: an employer hasless than $50,000 in employment taxesreported during the lookback period andis therefore a monthly depositor under§31.6302–1(b)(2). The employer’s em-ployment tax liabilities for the first andsecond quarters of 2010 are $2,450 and$2,400, respectively. In the third quarterof 2010, however, the employer’s employ-ment tax liability is $2,550. Under the deminimis deposit rule in effect prior to thesetemporary regulations, if the employerpays the $2,550 with its return for the thirdquarter of 2010, the amount would not beconsidered timely deposited for that quar-ter and, therefore, the employer wouldbe assessed the section 6656 penalty forfailure to deposit.

Modifying the de minimis deposit ruleto allow employers to base the determina-tion on the employment taxes due for theimmediately preceding quarter provides asafe harbor for employers regarding theirdeposit obligations. Thus, in this exam-ple, when the employer had an increase inits employment tax liability for the thirdquarter of 2010, its remittance still wouldbe deemed to have been timely depositedbecause the taxes for the immediatelypreceding return period were de minimis.These regulations have no application tothe One-Day rule in §31.6302–1(c)(2),which requires employers to make a de-posit on the next banking day if theyaccumulate $100,000 or more of employ-ment taxes on any day during a depositperiod. Therefore, if an employer accu-mulates $100,000 or more of employmenttaxes during a deposit period, the em-ployer must make a deposit on the nextbanking day even if the employer’s em-ployment tax liability for the prior quarterwas de minimis. Due to the programmingchanges necessary to implement this safe

February 2, 2009 411 2009–5 I.R.B.

harbor, the safe harbor will be availablefor deposit periods beginning on or afterJanuary 1, 2010.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations. For appli-cability of the Regulatory Flexibility Act,please refer to the Special Analyses sectionof the preamble to the cross-referenced no-tice of proposed rulemaking published inthis issue of the Bulletin. Pursuant to sec-tion 7805(f) of the Internal Revenue Code,these regulations will be submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment ontheir impact on small business.


The principal authors of these finalregulations are Raymond Bailey andAudra M. Dineen of the Office of theAssociate Chief Counsel (Procedure andAdministration).

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 31 isamended as follows:

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT SOURCE

Paragraph. 1. The authority citation forpart 31 continues to read in part as follows:

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

amended by revising paragraph (a)(1) andadding paragraph (g) to read as follows:

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

(a) * * * (1) [Reserved]. For furtherguidance, see §31.6011(a)–1T(a)(1).

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

see §31.6011(a)–1T(g).

Par. 3. Section 31.6011(a)–1T is re-vised to read as follows:

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

(a) Requirement—(1) In general.Except as otherwise provided in§31.6011(a)–5, every employer requiredto make a return under the Federal In-surance Contributions Act, as in effectprior to 1955, for the calendar quarterended December 31, 1954, in respect ofwages other than wages for agriculturallabor, shall make a return for each sub-sequent calendar quarter (whether or notwages are paid in such quarter) until hehas filed a final return in accordance with§31.6011(a)–6. Except as otherwise pro-vided in §31.6011(a)–5, every employernot required to make a return for the cal-endar quarter ended December 31, 1954,shall make a return for the first calen-dar quarter thereafter in which he payswages, other than wages for agriculturallabor, subject to the tax imposed by theFederal Insurance Contributions Act asin effect after 1954, and shall make a re-turn for each subsequent calendar quarter(whether or not wages are paid therein)until he has filed a final return in ac-cordance with §31.6011(a)–6. Exceptas otherwise provided in §31.6011(a)–8and in §31.6011(a)–1(a)(3), (a)(4), and(a)(5), Form 941, “Employer’s QUAR-TERLY Federal Tax Return,” is the formprescribed for making the return requiredby this subparagraph. Such return shallnot include wages for agricultural laborrequired to be reported on any returnprescribed by §31.6011(a)–1(a)(2). Thereturn shall include wages received by anemployee in the form of tips only to theextent of the tips reported by the employeeto the employer in a written statement fur-nished to the employer pursuant to section6053(a).

(a)(2) through (a)(4) [Reserved]. Forfurther guidance, see §31.6011(a)–1(a)(2)through (a)(4).

(5) Employers in the Employers’ An-nual Federal Tax Program (Form 944)—(i)In general. Employers notified of theirqualification for the Employers’ AnnualFederal Tax Program (Form 944) are re-quired to file Form 944, “Employer’sANNUAL Federal Tax Return,” instead ofForm 941 to make a return as required

by paragraph (a)(1) of this section. Uponproper request by the employer, the In-ternal Revenue Service (IRS) will notifyemployers in writing of their qualificationfor the Employers’ Annual Federal TaxProgram (Form 944). Qualified employ-ers are those with an estimated annualemployment tax liability (that is, socialsecurity, Medicare, and withheld Federalincome taxes) of $1,000 or less for theentire calendar year, except employersrequired under §31.6011(a)–1(a)(2) tomake a return on Form 943, “Employer’sAnnual Federal Tax Return for Agricul-tural Employees,” or §31.6011(a)–1(a)(3)to make a return on Schedule H (Form1040), “Household Employment Taxes.”The IRS may increase the amount of theestimated annual employment tax liabilitythat qualifies employers to file Form 944through a revenue procedure, notice, orother IRS guidance published in the Inter-nal Revenue Bulletin. The IRS will notifyemployers when they no longer qualifyfor the Employers’ Annual Federal TaxProgram (Form 944) and must file Forms941 instead.

(ii) Requests to participate and eligi-bility to opt out of the Employers’ AnnualFederal Tax Program (Form 944). The IRSwill establish procedures in a revenue pro-cedure, notice, or other guidance publishedin the Internal Revenue Bulletin for em-ployers to follow to request to receive no-tification to participate in the Employers’Annual Federal Tax Program (Form 944)and to be removed from the Employers’Annual Federal Tax Program (Form 944)after becoming a participant in order to fileForms 941 instead.

(b) through (f) [Reserved]. For furtherguidance, see §31.6011(a)–1(b) through(f).

(g) Effective/applicability dates—(1) Ingeneral. Paragraphs (a)(1) and (a)(5) ofthis section apply to taxable years begin-ning on or after December 30, 2008. Therules of paragraph (a)(1) of this sectionthat apply to taxable years beginning be-fore December 30, 2008, are contained in§31.6011(a)–1. The rules of paragraph(a)(5) of this section that apply to tax-able years beginning before December 30,2008, are contained in §31.6011(a)–1T ineffect prior to December 30, 2008.

(2) Expiration date. The applicabilityof this section will expire on or before De-cember 23, 2011.

2009–5 I.R.B. 412 February 2, 2009

Par. 4. Section 31.6011(a)–4 isamended by revising paragraph (a)(1) andadding paragraph (d) to read as follows:

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

(a) * * * (1) [Reserved]. For furtherguidance, see §31.6011(a)–4T(a)(1).

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

see §31.6011(a)–4T(d).Par. 5. Section 31.6011(a)–4T is re-

vised to read as follows:

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

(a) Withheld from wages—(1) In gen-eral. Except as otherwise provided in§31.6011(a)–4(a)(2), (a)(3), (a)(4), and(b), and in §31.6011(a)–5, every personrequired to make a return of income taxwithheld from wages pursuant to section3402 shall make a return for the first calen-dar quarter in which the person is requiredto deduct and withhold such tax and foreach subsequent calendar quarter, whetheror not wages are paid therein, until the per-son has filed a final return in accordancewith §31.6011(a)–6. Except as otherwiseprovided in §31.6011(a)–4(a)(2), (a)(3),(a)(4) and (b), and in §31.6011(a)–8, Form941, “Employer’s QUARTERLY FederalTax Return,” is the form prescribed formaking the return required under this para-graph (a)(1).

(a)(2) through (a)(3) [Reserved]. Forfurther guidance, see §31.6011(a)–4(a)(2)through (a)(3).

(4) Employers in the Employers’ An-nual Federal Tax Program (Form 944)—(i)In general. Employers notified of theirqualification for the Employers’ AnnualFederal Tax Program (Form 944) are re-quired to file Form 944, “Employer’sANNUAL Federal Tax Return,” instead ofForm 941 to make a return of income taxwithheld from wages pursuant to section3402. Upon proper request by the em-ployer, the Internal Revenue Service (IRS)will notify employers in writing of theirqualification for the Employers’ AnnualFederal Tax Program (Form 944). Quali-fied employers are those with an estimatedannual employment tax liability (that is,social security, Medicare, and withheld

federal income taxes) of $1,000 or less forthe entire calendar year, except employ-ers required under §31.6011(a)–4(a)(2)to make a return on Schedule H (Form1040), “Household Employment Taxes,”or §31.6011(a)–4(a)(3) to make a return onForm 943, “Employer’s Annual FederalTax Return for Agricultural Employees.”The IRS may increase the amount of theestimated annual employment tax liabilitythat qualifies employers to file Form 944through a revenue procedure, notice orother IRS guidance published in the Inter-nal Revenue Bulletin. The IRS will notifyemployers when they no longer qualifyfor the Employers’ Annual Federal TaxProgram (Form 944) and must file Forms941 instead.

(ii) Request to participate and eligibil-ity to opt out of the Employers’ AnnualFederal Tax Program (Form 944). The IRSwill establish procedures in a revenue pro-cedure, notice, or other IRS guidance pub-lished in the Internal Revenue Bulletin foremployers to follow to request to receivenotification to participate in the Employ-ers’ Annual Federal Tax Program (Form944) and to be removed from the Employ-ers’ Annual Federal Tax Program (Form944) after becoming a participant in orderto file Forms 941 instead.

(b) through (c) [Reserved]. For furtherguidance, see §31.6011(a)–4(b) through(c).

(d) Effective/applicability dates—(1) Ingeneral. Paragraphs (a)(1) and (a)(4) ofthis section apply to taxable years begin-ning on or after December 30, 2008. Therules of paragraph (a)(1) of this sectionthat apply to taxable years beginning be-fore December 30, 2008, are contained in§31.6011(a)–4. The rules of paragraph(a)(4) of this section that apply to tax-able years beginning before December 30,2008, are contained in §31.6011(a)–4T ineffect prior to December 30, 2008.


Par. 6. Section 31.6302–0 isamended by revising the entries for§31.6302–1(f)(4)(i), (g)(1) and (n) to readas follows:

§31.6302–0 Table of contents.

* * * * *

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

* * * * *(f) * * *(4) * * *(i) [Reserved]. For further guid-

ance, see §31.6302–0T, the entry for§31.6302–1T(f)(4)(i).

* * * * *(g) * * *(1) [Reserved]. For further guid-

ance, see §31.6302–0T, the entry for§31.6302–1T(g)(1).

* * * * *(n) [Reserved]. For further guid-

ance, see §31.6302–0T, the entry for§31.6302–1T(n).

Par. 7. Section 31.6302–0T is added toread as follows:

§31.6302–0T Table of contents(temporary).

This section lists the captions that ap-pear in §31.6302–1T.

Section 31.6302–1T Federal tax depositrules for withheld income taxes andtaxes under the Federal InsuranceContributions Act (FICA) attributable topayments made after December 31, 1992(temporary).

(a) through (b)(3) [Reserved]. For fur-ther guidance, see §31.6302–0, the entriesfor §31.6302–1(a) through (b)(3).

(4) Lookback period.(i) In general.(ii) Adjustments and claims for refund.(c)(1) through (c)(4) [Reserved]. For

further guidance, see §31.6302–0, the en-tries for §31.6302–1(c)(1) through (c)(4).

(c)(5) Exception to the monthly andsemi-weekly deposit rules for employersin the Employers’ Annual Federal TaxProgram (Form 944).

(c)(6) Extension of time to deposit foremployers in the Employers’ Annual Fed-eral Tax Program (Form 944) during thepreceding year.

(d) Examples 1 through 5 [Reserved].For further guidance, see §31.6302–0,

February 2, 2009 413 2009–5 I.R.B.

the entries for §31.6302–1(d) Examples 1through 5.

Example 6. Extension of time to depositfor employers who filed Form 944 for thepreceding year satisfied.

(e) through (f)(3) [Reserved]. For fur-ther guidance, see §31.6302–0, the entriesfor §31.6302–1(e) through (f)(3).

(4) De minimis rule.(i) De minimis deposit rules for quar-

terly and annual return periods beginningon or after January 1, 2001.

(ii) De minimis deposit rule for quar-terly return periods beginning on or afterJanuary 1, 2010

(iii) De minimis deposit rule for em-ployers who file Form 944.

(f)(5) Examples 1 and 2 [Reserved]. Forfurther guidance, see §31.6302–0, the en-tries for §31.6302–1(f)(5) Examples 1 and2.

Example 3. De minimis deposit rule foremployers who file Form 944 satisfied.

(g) [Reserved]. For further guid-ance, see §31.6302–0, the entry for§31.6302–1(g).

(1) In general.(g)(2) through (m) [Reserved]. For fur-

ther guidance, see §31.6302–0, the entriesfor §31.6302–1(g)(2) through (m).

(n) Effective/applicability dates.Par. 8. Section 31.6302–1 is amended

by revising paragraphs (e)(2), (f)(4)(i),(g)(1) and (n) and adding paragraph(f)(4)(ii) to read as follows:

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

see §31.6302–1T(e)(2).(f) * * *(4) * * * (i) and (ii) [Reserved]. For

further guidance, see §31.6302–1T(f)(4)(i)and (ii).

* * * * *(g) * * *(1) [Reserved]. For further

guidance, see §31.6302–1T(g)(1).

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

see §31.6302–1T(n).Par. 9. Section 31.6302–1T is revised

to read as follows:

§31.6302–1T Federal tax deposit rules forwithheld income taxes and taxes underthe Federal Insurance Contributions Act

(FICA) attributable to payments madeafter December 31, 1992 (temporary).

(a) through (b)(3) [Reserved]. For fur-ther guidance, see §31.6302–1(a) through(b)(3).

(4) Lookback period—(i) In general.For employers who file Form 941, “Em-ployer’s QUARTERLY Federal Tax Re-turn,” the lookback period for each calen-dar year is the twelve month period endedthe preceding June 30. For example, thelookback period for calendar year 2006 isthe period July 1, 2004, to June 30, 2005.The lookback period for employers whofile Form 944, “Employer’s ANNUALFederal Tax Return,” or filed Form 944either of the two previous calendar years,is the second calendar year preceding thecurrent calendar year. For example, thelookback period for calendar year 2006is calendar year 2004. In determiningstatus as either a monthly or semi-weeklydepositor, an employer should determinethe aggregate amount of employment taxliabilities reported on its return(s) (Form941 or Form 944) for the lookback pe-riod. The amount of employment taxliabilities reported for the lookback periodis the amount the employer reported oneither Forms 941 or Form 944 even ifthe employer is required to file the otherform(s) for the current calendar year. Newemployers shall be treated as having em-ployment tax liabilities of zero for any partof the lookback period before the date theemployer started or acquired its business.

(ii) Adjustments and claims for refund.The employment tax liability reported onthe original return for the return period isthe amount taken into account in determin-ing whether the aggregate amount of em-ployment taxes reported for the lookbackperiod exceeds $50,000. Any amounts re-ported on adjusted returns or claims for re-fund pursuant to sections 6205, 6402, 6413and 6414 filed after the due date of theoriginal return are not taken into accountwhen determining the aggregate amount ofemployment taxes reported for the look-back period. However, prior period adjust-ments reported on Forms 941 or 944 for2008 and earlier years are taken into ac-count in determining the employment taxliability for the return period in which theadjustments are reported.

(c)(1) through (c)(4) [Reserved]. Forfurther guidance, see §31.6302–1(c)(1)through (c)(4).

(5) Exception to the monthly and semi-weekly deposit rules for employers in theEmployers’ Annual Federal Tax Program(Form 944). Generally, an employer whofiles Form 944 for a taxable year may remitits accumulated employment taxes with itstimely filed return for that taxable yearand is not required to deposit under ei-ther the monthly or semi-weekly rules setforth in §31.6302–1(c)(1) and (2) duringthat taxable year. An employer who filesForm 944 whose actual employment taxliability exceeds the eligibility threshold,as set forth in §§31.6011(a)–1T(a)(5) and31.6011(a)–4T(a)(4), will not qualify forthis exception and should follow the de-posit rules set forth in this section.

(6) Extension of time to deposit for em-ployers in the Employers’ Annual FederalTax Program (Form 944) during the pre-ceding year. An employer who filed Form944 for the preceding year but will fileForms 941 instead for the current year willbe deemed to have timely deposited its cur-rent year’s January deposit obligation(s)under §31.6302–1(c)(1) through (4) if theemployer deposits the amount of such de-posit obligation(s) by March 15 of thatyear.

(d) Examples 1 through 5 [Reserved].For further guidance, see §31.6302–1(d)Examples 1 through 5.

Example 6. Extension of time to deposit foremployers who filed Form 944 for the preceding yearsatisfied. F (a monthly depositor) was notified tofile Form 944 to report its employment tax liabilitiesfor the 2006 calendar year. F filed Form 944 onJanuary 31, 2007, reporting a total employment taxliability for 2006 of $3,000. Because F’s annualemployment tax liability for the 2006 taxable yearexceeded $1,000 (the applicable eligibility thresholdfor that taxable year), the Internal Revenue Service(IRS) notified F to file Forms 941 for calendar year2007 and thereafter. Based on F’s liability duringthe lookback period (calendar year 2005, pursuantto paragraph (b)(4)(i) of this section), F is a monthlydepositor for 2007. F accumulates $1,000 in em-ployment taxes during January 2007. Because F is amonthly depositor, F’s January deposit obligation isdue February 15, 2007. F does not deposit these ac-cumulated employment taxes on February 15, 2007.F accumulates $1,500 in employment taxes duringFebruary 2007. F’s February deposit is due March15, 2007. F deposits the $2,500 of employment taxesaccumulated during January and February on March15, 2007. Pursuant to §31.6302–1T(c)(6), F will bedeemed to have timely deposited the employmenttaxes due for January 2007, and, thus, the IRS will

2009–5 I.R.B. 414 February 2, 2009

not impose a failure-to-deposit penalty under section6656 for that month.

(e)(1) [Reserved]. For further guid-ance, see §31.6302–1(e)(1).

(2) The term employment taxes does notinclude taxes with respect to wages for do-mestic service in a private home of the em-ployer, unless the employer is otherwiserequired to file a Form 941 or Form 944under §31.6011(a)–4, §31.6011(a)–4T, or§31.6011(a)–5. In the case of employ-ers paying advance earned income creditamounts, the amount of taxes required tobe deposited shall be reduced by advanceamounts paid to employees. Also, see§31.6302–3 concerning a taxpayer’s op-tion with respect to payments made beforeJanuary 1, 1994, to treat backup withhold-ing amounts under section 3406 separately.

(f)(1) through (f)(3) [Reserved]. Forfurther guidance, see §31.6302–1(f)(1)through (f)(3).

(4) De minimis rule—(i) De minimis de-posit rules for quarterly and annual re-turn periods beginning on or after January1, 2001. If the total amount of accumu-lated employment taxes for the return pe-riod is de minimis and the amount is fullydeposited or remitted with a timely filedreturn for the return period, the amount de-posited or remitted will be deemed to havebeen timely deposited. The total amount ofaccumulated employment taxes is de min-imis if it is less than $2,500 for the returnperiod or if it is de minimis pursuant toparagraph (f)(4)(ii) of this section.

(ii) De minimis deposit rule for quar-terly return periods beginning on or afterJanuary 1, 2010. For purposes of para-graph (f)(4)(i) of this section, if the totalamount of accumulated employment taxesfor the immediately preceding quarter wasless than $2,500, unless §31.6302–1(c)(3)applies to require a deposit at the close ofthe next banking day, then the employerwill be deemed to have timely depositedthe employer’s employment taxes for thecurrent quarter if the employer complieswith the time and method payment require-ments contained in paragraph (f)(4)(i) ofthis section.

(iii) De minimis deposit rule for em-ployers who file Form 944. An employerwho files Form 944 whose employmenttax liability for the year equals or exceeds$2,500 but whose employment tax liabilityfor a quarter of the year is de minimis pur-suant to paragraph (f)(4)(i) of this section

will be deemed to have timely depositedthe employment taxes due for that quarterif the employer fully deposits the employ-ment taxes accumulated during the quarterby the last day of the month following theclose of that quarter. Employment taxesaccumulated during the fourth quarter canbe either deposited by January 31 or remit-ted with a timely filed return for the returnperiod.

(5) Examples 1 and 2 [Reserved]. Forfurther guidance, see §31.6302–1(f)(5) Ex-amples 1 and 2.

Example 3. De minimis deposit rule for employ-ers who file Form 944 satisfied. K (a monthly de-positor) was notified to file Form 944 to report itsemployment tax liabilities for the 2006 calendar year.In the first quarter of 2006, K accumulates employ-ment taxes in the amount of $1,000. On April 28,2006, K deposits the $1,000 of employment taxes ac-cumulated in the 1st quarter. K accumulates another$1,000 of employment taxes during the second quar-ter of 2006. On July 31, 2006, K deposits the $1,000of employment taxes accumulated in the 2nd quar-ter. K’s business grows and accumulates $1,500 inemployment taxes during the third quarter of 2006.On October 31, 2006, K deposits the $1,500 of em-ployment taxes accumulated in the 3rd quarter. K ac-cumulates another $2,000 in employment taxes dur-ing the fourth quarter. K files Form 944 on January31, 2007, reporting a total employment tax liabilityfor 2006 of $5,500 and submits a check for the re-maining $2,000 of employment taxes with the return.K will be deemed to have timely deposited the em-ployment taxes due for all of 2006, because K com-plied with the de minimis deposit rule provided inparagraph (f)(4)(iii) of this section. Therefore, theIRS will not impose a failure-to-deposit penalty undersection 6656 for any month of the year. Under this deminimis deposit rule, as K was required to file Form944 for calendar year 2006, if K’s employment tax li-ability for a quarter is de minimis, then K may depositthat quarter’s liability by the last day of the monthfollowing the close of the quarter. This de minimisrule allows K to have the benefit of the same quar-terly de minimis amount K would have received if Kfiled Form 941 each quarter instead of Form 944 an-nually. Thus, as K’s employment tax liability for eachquarter was de minimis, K could deposit quarterly.

(g) Agricultural employers—specialrules—(1) In general. An agricultural em-ployer reports wages paid to farm workersannually on Form 943 (Employer’s AnnualTax Return for Agricultural Employees)and reports wages paid to nonfarm work-ers quarterly on Form 941 or annually onForm 944. Accordingly, an agriculturalemployer must treat employment taxes re-portable on Form 943 (“Form 943 taxes”)separately from employment taxes re-portable on Form 941 or Form 944 (“Form941 or Form 944 taxes”). Form 943 taxesand Form 941 or Form 944 taxes are notcombined for purposes of determining

whether a deposit of either is due, whetherthe One-Day rule of §31.6302–1(c)(3)applies, or whether any safe harbor is ap-plicable. In addition, separate Federal taxdeposit coupons must be used to depositForm 943 taxes and Form 941 or Form944 taxes. (See §31.6302–1(b) for rulesfor determining an agricultural employer’sdeposit status for Form 941 taxes.) Thedetermination of whether an agriculturalemployer is a monthly or semi-weeklydepositor of Form 943 taxes is made ac-cording to the rules of this paragraph (g).

(g)(2) through (m) [Reserved]. Forfurther guidance, see §31.6302–1(g)(2)through (m).

(n) Effective/applicability dates—(1)In general. Sections 31.6302–1 through31.6302–3 apply with respect to thedeposit of employment taxes attribut-able to payments made after December31, 1992. To the extent that the provi-sions of §§31.6302–1 through 31.6302–3are inconsistent with the provisions of§§31.6302(c)–1 and 31.6302(c)–2, ataxpayer will be considered to be incompliance with §§31.6301–1 through31.6302–3 if the taxpayer makes timelydeposits during 1993 in accordance with§§31.6302(c)–1 and 31.6302(c)–2. Para-graphs (b)(4), (c)(5), (c)(6), (d) Example6, (e)(2), (f)(4)(i), (f)(4)(iii), (f)(5) Exam-ple 3, and (g)(1) of this section apply totaxable years beginning on or after De-cember 30, 2008. Paragraph (f)(4)(ii) ofthis section applies to taxable years be-ginning on or after January 1, 2010. Therules of paragraphs (e)(2) and (g)(1) ofthis section that apply to taxable yearsbeginning before December 30, 2008, arecontained in §31.6302–1 in effect prior toDecember 30, 2008. The rules of para-graphs (b)(4), (c)(5), (c)(6), (d) Example6, (f)(4)(i), (f)(4)(iii), and (f)(5) Example3 of this section that apply to taxable yearsbeginning on or after January 1, 2006 andbefore December 30, 2008, are containedin §31.6302–1T in effect prior to Decem-ber 30, 2008. The rules of paragraphs(b)(4) and (f)(4) of this section that applyto taxable years beginning before January1, 2006, are contained in §31.6302–1 ineffect prior to January 1, 2006.


February 2, 2009 415 2009–5 I.R.B.






Section 6103.—Confi-dentiality and Disclosureof Returns and ReturnInformation26 CFR 301.6103(j)(1)–1: Disclosures of return in-formation to officers and employees of the Depart-ment of Commerce for certain statistical purposesand related activities.

T.D. 9439


Disclosure of ReturnInformation to the Bureauof Economic Analysis


ACTION: Final regulation and removal oftemporary regulations.

SUMMARY: This document contains finalregulations relating to disclosures of cor-porate tax return information to the Bureauof Economic Analysis (Bureau). The finalregulations authorize the IRS to disclosecertain items of corporate tax return infor-mation to the Secretary of Commerce forpurposes of structuring United States na-tional economic accounts and conductingrelated statistical activities authorized bylaw. The final regulations facilitate the as-sistance of the IRS to the Bureau in its sta-tistics programs, require no action by tax-payers, and have no effect on their tax lia-bilities.

DATES: Effective Date: These regulationsare effective on December 29, 2008.

Applicability Date: These regulationsapply to disclosures made to the Bureau ofEconomic Analysis on or after December29, 2008.

FOR FURTHER INFORMATIONCONTACT: Charles B. Christopher, (202)622–4570 (not a toll-free number).


Background

This document contains final regula-tions amending the Procedure and Admin-istration Regulations (26 CFR Part 301)under section 6103(j)(1)(B) of the Inter-nal Revenue Code (Code). The final reg-ulations contain rules relating to the dis-closure of corporate tax return informationto the Bureau of Economic Analysis (Bu-reau) of the Department of Commerce forthe purpose of, but only to the extent nec-essary in, structuring national economicaccounts and conducting related statisticalactivities authorized by law.

Section 6103(j)(1)(B) provides that,upon written request from the Secre-tary of Commerce, the Secretary of theTreasury shall furnish to BEA return in-formation that is prescribed by Treasuryregulations for the purpose of, but onlyto the extent necessary in, structuring ofnational economic accounts and conduct-ing related statistical activities authorizedby law. Prior regulations under section6103(j)(1)(B) permitted the disclosure toBEA of return information from corporatereturns processed by the IRS’s Statistics ofIncome Division for its corporate samplefile.

By letter dated December 18, 2003,the Department of Commerce requesteddisclosure of certain items of returninformation obtained from all corpo-rate returns, not just those processed bythe IRS’s Statistics of Income Divisionfor its corporate sample file. Proposedregulations (REG–148864–03, 2006–2C.B. 320 [71 FR 38323]) and tempo-rary regulations (T.D. 9267, 2006–2 C.B.313 [71 FR 38262]) were publishedin the Federal Register on July 6,2006. The Department of Commercethereafter submitted comments requestingcertain technical corrections to theitems of corporate return informationauthorized to be disclosed. No other

comments were received, and no publichearing was requested or held. Afterconsideration of the comments receivedfrom the Department of Commerce, theproposed regulations, as amended bythis Treasury decision, are adopted asfinal regulations, and the correspondingtemporary regulations are removed.See §601.601(d)(2)(ii)(b). These finalregulations generally retain the provisionsof the proposed regulations with theinclusion of the additional requesteditems as explained in more detail in thispreamble.

Explanation and Summary ofComments

Proposed §301.6103(j)(1)–1(c)(3) pro-vided an itemized description of the cor-porate tax return information authorizedto be disclosed to the Bureau for the pur-pose of structuring national economic ac-counts and conducting related statisticalactivities required by law. In its comments,the Department of Commerce requestedthat certain additional items of corporatetax return information that are essential tothe Bureau’s ability to measure accuratelyU.S. economic activity be included in theitemized list in the final regulations. Mostof the additional items of corporate tax re-turn information to which the Departmentof Commerce requests access are slightlydifferent variants of the same items autho-rized in the proposed regulations. The in-clusion of these items will enable the Bu-reau to measure accurately corporate prof-its, gross domestic product, and other mea-sures of activity in the economy. Afterconsideration of these comments, the Trea-sury Department and IRS have includedthe additional requested items in the finalregulations.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to these regulations. Because theregulations do not impose a collection ofinformation on small entities, the Regula-tory Flexibility Act (5 U.S.C. chapter 6)

2009–5 I.R.B. 416 February 2, 2009

does not apply. Pursuant to section 7805(f)of the Internal Revenue Code, the notice ofproposed rulemaking preceding these reg-ulations was submitted to the Chief Coun-sel for Advocacy of the Small BusinessAdministration for comment on their im-pact on small businesses.


The principal author of these regula-tions is Robin M. Tuczak, Office of the As-sociate Chief Counsel (Procedure & Ad-ministration).

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR Part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.6103(j)(1)–1 is

amended by revising paragraphs (c) intro-ductory text, (c)(1) and (e) and removingand reserving paragraph (c)(2), and addingparagraph (c)(3) to read as follows:

§301.6103(j)(1)–1 Disclosures of returninformation to officers and employees ofthe Department of Commerce for certainstatistical purposes and related activities.

* * * * *(c) Disclosure of return information re-

flected on returns of corporations to offi-cers and employees of the Bureau of Eco-nomic Analysis.

(1) As authorized by law for purposesof, but only to the extent necessary in,conducting and preparing statistical analy-ses, the Internal Revenue Service will dis-close to officers and employees of the Bu-reau of Economic Analysis all return in-formation, regardless of format or mediumand including edited information from theStatistics of Income sample, of designatedclasses or categories of corporations withrespect to the tax imposed by chapter 1 ofthe Internal Revenue Code.

(2) [Reserved].(3) The Internal Revenue Service will

disclose the following return informationreflected on returns filed by corporationsto officers and employees of the Bureau ofEconomic Analysis:

(i) From the business master files of theInternal Revenue Service—

(A) Taxpayer identity information (asdefined in section 6103(b)(6)) with respectto corporate taxpayers;

(B) Business or industry activity codes;(C) Filing requirement code; and(D) Physical location.(ii) From Form SS–4, “Application for

Employer Identification Number,” filed byan entity identifying itself on the form as acorporation or a private services corpora-tion—

(A) Taxpayer identity information (asdefined in section 6103(b)(6), including le-gal, trade, and business name);

(B) Physical location;(C) State or country of incorporation;(D) Entity type (corporate only);(E) Estimated highest number of em-

ployees expected in the next 12 months;(F) Principal activity of the business;(G) Principal line of merchandise;(H) Posting cycle date relative to filing;

and(I) Document code.(iii) From an employment tax return

filed by a corporation—(A) Taxpayer identity information (as

defined in section 6103(b)(6));(B) Total compensation reported;(C) Taxable wages paid for purposes of

Chapter 21 to each employee;(D) Master file tax account code

(MFT);(E) Total number of individuals em-

ployed in the taxable period covered by thereturn;

(F) Posting cycle date relative to filing;(G) Accounting period covered; and(H) Document code.(iv) From returns of corporate taxpay-

ers, including Form 1120, “U.S. Corpora-tion Income Tax Return,” Form 851, “Af-filiations Schedule,” and other business re-turns, schedules and forms that the InternalRevenue Service may issue—

(A) Taxpayer identity information (asdefined in section 6103(b)(6)), includingthat of a parent corporation, affiliate, orsubsidiary; a shareholder; a foreign corpo-

ration of which one or more U.S. share-holders (as defined in section 951(b)) ownat least 10% of the voting stock; a foreigntrust; and a U.S. agent of a foreign trust;

(B) Gross sales and receipts;(C) Gross income, including life insur-

ance company gross income;(D) Gross income from sources outside

the U.S.;(E) Gross rents from real property;(F) Other Gross Rents;(G) Total Gross Rents;(H) Returns and allowances;(I) Percentage of foreign ownership of

corporations and trusts;(J) Fact of ownership of foreign partner-

ships;(K) Fact of ownership of foreign entity

disregarded as a foreign entity;(L) Country of the foreign owner;(M) Gross value of the portion of the

foreign trust owned by filer;(N) Country of incorporation;(O) Cost of labor, salaries, and wages;(P) Total assets;(Q) The quantity of certain forms at-

tached that are returns of U.S. personswith respect to foreign disregarded enti-ties, partnerships, and corporations.

(R) Posting cycle date relative to filing;(S) Accounting period covered;(T) Master file tax account code (MFT);(U) Document code; and(V) Principal industrial activity code.

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

section applies to disclosures to the Bureauof Economic Analysis on or after Decem-ber 29, 2008.

§301.6103(j)(1)–1T [Removed]

Par. 3. Section 301.6103(j)(1)–1T isremoved.






February 2, 2009 417 2009–5 I.R.B.

Section 6302.—Mode orTime of Collection26 CFR 31.6302–1: Federal tax deposit rules forwithheld income taxes and taxes under the FederalInsurance Contributions Act (FICA) attributable topayments made after December 31, 1992.

Temporary regulations relate to the annual filingof Federal employment tax returns and requirements

for employment tax deposits. These temporary regu-lations relate to sections 6011 and 6302 of the Inter-nal Revenue Code (Code) concerning reporting andpaying income taxes withheld from wages and re-porting and paying taxes under the Federal Insur-ance Contributions Act (FICA) (collectively, “em-ployment taxes”). See T.D. 9440, page 409.

Section 7805.—Rulesand Regulations26 CFR 301.7805–1: Rules and regulations.

A revenue ruling holds that Dubai Merchantile Ex-change, which is a United Arab Emirates AuthorizedMarket Institution, is a qualified board or exchangewithin the meaning of section 1256(g)(7)(C) of theCode. See Rev. Rul. 2009-4, page 408.

2009–5 I.R.B. 418 February 2, 2009

Part III. Administrative, Procedural, and MiscellaneousRequired MinimumDistributions for 2009

Notice 2009–9

PURPOSE

This notice provides guidance to finan-cial institutions on reporting required min-imum distributions for 2009 after enact-ment of the Worker, Retiree, and EmployerRecovery Act of 2008, P. L. 110–458.

BACKGROUND

On December 23, 2008, the Presidentsigned the Worker, Retiree, and EmployerRecovery Act of 2008 (the Act) into law.Section 201 of the Act waives any requiredminimum distributions (RMDs) for 2009from retirement plans that hold each par-ticipant’s benefit in an individual account,such as § 401(k) plans and § 403(b) plans,and certain § 457(b) plans. The Act alsowaives any RMD for 2009 from an In-dividual Retirement Arrangement (IRA).This means that most participants andbeneficiaries otherwise required to takeminimum distributions from these typesof accounts are not required to withdrawany amount in 2009. If they do make awithdrawal in 2009 (that is not an RMDfor 2008), they might be able to roll overthe withdrawn amount into other eligibleretirement plans. Of course, they must stillinclude any previously untaxed portion ofthe withdrawal that they do not roll over intheir gross income. See Individual Retire-ment Arrangements (IRAs), Publication590, and Pension and Annuity Income,Publication 575, for additional informa-tion on rollovers and on calculating thetaxable portion of a distribution.

The Act does not waive any 2008RMDs, even for individuals who were eli-gible and chose to delay taking their 2008RMD until April 1, 2009 (e.g., retired em-ployees and IRA owners who turned 701/2in 2008). These individuals must still taketheir full 2008 RMD by April 1, 2009.The 2009 RMD waiver under the Act doesapply to individuals who may be eligibleto postpone taking their 2009 RMD until

April 1, 2010 (generally, retired employ-ees and IRA owners who attain age 701/2

in 2009). However, the Act does not waiveany RMDs for 2010.

If a beneficiary is receiving distribu-tions over a 5-year period, he or she cannow waive the distribution for 2009, ef-fectively taking distributions over a 6-yearrather than a 5-year period.

IRA REPORTING

Issuers of the 2008 Form 5498, IRAContribution Information, should not put acheck in Box 11. However, in recognitionof the short amount of time to make pro-gramming changes, if a financial institu-tion issues a 2008 Form 5498 with a checkin Box 11, the IRS will not consider suchform issued incorrectly solely because ofthe check in Box 11, provided the IRAowner is notified by the financial institu-tion no later than March 31, 2009, that noRMD is required for 2009.

In addition, the RMD information re-quired under Notice 2002–27, 2002–1C.B. 814, need not be sent to IRA own-ers for 2009. If a financial institutionsends a separate RMD statement to anIRA owner, either initially or in responseto the owner’s request for the financialinstitution to calculate the RMD for 2009,the financial institution must show theRMD for 2009 as zero (0). Alternatively,the financial institution may send the IRAowner a statement showing the RMDthat would have been required but for thewaiver of RMDs for 2009, along with anexplanation of the waiver for 2009.

The IRS encourages all financial insti-tutions to inform IRA owners who delayedtaking their 2008 RMD until April 1, 2009,that they are still required to take that dis-tribution.

EFFECT ON OTHER DOCUMENTS

Notice 2002–27 is modified.


The principal author of this no-tice is Anita Bower of the EmployeePlans, Tax Exempt and Government

Entities Division. Questions regardingthis notice may be sent via e-mail [email protected].

Treatment of CertainObligations Under Section956(c)

Notice 2009–10

1. On October 27, 2008, the TreasuryDepartment and the Internal Revenue Ser-vice (Service) published Notice 2008–91.See Notice 2008–91, 2008–43 I.R.B. 1001.This notice provides that the regulationsdescribed in Notice 2008–91 will apply (inaddition to the period described in Notice2008–91) to the third consecutive taxableyear of a foreign corporation, if any, (in-cluding any short taxable year) that endsafter October 3, 2008, and that ends on orbefore December 31, 2009.

2. On May 27, 2008, the Treasury De-partment and the Service published Rev.Proc. 2008–26, 2008–21 I.R.B. 1014,which applies to determine whether securi-ties are “readily marketable” for purposesof section 956(c)(2)(J) for any day duringcalendar years 2007 or 2008, for which itis relevant whether securities are readilymarketable for purposes of that section.This notice extends the application of Rev.Proc. 2008–26 to any day during calendaryear 2009, for which it is relevant whethersecurities are readily marketable for pur-poses of section 956(c)(2)(J) (in additionto any day during calendar years 2007 or2008).


The principal author of this notice isEthan A. Atticks of the Office of AssociateChief Counsel (International). For furtherinformation regarding this notice, contactMr. Atticks at (202) 622–3840 (not a toll-free call).

February 2, 2009 419 2009–5 I.R.B.

Brokers May Furnish CertainComposite Annual TaxReporting Statements byFebruary 17, 2009, WithoutPenalty

Notice 2009–11

PURPOSE

This notice provides additional time forfurnishing certain composite annual tax re-porting statements.

BACKGROUND

Section 403 of the Energy Improve-ment and Extension Act of 2008, Div.B of Pub. L. No. 110–343, 122 Stat.3765 (the Act), enacted on October 3,2008, amended section 6045(b) of theInternal Revenue Code to change fromJanuary 31 to February 15 the deadlinefor furnishing to customers the informa-tion statements required by section 6045,including Form 1099–B (Proceeds FromBroker and Barter Exchange Transac-tions), effective for statements requiredto be furnished after December 31, 2008.Because February 15, 2009, is a Sunday,and because February 16, 2009, is a le-gal holiday, the deadline under section6045(b) with respect to reportable itemsfrom calendar year 2008 is February 17,2009, pursuant to section 7503. The Actalso added language to section 6045(b) topermit reporting entities to furnish other

items that they must report to customersin January by the extended deadline whenthese other items are furnished with a“consolidated reporting statement (as de-fined in regulations).” There is not yet aregulatory definition of the term “consol-idated reporting statement.” Section 6722imposes a penalty on any reporting entitythat fails to furnish any required payeestatement by its deadline.

DEADLINE FOR REPORTING ITEMSFROM 2008

This notice applies to reporting enti-ties that furnish Form 1099–B and thatcustomarily report the items furnished onForm 1099–B to customers on an annualcomposite form recipient statement (asdescribed in Section 4.2 of Rev. Proc.2008–36, 2008–33 I.R.B. 340). This no-tice provides that such reporting entitieshave until February 17, 2009, to report allitems that they customarily report on theseannual composite form recipient state-ments to all customers whether or not eachcustomer’s transactional history for 2008triggered an obligation to furnish Form1099–B to that particular customer. Thisnotice modifies the 2008 General Instruc-tions for Forms 1099, 1098, 5498, andW–2G and applies only to the reporting ofitems from calendar year 2008.

EXAMPLE

This notice is illustrated by the follow-ing example:

Broker, a brokerage firm, customarily issues anannual composite form recipient statement to eachof its customers that reports dividends as requiredby section 6042(c), interest as required by section6049(c), and the gross proceeds of the sale of secu-rities and other items as required by section 6045(b).Broker issued correct annual composite form recipi-ent statements to all of its customers on February 12,2009. Because only 80 percent of Broker’s customerssold securities or other items in 2008, only 80 percentof the annual composite form recipient statementscontained information required to be reported undersection 6045(b) on Form 1099–B. Because the com-posite form recipient statements customarily includeddividends and interest with items reportable on Form1099–B, and because Broker provided correct state-ments to each of its customers by February 17, 2009,the IRS will treat Broker as having met its report-ing deadline requirements under sections 6042(c) and6049(c) for items from calendar year 2008 reportedon the annual composite form recipient statementsand will not assess any penalties under section 6722for these items.


The principal author of this noticeis Stephen Schaeffer of the Office ofAssociate Chief Counsel (Procedure &Administration). For further informa-tion regarding this notice, please contactStephen Schaeffer at (202) 622–4910 (nota toll-free call).

2009–5 I.R.B. 420 February 2, 2009

Part IV. Items of General InterestNotice of ProposedRulemaking byCross-Reference toTemporary Regulations

Employer’s Annual FederalTax Return and Modificationsto the Deposit Rules

REG–148568–04


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

SUMMARY: This document revises thenotice of proposed rulemaking publishedin the Federal Register on January 3,2006. In this issue of the Bulletin, theIRS is issuing temporary regulations (T.D.9440) relating to the annual filing of Fed-eral employment tax returns and require-ments for employment tax deposits undersections 6011 and 6302 of the InternalRevenue Code (Code). Those temporaryregulations generally allow certain em-ployers to file a Form 944, “Employer’sANNUAL Federal Tax Return,” rather thanForm 941, “Employer’s QUARTERLYFederal Tax Return.” In addition to rulesrelated to Form 944, those temporary reg-ulations provide an additional method foremployers who file Form 941 to determinewhether the amount of accumulated em-ployment taxes is considered de minimis.The temporary and proposed regulationsaffect taxpayers that file Form 941, “Em-ployer’s QUARTERLY Federal Tax Re-turn,” Form 944, “Employer’s ANNUALFederal Tax Return,” and any relatedSpanish-language returns or returns forU.S. possessions. The text of those reg-ulations also serves as the text of theseproposed regulations.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by March 30, 2009.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–148568–04), room

5203, Internal Revenue Service, POB7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to: CC:PA:LPD:PR (REG–148568–04),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronicallyvia the Federal eRulemaking Portalat http://www.regulations.gov (IRSREG–148568–04).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Audra M. Dineen at (202)622–4910; concerning submissions ofcomments and requests for a public hear-ing, Oluwafunmilayo Taylor of the Publi-cations and Regulations Branch at (202)622–7180 (not toll-free numbers).


Background

Temporary regulations in this issue ofthe Bulletin amend the Regulations on Em-ployment Taxes and Collection of IncomeTax at Source (26 CFR part 31) under sec-tion 6011 relating to the federal employ-ment tax return filing requirements andsection 6302 relating to the employmenttax deposit requirements. The regulationsconcern the reporting and paying of in-come taxes withheld from wages and taxesunder the Federal Insurance ContributionsAct (FICA). The text of those temporaryregulations also serves as the text of theseproposed regulations. The preamble to thetemporary regulations explains the tempo-rary regulations and these proposed regu-lations. The temporary and proposed regu-lations are part of the IRS’s effort to reducetaxpayer burden by permitting certain em-ployers to file one return annually to reporttheir employment tax liabilities instead offour quarterly returns.

Proposed Effective/Applicability Date

The regulations, as proposed, will ap-ply to taxable years ending on or after thedate of publication of the Treasury deci-sion adopting these rules as final regula-tions in the Federal Register.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulations.

It is hereby certified that these regula-tions will not have a significant economicimpact on a substantial number of smallentities pursuant to the Regulatory Flexi-bility Act (5 U.S.C. Chapter 6). The regu-lations under sections 6011 and 6302 affectonly a small number of taxpayers that fileemployment tax returns. Therefore, theTreasury Department and the IRS have de-termined that these regulations will not af-fect a substantial number of small entities.In addition, the Treasury Department andthe IRS have determined that any impacton entities affected by the regulations willnot be significant. The regulations merelyallow certain employers to file their em-ployment tax return annually rather thanquarterly. Therefore, these regulations willreduce the burden on these employers, byreducing the number of returns they mustfile each year. Based on these facts, theIRS has determined that these regulationswill not have a significant economic im-pact on a substantial number of small en-tities. Pursuant to section 7805(f) of theInternal Revenue Code, this regulation hasbeen submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on their impact onsmall business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signed origi-nal and eight (8) copies) or electronic com-ments that are submitted timely to the IRS.The IRS and Treasury Department requestcomments on the substance of the pro-posed regulations, as well as on the clarityof the proposed rules and how they can bemade easier to understand. All commentswill be available for public inspection andcopying. A public hearing will be sched-

February 2, 2009 421 2009–5 I.R.B.

uled if requested in writing by any personthat timely submits written comments. Ifa public hearing is scheduled, notice of thedate, time, and place for the public hearingwill be published in the Federal Register.


The principal authors of these finalregulations are Raymond Bailey andAudra M. Dineen of the Office of theAssociate Chief Counsel (Procedure andAdministration).

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 31 is pro-posed to be amended as follows:

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT SOURCE

Paragraph. 1. The authority citation forpart 31 continues to read in part as follows:

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

was proposed to be amended at 71 FR 46on January 3, 2006, is further amendedby revising paragraph (a)(1) and paragraph(a)(5) and adding paragraph (g) to read asfollows:

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

(a) * * *(1) [The text of proposed§31.6011(a)–1(a)(1) is the same as thetext of §31.6011(a)–1T(a)(1) publishedelsewhere in this issue of the Bulletin].

* * * * *(5) [The text of proposed

§31.6011(a)–1(a)(5) is the same as thetext of §31.6011(a)–1T(a)(5) publishedelsewhere in this issue of the Bulletin].

* * * * *(g) [The text of proposed

§31.6011(a)–1(g) is the same as the text of§31.6011(a)–1T(g) published elsewherein this issue of the Bulletin].

Par. 3. Section 31.6011(a)–4, whichwas proposed to be amended at 71 FR 46(January 3, 2006), is further amended byrevising paragraphs (a)(1) and (a)(4) andadding paragraph (d) to read as follows:

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

(a)* * *(1) [The text of proposed§31.6011(a)–4(a)(1) is the same as thetext of §31.6011(a)–4T(a)(1) publishedelsewhere in this issue of the Bulletin].


§31.6011(a)–4(a)(4) is the same as thetext of §31.6011(a)–4T(a)(4) publishedelsewhere in this issue of the Bulletin].

* * * * *(d) [The text of proposed

§31.6011(a)–4(d) is the same as the text of§31.6011(a)–4T(d) published elsewherein this issue of the Bulletin].

Par. 4. Section 31.6302–0 isamended by revising the entries for§31.6302–1(f)(4)(i), (g)(1) and (n) to readas follows:

§31.6302–0 Table of contents.

* * * * *


* * * * *(f) * * *(4) * * *(i) [The text of the proposed entry for

§31.6302–1(f)(4)(i) is the same as the textof the entry for §31.6302–1T(f)(4)(i) pub-lished elsewhere in this issue of the Bul-letin].

* * * * *(g) * * *(1) [The text of the proposed entry for

§31.6302–1(g)(1) is the same as the text ofthe entry for §31.6302–1T(g)(1) publishedelsewhere in this issue of the Bulletin].

* * * * *(n) [The text of the proposed entry for

§31.6302–1(n) is the same as the text of theentry for §31.6302–1T(n) published else-where in this issue of the Bulletin].

Par. 5. Section 31.6302–1, which wasproposed to be amended at 71 FR 46 onJanuary 3, 2006, is further amended by re-vising paragraphs (b)(4), (c)(5), (c)(6), (d)

Example 6, (e)(2), (f)(4), (f)(5) Example 3,(g)(1) and (n) to read as follows:


* * * * *(b)* * *


§31.6302–1(b)(4) is the same as the text of§31.6302–1T(b)(4) published elsewherein this issue of the Bulletin].

(c) * * *(5) [The text of proposed

§31.6302–1(c)(5) is the same as the text of§31.6302–1T(c)(5) published elsewherein this issue of the Bulletin].

(6) [The text of proposed§31.6302–1(c)(6) is the same as the text of§31.6302–1T(c)(6) published elsewherein this issue of the Bulletin].

(d)* * *Example 6. [The text of proposed

§31.6302–1(d) Example 6 is the same asthe text of §31.6302–1T(d) Example 6published elsewhere in this issue of theBulletin].

(e) * * *(2) [The text of proposed

§31.6302–1(e)(2) is the same as the text of§31.6302–1T(e)(2) published elsewherein this issue of the Bulletin].

(f) * * *(4) [The text of proposed

§31.6302–1(f)(4) is the same as the text of§31.6302–1T(f)(4) published elsewherein this issue of the Bulletin].

(5) * * *Example 3. [The text of proposed

§31.6302–1(f)(5) Example 3 is the sameas the text of §31.6302–1T(f)(5) Example3 published elsewhere in this issue of theBulletin].

(g) * * * (1) [The text of proposed§31.6302–1(g)(1) is the same as the text of§31.6302–1T(g)(1) published elsewhere inthis issue of the Bulletin].

* * * * *(n) [The text of proposed

§31.6302–1(n) is the same as the text of§31.6302–1T(n)(1) published elsewherein this issue of the Bulletin].

2009–5 I.R.B. 422 February 2, 2009

* * * * *



Notice of ProposedRulemaking byCross-Reference toTemporary Regulationsand Notice of Public Hearing

Guidance Regarding ForeignBase Company Sales Income

REG–150066–08


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

SUMMARY: In this issue of the Bulletin,the IRS and Treasury Department are is-suing temporary regulations (T.D. 9438)relating to foreign base company sales in-come, in cases in which personal propertysold by a controlled foreign corporation(CFC) is manufactured, produced, orconstructed pursuant to a contract manu-facturing arrangement or by one or morebranches of the CFC. The temporary reg-ulations modify the foreign base companysales income regulations to adequatelyaddress current business structures andpractices, particularly the growing impor-tance of contract manufacturing and othermanufacturing arrangements. The tem-porary regulations, in general, will affectCFCs and their United States sharehold-ers. The text of the temporary regulationsalso serves as the text of the proposedregulations. This document also providesnotice of a public hearing.

DATES: Written or electronic commentsmust be received by March 30, 2009.Outlines of the topics to be discussed atthe public hearing scheduled for April 20,2009, at 10 a.m. must be received by April2, 2009.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–150066–08),room 5203 Internal Revenue Service, POBox 7604 Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–150066–08),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC 20224. Alternatively,taxpayers may submit electroniccomments via the Federal eRulemakingPortal at www.regulations.gov(IRS-REG–150066–08).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Ethan Atticks, (202)622–3840; concerning submissionsof comments, hearing, and/or to beplaced on the building access list to at-tend the hearing, Richard A. Hurst [email protected] or(202) 622–7180 (not toll-free numbers).


Background and Explanation ofProvision

The temporary regulations in this issueof the Bulletin amend the Income Tax Reg-ulations (26 CFR part 1) relating to for-eign base company sales income, in casesin which personal property sold by a con-trolled foreign corporation (CFC) is man-ufactured, produced, or constructed pur-suant to a contract manufacturing arrange-ment or by one or more branches of theCFC. These regulations, in general, willaffect CFCs and their United States share-holders. The text of those temporary regu-lations also serves as the text of these pro-posed regulations. The preamble to thetemporary regulations explains these pro-posed regulations.

Special Analyses

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

of information on small entities, the Regu-latory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Code, these regulations have beensubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on their impact on small busi-ness.

Comments and Public Hearing

Before the proposed regulations areadopted as final regulations, considera-tion will be give to any written comments(a signed original and eight (8) copies)or electronic comments that are submit-ted timely to the IRS. The IRS and theTreasury Department specifically requestcomments on the clarity of the proposedrules and how they may be made easier tounderstand. All comments will be avail-able for public inspection and copying.

A public hearing has been scheduled forApril 20, 2009, beginning at 10 a.m. in theIRS Auditorium, Internal Revenue Build-ing, 1111 Constitution Avenue, NW, Wash-ington, DC. Due to building security pro-cedures, visitors must enter at the Consti-tution Avenue entrance. In addition, allvisitors must present photo identificationto enter the building. Because of accessrestrictions, visitors will not be admittedbeyond the Constitution Avenue entrancearea more than 30 minutes before the hear-ing starts. For information about havingyour name placed on the building accesslist to attend the hearing, see the “FORFURTHER INFORMATION CONTACT”section of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wishto present oral comments at the hearingmust submit written comments or elec-tronic comments by March 30, 2009, andan outline of the topics to be discussedand the time to be devoted to each topic(signed original and eight (8) copies) byApril 2, 2009. A period of 10 minutes willbe allotted to each person for making com-ments. An agenda showing the schedulingof the speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.


The principal author of these regula-tions is Ethan Atticks of the Office of

February 2, 2009 423 2009–5 I.R.B.

Associate Chief Counsel (International).However, other personnel from the IRSand the Treasury Department participatedin their development.

* * * * *

Proposed Amendments to theRegulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for26 CFR part 1 continues to read in part asfollows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.954–3 is amended

by revising paragraphs (b)(1)(i)(c),(b)(1)(ii)(a), (b)(1)(ii)(c), (b)(2)(i)(b),(b)(2)(i)(d), (b)(2)(ii)(a), (b)(2)(ii)(b),(b)(2)(ii)(e), (b)(4) Example 3, (c) and (d),and adding Examples 8 and 9 to paragraph(b)(4), and adding paragraphs (e), (f) and(g) to read as follows:

§1.954–3 Foreign base company salesincome.

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

ments to §1.954–3(b)(1)(i)(c) is the sameas the text of §1.954–3T(b)(1)(i)(c) pub-lished elsewhere in this issue of the Bul-letin].

(ii)* * * (a) [The text of the proposedamendments to §1.954–3(b)(1)(ii)(a) is thesame as the text of §1.954–3T(b)(1)(ii)(a)

published elsewhere in this issue of theBulletin].

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

ments to §1.954–3(b)(1)(ii)(c) is the sameas the text of §1.954–3T(b)(1)(ii)(c) pub-lished elsewhere in this issue of the Bul-letin].

(2) * * * (i) * * *(b) [The text of the proposed amend-

ments to §1.954–3(b)(2)(i)(b) is the sameas the text of §1.954–3T(b)(2)(i)(b) pub-lished elsewhere in this issue of the Bul-letin].

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

ments to §1.954–3(b)(2)(i)(d) is the sameas the text of §1.954–3T(b)(2)(i)(d) pub-lished elsewhere in this issue of the Bul-letin].

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

ments to §1.954–3(b)(2)(ii)(a) is the sameas the text of §1.954–3T(b)(2)(ii)(a) pub-lished elsewhere in this issue of the Bul-letin].

(b) [The text of the proposed amend-ments to §1.954–3(b)(2)(ii)(b) is the sameas the text of §1.954–3T(b)(2)(ii)(b) pub-lished elsewhere in this issue of the Bul-letin].

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

ments to §1.954–3(b)(2)(ii)(e) is the sameas the text of §1.954–3T(b)(2)(ii)(e) pub-lished elsewhere in this issue of the Bul-letin].

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

amendments to §1.954–3(b)(4) Example 3is the same as the text of §1.954–3T(b)(4)Example 3 published elsewhere in this is-sue of the Bulletin].

* * * * *Example 8. [The text of the proposed

amendments to §1.954–3(b)(4) Example 8is the same as the text of §1.954–3T Ex-ample 8 published elsewhere in this issueof the Bulletin].

Example 9. [The text of the proposedamendments to §1.954–3(b)(4) Example 9is the same as the text of §1.954–3T Ex-ample 9 published elsewhere in this issueof the Bulletin].

(e) [The text of the proposed amend-ments to §1.954–3(e) is the same as thetext of §1.954–3T(e) published elsewherein this issue of the Bulletin].

(f) [The text of the proposed amend-ments to §1.954–3(f) is the same as thetext of §1.954–3T(f) published elsewherein this issue of the Bulletin].

(g) [The text of the proposed amend-ments to §1.954–3(g) is the same as thetext of §1.954–3T(g) published elsewherein this issue of the Bulletin].



Announcement of Disciplinary Sanctions From the Officeof Professional ResponsibilityAnnouncement 2009-2

The Office of Professional Responsi-bility (OPR) announces recent disciplinarysanctions involving attorneys, certifiedpublic accountants, enrolled agents, en-rolled actuaries, enrolled retirement planagents, and appraisers. These individualsare subject to the regulations governingpractice before the Internal Revenue Ser-vice (IRS), which are set out in Title 31,Code of Federal Regulations, Part 10, andwhich are published in pamphlet form as

Treasury Department Circular No. 230.The regulations prescribe the duties andrestrictions relating to such practice andprescribe the disciplinary sanctions forviolating the regulations.

The disciplinary sanctions to be im-posed for violation of the regulations are:

Disbarred from practice before theIRS—An individual who is disbarred isnot eligible to represent taxpayers beforethe IRS.

Suspended from practice before theIRS—An individual who is suspended isnot eligible to represent taxpayers beforethe IRS during the term of the suspension.

Censured in practice before theIRS—Censure is a public reprimand. Un-like disbarment or suspension, censuredoes not affect an individual’s eligibilityto represent taxpayers before the IRS, butOPR may subject the individual’s future

2009–5 I.R.B. 424 February 2, 2009

representations to conditions designed topromote high standards of conduct.

Monetary penalty—A monetarypenalty may be imposed on an individualwho engages in conduct subject to sanc-tion or on an employer, firm, or entityif the individual was acting on its behalfand if it knew, or reasonably should haveknown, of the individual’s conduct.

Disqualification of appraiser—Anappraiser who is disqualified is barredfrom presenting evidence or testimony inany administrative proceeding before theDepartment of the Treasury or the IRS.

Under the regulations, attorneys, cer-tified public accountants, enrolled agents,enrolled actuaries, and enrolled retirementplan agents may not assist, or accept assis-tance from, individuals who are suspendedor disbarred with respect to matters consti-tuting practice (i.e., representation) beforethe IRS, and they may not aid or abet sus-pended or disbarred individuals to practicebefore the IRS.

Disciplinary sanctions are described inthese terms:

Disbarred by decision after hearing,Suspended by decision after hearing,Censured by decision after hearing,Monetary penalty imposed after hear-ing, and Disqualified after hearing—Anadministrative law judge (ALJ) conductedan evidentiary hearing upon OPR’s com-plaint alleging violation of the regulationsand issued a decision imposing one ofthese sanctions. After 30 days from theissuance of the decision, in the absence ofan appeal, the ALJ’s decision became thefinal agency decision.

Disbarred by default decision, Sus-pended by default decision, Censured bydefault decision, Monetary penalty im-posed by default decision, and Disqual-ified by default decision—An ALJ, afterfinding that no answer to OPR’s complainthad been filed, granted OPR’s motion for adefault judgment and issued a decision im-posing one of these sanctions.

Disbarment by decision on appeal,Suspended by decision on appeal, Cen-sured by decision on appeal, Monetarypenalty imposed by decision on ap-peal, and Disqualified by decision onappeal—The decision of the ALJ wasappealed to the agency appeal authority,acting as the delegate of the Secretaryof the Treasury, and the appeal authorityissued a decision imposing one of thesesanctions.

Disbarred by consent, Suspended byconsent, Censured by consent, Mone-tary penalty imposed by consent, andDisqualified by consent—In lieu of adisciplinary proceeding being institutedor continued, an individual offered a con-sent to one of these sanctions and OPRaccepted the offer. Typically, an offerof consent will provide for: suspensionfor an indefinite term; conditions that theindividual must observe during the sus-pension; and the individual’s opportunity,after a stated number of months, to filewith OPR a petition for reinstatement af-firming compliance with the terms of theconsent and affirming current eligibilityto practice (i.e., an active professionallicense or active enrollment status). Anenrolled agent or an enrolled retirement

plan agent may also offer to resign in orderto avoid a disciplinary proceeding.

Suspended by decision in expeditedproceeding, Suspended by default de-cision in expedited proceeding, Sus-pended by consent in expedited pro-ceeding—OPR instituted an expeditedproceeding for suspension (based on cer-tain limited grounds, including loss of aprofessional license and criminal convic-tions).

OPR has authority to disclose thegrounds for disciplinary sanctions in thesesituations: (1) an ALJ or the Secretary’sdelegate on appeal has issued a decisionon or after September 26, 2007, which wasthe effective date of amendments to theregulations that permit making such deci-sions publicly available; (2) the individualhas settled a disciplinary case by signingOPR’s “consent to sanction” form, whichrequires consenting individuals to admit toone or more violations of the regulationsand to consent to the disclosure of the in-dividual’s own return information relatedto the admitted violations (for example,failure to file Federal income tax returns);or (3) OPR has issued a decision in anexpedited proceeding for suspension.

Announcements of disciplinary sanc-tions appear in the Internal Revenue Bul-letin at the earliest practicable date. Thesanctions announced below are alphabet-ized first by the names of states and sec-ond by the last names of individuals. Un-less otherwise indicated, section numbers(e.g., § 10.51) refer to the regulations.

City & State Name Professional Disciplinary Sanction Effective Date(s)Designation

Alabama

Florence Bowlin, Donald W. CPA Suspended by defaultdecision in expeditedproceeding under § 10.82(revocation of CPAlicense)

Indefinite fromDecember 1, 2008

February 2, 2009 425 2009–5 I.R.B.


Arizona

Scottsdale Cifelli, Thomas A. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(suspension of attorneylicense)


Phoenix Groh, Gregory G. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(suspension of attorneylicense)


Chandler Huynh, Hoang V. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(suspension of attorneylicense)

Indefinite fromNovember 5, 2008

Payson Johnson, Richard B. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(suspension of attorneylicense)


Mesa Matheny, Ronald S. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(suspension of attorneylicense)


Phoenix Olson, Carl R. CPA Suspended by defaultdecision in expeditedproceeding under § 10.82(revocation of CPAlicense in Kansas)

Indefinite fromDecember 15,2008

Dewey Wirth, Andrew T. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)


California

Ventura Hartnett, John G. Attorney Suspended by decisionin expedited proceedingunder § 10.82 (suspensionof attorney license inMassachusetts)


Colorado

Englewood Simon, Harry L. Attorney Suspended by decisionin expedited proceedingunder § 10.82 (suspensionof attorney license)


2009–5 I.R.B. 426 February 2, 2009


Illinois

Northbrook Kipnis, Mark S. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(conviction under18 U.S.C. §§ 1341 and 1346,frauds and swindles)


Waukegan Meuth, Patterson C. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)


Kansas

Emporia Markowitz, Daniel J. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment inMissouri)


Olson, Carl R.,See Arizona

Overland Park Stewart, Kimberly CPA Suspended by defaultdecision in expeditedproceeding under § 10.82(revocation of CPAlicense)


Kentucky

Louisville Brooks, Troy L. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment inTennessee)


Louisiana

Lafayette Peddy, Jr., Millard C. CPA Suspended by defaultdecision in expeditedproceeding under § 10.82(revocation of CPAlicense)


Massachusetts

East Walpole Brauer, David P. Attorney Suspended by decisionin expedited proceedingunder § 10.82 (suspensionof attorney license)


Hartnett, John G.,See California

February 2, 2009 427 2009–5 I.R.B.


Minnesota

Varriano, Richard D.,See North Dakota

Mississippi

Jackson McIntyre, James G. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)


Oxford Scruggs, Richard F. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)


Missouri

Kirkwood Belz, Mark Attorney Suspended by decisionin expedited proceedingunder § 10.82 (suspensionof attorney license)


Markowitz, Daniel J.,See Kansas

New York

New York Lefrak, Joseph S. Attorney Suspended by decisionin expedited proceedingunder § 10.82 (attorneydisbarment)

Indefinite fromNovember 12,2008

Dix Hills Napolitano, James P. CPA Suspended by ALJ defaultdecision for violationof § 10.51 (failure toexercise due diligence inrepresentations to client)

Indefinite fromSeptember 23,2008

North Carolina

Raleigh McLamb, Jr., James O. CPA Suspended by defaultdecision in expeditedproceeding under § 10.82(revocation of CPAlicense)


North Dakota

Fargo Varriano, Richard D. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney suspension inMinnesota)


2009–5 I.R.B. 428 February 2, 2009


Oklahoma

Bethany Farrow, Katherine L. CPA Suspended by consentfor violation of § 10.51(failure to timely fileFederal income taxreturns)


Oregon

Sandy Ryan, Jane D. CPA Suspended by defaultdecision in expeditedproceeding under § 10.82(conviction under State ofOregon law 164.055, theftin the first degree)


Tennessee

Brooks, Troy L.,See Kentucky

Martin Speight, Harry M. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)


Greenville Welch, Lawrence A. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney disbarment)


Virginia

Ashburn Askintowicz, John W. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(attorney license annulledin West Virginia)


West Virginia

Askintowicz, John W.,See Virginia

February 2, 2009 429 2009–5 I.R.B.


Wisconsin

Ripon Goluba, David A. Attorney Suspended by defaultdecision in expeditedproceeding under § 10.82(suspension of attorneylicense)


Racine Shumate, Thomas M. Attorney Suspended by defaultdecision in expeditedproceeding under§ 10.82 (convictionunder 26 U.S.C. § 7212,corruptly impeding theadministration of the IRSlaws)


2009–5 I.R.B. 430 February 2, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

February 2, 2009 i 2009–5 I.R.B.

Numerical Finding List1

Bulletins 2009–1 through 2009–5

Announcements:

2009-1, 2009-1 I.R.B. 242

2009-2, 2009-5 I.R.B. 424

Notices:

2009-1, 2009-2 I.R.B. 250

2009-2, 2009-4 I.R.B. 344

2009-3, 2009-2 I.R.B. 250

2009-4, 2009-2 I.R.B. 251

2009-5, 2009-3 I.R.B. 309

2009-6, 2009-3 I.R.B. 311

2009-7, 2009-3 I.R.B. 312

2009-8, 2009-4 I.R.B. 347

2009-9, 2009-5 I.R.B. 419

2009-10, 2009-5 I.R.B. 419

2009-11, 2009-5 I.R.B. 420

Proposed Regulations:

REG-148568-04, 2009-5 I.R.B. 421

REG-160872-04, 2009-4 I.R.B. 358

REG-158747-06, 2009-4 I.R.B. 362

REG-150670-07, 2009-4 I.R.B. 378

REG-113462-08, 2009-4 I.R.B. 379

REG-150066-08, 2009-5 I.R.B. 423

Revenue Procedures:

2009-1, 2009-1 I.R.B. 1

2009-2, 2009-1 I.R.B. 87

2009-3, 2009-1 I.R.B. 107

2009-4, 2009-1 I.R.B. 118

2009-5, 2009-1 I.R.B. 161

2009-6, 2009-1 I.R.B. 189

2009-7, 2009-1 I.R.B. 226

2009-8, 2009-1 I.R.B. 229

2009-9, 2009-2 I.R.B. 256

2009-10, 2009-2 I.R.B. 267

2009-11, 2009-3 I.R.B. 313

2009-12, 2009-3 I.R.B. 321

2009-13, 2009-3 I.R.B. 323

2009-14, 2009-3 I.R.B. 324

2009-15, 2009-4 I.R.B. 356

Revenue Rulings:

2009-1, 2009-2 I.R.B. 248

2009-2, 2009-2 I.R.B. 245

2009-3, 2009-5 I.R.B. 382

2009-4, 2009-5 I.R.B. 408

Treasury Decisions:

9434, 2009-4 I.R.B. 339

9435, 2009-4 I.R.B. 333

9436, 2009-3 I.R.B. 268

Treasury Decisions— Continued:

9437, 2009-4 I.R.B. 341

9438, 2009-5 I.R.B. 387

9439, 2009-5 I.R.B. 416

9440, 2009-5 I.R.B. 409

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin2008–52, dated December 29, 2008.

2009–5 I.R.B. ii February 2, 2009

Finding List of Current Actions onPreviously Published Items1

Bulletins 2009–1 through 2009–5

Notices:

2001-55

Modified by

Notice 2009-1, 2009-2 I.R.B. 250

2002-27

Modified by

Notice 2009-9, 2009-5 I.R.B. 419

2007-54

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268

2008-11

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268

2008-12

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268Rev. Proc. 2009-11, 2009-3 I.R.B. 313

2008-13

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268

List of forms modified and superseded by

Rev. Proc. 2009-11, 2009-3 I.R.B. 313

Modified and clarified by

Notice 2009-5, 2009-3 I.R.B. 309

2008-46

Obsoleted by

T.D. 9436, 2009-3 I.R.B. 268Rev. Proc. 2009-11, 2009-3 I.R.B. 313

Revenue Procedures:

2007-17

Superseded by

Rev. Proc. 2009-14, 2009-3 I.R.B. 324

2007-71

Modified by

Notice 2009-3, 2009-2 I.R.B. 250

2008-1

Superseded by

Rev. Proc. 2009-1, 2009-1 I.R.B. 1

2008-2

Superseded by

Rev. Proc. 2009-2, 2009-1 I.R.B. 87

2008-3

Superseded by

Rev. Proc. 2009-3, 2009-1 I.R.B. 107

2008-4

Superseded by

Rev. Proc. 2009-4, 2009-1 I.R.B. 118

Revenue Procedures— Continued:

2008-5

Superseded by

Rev. Proc. 2009-5, 2009-1 I.R.B. 161

2008-6

Superseded by

Rev. Proc. 2009-6, 2009-1 I.R.B. 189

2008-7

Superseded by

Rev. Proc. 2009-7, 2009-1 I.R.B. 226

2008-8

Superseded by

Rev. Proc. 2009-8, 2009-1 I.R.B. 229

2008-9

Superseded by

Rev. Proc. 2009-9, 2009-2 I.R.B. 256

2008-61

Superseded by

Rev. Proc. 2009-3, 2009-1 I.R.B. 107

2008-68

Amplified and superseded by

Rev. Proc. 2009-15, 2009-4 I.R.B. 356

Revenue Rulings:

65-286

Obsoleted by

T.D. 9435, 2009-4 I.R.B. 333

76-54

Obsoleted by

T.D. 9435, 2009-4 I.R.B. 333

92-19

Supplemented by

Rev. Rul. 2009-3, 2009-5 I.R.B. 382

2008-19

Modified by

Rev. Rul. 2009-3, 2009-5 I.R.B. 382

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin 2008–52, dated December 29,2008.

February 2, 2009 iii 2009–5 I.R.B.

2009–5 I.R.B. February 2, 2009

February 2, 2009 2009–5 I.R.B.

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

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