INCOME TAX EXEMPT ORGANIZATIONS · September 17, 2007 2007–38 I.R.B. The IRS Mission Provide America’s taxpayers top quality service by helping them understand and meet their

Bulletin No. 2007-38September 17, 2007

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

INCOME TAX

Rev. Rul. 2007–54, page 604.Life insurance reserves. This ruling provides guidance re-garding (1) the amount of life insurance reserves taken intoaccount for a variable contract where some or all of the re-serves are accounted for as part of a life insurance company’sseparate account reserves and (2) what interest rate is usedto calculate required interest under section 812(b)(2)(A) of theCode on life insurance reserves in situations where the amountof those reserves is the tax reserve determined under section807(d)(2).

Rev. Rul. 2007–55, page 604.Fringe benefits aircraft valuation formula. The StandardIndustry Fare Level (SIFL) cents-per-mile rates and terminalcharge in effect for the second half of 2007 are set forth forpurposes of determining the value of noncommercial flightson employer-provided aircraft under section 1.61–21(g) of theregulations.

Rev. Rul. 2007–60, page 606.Revenue rulings obsolete. This ruling obsoletes Rev. Rul.75–425, 1975–2 C.B. 291, which provides guidance relatedto the effect of signing a waiver (USCIS Form I–508) undersection 247(b) of the Immigration and Nationality Act (8 U.S.C.section 1257(b)) by alien individuals employed in the UnitedStates by a foreign government or international organization.Rev. Rul. 75–425 obsoleted.

T.D. 9347, page 624.Final regulations under section 6655 of the Code provide guid-ance with respect to estimated tax payments by corporations.Rev. Ruls. 67–93, 76–450, and 78–257 obsoleted.

T.D. 9350, page 607.Final regulations under section 6011 of the Code modify andclarify the rules relating to the disclosure of reportable trans-actions under regulations section 1.6011–4. The regulationsalso make conforming changes to the disclosure rules underregulations sections 20.6011–4, 25.6011–4, 31.6011–4,53.6011–4, 54.6011–4, and 56.6011–4. These regulationsaffect taxpayers who must disclose transactions under section6011 and material advisors under sections 6111 and 6112.

EXEMPT ORGANIZATIONS


REG–116215–07, page 659.Proposed regulations provide rules relating to informationmade available by the IRS for public inspection under section6104(a) of the Code and materials that are made publiclyavailable under section 6110.

(Continued on the next page)

Finding Lists begin on page ii.

ESTATE TAX


GIFT TAX


EMPLOYMENT TAX


EXCISE TAX


ADMINISTRATIVE

T.D. 9351, page 616.Final regulations under section 6111 of the Code provide rulesrelating to the disclosure of reportable transactions by materialadvisors who must disclose transactions under section 6111and material advisors who maintain lists under section 6112.

T.D. 9352, page 621.Final regulations under section 6112 of the Code provide rulesrelating to the list maintenance obligation of material advisorswho must maintain lists under section 6112.

Announcement 2007–77, page 662.This document contains corrections to proposed regulations(REG–103842–07, 2007–28 I.R.B. 79) that involve the de-duction for income attributable to domestic production activ-ities under section 199 of the Code and that affect taxpayerswho produce qualified films under sections 199(c)(4)(A)(i)(II) and(c)(6) and taxpayers who are members of an expanded affiliatedgroup under section 199(d)(4).

Announcement 2007–78, page 663.This document contains corrections to final regulations (T.D.9321, 2007–19 I.R.B. 1123) which set forth guidance on theapplication of secton 409A of the Code to nonqualified deferredcompensation plans.

Announcement 2007–80, page 667.This document contains corrections to temporary regulations(T.D. 9330, 2007–31 I.R.B. 239) that apply to corporationsthat have undergone ownership changes within the meaningof section 382 of the Code. The regulations also provideguidance regarding the treatment of prepaid income under thebuilt-in gain provisions of section 382(h).

Announcement 2007–81, page 667.This document provides a change of location for a publichearing on proposed regulations (REG–119097–05, 2007–28I.R.B. 74) providing guidance on the portion of a trust properlyincludible in a grantor’s gross estate under sections 2036and 2039 of the Code if the grantor has retained the use ofproperty in a trust or the right to annuity, unitrust, or otherincome payment from such trust for life, for any period notascertainable without reference to the grantor’s death, or fora period that does not in fact end before the grantor’s death.

September 17, 2007 2007–38 I.R.B.

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

applying the tax law with integrity and fairness to all.

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

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

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

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

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

The Bulletin is divided into four parts as follows:

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

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

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

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

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

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

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

2007–38 I.R.B. September 17, 2007

September 17, 2007 2007–38 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 61.—Gross IncomeDefined

26 CFR 1.61–21: Taxation of fringe benefits.

Fringe benefits aircraft valuation for-mula. The Standard Industry Fare Level(SIFL) cents-per-mile rates and terminalcharge in effect for the second half of 2007are set forth for purposes of determiningthe value of noncommercial flights onemployer-provided aircraft under section1.61–21(g) of the regulations.

Rev. Rul. 2007–55

For purposes of the taxation of fringebenefits under section 61 of the Inter-nal Revenue Code, section 1.61–21(g) ofthe Income Tax Regulations provides arule for valuing noncommercial flightson employer-provided aircraft. Section1.61–21(g)(5) provides an aircraft valua-tion formula to determine the value of suchflights. The value of a flight is determinedunder the base aircraft valuation formula(also known as the Standard Industry Fare

Level formula or SIFL) by multiplyingthe SIFL cents-per-mile rates applicablefor the period during which the flight wastaken by the appropriate aircraft multipleprovided in section 1.61–21(g)(7) and thenadding the applicable terminal charge. TheSIFL cents-per-mile rates in the formulaand the terminal charge are calculated bythe Department of Transportation and arereviewed semi-annually.

The following chart sets forth the termi-nal charge and SIFL mileage rates:

Period During Whichthe Flight Is Taken

TerminalCharge

SIFL MileageRates

7/1/07 - 12/31/07 $37.91 Up to 500 miles= $.2074 per mile

501–1500 miles= $.1581 per mile

Over 1500 miles= $.1520 per mile

DRAFTING INFORMATION

The principal author of this revenueruling is Kathleen Edmondson of theOffice of Division Counsel/AssociateChief Counsel (Tax Exempt/Govern-ment Entities). For further informationregarding this revenue ruling, contactMs. Edmondson at (202) 622–0047 (not atoll-free call).

Section 807.—Rules forCertain Reserves(Also § 812.)

Life insurance reserves. This rul-ing provides guidance regarding (1) theamount of life insurance reserves takeninto account for a variable contract wheresome or all of the reserves are accountedfor as part of a life insurance company’sseparate account reserves and (2) whatinterest rate is used to calculate requiredinterest under section 812(b)(2)(A) of theCode on life insurance reserves in situa-tions where the amount of those reservesis the tax reserve determined under section807(d)(2).

Rev. Rul. 2007–54

ISSUE(S)

1. What is the amount of the life insur-ance reserves taken into account under sec-tion 807 of the Internal Revenue Code fora variable contract where some or all of thereserves are accounted for as part of a lifeinsurance company’s separate account re-serves?

2. If the amount of the life insurance re-serves for a variable contract is the tax re-serve determined under section 807(d)(2),what interest rate is used to calculate re-quired interest on those reserves?

FACTS

Situation 1. IC is a life insurance com-pany as defined in section 816(a) and is theissuer of Contract A. Contract A providesfor the payment of variable annuity bene-fits computed on the basis of a recognizedmortality table and the investment experi-ence of IC’s segregated asset account (sep-arate account). IC bears the mortality riskswith regard to the contingencies involvedin the variable annuity benefits. ContractA neither provides any “supplemental ben-

efits” (as defined in section 807(e)(3)(D))nor involves any “qualified substandardrisks” (as defined in section 807(e)(5)(B)).

Contract A is a “variable contract” asdefined in section 817(d) and an “annuitycontract” under section 817(g). IC’s re-serves for Contract A are “life insurancereserves” as defined in section 816(b).

For taxable years 2006 and 2007, theamounts of end-of-year tax reserves de-termined under section 807(d)(2) for Con-tract A are $8,000 and $10,000, respec-tively. The applicable Federal interest ratefor Contract A is 4.82 percent, and the ap-plicable Federal interest rate exceeds theprevailing State assumed rate for the Con-tract.

The 2006 and 2007 end-of-year netsurrender values determined under section807(e)(1) for Contract A are $7,840 and$9,830, respectively. The amounts takeninto account by IC with regard to Con-tract A in determining its 2006 and 2007end-of-year statutory reserves within themeaning of section 807(d)(6) are $8,050and $10,045, respectively. None of IC’sstatutory reserves is attributable to anydeferred or uncollected premium.

2007–38 I.R.B. 604 September 17, 2007

Situation 2. The facts are the same asSituation 1, except that Contract A pro-vides a minimum guaranteed death bene-fit in addition to variable annuity benefits.IC bears the mortality risks and investmentrisks with regard to the contingencies in-volved in the provision of the death bene-fit.

For taxable years 2006 and 2007, theend-of-year tax reserves determined un-der section 807(d)(2) for Contract A are$8,155 and $10,165, respectively. The2006 and 2007 end-of-year net surrendervalues determined under section 807(e)(1)for Contract A are $8,000 and $10,000, re-spectively. The amount taken into accountby IC with regard to Contract A in de-termining its 2006 and 2007 end-of-yearstatutory reserves within the meaning ofsection 807(d)(6) are $8,210 and $10,215,respectively.

If Contract A had not provided the min-imum guaranteed death benefit, the 2006and 2007 end-of-year tax reserves deter-mined under section 807(d)(2) would havebeen $8,000 and $10,000, respectively.

LAW AND ANALYSIS

Issue 1. Section 803(a) provides thatlife insurance company gross income isthe sum of (i) premiums, (ii) net decreasesin certain reserves under section 807(a),and (iii) other amounts generally includedby a taxpayer in gross income. Section805(a)(2) authorizes a deduction for thenet increase in certain reserves under sec-tion 807(b). In calculating the change inreserves for a variable contract, the in-crease or decrease in the reserves due toappreciation and depreciation of separateaccount assets is removed. See section817(a).

Section 807(c) sets forth the items takeninto account in determining the net de-crease or net increase in reserves undersection 807(a) and (b). Among the itemstaken into account are “life insurance re-serves” (as defined in section 816(b)).

For purposes of determining a lifeinsurance company’s income or deduc-tion from a change in reserves, section807(d)(1) provides that the amount of thelife insurance reserves for any contract isthe greater of— (i) the contract’s net sur-render value, or (ii) the contract’s tax re-serve determined under section 807(d)(2).However, the life insurance reserves for a

contract cannot exceed the “statutory re-serves” (as defined in section 807(d)(6)).

Section 807(d)(2) provides that theamount of the tax reserve for any contractis determined using— (i) the tax reservemethod applicable to the contract, (ii) thegreater of the applicable Federal inter-est rate or the prevailing State assumedinterest rate, and (iii) the prevailing com-missioners’ standard tables for mortalityand morbidity adjusted as appropriate toreflect the risks (such as substandard risks)incurred under the contract which are nototherwise taken into account. The tax re-serves determined under section 807(d)(2)reflect all of the benefits (including thenet surrender value) payable under thecontract.

Section 807(e)(1) provides generallythat the net surrender value of “any con-tract” is determined with regard to anypenalty or charge which would be im-posed on surrender, but without regard toany market value adjustment on surrender.The net surrender value represents thecurrent contractual cash benefit payableunder a contract.

Except as otherwise provided in specialrules under section 807(e)(3) and (5) (re-lating to qualified supplemental benefitsand qualified substandard risks), the com-parison of the tax reserve and the net sur-render value is made on an aggregate ben-efit basis. See H. Rep. No. 432, Pt. 2, 98th

Cong., 2d Sess. 1414 (1984); S. Prt. 169,Vol. I, 98th Cong. 2d Sess. 540 (1984).

Section 807 makes no distinction be-tween a fixed (non-variable) contract and avariable contract. For both fixed and vari-able contracts, a life insurance companydetermines its income or deduction from achange in reserves using the amounts of itslife insurance reserves determined undersection 807. See also section 817(a) (re-ferring to “the sum of the items describedin section 807(c)”).

Section 817(c) requires a life insurancecompany to account separately for theincome, exclusion, deduction, asset, re-serve, and other liability items attributableto variable contracts. If a variable contractcontains a guarantee (for example, a mini-mum death benefit), section 817(d) (flushlanguage) requires an insurance companyto account for the excess of obligationsunder the guarantee over the obligationsunder the contract without regard to theguarantee as part of the company’s general

account, and not as part of the company’sseparate account.

In both Situation 1 and Situation 2, theend-of-year tax reserves determined undersection 807(d)(2) for Contract A— (i) ex-ceed the end-of-year net surrender value ofthe Contract, but (ii) are less than the end-of-year statutory reserves for the Contract.Accordingly, under section 807(d)(1), theamount of the end-of-year life insurancereserves taken into account under section807 for Contract A in both Situations isthe amount of the end-of-year tax reservesdetermined under section 807(d)(2). InSituation 1, the amounts of the 2006 and2007 end-of-year life insurance reservesfor Contract A are $8,000 and $10,000, re-spectively. In Situation 2, the amounts ofthe 2006 and 2007 end-of-year life insur-ance reserves for Contract A are $8,155and $10,165, respectively.

In Situation 2, IC is required under sec-tion 817(d) to account for the excess ofits obligations under Contract A with theminimum death benefit over its obligationsunder the Contract without the death ben-efit as part of the company’s general ac-count reserves. Pursuant to section 817(c),IC accounts for its remaining obligationsunder the Contract A as part of the com-pany’s separate account reserves. Accord-ingly, for end-of-year 2006, IC accountsfor the $155 excess of its obligations un-der Contract A with the minimum deathbenefit ($8,155) over its obligations un-der the Contract without the death benefit($8,000) as part of the company’s generalaccount reserves. IC accounts for the re-maining $8,000 as part of its separate ac-count reserves. For end-of-year 2007, ICaccounts for the $165 excess of its obliga-tions under Contract A with the minimumdeath benefit ($10,165) over its obligationsunder Contract A without the death bene-fit ($10,000) as part of the company’s gen-eral account reserves. IC accounts for theremaining $10,000 as part of its separateaccount reserves.

The allocation of obligations betweengeneral account reserves and separate ac-count reserves has no effect on the deter-mination of the amount of IC’s life insur-ance reserves for Contract A under section807(d).

Issue 2. To prevent a life insurancecompany from realizing a double benefitfor tax-preferred investment income (tax-exempt interest and dividends qualifying

September 17, 2007 605 2007–38 I.R.B.

for the dividends received deduction) usedto fund the company’s obligations to poli-cyholders, sections 807 and 805 require thecompany to adjust certain income and de-duction items for the policyholders’ shareof such tax preferred income. See section807(a) and (b), section 805(a)(4).

Section 812 provides the mechanismto calculate the life insurance company’sand policyholders’ respective shares ofnet investment income. Under section812(b)(1), a life insurance company’sshare of net investment income is the ex-cess (if any) of “net investment income”(determined under section 812(c)) for thetaxable year over the sum of (i) “pol-icy interest” (determined under section812(b)(2)) for the taxable year, and (ii)the “gross investment income’s propor-tionate share of policyholder dividends”(determined under section 812(b)(3)) forthe taxable year.

Policy interest includes “required inter-est” on reserves. Section 812(b)(2)(A).Required interest on a contract’s reservesis calculated using the mean of the con-tract’s beginning-of-year and end-of-yearreserves and the interest rate used in de-termining the contract’s reserves. For ex-ample, if the life insurance reserves for acontract are determined using the greaterof the applicable Federal interest rate or theprevailing State assumed interest rate forthe contract, then required interest on thosereserves is calculated by multiplying (i) themean of the reserves by (ii) the interestrate used in calculating the reserves (i.e.,the greater of the applicable Federal in-terest rate or the prevailing State assumedinterest rate for the contract). If neitherthe prevailing State assumed interest ratenor the applicable Federal interest rate isused in determining a contract’s life in-surance reserves, then required interest iscalculated using another appropriate rate.Section 812(b)(2); Rev. Rul. 2003–120,2003–2 C.B. 1154.

In both Situation 1 and Situation 2, theamount of the life insurance reserves takeninto account under section 807 for Con-tract A is the amount of tax reserve de-termined under section 807(d)(2), whichis determined using the applicable Federalinterest rate for the Contract. As the appli-cable Federal interest rate is used to deter-mine the amount of the life insurance re-serves for Contract A, the required intereston the Contract’s life insurance reserves

is calculated by multiplying the mean ofthose reserves by the applicable Federalinterest rate for the Contract. Rev. Rul.2003–120.

In Situation 1, the mean of the 2007beginning-of-year and end-of-year life in-surance reserves for Contract A is $9,000([$8,000 + $10,000] ÷ 2 = $9,000) and theapplicable Federal interest rate for Con-tract A is 4.82 percent. For taxable year2007, the required interest on Contract A’slife insurance reserves is $433.80 ($9,000× 4.82% = $433.80).

In Situation 2, the mean of the 2007beginning-of-year and end-of-year life in-surance reserves for Contract A is $9,160([$8,155 + $10,165] ÷ 2 = $9,160). Theapplicable Federal interest rate for Con-tract A is 4.82 percent. For taxable year2007, the required interest on Contract A’slife insurance reserves is $441.51 ($9,160× 4.82% = $441.51). Consistent with theallocation of Contract A’s life insurancereserves between IC’s general accountreserves and separate account reserves,$7.71 of the required interest ($441.51× $160 / $9,160 = $7.71) is taken intoaccount under section 812 as required in-terest on IC’s general account reserves.The remaining $433.80 ($441.51 × $9,000/ $9,160 = $433.80) of the required interestis taken into account under section 812 asrequired interest on IC’s separate accountreserves.

HOLDING(S)

1. Under section 807(d)(1), theamounts of the end-of-year life insurancereserves for Contract A in both Situa-tion 1 and Situation 2 are the amountsof the tax reserve determined under sec-tion 807(d)(2). Thus, in Situation 1, theamounts of the 2006 and 2007 end-of-yearlife insurance reserves for Contract A are$8,000 and $10,000, respectively. In Sit-uation 2, the amounts of the 2006 and2007 end-of-year life insurance reservesfor Contract A are $8,155 and $10,165,respectively.

2. In both Situation 1 and Situation 2,the required interest on Contract A’s lifeinsurance reserves is calculated by multi-plying the mean of the Contract’s begin-ning-of-year and end-of-year reserves bythe applicable Federal interest rate for theContract. In Situation 1, the 2007 requiredinterest on Contract A’s life insurance re-

serves is $433.80. In Situation 2, the 2007required interest on Contract A’s life insur-ance reserves is $441.51. Of this amount,$7.71 is required interest on IC’s generalaccount reserves for Contract A, and theremaining $433.80 is required interest onIC’s separate account reserves for ContractA.


The principal author of this revenue rul-ing is Stephen D. Hooe of the Office ofAssociate Chief Counsel (Financial Insti-tutions & Products). For further informa-tion regarding this revenue ruling, contactStephen D. Hooe at (202) 622–3900 (not atoll-free call).

Section 812.—Definitionof Company’s Share andPolicyholders’ Share

A revenue ruling that provides guidance regard-ing (1) the amount of life insurance reserves takeninto account for a variable contract where some or allof the reserves are accounted for as part of a life in-surance company’s separate account reserves and (2)what interest rate is used to calculate required interestunder section 812(b)(2)(A) on life insurance reservesin situations where the amount of those reserves is thetax reserve determined under section 807(d)(2). SeeRev. Rul. 2007-54, page 604.

Section 893.—Compen-sation of Employees ofForeign Governments orInternational Organizations26 CFR 1.893–1: Compensation of employees of for-eign governments or international organizations.

Revenue rulings obsolete. This rul-ing obsoletes Rev. Rul. 75–425, 1975–2C.B. 291, which provides guidance relatedto the effect of signing a waiver (USCISForm I–508) under section 247(b) of theImmigration and Nationality Act (8 U.S.C.section 1257(b)) by alien individuals em-ployed in the United States by a foreigngovernment or international organization.Rev. Rul. 75–425 obsoleted.

Rev. Rul. 2007–60

The Internal Revenue Service is con-tinuing its program of reviewing guidance(including revenue rulings, revenue pro-cedures, and notices) published in the In-

2007–38 I.R.B. 606 September 17, 2007

ternal Revenue Bulletin to identify thoserulings that are obsolete because (1) theapplicable statutory provisions or regula-tions have been changed or repealed; (2)the ruling position is specifically coveredby statute, regulations, or subsequent pub-lished position; or (3) the facts on whichthe ruling position is based no longer existor are not sufficiently described to permitclear application of the current statute andregulations.

Rev. Rul. 75–425, 1975–2 C.B. 291,concerns the effect of an alien individualemployed by a foreign government orinternational organization in the UnitedStates signing a waiver (United StatesCitizenship and Immigration Services(USCIS) Form I–508) under section247(b) of the Immigration and Nation-ality Act (8 U.S.C. § 1257(b)). Generally,an alien individual employed by a foreigngovernment or international organizationwho files the waiver provided by section247(b) of the Immigration and NationalityAct is, from the date of filing the waiver,no longer entitled to exemption from in-come tax under section 893 of the InternalRevenue Code with respect to his or hercompensation received from such foreigngovernment or international organiza-tion. See Treas. Reg. § 1.893–1(a)(5)and (b)(4). However, the filing of thewaiver will have no effect on any incometax exemption derived by an alien indi-vidual from the provisions of an incometax treaty, consular agreement, or otherinternational agreement to the extent theapplication of the exemption is not de-pendent upon the internal revenue lawsof the United States. See Treas. Reg.§ 1.893–1(c)(2).

Rev. Rul. 75–425 sets forth the appli-cation of the above rules with respect toa list of foreign countries with which theUnited States had an income tax treaty orconsular agreement and a list of interna-tional organizations with respect to whichthe United States was a signatory to the in-ternational agreement creating the interna-tional organization(s) at the time of pub-lication of the revenue ruling. Becausemany of those income tax treaties, consularagreements, and international agreementshave been modified, superseded, or areno longer in force, and because the factson which the ruling position was basedno longer exist or are not sufficiently de-scribed to permit clear application of the

currently applicable legal provisions andagreements, the Internal Revenue Servicehas concluded that Rev. Rul. 75–425 is nolonger determinative with respect to for-eign government and international organ-ization employees of any foreign country.Accordingly, Rev. Rul. 75–425 is herebydeclared obsolete.

Alien individuals employed by a for-eign government or international organi-zation in the United States, who file thewaiver provided by section 247(b) of theImmigration and Nationality Act (USCISForm I–508), will be entitled to any taxexemption conferred under the provisionsof an applicable income tax treaty, con-sular agreement, or international agree-ment, that is still in force, to the extentthe application of the exemption is notdependent upon the internal revenue lawsof the United States. For guidance withrespect to a specific foreign country orinternational organization, send an e-mailto [email protected].


Various personnel from the Office ofAssociate Chief Counsel (International)participated in the drafting of this rev-enue ruling. For further informationregarding this revenue ruling, contactRichard A. Ward at (202) 874–1621 (not atoll-free call) or e-mail [email protected].

Section 6011.—GeneralRequirement of Return,Statement, or List26 CFR 1.6011–4: Requirement of statement disclos-ing participation in certain transactions by taxpay-ers.

T.D. 9350

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Parts 1, 20, 25, 31,53, 54, and 56

AJCA Modifications to theSection 6011 Regulations

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains finalregulations under section 6011 of the Inter-nal Revenue Code that modify the rules re-lating to the disclosure of reportable trans-actions under section 6011. These regula-tions affect taxpayers participating in re-portable transactions under section 6011,material advisors responsible for disclos-ing reportable transactions under section6111, and material advisors responsible forkeeping lists under section 6112.

DATES: Effective Date: These regulationsare effective August 3, 2007.

FOR FURTHER INFORMATIONCONTACT: Charles D. Wien,Michael H. Beker, or Tolsun N. Waddle,202–622–3070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regula-tions that amend 26 CFR part 1 by modify-ing and clarifying the rules relating to thedisclosure of reportable transactions undersection 6011. This document also containsfinal regulations that amend 26 CFR parts20, 25, 31, 53, 54, and 56 by modifyingthe rules for purposes of estate, gift, em-ployment, and pension and exempt organi-zations excise taxes that require the disclo-sure of listed transactions by certain tax-payers on their Federal tax returns undersection 6011.

The American Jobs Creation Act of2004, Public Law 108–357, (118 Stat.1418), (AJCA) was enacted on October22, 2004. The AJCA revised sections6111 and 6112, thereby necessitatingchanges to the rules under section 6011.On November 1, 2006, the IRS and Trea-sury Department issued a notice of pro-posed rulemaking and temporary and finalregulations under sections 6011, 6111, and6112 (REG–103038–05, 2006–49 I.R.B.1049, REG–103039–05, 2006–49 I.R.B.1057, REG–103043–05, 2006–49 I.R.B.1063, T.D. 9295, 2006–49 I.R.B. 1030)(the November 2006 regulations). TheNovember 2006 regulations were pub-lished in the Federal Register (71 FR64488, 71 FR 64496, 71 FR 64501, 71 FR64458) on November 2, 2006.

The IRS and Treasury Department re-ceived written public comments respond-ing to the proposed regulations and held

September 17, 2007 607 2007–38 I.R.B.

a public hearing regarding the proposedrules on March 20, 2007. After consid-eration of the comments received and thecomments made at the hearing, the pro-posed regulations are adopted as revisedby this Treasury decision. These final reg-ulations generally retain the provisions ofthe proposed regulations but include somemodifications based on the recommenda-tions made in the public comments.

Summary of Comments andExplanation of Provisions

Nine written comments were receivedin response to the NPRM. All commentswere considered and are available for pub-lic inspection upon request.

Transactions of Interest

The proposed regulations identifiedtransactions of interest as a new reportabletransaction category. As stated in thepreamble to the proposed regulations, atransaction of interest is a transaction thatthe IRS and Treasury Department believehas a potential for tax avoidance or eva-sion, but for which the IRS and TreasuryDepartment lack enough information todetermine whether the transaction shouldbe identified specifically as a tax avoid-ance transaction. These final regulationsadopt the language in the proposed regu-lations regarding transactions of interestwithout modification. This language pro-vides that a transaction of interest is atransaction that is the same as or sub-stantially similar to one of the types oftransactions that the IRS has identified bynotice, regulation, or other form of pub-lished guidance as a transaction of interest.These final regulations also retain the lan-guage in the proposed regulations thatprovide that a taxpayer’s participation in atransaction of interest will be determinedin the published guidance which identifiesthe transaction of interest.

Several commentators requested morespecificity and guidance on the definitionof what constitutes a transaction of inter-est. Specifically, the commentators rec-ommended that the term “participation,”for purposes of determining whether a tax-payer participated in a transaction of in-terest, be defined in the regulations ratherthan in the published guidance identify-ing the transaction of interest. The com-mentators also requested that the published

guidance describing a transaction of inter-est be crafted in a clear and specific man-ner, thereby enabling taxpayers to deter-mine whether they participated in a trans-action of interest. One commentator alsorecommended providing a list of factors inthe regulations that the IRS would considerwhen identifying a transaction of interest.Further, several commentators requestedthat the IRS and Treasury Department pro-vide notice to taxpayers that the IRS andTreasury Department are considering des-ignating a particular transaction as a trans-action of interest and requesting commentsprior to publishing guidance identifying atransaction as a transaction of interest.

The IRS and Treasury Department be-lieve that providing a specific definitionfor the transactions of interest categoryin the regulations would unduly limit theIRS and Treasury Department’s ability toidentify transactions that have the poten-tial for tax avoidance or evasion. In or-der to maintain flexibility in identifying atransaction of interest, the description ofa transaction of interest will be providedin the published guidance that identifiesthe transaction of interest. The publishedguidance identifying a transaction of in-terest will provide taxpayers with the in-formation necessary to determine whethera particular transaction is the same as orsubstantially similar to the transaction de-scribed in the published guidance and todetermine who participated in the transac-tion.

The IRS and Treasury Department donot believe that the regulations should beamended to include language requiring theIRS and Treasury Department to provideadvance notice for transactions of interestas suggested by the commentators. How-ever, the IRS and Treasury Departmentmay choose to publish advance noticeand request comments in certain circum-stances. The determination of whether toprovide advance notice and a request forcomments will be made on a transactionby transaction basis.

The proposed regulations also pro-vide that upon publication of the finalregulations, the transactions of interestcategory of reportable transaction will ap-ply to transactions entered into on or afterNovember 2, 2006. These final regula-tions adopt the effective date stated in theproposed regulations.

The preamble to the proposed regula-tions provides that when the IRS and Trea-sury Department have gathered enough in-formation to make an informed decision asto whether a particular transaction of inter-est is a tax avoidance type of transaction,the IRS and Treasury Department may takeone or more actions, including removingthe transaction from the transaction of in-terest category in published guidance, des-ignating the transaction as a listed trans-action, or providing a new category of re-portable transaction. Several commenta-tors recommended that the period duringwhich a transaction may be considered atransaction of interest be limited to twenty-four months, unless the IRS and TreasuryDepartment affirmatively act to extend thedesignation for an additional twenty-fourmonths with no limit on the number ofpermissible extensions. One commentatorsuggested that the length of the period belimited to twenty-four months, with no ex-tensions.

The IRS and Treasury Department be-lieve that limiting the length of time atransaction may be designated a transac-tion of interest would be contrary to thepurpose of the transactions of interest cat-egory of reportable transaction and wouldhinder the ability of the IRS and TreasuryDepartment to efficiently and effectivelygather the necessary information to deter-mine whether a particular transaction is atax avoidance type of transaction. Accord-ingly, these final regulations do not adoptthese suggestions.

Disclosure of Reportable Transactions byOwners of a Pass-through Entity

I. Timing of disclosures

The proposed regulations provide thatif a taxpayer who is a partner in a partner-ship, a shareholder in an S corporation, ora beneficiary of a trust receives a timelySchedule K–1 less than 10 calendar daysbefore the due date of the taxpayer’s re-turn (including extensions) and, based onreceipt of the timely Schedule K–1, thetaxpayer determines that the taxpayer par-ticipated in a reportable transaction, thedisclosure statement will not be consideredlate if the taxpayer discloses the reportabletransaction by filing a disclosure statementwith the Office of Tax Shelter Analysis(OTSA) within 45 calendar days after the

2007–38 I.R.B. 608 September 17, 2007

due date of the taxpayer’s return (includ-ing extensions). Several commentatorsrequested that the proposed regulationsnot limit relief to taxpayers who receive atimely Schedule K–1 before the due dateof their return. Others believed the 45 daydisclosure period was too short. One com-mentator recommended that the provisionapply to late disclosures that were inad-vertent or non-abusive. One commentatorrecommended that the 10 day period beextended to 30 days and the 45 day disclo-sure period be extended to 90 days. Withrespect to the date the disclosure periodbegins, two commentators commentedthat the disclosure period should begin onthe date the taxpayer receives the timelySchedule K–1.

The IRS and Treasury Departmentagree that the 45 day disclosure periodshould be extended. These final regula-tions extend the disclosure period to 60calendar days. The IRS and TreasuryDepartment believe that this additionalperiod will provide taxpayers with ampletime to review the entity’s return and com-ply with any administrative and regulatoryrequirements before filing their disclosurestatement. It should be noted that if ataxpayer receives a timely Schedule K–1after the due date of the taxpayer’s return(including extensions), the taxpayer willhave received the timely Schedule K–1less than 10 calendar days before the duedate of the return and will have 60 calendardays after the due date of the taxpayer’sreturn (including extensions) to file thedisclosure statement.

II. Pass-through owners

Several commentators have suggestedthat the disclosure obligations of ownersof a pass-through entity that participatesin a reportable transaction be amended toprovide that only certain owners of thepass-through entity are required to dis-close their participation in the reportabletransaction. One commentator suggestedthat an owner of a pass-through entityshould be removed from this disclo-sure obligation when (1) the owner didnot know and should not have knownthat the pass-through entity engaged inthe reportable transaction; and (2) thepass-through entity failed to disclosetimely its participation in the reportabletransaction on its return to OTSA. The

commentator also recommends that if theowner knew or reasonably should haveknown of the pass-through entity’s partic-ipation in the reportable transaction, theowner should be required to file a disclo-sure statement even if the pass-throughentity did not disclose the transaction tothe owner. A different commentator sug-gested that an owner of a pass-through en-tity not be required to disclose the owner’sparticipation in a reportable transaction,even if the owner knew or should haveknown of the pass-through entity’s partic-ipation in the reportable transaction.

Several commentators also suggestedadopting a de minimis ownership rule ex-empting taxpayers owning less than a cer-tain percentage of the pass-through entityfrom the disclosure requirements. Onecommentator suggested exempting ownersof 5 percent or less of the outstanding in-terests in the pass-through entity that par-ticipates in a reportable transaction.

The IRS and Treasury Department areaware that certain partners, shareholders,and beneficiaries may file income tax re-turns that reflect the tax consequences, taxbenefits, or tax strategy of a reportabletransaction even though the taxpayer is un-aware that the pass-through entity engagedin the reportable transaction. The IRS andTreasury Department recognize the con-cerns of the commentators. In light of thepotential monetary penalties for failing todisclose participation in a reportable trans-action and in order to maintain flexibil-ity in determining who should be subjectto the disclosure requirements for a par-ticular transaction, these final regulationsamend the proposed regulations to add lan-guage providing flexibility to the IRS andTreasury Department to issue other pro-visions for disclosure under §1.6011–4 inpublished guidance.

Time Period for Disclosing Participationin a Listed Transaction and Transactionof Interest

Under the proposed regulations if atransaction becomes a listed transactionor a transaction of interest after the filingof a taxpayer’s tax return (including anamended return) reflecting the taxpayer’sparticipation in the listed transaction ortransaction of interest and before the endof the period of limitations for assessmentof tax for any taxable year in which the

taxpayer participated in the listed trans-action or transaction of interest, then adisclosure statement must be filed, regard-less of whether the taxpayer participatedin the listed transaction or transaction ofinterest in the year the transaction becamea listed transaction or a transaction of in-terest, with OTSA within 60 calendar daysafter the date on which the transactionbecame a listed transaction or a transac-tion of interest. The proposed regulationsalso provide that the Commissioner maydetermine the time for disclosure of listedtransactions and transactions of interestin the published guidance identifying thetransaction.

Many commentators suggested that thecurrent rule, which requires the disclosureof subsequently identified listed transac-tions on the taxpayer’s next filed tax returnbe retained in light of the potential mone-tary penalties and potential administrativeburden due to the shortened disclosure pe-riod. One commentator recommended thatthe taxpayer be required to file the dis-closure statement by the later of the tax-payer’s next filed tax return or within 60calendar days after the date on which thetransaction becomes a listed transaction ortransaction of interest.

A critical factor in the ability to ana-lyze a particular transaction is the ability tohave the necessary information availablein a timely manner. Thus, requiring tax-payers to file a disclosure statement withOTSA in a timely manner is essential. Be-cause the IRS and Treasury Departmentrecognize that compliance within 60 calen-dar days may be burdensome in certain cir-cumstances, the proposed regulations areamended to provide that taxpayers have90 calendar days to disclose their partic-ipation in a subsequently identified listedtransaction or transaction of interest.

Brief Asset Holding Period ReportableTransaction Category

Due to changes in section 901 andbased on comments received, the IRS andTreasury Department have determined thatthe brief asset holding period reportabletransaction category is no longer neces-sary. These final regulations thereforeremove this category as a reportable trans-action category.

September 17, 2007 609 2007–38 I.R.B.

Form 8271

Before the enactment of the AJCA, sec-tion 6111 provided that tax shelter organiz-ers were required to provide investors intax shelters the registration number for thetax shelter. Section 301.6111–1T, Q&A55, requires investors to report the reg-istration number of the tax shelter to theIRS on Form 8271, “Investor Reportingof Tax Shelter Registration Number”, andattach the Form 8271 to any return onwhich any deduction, loss, credit, or othertax benefit attributable to the tax shelteris claimed. Because only a few investorsmust still file Form 8271 for pre-AJCAsection 6111 tax shelters and because theIRS already is aware of these transactions,the IRS and Treasury Department have de-cided that investors are no longer requiredto file Forms 8271 otherwise due on or af-ter August 3, 2007. The Form 8271 will beobsoleted. Taxpayers required to file Form8886, “Reportable Transaction DisclosureStatement”, pursuant to §1.6011–4(d), andForm 8271 with respect to the same trans-action only need to report the registrationnumber on Form 8886.

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 deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations, andbecause these regulations do not impose acollection of information on small entities,the provisions of the Regulatory Flexibil-ity Act (5 U.S.C. chapter 35) do not ap-ply. The disclosure statement referenced inthese regulations has been made availablefor public comment and any update to thedisclosure statement will be made avail-able for public comment in accordancewith the Paperwork Reduction Act of 1995(44 U.S.C. chapter 35). Pursuant to sec-tion 7805(f) of the Internal Revenue Code,the notice of proposed rulemaking preced-ing these regulations was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Drafting Information

The principal authors of theseregulations are Charles D. Wien,Michael H. Beker, and Tolsun N. Waddle,Office of the Associate Chief Counsel(Passthroughs and Special Industries).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1, 20, 25,31, 53, 54, and 56 are amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.6011–4 is revised to

read as follows:

§1.6011–4 Requirement of statementdisclosing participation in certaintransactions by taxpayers.

(a) In general. Every taxpayer thathas participated, as described in paragraph(c)(3) of this section, in a reportable trans-action within the meaning of paragraph (b)of this section and who is required to filea tax return must file within the time pre-scribed in paragraph (e) of this section adisclosure statement in the form prescribedby paragraph (d) of this section. The factthat a transaction is a reportable transac-tion shall not affect the legal determinationof whether the taxpayer’s treatment of thetransaction is proper.

(b) Reportable transactions—(1) Ingeneral. A reportable transaction is atransaction described in any of the para-graphs (b)(2) through (7) of this section.The term transaction includes all of thefactual elements relevant to the expectedtax treatment of any investment, entity,plan, or arrangement, and includes anyseries of steps carried out as part of a plan.

(2) Listed transactions. A listed trans-action is a transaction that is the sameas or substantially similar to one of thetypes of transactions that the Internal Rev-enue Service (IRS) has determined to bea tax avoidance transaction and identified

by notice, regulation, or other form of pub-lished guidance as a listed transaction.

(3) Confidential transactions—(i) Ingeneral. A confidential transaction is atransaction that is offered to a taxpayerunder conditions of confidentiality and forwhich the taxpayer has paid an advisor aminimum fee.

(ii) Conditions of confidentiality. Atransaction is considered to be offered toa taxpayer under conditions of confiden-tiality if the advisor who is paid the min-imum fee places a limitation on disclosureby the taxpayer of the tax treatment or taxstructure of the transaction and the limi-tation on disclosure protects the confiden-tiality of that advisor’s tax strategies. Atransaction is treated as confidential evenif the conditions of confidentiality are notlegally binding on the taxpayer. A claimthat a transaction is proprietary or exclu-sive is not treated as a limitation on dis-closure if the advisor confirms to the tax-payer that there is no limitation on disclo-sure of the tax treatment or tax structure ofthe transaction.

(iii) Minimum fee. For purposes of thisparagraph (b)(3), the minimum fee is—

(A) $250,000 for a transaction if thetaxpayer is a corporation;

(B) $50,000 for all other transactionsunless the taxpayer is a partnership or trust,all of the owners or beneficiaries of whichare corporations (looking through anypartners or beneficiaries that are them-selves partnerships or trusts), in whichcase the minimum fee is $250,000.

(iv) Determination of minimum fee. Forpurposes of this paragraph (b)(3), in de-termining the minimum fee, all fees fora tax strategy or for services for advice(whether or not tax advice) or for the im-plementation of a transaction are taken intoaccount. Fees include consideration inwhatever form paid, whether in cash or inkind, for services to analyze the transaction(whether or not related to the tax conse-quences of the transaction), for services toimplement the transaction, for services todocument the transaction, and for servicesto prepare tax returns to the extent returnpreparation fees are unreasonable in lightof the facts and circumstances. For pur-poses of this paragraph (b)(3), a taxpayeralso is treated as paying fees to an advisorif the taxpayer knows or should know thatthe amount it pays will be paid indirectly tothe advisor, such as through a referral fee

2007–38 I.R.B. 610 September 17, 2007

or fee-sharing arrangement. A fee does notinclude amounts paid to a person, includ-ing an advisor, in that person’s capacity asa party to the transaction. For example,a fee does not include reasonable chargesfor the use of capital or the sale or use ofproperty. The IRS will scrutinize carefullyall of the facts and circumstances in deter-mining whether consideration received inconnection with a confidential transactionconstitutes fees.

(v) Related parties. For purposes ofthis paragraph (b)(3), persons who bear arelationship to each other as described insection 267(b) or 707(b) will be treated asthe same person.

(4) Transactions with contractual pro-tection—(i) In general. A transaction withcontractual protection is a transaction forwhich the taxpayer or a related party (asdescribed in section 267(b) or 707(b)) hasthe right to a full or partial refund of fees(as described in paragraph (b)(4)(ii) of thissection) if all or part of the intended taxconsequences from the transaction are notsustained. A transaction with contractualprotection also is a transaction for whichfees (as described in paragraph (b)(4)(ii)of this section) are contingent on the tax-payer’s realization of tax benefits fromthe transaction. All the facts and circum-stances relating to the transaction will beconsidered when determining whether afee is refundable or contingent, includingthe right to reimbursements of amountsthat the parties to the transaction have notdesignated as fees or any agreement to pro-vide services without reasonable compen-sation.

(ii) Fees. Paragraph (b)(4)(i) of this sec-tion only applies with respect to fees paidby or on behalf of the taxpayer or a relatedparty to any person who makes or providesa statement, oral or written, to the taxpayeror related party (or for whose benefit astatement is made or provided to the tax-payer or related party) as to the potentialtax consequences that may result from thetransaction.

(iii) Exceptions—(A) Termination oftransaction. A transaction is not consid-ered to have contractual protection solelybecause a party to the transaction has theright to terminate the transaction uponthe happening of an event affecting thetaxation of one or more parties to thetransaction.

(B) Previously reported transaction. Ifa person makes or provides a statement toa taxpayer as to the potential tax conse-quences that may result from a transactiononly after the taxpayer has entered into thetransaction and reported the consequencesof the transaction on a filed tax return,and the person has not previously receivedfees from the taxpayer relating to the trans-action, then any refundable or contingentfees are not taken into account in determin-ing whether the transaction has contrac-tual protection. This paragraph (b)(4) doesnot provide any substantive rules regard-ing when a person may charge refundableor contingent fees with respect to a trans-action. See Circular 230, 31 CFR Part 10,for the regulations governing practice be-fore the IRS.

(5) Loss transactions—(i) In general.A loss transaction is any transaction result-ing in the taxpayer claiming a loss undersection 165 of at least—

(A) $10 million in any single taxableyear or $20 million in any combination oftaxable years for corporations;

(B) $10 million in any single taxableyear or $20 million in any combinationof taxable years for partnerships that haveonly corporations as partners (lookingthrough any partners that are themselvespartnerships), whether or not any lossesflow through to one or more partners; or

(C) $2 million in any single taxable yearor $4 million in any combination of taxableyears for all other partnerships, whether ornot any losses flow through to one or morepartners;

(D) $2 million in any single taxable yearor $4 million in any combination of tax-able years for individuals, S corporations,or trusts, whether or not any losses flowthrough to one or more shareholders orbeneficiaries; or

(E) $50,000 in any single taxable yearfor individuals or trusts, whether or not theloss flows through from an S corporationor partnership, if the loss arises with re-spect to a section 988 transaction (as de-fined in section 988(c)(1) relating to for-eign currency transactions).

(ii) Cumulative losses. In determin-ing whether a transaction results in a tax-payer claiming a loss that meets the thresh-old amounts over a combination of taxableyears as described in paragraph (b)(5)(i) ofthis section, only losses claimed in the tax-able year that the transaction is entered into

and the five succeeding taxable years arecombined.

(iii) Section 165 loss—(A) For purposesof this section, in determining the thresh-olds in paragraph (b)(5)(i) of this section,the amount of a section 165 loss is ad-justed for any salvage value and for anyinsurance or other compensation received.See §1.165–1(c)(4). However, a section165 loss does not take into account offset-ting gains, or other income or limitations.For example, a section 165 loss does nottake into account the limitation in section165(d) (relating to wagering losses) or thelimitations in sections 165(f), 1211, and1212 (relating to capital losses). The fullamount of a section 165 loss is taken intoaccount for the year in which the loss issustained, regardless of whether all or partof the loss enters into the computation ofa net operating loss under section 172 or anet capital loss under section 1212 that is acarryback or carryover to another year. Asection 165 loss does not include any por-tion of a loss, attributable to a capital losscarryback or carryover from another year,that is treated as a deemed capital loss un-der section 1212.

(B) For purposes of this section, asection 165 loss includes an amount de-ductible pursuant to a provision that treatsa transaction as a sale or other disposition,or otherwise results in a deduction undersection 165. A section 165 loss includes,for example, a loss resulting from a sale orexchange of a partnership interest undersection 741 and a loss resulting from asection 988 transaction.

(6) Transactions of interest. A transac-tion of interest is a transaction that is thesame as or substantially similar to one ofthe types of transactions that the IRS hasidentified by notice, regulation, or otherform of published guidance as a transac-tion of interest.

(7) [Reserved].(8) Exceptions—(i) In general. A trans-

action will not be considered a reportabletransaction, or will be excluded from anyindividual category of reportable transac-tion under paragraphs (b)(3) through (7) ofthis section, if the Commissioner makes adetermination by published guidance thatthe transaction is not subject to the report-ing requirements of this section. The Com-missioner may make a determination byindividual letter ruling under paragraph (f)of this section that an individual letter rul-

September 17, 2007 611 2007–38 I.R.B.

ing request on a specific transaction satis-fies the reporting requirements of this sec-tion with regard to that transaction for thetaxpayer who requests the individual letterruling.

(ii) Special rule for RICs. For pur-poses of this section, a regulated invest-ment company (RIC) as defined in section851 or an investment vehicle that is owned95 percent or more by one or more RICsat all times during the course of the trans-action is not required to disclose a transac-tion that is described in any of paragraphs(b)(3) through (5) and (b)(7) of this sectionunless the transaction is also a listed trans-action or a transaction of interest.

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

(1) Taxpayer. The term taxpayermeans any person described in section7701(a)(1), including S corporations. Ex-cept as otherwise specifically providedin this section, the term taxpayer also in-cludes an affiliated group of corporationsthat joins in the filing of a consolidatedreturn under section 1501.

(2) Corporation. When used specifi-cally in this section, the term corporationmeans an entity that is required to file a re-turn for a taxable year on any 1120 seriesform, or successor form, excluding S cor-porations.

(3) Participation—(i) In general—(A)Listed transactions. A taxpayer has par-ticipated in a listed transaction if thetaxpayer’s tax return reflects tax conse-quences or a tax strategy described in thepublished guidance that lists the transac-tion under paragraph (b)(2) of this section.A taxpayer also has participated in a listedtransaction if the taxpayer knows or hasreason to know that the taxpayer’s taxbenefits are derived directly or indirectlyfrom tax consequences or a tax strategydescribed in published guidance that lists atransaction under paragraph (b)(2) of thissection. Published guidance may iden-tify other types or classes of persons thatwill be treated as participants in a listedtransaction. Published guidance also mayidentify types or classes of persons thatwill not be treated as participants in alisted transaction.

(B) Confidential transactions. A tax-payer has participated in a confidentialtransaction if the taxpayer’s tax returnreflects a tax benefit from the transactionand the taxpayer’s disclosure of the tax

treatment or tax structure of the transac-tion is limited in the manner describedin paragraph (b)(3) of this section. If apartnership’s, S corporation’s or trust’sdisclosure is limited, and the partner’s,shareholder’s, or beneficiary’s disclo-sure is not limited, then the partnership,S corporation, or trust, and not the partner,shareholder, or beneficiary, has partici-pated in the confidential transaction.

(C) Transactions with contractual pro-tection. A taxpayer has participated in atransaction with contractual protection ifthe taxpayer’s tax return reflects a tax ben-efit from the transaction and, as describedin paragraph (b)(4) of this section, the tax-payer has the right to the full or partial re-fund of fees or the fees are contingent. If apartnership, S corporation, or trust has theright to a full or partial refund of fees orhas a contingent fee arrangement, and thepartner, shareholder, or beneficiary doesnot individually have the right to the re-fund of fees or a contingent fee arrange-ment, then the partnership, S corporation,or trust, and not the partner, shareholder, orbeneficiary, has participated in the transac-tion with contractual protection.

(D) Loss transactions. A taxpayer hasparticipated in a loss transaction if thetaxpayer’s tax return reflects a section165 loss and the amount of the section165 loss equals or exceeds the thresh-old amount applicable to the taxpayer asdescribed in paragraph (b)(5)(i) of thissection. If a taxpayer is a partner in apartnership, shareholder in an S corpora-tion, or beneficiary of a trust and a section165 loss as described in paragraph (b)(5)of this section flows through the entityto the taxpayer (disregarding netting atthe entity level), the taxpayer has partici-pated in a loss transaction if the taxpayer’stax return reflects a section 165 loss andthe amount of the section 165 loss thatflows through to the taxpayer equals orexceeds the threshold amounts applicableto the taxpayer as described in paragraph(b)(5)(i) of this section. For this purpose,a tax return is deemed to reflect the fullamount of a section 165 loss describedin paragraph (b)(5) of this section alloca-ble to the taxpayer under this paragraph(c)(3)(i)(D), regardless of whether all orpart of the loss enters into the computationof a net operating loss under section 172or net capital loss under section 1212 that

the taxpayer may carry back or carry overto another year.

(E) Transactions of interest. A taxpayerhas participated in a transaction of interestif the taxpayer is one of the types or classesof persons identified as participants in thetransaction in the published guidance de-scribing the transaction of interest.

(F) [Reserved].(G) Shareholders of foreign corpora-

tions—(1) In general. A reporting share-holder of a foreign corporation participatesin a transaction described in paragraphs(b)(2) through (5) and (b)(7) of this sec-tion if the foreign corporation would beconsidered to participate in the transac-tion under the rules of this paragraph (c)(3)if it were a domestic corporation filinga tax return that reflects the items fromthe transaction. A reporting shareholderof a foreign corporation participates in atransaction described in paragraph (b)(6)of this section only if the published guid-ance identifying the transaction includesthe reporting shareholder among the typesor classes of persons identified as partic-ipants. A reporting shareholder (and anysuccessor in interest) is considered to par-ticipate in a transaction under this para-graph (c)(3)(i)(G) only for its first tax-able year with or within which ends thefirst taxable year of the foreign corpora-tion in which the foreign corporation par-ticipates in the transaction, and for the re-porting shareholder’s five succeeding tax-able years.

(2) Reporting shareholder. The termreporting shareholder means a UnitedStates shareholder (as defined in section951(b)) in a controlled foreign corporation(as defined in section 957) or a 10 percentshareholder (by vote or value) of a qual-ified electing fund (as defined in section1295).

(ii) Examples. The following exam-ples illustrate the provisions of paragraph(c)(3)(i) of this section:

Example 1. Notice 2003–55, 2003–2 C.B. 395,which modified and superseded Notice 95–53,1995–2 C.B. 334 (see §601.601(d)(2) of this chap-ter), describes a lease stripping transaction in whichone party (the transferor) assigns the right to receivefuture payments under a lease of tangible propertyand treats the amount realized from the assignmentas its current income. The transferor later transfersthe property subject to the lease in a transactionintended to qualify as a transferred basis transaction,for example, a transaction described in section 351.The transferee corporation claims the deductionsassociated with the high basis property subject to the

2007–38 I.R.B. 612 September 17, 2007

lease. The transferor’s and transferee corporation’stax returns reflect tax positions described in Notice2003–55. Therefore, the transferor and transfereecorporation have participated in the listed transac-tion. In the section 351 transaction, the transferorwill have received stock with low value and high ba-sis from the transferee corporation. If the transferorsubsequently transfers the high basis/low value stockto a taxpayer in another transaction intended to qual-ify as a transferred basis transaction and the taxpayeruses the stock to generate a loss, and if the taxpayerknows or has reason to know that the tax loss claimedwas derived indirectly from the lease stripping trans-action, then the taxpayer has participated in the listedtransaction. Accordingly, the taxpayer must disclosethe transaction and the manner of the taxpayer’sparticipation in the transaction under the rules of thissection. For purposes of this example, if a bank lendsmoney to the transferor, transferee corporation, ortaxpayer for use in their transactions, the bank hasnot participated in the listed transaction because thebank’s tax return does not reflect tax consequencesor a tax strategy described in the listing notice (nordoes the bank’s tax return reflect a tax benefit derivedfrom tax consequences or a tax strategy describedin the listing notice) nor is the bank described as aparticipant in the listing notice.

Example 2. XYZ is a limited liability companytreated as a partnership for tax purposes. X, Y, andZ are members of XYZ. X is an individual, Y is anS corporation, and Z is a partnership. XYZ entersinto a confidential transaction under paragraph (b)(3)of this section. XYZ and X are bound by the confi-dentiality agreement, but Y and Z are not bound bythe agreement. As a result of the transaction, XYZ,X, Y, and Z all reflect a tax benefit on their tax re-turns. Because XYZ’s and X’s disclosure of the taxtreatment and tax structure are limited in the mannerdescribed in paragraph (b)(3) of this section and theirtax returns reflect a tax benefit from the transaction,both XYZ and X have participated in the confidentialtransaction. Neither Y nor Z has participated in theconfidential transaction because they are not subjectto the confidentiality agreement.

Example 3. P, a corporation, has an 80% partner-ship interest in PS, and S, an individual, has a 20%partnership interest in PS. P, S, and PS are calendaryear taxpayers. In 2006, PS enters into a transac-tion and incurs a section 165 loss (that does not meetany of the exceptions to a section 165 loss identi-fied in published guidance) of $12 million and off-setting gain of $3 million. On PS’ 2006 tax return,PS includes the section 165 loss and the correspond-ing gain. PS must disclose the transaction under thissection because PS’ section 165 loss of $12 millionis equal to or greater than $2 million. P is allocated$9.6 million of the section 165 loss and $2.4 millionof the offsetting gain. P does not have to disclose thetransaction under this section because P’s section 165loss of $9.6 million is not equal to or greater than $10million. S is allocated $2.4 million of the section 165loss and $600,000 of the offsetting gain. S must dis-close the transaction under this section because S’ssection 165 loss of $2.4 million is equal to or greaterthan $2 million.

(4) Substantially similar. The termsubstantially similar includes any transac-tion that is expected to obtain the same or

similar types of tax consequences and thatis either factually similar or based on thesame or similar tax strategy. Receipt of anopinion regarding the tax consequences ofthe transaction is not relevant to the deter-mination of whether the transaction is thesame as or substantially similar to anothertransaction. Further, the term substan-tially similar must be broadly construedin favor of disclosure. For example, atransaction may be substantially similar toa listed transaction even though it involvesdifferent entities or uses different InternalRevenue Code provisions. (See for exam-ple, Notice 2003–54, 2003–2 C.B. 363,describing a transaction substantially sim-ilar to the transactions in Notice 2002–50,2002–2 C.B. 98, and Notice 2002–65,2002–2 C.B. 690.) The following exam-ples illustrate situations where a transac-tion is the same as or substantially similarto a listed transaction under paragraph(b)(2) of this section. (Such transactionsmay also be reportable transactions un-der paragraphs (b)(3) through (7) of thissection.) See §601.601(d)(2)(ii)(b) of thischapter. The following examples illustratethe provisions of this paragraph (c)(4):

Example 1. Notice 2000–44, 2000–2 C.B. 255(see §601.601(d)(2)(ii)(b) of this chapter), sets fortha listed transaction involving offsetting options trans-ferred to a partnership where the taxpayer claims ba-sis in the partnership for the cost of the purchased op-tions but does not adjust basis under section 752 asa result of the partnership’s assumption of the tax-payer’s obligation with respect to the options. Trans-actions using short sales, futures, derivatives or anyother type of offsetting obligations to inflate basis in apartnership interest would be the same as or substan-tially similar to the transaction described in Notice2000–44. Moreover, use of the inflated basis in thepartnership interest to diminish gain that would oth-erwise be recognized on the transfer of a partnershipasset would also be the same as or substantially sim-ilar to the transaction described in Notice 2000–44.See §601.601(d)(2)(ii)(b).

Example 2. Notice 2001–16, 2001–1 C.B. 730(see §601.601(d)(2)(ii)(b) of this chapter), sets fortha listed transaction involving a seller (X) who desiresto sell stock of a corporation (T), an intermediary cor-poration (M), and a buyer (Y) who desires to purchasethe assets (and not the stock) of T. M agrees to facil-itate the sale to prevent the recognition of the gainthat T would otherwise report. Notice 2001–16 de-scribes M as a member of a consolidated group thathas a loss within the group or as a party not subject totax. Transactions utilizing different intermediaries toprevent the recognition of gain would be the same asor substantially similar to the transaction describedin Notice 2001–16. An example is a transaction inwhich M is a corporation that does not file a consol-idated return but which buys T stock, liquidates T,sells assets of T to Y, and offsets the gain on the sale

of those assets with currently generated losses. See§601.601(d)(2)(ii)(b).

(5) Tax. The term tax means Federalincome tax.

(6) Tax benefit. A tax benefit includesdeductions, exclusions from gross income,nonrecognition of gain, tax credits, adjust-ments (or the absence of adjustments) tothe basis of property, status as an entity ex-empt from Federal income taxation, andany other tax consequences that may re-duce a taxpayer’s Federal income tax li-ability by affecting the amount, timing,character, or source of any item of income,gain, expense, loss, or credit.

(7) Tax return. The term tax returnmeans a Federal income tax return and aFederal information return.

(8) Tax treatment. The tax treatment ofa transaction is the purported or claimedFederal income tax treatment of the trans-action.

(9) Tax structure. The tax structure of atransaction is any fact that may be relevantto understanding the purported or claimedFederal income tax treatment of the trans-action.

(d) Form and content of disclosurestatement. A taxpayer required to filea disclosure statement under this sec-tion must file a completed Form 8886,“Reportable Transaction Disclosure State-ment” (or a successor form), in accordancewith this paragraph (d) and the instructionsto the form. The Form 8886 (or a successorform) is the disclosure statement requiredunder this section. The form must beattached to the appropriate tax return(s)as provided in paragraph (e) of this sec-tion. If a copy of a disclosure statementis required to be sent to the Office of TaxShelter Analysis (OTSA) under paragraph(e) of this section, it must be sent in accor-dance with the instructions to the form. Tobe considered complete, the informationprovided on the form must describe theexpected tax treatment and all potential taxbenefits expected to result from the trans-action, describe any tax result protection(as defined in §301.6111–3(c)(12) of thischapter) with respect to the transaction,and identify and describe the transactionin sufficient detail for the IRS to be ableto understand the tax structure of the re-portable transaction and the identity of allparties involved in the transaction. An in-complete Form 8886 (or a successor form)containing a statement that information

September 17, 2007 613 2007–38 I.R.B.

will be provided upon request is not con-sidered a complete disclosure statement.If the form is not completed in accordancewith the provisions in this paragraph(d) and the instructions to the form, thetaxpayer will not be considered to havecomplied with the disclosure requirementsof this section. If a taxpayer receives oneor more reportable transaction numbersfor a reportable transaction, the taxpayermust include the reportable transactionnumber(s) on the Form 8886 (or a succes-sor form). See §301.6111–3(d)(2) of thischapter.

(e) Time of providing disclosure—(1)In general. The disclosure statement fora reportable transaction must be attachedto the taxpayer’s tax return for each tax-able year for which a taxpayer participatesin a reportable transaction. In addition, adisclosure statement for a reportable trans-action must be attached to each amendedreturn that reflects a taxpayer’s participa-tion in a reportable transaction. A copyof the disclosure statement must be sentto OTSA at the same time that any dis-closure statement is first filed by the tax-payer pertaining to a particular reportabletransaction. If a reportable transaction re-sults in a loss which is carried back to aprior year, the disclosure statement for thereportable transaction must be attached tothe taxpayer’s application for tentative re-fund or amended tax return for that prioryear. In the case of a taxpayer that is apartner in a partnership, a shareholder in anS corporation, or a beneficiary of a trust,the disclosure statement for a reportabletransaction must be attached to the part-nership, S corporation, or trust’s tax returnfor each taxable year in which the part-nership, S corporation, or trust participatesin the transaction under the rules of para-graph (c)(3)(i) of this section. If a tax-payer who is a partner in a partnership, ashareholder in an S corporation, or a bene-ficiary of a trust receives a timely ScheduleK–1 less than 10 calendar days before thedue date of the taxpayer’s return (includ-ing extensions) and, based on receipt ofthe timely Schedule K–1, the taxpayer de-termines that the taxpayer participated ina reportable transaction within the mean-ing of paragraph (c)(3) of this section, thedisclosure statement will not be consideredlate if the taxpayer discloses the reportabletransaction by filing a disclosure statementwith OTSA within 60 calendar days after

the due date of the taxpayer’s return (in-cluding extensions). The Commissioner inhis discretion may issue in published guid-ance other provisions for disclosure under§1.6011–4.

(2) Special rules—(i) Listed transac-tions and transactions of interest. In gen-eral, if a transaction becomes a listed trans-action or a transaction of interest after thefiling of a taxpayer’s tax return (includ-ing an amended return) reflecting the tax-payer’s participation in the listed trans-action or transaction of interest and be-fore the end of the period of limitationsfor assessment of tax for any taxable yearin which the taxpayer participated in thelisted transaction or transaction of interest,then a disclosure statement must be filed,regardless of whether the taxpayer partic-ipated in the transaction in the year thetransaction became a listed transaction or atransaction of interest, with OTSA within90 calendar days after the date on whichthe transaction became a listed transactionor a transaction of interest. The Commis-sioner also may determine the time for dis-closure of listed transactions and transac-tions of interest in the published guidanceidentifying the transaction.

(ii) Loss transactions. If a transac-tion becomes a loss transaction becausethe losses equal or exceed the thresh-old amounts as described in paragraph(b)(5)(i) of this section, a disclosure state-ment must be filed as an attachment to thetaxpayer’s tax return for the first taxableyear in which the threshold amount isreached and to any subsequent tax returnthat reflects any amount of section 165loss from the transaction.

(3) Multiple disclosures. The taxpayermust disclose the transaction in the timeand manner provided for under the provi-sions of this section regardless of whetherthe taxpayer also plans to disclose thetransaction under other published guid-ance, for example, §1.6662–3(c)(2).

(4) Example. The following exampleillustrates the application of this paragraph(e):

Example. In January of 2008, F, a calendar yeartaxpayer, enters into a transaction that at the time isnot a listed transaction and is not a transaction de-scribed in any of the paragraphs (b)(3) through (7)of this section. All the tax benefits from the transac-tion are reported on F’s 2008 tax return filed timely inApril 2009. On May 2, 2011, the IRS publishes a no-tice identifying the transaction as a listed transactiondescribed in paragraph (b)(2) of this section. Upon

issuance of the May 2, 2011 notice, the transactionbecomes a reportable transaction described in para-graph (b) of this section. The period of limitations onassessment for F’s 2008 taxable year is still open. Fis required to file Form 8886 for the transaction withOTSA within 90 calendar days after May 2, 2011.

(f) Rulings and protective disclo-sures—(1) Rulings. If a taxpayer requestsa ruling on the merits of a specific trans-action on or before the date that disclosurewould otherwise be required under thissection, and receives a favorable rulingas to the transaction, the disclosure rulesunder this section will be deemed to havebeen satisfied by that taxpayer with regardto that transaction, so long as the requestfully discloses all relevant facts relating tothe transaction which would otherwise berequired to be disclosed under this section.If a taxpayer requests a ruling as to whethera specific transaction is a reportable trans-action on or before the date that disclosurewould otherwise be required under thissection, the Commissioner in his discre-tion may determine that the submissionsatisfies the disclosure rules under thissection for the taxpayer requesting theruling for that transaction if the requestfully discloses all relevant facts relating tothe transaction which would otherwise berequired to be disclosed under this section.The potential obligation of the taxpayer todisclose the transaction under this sectionwill not be suspended during the periodthat the ruling request is pending.

(2) Protective disclosures. If a taxpayeris uncertain whether a transaction must bedisclosed under this section, the taxpayermay disclose the transaction in accordancewith the requirements of this section andcomply with all the provisions of this sec-tion, and indicate on the disclosure state-ment that the disclosure statement is be-ing filed on a protective basis. The IRSwill not treat disclosure statements filedon a protective basis any differently thanother disclosure statements filed under thissection. For a protective disclosure to beeffective, the taxpayer must comply withthese disclosure regulations by providingto the IRS all information requested by theIRS under this section.

(g) Retention of documents. (1) In ac-cordance with the instructions to Form8886 (or a successor form), the taxpayermust retain a copy of all documents andother records related to a transaction sub-ject to disclosure under this section that

2007–38 I.R.B. 614 September 17, 2007

are material to an understanding of thetax treatment or tax structure of the trans-action. The documents must be retaineduntil the expiration of the statute of limi-tations applicable to the final taxable yearfor which disclosure of the transaction wasrequired under this section. (This docu-ment retention requirement is in additionto any document retention requirementsthat section 6001 generally imposes on thetaxpayer.) The documents may includethe following:

(i) Marketing materials related to thetransaction;

(ii) Written analyses used in decision-making related to the transaction;

(iii) Correspondence and agreementsbetween the taxpayer and any advisor,lender, or other party to the reportabletransaction that relate to the transaction;

(iv) Documents discussing, referring to,or demonstrating the purported or claimedtax benefits arising from the reportabletransaction; and documents, if any, refer-ring to the business purposes for the re-portable transaction.

(2) A taxpayer is not required to retainearlier drafts of a document if the taxpayerretains a copy of the final document (or, ifthere is no final document, the most recentdraft of the document) and the final docu-ment (or most recent draft) contains all theinformation in the earlier drafts of the doc-ument that is material to an understandingof the purported tax treatment or tax struc-ture of the transaction.

(h) Effective/applicability date—(1) Ingeneral. This section applies to transac-tions entered into on or after August 3,2007. However, this section applies totransactions of interest entered into on orafter November 2, 2006. Paragraph (f)(1)of this section applies to ruling requests re-ceived on or after November 1, 2006. Oth-erwise, the rules that apply with respect totransactions entered into before August 3,2007, are contained in §1.6011–4 in effectprior to August 3, 2007. (See 26 CFR part1 revised as of April 1, 2007).

(2) [Reserved].

§1.6011–4T [Removed]

Par. 3. Section 1.6011–4T is removed.

PART 20—ESTATE TAX; ESTATESOF DECEDENTS DYING AFTERAUGUST 16, 1954

Par. 4. The authority citation for part20 continues to read, in part, as follows:


read as follows:


(a) In general. If a transaction is iden-tified as a listed transaction or a transac-tion of interest as defined in §1.6011–4 ofthis chapter by the Commissioner in pub-lished guidance (see §601.601(d)(2)(ii)(b)of this chapter), and the listed transactionor transaction of interest involves an estatetax under chapter 11 of subtitle B of the In-ternal Revenue Code, the transaction mustbe disclosed in the manner stated in suchpublished guidance.

(b) Effective/applicability date. Thissection applies to listed transactions en-tered into on or after January 1, 2003. Thissection applies to transactions of interestentered into on or after November 2, 2006.

PART 25—GIFT TAX; GIFTS MADEAFTER DECEMBER 31, 1954



read as follows:


(a) In general. If a transaction is iden-tified as a listed transaction or a transac-tion of interest as defined in §1.6011–4 ofthis chapter by the Commissioner in pub-lished guidance (see §601.601(d)(2)(ii)(b)of this chapter), and the listed transactionor transaction of interest involves a gift taxunder chapter 12 of subtitle B of the Inter-nal Revenue Code, the transaction must bedisclosed in the manner stated in such pub-lished guidance.

(b) Effective/applicability date. Thissection applies to listed transactions en-tered into on or after January 1, 2003. This

section applies to transactions of interestentered into on or after November 2, 2006.

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT THE SOURCE



read as follows:


(a) In general. If a transaction is identi-fied as a listed transaction or a transactionof interest as defined in §1.6011–4 of thischapter by the Commissioner in publishedguidance (see §601.601(d)(2)(ii)(b) of thischapter), and the listed transaction or trans-action of interest involves an employmenttax under chapters 21 through 25 of sub-title C of the Internal Revenue Code, thetransaction must be disclosed in the man-ner stated in such published guidance.


PART 53—FOUNDATION ANDSIMILAR EXCISE TAXES


Authority: 26 U.S.C. 7805 * * *Par. 11. Section 53.6011–4 is revised

to read as follows:


(a) In general. If a transaction is iden-tified as a listed transaction or a transac-tion of interest as defined in §1.6011–4 ofthis chapter by the Commissioner in pub-lished guidance (see §601.601(d)(2)(ii)(b)of this chapter), and the listed transactionor transaction of interest involves an ex-cise tax under chapter 42 of subtitle D ofthe Internal Revenue Code (relating to pri-vate foundations and certain other tax-ex-empt organizations), the transaction must

September 17, 2007 615 2007–38 I.R.B.

be disclosed in the manner stated in suchpublished guidance.


PART 54—PENSION EXCISE TAXES



to read as follows:


(a) In general. If a transaction is iden-tified as a listed transaction or a transac-tion of interest as defined in §1.6011–4 ofthis chapter by the Commissioner in pub-lished guidance (see §601.601(d)(2)(ii)(b)of this chapter), and the listed transactionor transaction of interest involves an excisetax under chapter 43 of subtitle D of the In-ternal Revenue Code (relating to qualifiedpension, etc., plans) the transaction mustbe disclosed in the manner stated in suchpublished guidance.


PART 56—PUBLIC CHARITY EXCISETAXES



to read as follows:


(a) In general. If a transaction is identi-fied as a listed transaction or a transactionof interest as defined in §1.6011–4 of thischapter by the Commissioner in publishedguidance (see §601.601(d)(2) of this chap-ter), and the listed transaction or transac-tion of interest involves an excise tax un-der chapter 41 of subtitle D of the Inter-nal Revenue Code (relating to public char-

ities), the transaction must be disclosed inthe manner stated in such published guid-ance.


Kevin M. Brown,Deputy Commissioner forServices and Enforcement.

Approved July 25, 2007.

Eric Solomon,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on July 31, 2007,11:22 a.m., and published in the issue of the Federal Registerfor August 3, 2007, 72 F.R. 43146)

Section 6104.—Publicityof Information RequiredFrom Certain ExemptOrganizations and CertainTrusts

Proposed regulations provide rules relating to in-formation made available by the IRS for public in-spection under section 6104(a). See REG-116215-07, page 659.

Section 6110.—PublicInspection of WrittenDeterminations

Proposed regulations provide rules relating to ma-terials that are made publicly available under section6110. See REG-116215-07, page 659.

Section 6111.—Disclosureof Reportable Transactions26 CFR 301.6111–3: Disclosure of reportable trans-actions.

T.D. 9351

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 301




SUMMARY: This document contains finalregulations under section 6111 of the Inter-nal Revenue Code that provide the rules re-lating to the disclosure of reportable trans-actions by material advisors. These reg-ulations affect material advisors responsi-ble for disclosing reportable transactionsunder section 6111 and material advisorsresponsible for keeping lists under section6112.


FOR FURTHER INFORMATIONCONTACT: Charles D. Wien,Michael H. Beker, or Tolsun N. Waddle,202–622–3070 (not a toll-free number).


Background

This document contains final regula-tions that amend 26 CFR part 301 by pro-viding rules relating to the disclosure of re-portable transactions by material advisorsunder section 6111.

The American Jobs Creation Act of2004, Public Law 108–357 (118 Stat.1418), (AJCA) was enacted on Octo-ber 22, 2004. Section 815 of the AJCAamended section 6111 to require eachmaterial advisor with respect to any re-portable transaction to make a return (insuch form as the Secretary may prescribe)setting forth: (1) information identifyingand describing the transaction; (2) infor-

2007–38 I.R.B. 616 September 17, 2007

mation describing any potential tax bene-fits expected to result from the transaction;and (3) such other information as the Sec-retary may prescribe. Section 6111(a),as amended, also provides that the returnmust be filed not later than the date speci-fied by the Secretary. Section 6111(b)(1),as amended, provides a definition for theterm material advisor and includes as partof that definition a requirement that thematerial advisor derive certain thresholdamounts of gross income that the Secretarymay prescribe. The AJCA amendments tosection 6111 also authorize the Secretaryto prescribe regulations that provide: (1)that only one person shall be required tomeet the requirements of section 6111(a)in cases in which two or more personswould otherwise be required to meet suchrequirements; (2) exemptions from therequirements of section 6111; and (3)rules as may be necessary or appropriateto carry out the purposes of section 6111.Section 815 of the AJCA is effective fortransactions with respect to which materialaid, assistance, or advice is provided afterOctober 22, 2004.

In response to the AJCA, the IRSand Treasury Department issued in-terim guidance on section 6111 in No-tice 2004–80, 2004–2 C.B. 963; No-tice 2005–17, 2005–1 C.B. 606; No-tice 2005–22, 2005–1 C.B. 756; andNotice 2006–6, 2006–1 C.B. 385 (see§601.601(d)(2)). On November 1, 2006,the IRS and Treasury Department issued anotice of proposed rulemaking and tempo-rary and final regulations under sections6011, 6111, and 6112 (REG–103038–05,2006–49 I.R.B. 1049, REG–103039–05,2006–49 I.R.B. 1057, REG–103043–05,2006–49 I.R.B. 1063, T.D. 9295, 2006–49I.R.B. 1030) (the November 2006 regula-tions). The November 2006 regulationswere published in the Federal Register(71 FR 64488, 71 FR 64496, 71 FR 64501,71 FR 64458) on November 2, 2006.

The IRS and Treasury Department re-ceived written public comments respond-ing to the proposed regulations and helda public hearing regarding the proposedrules on March 20, 2007. After consider-ation of the comments received and com-ments made at the hearing, the proposedregulations are adopted as revised by thisTreasury decision. These final regulationsgenerally retain the provisions of the pro-posed regulations but include some modi-

fications based on recommendations in thepublic comments.


Nine written comments were receivedin response to the NPRM. All commentswere considered and are available for pub-lic inspection upon request.

Reportable Transaction Number

The proposed regulations provide that amaterial advisor must provide a reportabletransaction number to all taxpayers andmaterial advisors to whom the materialadvisor makes or provides tax statements.Many commentators commented that therequirement to provide the reportabletransaction number to all taxpayers andmaterial advisors to whom the material ad-visor makes or provides tax statements isoverly broad and suggested, instead, thatthe reportable transaction number only berequired to be furnished to those for whomthe taxpayer acted as a material advisor.One commentator recommended that theregulation be amended to remove the obli-gation to provide a reportable transactionnumber. Another commentator recom-mended that a material advisor should berequired to provide the reportable trans-action number to taxpayers only in thecase of marketed transactions. The com-mentator also commented that in a purelyone-on-one, non-abusive transaction, theuse of the reportable transaction numbermay infringe upon the attorney-client re-lationship.

The IRS and Treasury Department at-tempted to balance the need for disclosureof reportable transactions with the result-ing burden imposed upon taxpayers. TheIRS and Treasury Department do not be-lieve that requiring a material advisor toprovide a reportable transaction numberto certain taxpayers and material advisorsimposes an undue burden upon taxpayersin light of the benefit to tax administra-tion. However, the IRS and Treasury De-partment recognize that requiring the re-portable transaction number to be providedto all persons for whom the material advi-sor made a tax statement may be unnec-essary. Therefore, these final regulationsstate that a material advisor is required toprovide a reportable transaction numberto all taxpayers and material advisors for

whom the material advisor acts as a mate-rial advisor.

Material Advisor Fee Threshold Language

The proposed regulations provide, ingeneral, that a lower threshold amount ofgross income applies in the case of a re-portable transaction when substantially allof the tax benefits are provided to naturalpersons (looking through any partnerships,S corporations, or trusts). The IRS andTreasury Department received commentsasking for clarification of the term “sub-stantially all of the tax benefits.”

The final regulations provide that thedetermination of whether the lower thresh-old amount applies is based on the factsand circumstances. Generally, unless thefacts and circumstances prove otherwise,if 70 percent or more of the tax benefitsfrom a reportable transaction are providedto natural persons (looking through anypartnerships, S corporations, or trusts) thensubstantially all of the tax benefits will beconsidered to be provided to natural per-sons.

Material Advisor Disclosure of theIdentity of Other Material Advisors

The proposed regulations provide thata material advisor who is required to file adisclosure statement must also disclose theidentity of other material advisors. Twocommentators recommended that these fi-nal regulations be amended to provide thata material advisor must provide the iden-tity of other material advisors only if thematerial advisor has actual knowledge ofsuch other material advisors.

After carefully considering the recom-mendation by the commentators, these fi-nal regulations provide that a material ad-visor must provide the identities of anymaterial advisor(s) who the material advi-sor knows or has reason to know acted as amaterial advisor with respect to the trans-action.

Designation Agreements

The proposed regulations provide thatif more than one material advisor is re-quired to disclose a reportable transactionunder section 6111, the material advisorsmay designate by written agreement a sin-gle material advisor to disclose the transac-tion. The designation of one material ad-

September 17, 2007 617 2007–38 I.R.B.

visor to disclose the transaction does notrelieve the other material advisors of theirobligation to disclose the transaction tothe IRS in accordance with section 6111,if the designated material advisor fails todisclose the transaction to the IRS in atimely manner. One commentator recom-mended that a good faith participation in adesignation agreement be treated as if thenon-designated material advisor has satis-fied the advisor’s obligations under section6111 and/or section 6112. The commenta-tor also suggested that if the previous rec-ommendation is not adopted, that these fi-nal regulations prohibit designation agree-ments entirely.

These final regulations do not adopt therecommendation of the commentator. Thepurpose of the designation agreement lan-guage is to reduce the burden on materialadvisors in complying with the disclosureand list maintenance regulations while bal-ancing the need of the IRS and TreasuryDepartment to receive the necessary in-formation described in sections 6111 and6112. The designation agreement allowsmaterial advisors, if they choose, to haveone material advisor comply with the dis-closure and list maintenance obligationsrather than multiple advisors maintainingduplicative lists. Inherent in the languageis the assumption that the designated ma-terial advisor will comply with the require-ments. Absolving the non-designated ma-terial advisors from the obligations listedin sections 6111 and 6112 for good faithdesignation agreements would require theIRS to determine whether the designationagreement was entered into in good faithand would increase the burdens on tax ad-ministration.

Form 8271

Before the enactment of the AJCA, sec-tion 6111 provided that tax shelter organiz-ers were required to provide investors intax shelters the registration number for thetax shelter. Section 301.6111–1T, Q&A55, requires investors to report the reg-istration number of the tax shelter to theIRS on Form 8271, “Investor Reportingof Tax Shelter Registration Number”, andattach the Form 8271 to any return onwhich any deduction, loss, credit, or othertax benefit attributable to the tax shelteris claimed. Because only a few investorsmust still file Form 8271 for pre-AJCA

section 6111 tax shelters and because theIRS already is aware of these transactions,the IRS and Treasury Department have de-cided that investors are no longer requiredto file Forms 8271 otherwise due on or af-ter August 3, 2007. The Form 8271 willbe obsoleted. However, these final regula-tions continue to require that material ad-visors must provide the reportable trans-action number to all taxpayers and mate-rial advisors for whom the material advisoracts as a material advisor.

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 deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations, andbecause these regulations do not impose acollection of information on small entities,the provisions of the Regulatory Flexibil-ity Act (5 U.S.C. chapter 35) do not ap-ply. The return referenced in these reg-ulations will be made available for pub-lic comment in accordance with the Paper-work Reduction Act of 1995 (44 U.S.C.chapter 35). Pursuant to section 7805(f) ofthe 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 its impacton small business.



* * * * *


Accordingly, 26 CFR part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 is amended by adding entries innumerical order to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *Section 301.6111–3 also issued under

26 U.S.C. 6111.Par. 2. Section 301.6111–3 is added to

read as follows:

§301.6111–3 Disclosure of reportabletransactions.

(a) In general. Each material advisor,as defined in paragraph (b) of this section,with respect to any reportable transaction,as defined in §1.6011–4(b) of this chapter,must file a return as described in paragraph(d) of this section by the date described inparagraph (e) of this section.

(b) Material advisor—(1) In general. Aperson is a material advisor with respectto a transaction if the person provides anymaterial aid, assistance, or advice with re-spect to organizing, managing, promoting,selling, implementing, insuring, or carry-ing out any reportable transaction, and di-rectly or indirectly derives gross incomein excess of the threshold amount as de-fined in paragraph (b)(3) of this section forthe material aid, assistance, or advice. Theterm transaction includes all of the factualelements relevant to the expected tax treat-ment of any investment, entity, plan or ar-rangement, and includes any series of stepscarried out as part of a plan.

(2) Material aid, assistance, or ad-vice—(i) In general. Except as providedin paragraph (b)(5) of this section, a per-son provides material aid, assistance, oradvice with respect to organizing, man-aging, promoting, selling, implementing,insuring, or carrying out any transaction ifthe person makes or provides a tax state-ment to or for the benefit of—

(A) A taxpayer who either is re-quired to disclose the transaction un-der §§1.6011–4, 20.6011–4, 25.6011–4,31.6011–4, 53.6011–4, 54.6011–4, or56.6011–4 of this chapter because thetransaction is a listed transaction or atransaction of interest, or would have beenrequired to disclose the transaction un-der §§1.6011–4, 20.6011–4, 25.6011–4,31.6011–4, 53.6011–4, 54.6011–4, or56.6011–4 of this chapter if the transac-

2007–38 I.R.B. 618 September 17, 2007

tion had become a listed transaction or atransaction of interest within the period oflimitations in §1.6011–4(e) of this chapter;

(B) A taxpayer who the potential ma-terial advisor knows is or reasonably ex-pects to be required to disclose the trans-action under §1.6011–4 of this chapter be-cause the transaction is or is reasonably ex-pected to become a transaction describedin §1.6011–4(b)(3) through (5) or (7) ofthis chapter;

(C) A material advisor who is requiredto disclose the transaction under this sec-tion because it is a listed transaction or atransaction of interest; or

(D) A material advisor who the poten-tial material advisor knows is or reason-ably expects to be required to disclosethe transaction under this section becausethe transaction is or is reasonably ex-pected to become a transaction describedin §1.6011–4(b)(3) through (5) or (7) ofthis chapter.

(ii) Tax statement—(A) In general. Atax statement is any statement (includ-ing another person’s statement), oral orwritten, that relates to a tax aspect of atransaction that causes the transaction tobe a reportable transaction as defined in§1.6011–4(b)(2) through (7) of this chap-ter. A tax statement under this sectionincludes tax result protection that insuressome or all of the tax benefits of a re-portable transaction.

(B) Confidential transactions. A state-ment relates to a tax aspect of a transactionthat causes it to be a confidential transac-tion if the statement concerns a tax benefitrelated to the transaction and either the tax-payer’s disclosure of the tax treatment ortax structure of the transaction is limited inthe manner described in §1.6011–4(b)(3)of this chapter by or for the benefit of theperson making the statement, or the per-son making the statement knows the tax-payer’s disclosure of the tax structure ortax aspects of the transaction is limited inthe manner described in §1.6011–4(b)(3)of this chapter.

(C) Transactions with contractual pro-tection. A statement relates to a tax as-pect of a transaction that causes it to bea transaction with contractual protection ifthe statement concerns a tax benefit relatedto the transaction and either—

(1) The taxpayer has the right to afull or partial refund of fees paid to theperson making the statement or the fees

are contingent in the manner described in§1.6011–4(b)(4) of this chapter; or

(2) The person making the statementknows or has reason to know that the tax-payer has the right to a full or partial refundof fees (described in §1.6011–4(b)(4)(ii) ofthis chapter) paid to another if all or partof the intended tax consequences from thetransaction are not sustained or that fees(as described in §1.6011–4(b)(4)(ii) of thischapter) paid by the taxpayer to anotherare contingent on the taxpayer’s realiza-tion of tax benefits from the transaction inthe manner described in §1.6011–4(b)(4)of this chapter.

(D) Loss transactions. A statement re-lates to a tax aspect of a transaction thatcauses it to be a loss transaction if the state-ment concerns an item that gives rise to aloss described in §1.6011–4(b)(5) of thischapter.

(E) [Reserved].(iii) Special rules—(A) Capacity as an

employee. A material advisor generallydoes not include a person who makes a taxstatement solely in the person’s capacity asan employee, shareholder, partner or agentof another person. Any tax statement madeby that person will be attributed to that per-son’s employer, corporation, partnershipor principal. However, a person shall betreated as a material advisor if that personforms or avails of an entity with the pur-pose of avoiding the rules of section 6111or 6112 or the penalties under section 6707or 6708.

(B) Post-filing advice. A person willnot be considered to be a material advi-sor with respect to a transaction if that per-son does not make or provide a tax state-ment regarding the transaction until afterthe first tax return reflecting tax benefit(s)of the transaction is filed with the IRS.However, this exception does not apply toa person who makes a tax statement withrespect to the transaction if it is expectedthat the taxpayer will file a supplementalor amended return reflecting additional taxbenefits from the transaction.

(C) Publicly filed statements. A taxstatement with respect to a transaction thatincludes only information about the trans-action contained in publicly available doc-uments filed with the Securities and Ex-change Commission no later than the closeof the transaction will not be considered atax statement to or for the benefit of a per-

son described in paragraph (b)(2) of thissection.

(3) Gross income derived for materialaid, assistance, or advice—(i) Thresholdamount—(A) In general. The thresholdamount of gross income is $50,000 in thecase of a reportable transaction substan-tially all of the tax benefits from whichare provided to natural persons (lookingthrough any partnerships, S corporations,or trusts). For all other transactions, thethreshold amount is $250,000.

(B) Listed transactions and transac-tions of interest. For listed transactionsdescribed in §§1.6011–4, 20.6011–4,25.6011–4, 31.6011–4, 53.6011–4,54.6011–4, or 56.6011–4 of this chap-ter, the threshold amounts in paragraph(b)(3)(i)(A) of this section are reducedfrom $50,000 to $10,000 and from$250,000 to $25,000. For transactionsof interest described in §§1.6011–4,20.6011–4, 25.6011–4, 31.6011–4,53.6011–4, 54.6011–4, or 56.6011–4 ofthis chapter, the threshold amounts inparagraph (b)(3)(i)(A) of this section maybe reduced as identified in the publishedguidance describing the transaction.

(C) [Reserved].(D) Substantially all of the tax benefits.

For purposes of this section, the determina-tion of whether substantially all of the taxbenefits from a reportable transaction areprovided to natural persons is made basedon all the facts and circumstances. Gen-erally, unless the facts and circumstancesprove otherwise, if 70 percent or more ofthe tax benefits from a reportable transac-tion are provided to natural persons (look-ing through any partnerships, S corpora-tions, or trusts) then substantially all of thetax benefits will be considered to be pro-vided to natural persons.

(ii) Gross income derived directly orindirectly for the material aid, assistance,or advice. In determining the amount ofgross income a person derives directly orindirectly for material aid, assistance, oradvice, all fees for a tax strategy or for ser-vices for advice (whether or not tax advice)or for the implementation of a reportabletransaction are taken into account. Feesinclude consideration in whatever formpaid, whether in cash or in kind, for ser-vices to analyze the transaction (whetheror not related to the tax consequences ofthe transaction), for services to implementthe transaction, for services to document

September 17, 2007 619 2007–38 I.R.B.

the transaction, and for services to preparetax returns to the extent return preparationfees are unreasonable in light of all of thefacts and circumstances. A fee does notinclude amounts paid to a person, includ-ing an advisor, in that person’s capacity asa party to the transaction. For example,a fee does not include reasonable chargesfor the use of capital or the sale or use ofproperty. The IRS will scrutinize carefullyall of the facts and circumstances in deter-mining whether consideration received inconnection with a reportable transactionconstitutes gross income derived directlyor indirectly for aid, assistance, or advice.For purposes of this section, the thresh-old amount must be met independentlyfor each transaction that is a reportabletransaction and aggregation of fees amongtransactions is not required.

(4) Date a person becomes a materialadvisor—(i) In general. A person willbe treated as becoming a material advisorwhen all of the following events have oc-curred (in no particular order)—

(A) The person provides material aid,assistance or advice as described in para-graph (b)(2) of this section;

(B) The person directly or indirectlyderives gross income in excess of thethreshold amount as described in para-graph (b)(3) of this section; and

(C) The transaction is entered into bythe taxpayer to whom or for whose benefitthe person provided the tax statement, orin the case of a tax statement provided toanother material advisor, when the transac-tion is entered into by a taxpayer to whomor for whose benefit that material advisorprovided a tax statement.

(ii) Determining if the taxpayer enteredinto the transaction. Material advisors,including those who cease providing ser-vices before the time the transaction is en-tered into, must make reasonable and goodfaith efforts to determine whether the eventdescribed in paragraph (b)(4)(i)(C) of thissection has occurred.

(iii) Listed transactions and transac-tions of interest. If a transaction that wasnot a reportable transaction is identified asa listed transaction or a transaction of inter-est in published guidance after the occur-rence of the events described in paragraph(b)(4)(i) of this section, the person will betreated as becoming a material advisor onthe date the transaction is identified as a

listed transaction or a transaction of inter-est.

(5) Other persons designated as ma-terial advisors. Published guidance mayidentify other types or classes of personsas material advisors.

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

(1) Reportable transaction. Theterm reportable transaction is definedin §1.6011–4(b)(1) of this chapter.

(2) Listed transaction. The term listedtransaction is defined in §1.6011–4(b)(2)of this chapter. See also §§20.6011–4(a),25.6011–4(a), 31.6011–4(a), 53.6011–4(a), 54.6011–4(a), or 56.6011–4(a) ofthis chapter.

(3) Derive. The term derive means re-ceive or expect to receive.

(4) Person. The term person means anyperson described in section 7701(a)(1), in-cluding an affiliated group of corporationsthat join in the filing of a consolidated re-turn under section 1501.

(5) Substantially similar. The termsubstantially similar is defined in§1.6011–4(c)(4) of this chapter.

(6) Tax. The term tax means Federaltax.

(7) Tax benefit. A tax benefit includesdeductions, exclusions from gross income,nonrecognition of gain, tax credits, adjust-ments (or the absence of adjustments) tothe basis of property, status as an entity ex-empt from Federal income taxation, andany other tax consequences that may re-duce a taxpayer’s Federal tax liability byaffecting the amount, timing, character, orsource of any item of income, gain, ex-pense, loss, or credit.

(8) Tax return. The term tax returnmeans a Federal tax return and a Federalinformation return.

(9) Tax structure. The tax structure of atransaction is any fact that may be relevantto understanding the purported or claimedFederal tax treatment of the transaction.

(10) Tax treatment. The tax treatmentof a transaction is the purported or claimedFederal tax treatment of the transaction.

(11) Taxpayer. The term taxpayer isdefined in §1.6011–4(c)(1) of this chapter.

(12) Tax result protection. The term taxresult protection includes insurance com-pany and other third party products com-monly described as tax result insurance.

(13) Transaction of interest. Theterm transaction of interest is defined

in §1.6011–4(b)(6) of this chapter. Seealso §§20.6011–4(a), 25.6011–4(a),31.6011–4(a), 53.6011–4(a), 54.6011–4(a), or 56.6011–4(a) of this chapter.

(d) Form and content of material advi-sor’s disclosure statement—(1) In general.A material advisor required to file a dis-closure statement under this section mustfile a completed Form 8918, “Material Ad-visor Disclosure Statement” (or successorform) in accordance with this paragraph(d) and the instructions to the form. To beconsidered complete, the information pro-vided on the form must describe the ex-pected tax treatment and all potential taxbenefits expected to result from the trans-action, describe any tax result protectionwith respect to the transaction, and iden-tify and describe the transaction in suffi-cient detail for the IRS to be able to un-derstand the tax structure of the reportabletransaction and the identity of any ma-terial advisor(s) whom the material advi-sor knows or has reason to know actedas a material advisor as defined in para-graph (b) of this section with respect tothe transaction. An incomplete form con-taining a statement that information will beprovided upon request is not considered acomplete disclosure statement. A materialadvisor may file a single form for substan-tially similar transactions. An amendedform must be filed if information previ-ously provided is no longer accurate, if ad-ditional information that was not disclosedbecomes available, or if there are materialchanges to the transaction. A material ad-visor is not required to file an additionalform for each additional taxpayer that en-ters into the same or substantially similartransaction. If the form is not completedin accordance with the provisions in thisparagraph (d) and the instructions to theform, the material advisor will not be con-sidered to have complied with the disclo-sure requirements of this section.

(2) Reportable transaction number.The IRS will issue to a material advi-sor a reportable transaction number withrespect to the disclosed reportable trans-action. Receipt of a reportable transactionnumber does not indicate that the dis-closure statement is complete, nor doesit indicate that the transaction has beenreviewed, examined, or approved by theIRS. Material advisors must provide thereportable transaction number to all tax-payers and material advisors for whom the

2007–38 I.R.B. 620 September 17, 2007

material advisor acts as a material advisoras defined in paragraph (b) of this section.The reportable transaction number mustbe provided at the time the transactionis entered into, or, if the transaction isentered into prior to the material advi-sor receiving the reportable transactionnumber, within 60 calendar days from thedate the reportable transaction number ismailed to the material advisor.

(e) Time of providing disclosure. Thematerial advisor’s disclosure statement fora reportable transaction must be filed withthe Office of Tax Shelter Analysis (OTSA)by the last day of the month that followsthe end of the calendar quarter in whichthe advisor became a material advisor withrespect to the reportable transaction or inwhich the circumstances necessitating anamended disclosure statement occur. Thedisclosure statement must be sent to OTSAat the address provided in the instructionsfor Form 8918 (or a successor form).

(f) Designation agreements. If morethan one material advisor is required to dis-close a reportable transaction under thissection, the material advisors may desig-nate by written agreement a single mate-rial advisor to disclose the transaction. Thetransaction must be disclosed by the lastday of the month following the end of thecalendar quarter that includes the earliestdate on which a material advisor who is aparty to the agreement became a materialadvisor with respect to the transaction asdescribed in paragraph (b)(4) of this sec-tion. The designation of one material ad-visor to disclose the transaction does notrelieve the other material advisors of theirobligation to disclose the transaction to theIRS in accordance with this section, if thedesignated material advisor fails to dis-close the transaction to the IRS in a timelymanner.

(g) Protective disclosures. If a poten-tial material advisor is uncertain whethera transaction must be disclosed under thissection, the advisor may disclose the trans-action in accordance with the requirementsof this section and comply with all theprovisions of this section, and indicate onthe disclosure statement that the disclosurestatement is being filed on a protective ba-sis. The IRS will not treat disclosure state-ments filed on a protective basis any differ-ently than other disclosure statements filedunder this section. For a protective disclo-

sure to be effective, the advisor must com-ply with the regulations under this sectionand §301.6112–1 by providing to the IRSall information requested by the IRS underthese sections.

(h) Rulings. If a potential material ad-visor requests a ruling as to whether a spe-cific transaction is a reportable transactionon or before the date that disclosure wouldotherwise be required under this section,the Commissioner in his discretion maydetermine that the submission satisfies thedisclosure rules under this section for thattransaction if the request fully disclosesall relevant facts relating to the transactionwhich would otherwise be required to bedisclosed under this section. The poten-tial obligation of the person to disclose thetransaction under this section (or to main-tain or furnish the list under §301.6112–1)will not be suspended during the periodthat the ruling request is pending.

(i) Effective/applicability date—(1) Ingeneral. This section applies to trans-actions with respect to which a materialadvisor makes a tax statement on or afterAugust 3, 2007. However, this section ap-plies to transactions of interest entered intoon or after November 2, 2006 with respectto which a material advisor makes a taxstatement under §301.6111–3 on or afterNovember 2, 2006. Paragraph (h) of thissection applies to ruling requests receivedon or after November 1, 2006. Otherwise,the rules that apply with respect to trans-actions entered into before August 3, 2007are contained in Notice 2004–80, 2004–2C.B. 963; Notice 2005–17, 2005–1 C.B.606; and Notice 2005–22, 2005–1 C.B.756 (see §601.601(d)(2)(ii)(b) in effectprior to August 3, 2007.

(2) [Reserved].

§301.6111–3T [Removed]

Par. 3. Section 301.6111–3T is re-moved.





(Filed by the Office of the Federal Register on July 31, 2007,11:22 a.m., and published in the issue of the Federal Registerfor August 3, 2007, F.R. 43157)

Section 6112.—MaterialAdvisors of ReportableTransactions Must KeepLists of Advisees, etc.26 CFR 301.6112–1: Material advisors of reportabletransactions must keep lists of advisees, etc.

T.D. 9352

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 301




SUMMARY: This document contains finalregulations under section 6112 of the Inter-nal Revenue Code that provide the rules re-lating to the obligation of material advisorsto prepare and maintain lists with respectto reportable transactions. These regula-tions affect material advisors responsiblefor keeping lists under section 6112.


FOR FURTHER INFORMATIONCONTACT: Charles D. Wien,Michael H. Beker, or Tolsun N. Waddle,202–622–3070; (not a toll-free number).


Paperwork Reduction Act

The collections of information con-tained in this final regulation have beenreviewed and approved by the Officeof Management and Budget in accor-dance with the Paperwork Reduction Act(44 U.S.C. 3507) under control number1545–1686. Responses to these collec-tions of information are mandatory. Anagency may not conduct or sponsor, anda person is not required to respond to, a

September 17, 2007 621 2007–38 I.R.B.

collection of information unless the collec-tion of information displays a valid OMBcontrol number assigned by the Office ofManagement and Budget.

The estimated annual burden perrecordkeeper for the collection of infor-mation in §301.6112–1 is 100 hours andthe estimated number of recordkeepers is500.

Comments concerning the accuracyof these burden estimates and sugges-tions for reducing these burdens shouldbe sent to Internal Revenue Service,Attn: IRS Reports Clearance Officer,SE:W:CAR:MP:T:T:SP, Washington, DC20224, and to the Office of Manage-ment and Budget, Attn: Desk Officerfor the Department of Treasury, Officeof Information and Regulatory Affairs,Washington, DC 20503.

Books and records relating to these col-lections of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns and taxinformation are confidential, as requiredby 26 U.S.C. 6103.

Background

This document contains final regu-lations that amend 26 CFR part 301 byamending the rules relating to the listmaintenance requirements of materialadvisors with respect to reportable trans-actions under section 6112.

The American Jobs Creation Act of2004, Public Law 108–357 (118 Stat.1418), (AJCA) was enacted on October 22,2004. Section 815 of the AJCA amendedsection 6112 to provide that each mate-rial advisor (as defined in section 6111, asamended by the AJCA) with respect to anyreportable transaction is required to main-tain a list (in such manner as the Secretarymay by regulations prescribe) identifyingeach person with respect to whom theadvisor acted as a material advisor withrespect to the transaction, and containingother information as the Secretary mayby regulations require. Section 815 of theAJCA is effective for transactions withrespect to which material aid, assistance,or advice is provided after October 22,2004. Prior to the amendments to section6111 made by the AJCA, the definition ofmaterial advisor was in §301.6112–1 of

the Procedure and Administration Regula-tions.

On November 1, 2006, the IRS andTreasury Department issued a noticeof proposed rulemaking and tempo-rary and final regulations under sections6011, 6111, and 6112 (REG–103038–05,2006–49 I.R.B. 1049, REG–103039–05,2006–49 I.R.B. 1057, REG–103043–05,2006–49 I.R.B 1063, T.D. 9295, 2006–49I.R.B. 1030) (the November 2006 regula-tions). The November 2006 regulationswere published in the Federal Register(71 FR 64488, 71 FR 64496, 71 FR 64501,71 FR 64458) on November 2, 2006.

The IRS and Treasury Department re-ceived written public comments respond-ing to the proposed regulations and helda public hearing regarding the proposedrules on March 20, 2007. After consider-ation of the comments received and com-ments made at the hearing, the proposedregulations are adopted as revised by thisTreasury decision. These final regulationsgenerally retain the provisions of the pro-posed regulations but include some modi-fications based on recommendations in thepublic comments.


Furnishing of Lists

The proposed regulations provided thateach material advisor must prepare andmaintain a list for each reportable trans-action. The proposed regulations alsoprovided that each list must include threecomponents: an itemized statement, adescription of the transaction, and docu-ments. Further, the proposed regulationsprovided that each material advisor re-sponsible for maintaining a list must, uponwritten request by the IRS, make eachcomponent of the list available to the IRSby furnishing each component of the listto the IRS within 20 business days fromthe day on which the request is provided.The proposed regulations stated that eachcomponent of the list must be furnishedto the IRS in a form that enables the IRSto determine without undue delay or diffi-culty the information required to be on thelist. If any component of the list is not insuch form, the material advisor will not beconsidered to have complied with the list

maintenance provisions of section 6112and the regulations thereunder.

Several commentators recommendedthat the proposed regulations should pro-vide the IRS with flexibility to determine,based on the amount of information re-quired, a production schedule that willbe sufficient to avoid the imposition ofpenalties. Two commentators suggestedproviding a phased disclosure procedure.One commentator recommended that the20 business days begin after the advisorhad an adequate opportunity to gather therequired information. Another commenta-tor recommended amending the proposedregulations to provide a substantial com-pliance standard.

The IRS and Treasury Department be-lieve that providing the IRS the ability todetermine an alternative production sched-ule will benefit both taxpayers and the IRS.These final regulations remove the lan-guage regarding the period for furnishinga list or the components of the list to theIRS because that period will be addressedin forthcoming published guidance undersection 6708. In addition, an alternativeschedule for furnishing the list or the com-ponents of the list will be addressed in pub-lished guidance under section 6708.

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 deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations. It ishereby certified that the collection of infor-mation in these regulations will not have asignificant economic impact on a substan-tial number of small entities. This certi-fication is based upon the fact that mostof the information is already required tobe reported under the current regulations;the clarifications and new information re-quired by the final regulations add littleor no new burden to the existing require-ments. Therefore, a Regulatory Flexibil-ity Analysis under the Regulatory Flexi-bility Act (5 U.S.C. chapter 6) is not re-quired. Pursuant to section 7805(f) of theInternal Revenue Code, the notice of pro-posed rulemaking preceding these regula-tions was submitted to the Chief Counsel

2007–38 I.R.B. 622 September 17, 2007

for Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.



* * * * *


Accordingly, 26 CFR part 301 isamended as follows:


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


to read as follows:

§301.6112–1 Material advisors ofreportable transactions must keep lists ofadvisees, etc.

(a) In general. Each material advisor,as defined in §301.6111–3(b), with respectto any reportable transaction, as definedin §1.6011–4(b) of this chapter, shall pre-pare and maintain a list in accordance withparagraph (b) of this section and shall fur-nish such list to the Internal Revenue Ser-vice (IRS) in accordance with paragraph(e) of this section.

(b) Preparation and maintenance oflists—(1) In general. A separate list mustbe prepared and maintained for each re-portable transaction. However, one listmust be maintained for substantially simi-lar transactions. A list must be maintainedin a form that enables the IRS to determinewithout undue delay or difficulty the in-formation required in paragraph (b)(3) ofthis section. The Commissioner in his dis-cretion may provide in published guidancea form or method for maintaining and/orfurnishing the list.

(2) Persons required to be included onlists. A material advisor is required tomaintain a list identifying each person withrespect to whom the advisor acted as a ma-terial advisor with respect to the reportabletransaction. However, a material advisor isnot required to identify a person on the listif the person entered into a listed transac-tion or a transaction of interest more than 6years before the transaction was identifiedin published guidance as a listed transac-tion or a transaction of interest.

(3) Contents. Each list must include thethree components described in paragraph(b)(3)(i), (ii), and (iii) of this section.

(i) Statement. An itemized statementcontaining the following information—

(A) The name of each reportable trans-action, the citation to the published guid-ance number identifying the transaction ifthe transaction is a listed transaction or atransaction of interest, and the reportabletransaction number obtained under section6111;

(B) The name, address, and TIN of eachperson required to be included on the list;

(C) The date on which each person re-quired to be included on the list enteredinto each reportable transaction, if knownby the material advisor;

(D) The amount invested in each re-portable transaction by each person re-quired to be included on the list, if knownby the material advisor;

(E) A summary or schedule of the taxtreatment that each person is intended orexpected to derive from participation ineach reportable transaction; and

(F) The name of each other materialadvisor to the transaction, if known by thematerial advisor.

(ii) Description of the transaction. Adetailed description of each reportabletransaction that describes both the taxstructure of the transaction and the pur-ported tax treatment of the transaction.

(iii) Documents. The following docu-ments—

(A) A copy of any designation agree-ment (as described in paragraph (f) of thissection) to which the material advisor is aparty; and

(B) Copies of any additional writtenmaterials, including tax analyses or opin-ions, relating to each reportable transactionthat are material to an understanding of thepurported tax treatment or tax structure ofthe transaction that have been shown or

provided to any person who acquired ormay acquire an interest in the transactions,or to their representatives, tax advisors, oragents, by the material advisor or any re-lated party or agent of the material advisor.However, a material advisor is not requiredto retain earlier drafts of a document pro-vided the material advisor retains a copyof the final document (or, if there is no fi-nal document, the most recent draft of thedocument) and the final document (or mostrecent draft) contains all the informationin the earlier drafts of such document thatis material to an understanding of the pur-ported tax treatment or the tax structure ofthe transaction.

(c) Definitions. For purposes of thissection, the following terms are defined as:

(1) Material advisor. The term materialadvisor is defined in §301.6111–3(b).

(2) Reportable transaction. Theterm reportable transaction is definedin §1.6011–4(b)(1) of this chapter.

(3) Listed transaction. The term listedtransaction is defined in §1.6011–4(b)(2)of this chapter. See also §§20.6011–4(a),25.6011–4(a), 31.6011–4(a), 53.6011–4(a), 54.6011–4(a), or 56.6011–4(a) ofthis chapter.

(4) Substantially similar. The termsubstantially similar is defined in§1.6011–4(c)(4) of this chapter.

(5) Person. The term person is definedin §301.6111–3(c)(4).

(6) Related party. A person is a re-lated party with respect to another personif such person bears a relationship to suchother person described in section 267(b) or707(b).

(7) Tax. The term tax is defined in§301.6111–3(c)(6).

(8) Tax benefit. The term tax benefit isdefined in §301.6111–3(c)(7).

(9) Tax return. The term tax return isdefined in §301.6111–3(c)(8).

(10) Tax structure. The term tax struc-ture is defined in §301.6111–3(c)(9).

(11) Tax treatment. The term tax treat-ment is defined in §301.6111–3(c)(10).

(12) Transaction of interest. Theterm transaction of interest is definedin §1.6011–4(b)(6) of this chapter. Seealso §§20.6011–4(a), 25.6011–4(a),31.6011–4(a), 53.6011–4(a), 54.6011–4(a), or 56.6011–4(a) of this chapter.

(d) Retention of lists. Each materialadvisor must maintain each component ofthe list described in paragraph (b)(3) of

September 17, 2007 623 2007–38 I.R.B.

this section in a readily accessible formfor seven years following the earlier ofthe date on which the material advisor lastmade a tax statement relating to the trans-action, or the date the transaction was lastentered into, if known. If the material ad-visor required to prepare, maintain, andfurnish the list is a corporation, partner-ship, or other entity (entity) that has dis-solved or liquidated before completion ofthe seven-year period, the person respon-sible under state law for winding up theaffairs of the entity must prepare, main-tain and furnish each component of the liston behalf of the entity, unless the entitysubmits the list to the Office of Tax Shel-ter Analysis (OTSA) within 60 days afterthe dissolution or liquidation. If state lawdoes not specify any person as responsi-ble for winding up the affairs, then each ofthe directors of the corporation, the generalpartners of the partnership, or the trustees,owners, or members of the entity are re-sponsible for preparing, maintaining andfurnishing each component of the list onbehalf of the entity, unless the entity sub-mits the list to the OTSA within 60 daysafter the dissolution or liquidation. The re-sponsible person must also provide noticeto OTSA of such dissolution or liquidationwithin 60 days after the dissolution or liq-uidation. The list and the notice providedto OTSA must be sent to: Internal Rev-enue Service, OTSA Mail Stop 4915, 1973North Rulon White Blvd., Ogden, Utah84404, or to such other address as providedby the Commissioner.

(e) Furnishing of lists—(1) In gen-eral. Each material advisor responsiblefor maintaining a list must, upon writtenrequest by the IRS, make each compo-nent of the list described in paragraph(b)(3) of this section available to the IRS.Each component of the list must be fur-nished to the IRS in a form that enablesthe IRS to determine without undue delayor difficulty the information required inparagraph (b)(3) of this section. If anycomponent of the list is not in a formthat enables the IRS to determine withoutundue delay or difficulty the informa-tion required in paragraph (b)(3) of thissection, the material advisor will not beconsidered to have complied with the listmaintenance provisions in section 6112and this section. A material advisor mustmake the list or each component of thelist available to the IRS within the period

prescribed in section 6708 or publishedguidance relating to section 6708.

(2) Claims of privilege. Each mate-rial advisor who is required to maintain alist with respect to a reportable transaction,must still maintain the list pursuant to therequirements of this section even if a per-son asserts a claim of privilege with re-spect to the information specified in para-graph (b)(3)(iii)(B) of this section.

(f) Designation agreements. If morethan one material advisor is required tomaintain a list of persons for a reportabletransaction, in accordance with paragraph(b) of this section, the material advisorsmay designate by written agreement a sin-gle material advisor to maintain the list or aportion of the list. The designation of onematerial advisor to maintain the list doesnot relieve the other material advisors fromtheir obligation to furnish the list to the IRSin accordance with paragraph (e)(1) of thissection, if the designated material advisorfails to furnish the list to the IRS in a timelymanner. A material advisor is not relievedfrom the requirement of this section be-cause a material advisor is unable to obtainthe list from any designated material ad-visor, any designated material advisor didnot maintain a list, or the list maintainedby any designated material advisor is notcomplete.

(g) Effective/applicability date. In gen-eral, this section applies to transactionswith respect to which a material advisormakes a tax statement under §301.6111–3on or after August 3, 2007. However, thissection applies to transactions of interestentered into on or after November 2, 2006,with respect to which a material advisormakes a tax statement under §301.6111–3on or after November 2, 2006. Otherwise,the rules that apply before August 3, 2007are contained in §301.6112–1 in effectprior to August 3, 2007 (see 26 CFR part301 revised as of April 1, 2007, and seealso Notice 2004–80, 2004–2 C.B. 963;Notice 2005–17, 2005–1 C.B. 606; andNotice 2005–22, 2005–1 C.B. 756 (see§601.601(d)(2)(ii)(b) of this chapter).






Section 6655.—Failureby Corporation to PayEstimated Income Tax26 CFR 1.6655–1: Addition to the tax in the case ofa corporation.

T.D. 9347

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Parts 1, 301, and 602

Corporate Estimated Tax



SUMMARY: This document contains finalregulations that provide guidance to cor-porations with respect to estimated tax re-quirements. These final regulations gen-erally affect corporate taxpayers who arerequired to make estimated tax payments.These final regulations reflect changes tothe law since 1984. This document alsoremoves the section 6154 regulations.

DATES: Effective date: These regulationsare effective on August 7, 2007.

Applicability date: These regulationsapply to tax years beginning after Septem-ber 6, 2007.

FOR FURTHER INFORMATIONCONTACT: Timothy Sheppard, at (202)622–4910 (not a toll-free number).


Background

This document contains amendmentsto the Income Tax Regulations (26 CFRPart 1), the Procedure and AdministrationRegulations (26 CFR Part 301), and theOMB Control Numbers under the Paper-work Reduction Act Regulations (26 CFRPart 602) relating to corporate estimated

2007–38 I.R.B. 624 September 17, 2007

taxes under section 6425 and section 6655of the Internal Revenue Code (Code).This document also removes §§1.6154–1,1.6154–2, 1.6154–3, 1.6154–4, 1.6154–5,and 301.6154–1. The IRS is removingthe section 6154 regulations because Con-gress repealed section 6154 in 1987.

These regulations reflect changes tothe law made by the Deficit ReductionAct of 1984, Public Law 98–369 (98Stat. 494); the Superfund Amendmentsand Reauthorization Act of 1986, PublicLaw 99–499 (100 Stat. 1613); the TaxReform Act of 1986, Public Law 99–514(100 Stat. 2085); the Omnibus BudgetReconciliation Act of 1987, Public Law100–203 (101 Stat. 1330); the RevenueAct of 1987, Public Law 100–203 (101Stat. 1330–382); the Omnibus Trade andCompetitiveness Act of 1988, Public Law100–418 (102 Stat. 1107); the Technicaland Miscellaneous Revenue Act of 1988,Public Law 100–647 (102 Stat. 3342);the Omnibus Budget Reconciliation Actof 1989, Public Law 101–239 (103 Stat.2106); the Omnibus Budget Reconcilia-tion Act of 1990, Public Law 101–508(104 Stat. 1388); the Tax Extension Actof 1991, Public Law 102–227 (105 Stat.1686); the Act of Feb. 7, 1992, PublicLaw 102–244 (106 Stat. 3); the Unem-ployment Compensation Amendmentsof 1992, Public Law 102–318 (106 Stat.290); the Omnibus Budget ReconciliationAct of 1993, Public Law 103–66 (107 Stat.312); the Uruguay Round Agreements Actof 1994, Public Law 103–465 (108 Stat.4809); the Small Business Job ProtectionAct of 1996, Public Law 104–188 (110Stat. 1755); the Taxpayer Relief Act of1997, Public Law 105–34 (111 Stat. 788);the Ticket to Work and Work IncentivesImprovement Act of 1999, Public Law106–170 (113 Stat. 1860); the Commu-nity Renewal Tax Relief Act of 2000,Public Law 106–554 (114 Stat. 2763); theEconomic Growth and Tax Relief Recon-ciliation Act of 2001, Public Law 107–16(115 Stat. 38); the Jobs and Growth TaxRelief Reconciliation Act of 2003, Pub-lic Law 108–27 (117 Stat. 752); and theAmerican Jobs Creation Act of 2004, Pub-lic Law 108–357 (118 Stat. 1418).

These regulations do not reflectchanges made by the Tax Increase Pre-vention and Reconciliation Act of 2005,Public Law 109–222 (120 Stat. 345)(TIPRA), as amended by the U.S. Troop

Readiness, Veterans’ Care, Katrina Re-covery, and Iraq Accountability Act of2007, Public Law 110–28 (121 Stat. 112),because TIPRA made temporary, tar-geted changes to the time and amountof any required installment otherwisedue in September 2010 and September2011. TIPRA also changed the amountof required installments in 2006, 2012,and 2013 for corporations with assets ofnot less than $1 billion. Although thesechanges are not reflected in these regula-tions, these and any further changes madein the Code supersede the rules in theseregulations.

A notice of proposed rulemaking undersection 6655 (REG–107722–00, 2006–1C.B. 354) was published in the FederalRegister (70 FR 73393) on December 12,2005. The proposed regulations provideguidance on how to determine the amountof a corporation’s estimated tax due witheach quarterly installment. No requests fora public hearing were received, so the pub-lic hearing on the proposed regulations,scheduled for March 15, 2006, was can-celled. The IRS received written and elec-tronic comments responding to the noticeof proposed rulemaking. After considera-tion of all comments, the proposed regula-tions are adopted as revised by this Trea-sury decision.

Explanation of Provisions andSummary of Comments

Section 6655 generally requires corpo-rations to make quarterly estimated taxpayments or be assessed an addition totax for any underpayment. As a generalrule, payments are due on the fifteenthday of the fourth, sixth, ninth, and twelfthmonths. Each quarterly payment must beat least twenty-five percent of the requiredannual payment in order to avoid an under-payment penalty. Generally, the requiredannual payment equals one hundred per-cent of the tax shown on the return for thecurrent year tax, or for certain small tax-payers, the lesser of one hundred percent ofthe tax shown on the return for the currentyear tax or one hundred percent of the taxshown on the return for the preceding tax-able year. Alternatively, corporations mayelect to use an annualized income install-ment or an adjusted seasonal installment ifless than the amount computed under thegeneral rules.

1. Comments Concerning §1.6655–1(Addition to Tax in the Case of aCorporation) of the Proposed Regulations

A. Recapture of a tax credit not includedin the definition of “tax”

One commentator requested that the fi-nal regulations clarify that the recapture ofa tax credit under Chapter 1 is not a sec-tion 11 tax and not included within the def-inition of tax for purposes of section 6655unless there is authority that provides thatthe recaptured credit is treated as a tax im-posed by section 11.

Revenue Ruling 78–257, 1978–1 C.B.440, provides that the term tax, as definedin section 6655, includes the amount oftax resulting from the recomputation of aprior year’s investment credit at the appli-cable rate for the current year. However,Berkshire Hathaway, Inc. v. United States,802 F.2d 429 (Fed. Cir. 1986), held that,for purposes of the definition of tax un-der section 6655, the recapture tax underformer section 47 was not a tax imposedby section 11. The Court concluded thatbecause the taxpayer paid no tax imposedby section 11 in the preceding taxableyear, that taxpayer was not subject to anaddition to tax for failing to pay estimatedtax in the current year under the formerprovision in section 6655(d)(2) that al-lowed a taxpayer to pay estimated tax inthe current year based on the law applica-ble to (other than the rates), and the knownfacts of, the prior year’s return. Basedon the holding in Berkshire Hathaway,§1.6655–1(g)(1)(iii) of the final regula-tions provides that, unless otherwise pro-vided in the Internal Revenue Code, forpurposes of the definition of tax as used insection 6655, a recapture of tax, such as arecapture provided by section 50(a)(1)(A)and any other similar provision, is not con-sidered to be a tax imposed by section 11.Therefore, Rev. Rul. 78–257 is removed.See §601.601(d)(2)(ii)(b).

B. Tax rate changes for preceding yearsafe harbor

Section 6655(d)(1)(B)(ii) allows tax-payers to determine their required annualpayment based on 100 percent of the taxshown on the preceding year’s return.Commentators suggested that the rule pro-vided in §1.6655–1(g)(3) of the proposedregulations, which requires taxpayers to

September 17, 2007 625 2007–38 I.R.B.

recompute the tax determined for the pre-ceding taxable year based on the currentyear tax rates if the tax rates for the cur-rent year and the preceding year differ,is not authorized by section 6655. Thecommentators suggested that, prior to theeffective date of its amendment in 1987,section 6655 allowed estimated tax pay-ments to be based on the facts shown onthe return for the preceding taxable yearand the law applicable to that year butusing the tax rates for the current taxableyear. The commentators requested that thefinal regulations not adopt the rule pro-vided in §1.6655–1(g)(3) of the proposedregulations.

Section 6655 no longer provides spe-cific statutory authority to recompute taxdetermined for the preceding taxable yearusing the rates applicable to the currenttaxable year. Therefore, the final regu-lations do not adopt the rule provided in§1.6655–1(g)(3) of the proposed regula-tions.

C. Return for the preceding taxable year

One commentator requested that the fi-nal regulations clarify that the regulationsadopt the holding in Mendes v. Commis-sioner, 121 T.C. 308 (2003). In Mendes,the Tax Court held that a tax return thatis filed after the IRS issues a notice ofdeficiency is not a return for purposes ofsection 6654(d)(1)(B)(i). Id. at 324–325.Mendes cited Evans Cooperage Co., Inc.v. United States, 712 F.2d 199 (5th Cir.1983), for the proposition that the purposeof the preceding year safe harbor is “to pro-vide a predictable escape from any pos-sible penalty liability [and this purpose]would be defeated if penalties for under-payment of estimated taxes during the yearwere based, not on the easily determinableamount reflected on the preceding year’sreturn, but instead upon the ultimate taxliability, possibly determined by adversetax audit, a year or so after the tax yearfor...which the estimated tax installmentswere paid.” Mendes, 121 T.C. at 326 (quot-ing Evans Cooperage, 712 F.2d at 204).Evans Cooperage held that the statutoryreference to “tax shown on the return of thecorporation for the preceding taxable year”refers to the timely filed return for the pre-ceding year, not to any later-filed amendedreturn. Evans Cooperage, 712 F.2d at 204.

Section 1.6655–1(g)(2) of the proposedregulations provides that the reference insection 6655(d)(1)(B)(ii) to “return of thecorporation of the preceding taxable year”includes the Federal income tax return asamended, only if an amended Federal in-come tax return has been filed before thedue date for an installment. As long asa taxpayer has remaining estimated taxinstallment payments to make during thetax year and is basing the payments onthe preceding year return, the remainingpayments should be made based on themost recent information the IRS has onthe preceding year return. This includesthe information on an amended return forthe preceding year filed before an install-ment due date. Section 1.6655–1(g)(2)of the final regulations retains this rulebut clarifies that the term “return for thepreceding taxable year” includes the Fed-eral income tax return as amended onlyif filed before the applicable installmentdue date if an amended Federal incometax return is filed for the preceding tax-able year. If an amended Federal incometax return is filed on or after an installmentdue date, then the term “return for the pre-ceding taxable year” does not include thatamended Federal income tax return withrespect to the installments due prior to thetime the amended Federal income tax re-turn is filed. This rule applies regardlessof whether the IRS issues a notice of de-ficiency prior to the filing of the amendedFederal income tax return.

2. Comments Concerning §1.6655–2(Annualized Income Installment Method)of the Proposed Regulations

As a general comment to the proposedregulations, one commentator noted thatthe estimated tax payment rules shouldstrive to provide the most accurate pic-ture of annualized taxable income based onfacts known as of the end of an annualiza-tion period. The IRS and Treasury Depart-ment agree with this comment and recog-nize that treating an annualization periodas a short taxable year does not necessar-ily result in an accurate estimate of annual-ized taxable income. The final regulationsmake it clear that taxpayers may not deter-mine taxable income for an annualizationperiod or an adjusted seasonal installmentperiod as though the period is a short tax-able year.

Consistent with the general rejectionof a short taxable year approach, the fi-nal regulations recognize that certain typesof items that are generally incurred once(or otherwise infrequently) during the tax-able year or that are subject to specialexceptions, should not be annualized be-cause doing so would create a distortionin the estimate of annualized taxable in-come. This approach also recognizes thatalthough distortions may occur in the an-nualization process due to general fluctua-tions in the timing of items of income anddeductions incurred throughout the year,taxpayers should generally be permitted torely on such annualized estimates to theextent the estimate is based upon informa-tion available to the taxpayer as of the endof the annualization period.

A commentator expressed concern thatthe rules provided in the proposed regu-lations were too mechanical and createdtraps for the unwary. In response to thiscomment, the final regulations providerules which are intended to produce a rea-sonably accurate estimate of annualizedtaxable income for estimated tax purposeswithout imposing an undue complianceburden on taxpayers. Specifically, thefinal regulations address this general con-cern by allowing taxpayers to make areasonably accurate allocation of certainitems of income or expense. However, ataxpayer’s annualized taxable income forestimated tax purposes is primarily basedon items of income and expense recog-nized during the annualization period.Therefore, the annualization method is asinherently complex as computing taxableincome.

A. Reasonably accurate allocation

Commentators noted that many of therules provided in the proposed regulationswith respect to economic performance andrecurring expenses would create signifi-cant administrative burdens, result in sim-ilarly situated taxpayers being treated dif-ferently, and did not further the underlyinggoal of providing an accurate picture of an-nualized taxable income.

The final regulations do not retain therecurring expense rules provided in theproposed regulations. The final regula-tions provide special rules for specificitems of deduction that are routinely in-curred on an annual basis or for which

2007–38 I.R.B. 626 September 17, 2007

a special exception to the general ac-counting rules exists. Given the natureof these items, applying the general an-nualization rules to these items couldresult in a significant distortion in theestimate of annualized taxable income.These items include real property taxdeductions; employee and independentcontractor bonus compensation deduc-tions (including the employer’s share ofemployment taxes related to such com-pensation); deductions under sections 404(deferred compensation) and 419 (wel-fare benefit funds); items allowed as adeduction for the taxable year by reason ofsection 170(a)(2) and §1.170A–11(b) (cer-tain charitable contributions by accrualmethod corporations), §1.461–5 (recur-ring item exception) or §1.263(a)–4(f)(12-month rule); and items of deductiondesignated by the Secretary by publicationin the Internal Revenue Bulletin (IRB)(see §601.601(d)(2)(ii)(b)).

The final regulations require that thesespecified items of deduction be allocatedin a reasonably accurate manner. The itemof deduction that must be allocated in areasonably accurate manner includes thetotal amount of the item of deduction rec-ognized by the taxpayer during the tax-able year regardless of whether the itemis deemed to be paid or incurred duringthe taxable year as a result of events thatoccurred during the taxable year, after thetaxable year, or both. While a reason-ably accurate allocation may permit cer-tain items to be recognized in an annualiza-tion period prior to being paid or incurred,an amount may only be taken into accountto the extent the item of deduction is prop-erly recognized by the taxpayer during thetaxable year. Therefore, taxpayers will besubject to a section 6655 addition to tax foran underpayment of estimated tax if an un-derpayment results from a deduction thetaxpayer expected to be incurred but wasnot ultimately recognized as a deductionby the taxpayer in the computation of tax-able income for that year.

The final regulations provide that an al-location will be considered to be made ina reasonably accurate manner if the item isallocated ratably throughout the tax year.In addition, an allocation will be consid-ered to be made in a reasonably accuratemanner to the extent it provides a reason-able estimate of taxable income for the tax-able year based upon the facts known as of

the end of the annualization period. Thefinal regulations provide a list of some rel-evant factors to be taken into considerationin determining whether an allocation pro-vides a reasonable estimate of taxable in-come based upon facts known as of the endof the annualization period. The IRS andTreasury Department recognize that vari-ous allocations may be considered to bedone in a reasonably accurate manner andintend for taxpayers to have flexibility indetermining which allocation to use, par-ticularly when use of a specific allocationreduces administrative burdens on the tax-payer. In general, allocations that are madewith the intent to distort will not be con-sidered to have been made in a reasonablyaccurate manner.

Many of the items of deduction whichare required to be allocated in a reason-ably accurate manner include items thatmay not have otherwise been allowed tobe taken into account by taxpayers (forexample, year-end bonus liabilities, itemspaid after year end) under the general an-nualization rules to the extent they weredeemed to be incurred in the last quarterof the year. In this regard, the final regu-lations provide a measure of relief to tax-payers with respect to such items. Thefinal regulations provide that the Secre-tary may designate in future IRB guidanceadditional items of deduction that are re-quired to be allocated in a reasonably ac-curate manner. Taxpayers are encouragedto bring items to the attention of the IRSand Treasury Department that they believeshould be allocated in a reasonably accu-rate manner rather than applying the gen-eral annualization rules.

Commentators requested that tax-payers be permitted to take the excep-tions provided in section 170(a)(2) and§1.170A–11(b) (certain charitable contri-butions by accrual method corporations),§1.461–5 (recurring item exception) or§1.263(a)–4(f) (12-month rule) into ac-count for purposes of determining items ofexpense incurred during an annualizationperiod. As noted above, these exceptionsfrequently apply either to expenses paidannually or to expenses paid after the endof the taxable year. The specific rules andunderlying intent of these exceptions donot easily translate to the concept of anannualization period. The final regula-tions provide that items of expense thatutilize these exceptions will be considered

to be properly taken into account if theyare allocated among annualization periodsin a reasonably accurate manner. There-fore, the final regulations permit taxpayersfor estimated tax payment purposes toallocate throughout the tax year items ofdeduction recognized in the taxable yearas a result of these exceptions to the ex-tent the allocation is made in a reasonablyaccurate manner. The final regulationsadopt this approach in order to reduce thecomplexity and burden associated with thecomputation of estimate taxes by allowingtaxpayers to allocate these specific itemsof expense in a reasonably accurate man-ner while also preventing unintended dis-tortions under the annualization method.

B. Net operating loss deductions

Several commentators addressed provi-sions in the proposed regulations requiringa net operating loss (NOL) deduction to betaken into account in computing an annual-ized installment after annualizing the tax-able income for the annualization period.One commentator argued that economicperformance with respect to an NOL car-ryover has already occurred and therefore,the NOL deduction should be taken intoaccount in computing an annualized in-stallment before annualizing the taxableincome for the annualization period. An-other commentator suggested that specialrules be provided for extraordinary itemssuch as NOL deductions noting the uniquenature of such items. Comments were alsoreceived suggesting that NOL deductionsshould be treated the same as any other de-duction.

NOL deductions are different fromother items of deduction occurringthroughout the year in that there is noanticipation that similar deductions willrecur throughout the year or in futureyears. In this regard, NOL deductionsare more like extraordinary items. Treat-ing NOL deductions in the same manneras other recurring deductions would beinconsistent with attempting to providea reasonably accurate picture of annual-ized taxable income and could result in adistorted estimate of annualized taxableincome similar to the distortions created bythe various techniques the regulations areintended to prevent. The final regulationstreat a NOL deduction as an extraordinaryitem that is treated as occurring on the

September 17, 2007 627 2007–38 I.R.B.

first day of the taxable year and is takeninto account after annualization. As aresult of the final regulations, Rev. Rul.67–93, 1967–1 C.B. 366, is removed. See§601.601(d)(2)(ii)(b).

C. Credit carryovers

One commentator suggested that acredit carryover should be taken intoaccount in computing an annualized in-stallment before annualizing the taxableincome for the annualization period be-cause economic performance has occurredfor the credit carryover. In general, tax-payers annualize components of a creditfor the current taxable year to determinethe amount of a credit because the credit isbased on components for the current year.However, credit carryovers are generallybased on the components for the entireyear in which the credit arose. Therefore,the credit carryover already is computedbased on annualized components for theyear in which the credit arose. Becausea credit carryover is based on annualizedcomponents, the final regulations providethat a credit carryover must be taken intoaccount after determining the annualizedtax and before taking into account the ap-plicable percentage for the annualizationperiod.

D. Credits incurred in an annualizationperiod and recaptured credits

One commentator suggested that thefinal regulations provide that credits in-curred in an annualization period are notannualized. The commentator suggestedthat annualization should be based on theunderlying basis for the credit. The com-mentator also suggested that if a creditis based on an item that is annualized incomputing the required installment for theannualization period, the amounts shouldbe annualized in determining the amountof the credit. Finally, the commentatorsuggested that similar rules should applyto the recapture of credits that are includedwithin the definition of tax.

Section 1.6655–2(f)(3)(iii) of the fi-nal regulations provides that the itemsupon which the credit is computed areannualized pursuant to the provisionsof §1.6655–2(f)(1) and the amount of thecredit is computed based on the annualizeditems. The amount of the credit is then de-ducted from the annualized tax. For exam-

ple, for an annualization period consistingof three months in a full 12-month taxableyear, the items upon which the credit isbased that are taken into account for thethree-month period are multiplied by four,the credit is determined, and the creditreduces the annualized tax. Reducing theannualized tax by a credit before takinginto account the applicable percentage isconsistent with the statutory definition oftax provided in section 6655(g)(1) andthe annualized income installment methodprovided in section 6655(e). In order toclarify this rule, §1.6655–2(b)(1) of thefinal regulations provides that tax meanstax after taking into account credits andbefore applying the applicable percent-age. These rules generally do not applyto a credit recapture because, as discussedin heading 1A of the preamble, a creditrecapture, such as a recapture providedby section 50(a)(1)(A), is not taken intoaccount when determining the tax for anannualized income installment for pur-poses of section 6655.

E. Depreciation and amortization expense

One commentator requested clari-fication on the alternative method in§1.6655–2(f)(2)(v)(A) of the proposedregulations. The proposed regulationsprovide that a taxpayer may claim for anannualization period at least a proportion-ate amount of 50 percent of the taxpayer’sestimated depreciation and amortization(depreciation) expense for the currenttaxable year attributable to assets that ataxpayer had in service on the last day ofthe preceding taxable year, that remainin service on the first day of the currenttaxable year, and that are subject to thehalf-year convention. Several commen-tators suggested that the regulations werenot clear on how a taxpayer determineshow much more than 50 percent may beused and requested that the final regu-lations provide criteria for making thisdetermination.

Another commentator suggested thatthe general rule in §1.6655–2(f)(2)(v)(A)of the proposed regulations for taking intoaccount depreciation was impractical formany taxpayers because of the administra-tive burdens associated with the compu-tation of actual and expected depreciationexpense. The commentator also suggestedthat the rule does not provide an alternative

calculation methodology for assets subjectto a convention other than the half-yearconvention or for intangible assets. Thecommentator requested that the final reg-ulations provide alternative computationmethodologies for all depreciable andamortizable assets and allow taxpayers totake into account section 179 deductions.The commentator also requested that thefinal regulations eliminate the alternativerule in §1.6655–2(f)(2)(v)(A) of the pro-posed regulations that allows taxpayers totake into account a proportionate amountof 50 percent of taxpayers’ current yearestimated depreciation expense. The com-mentator requested that instead the finalregulations provide a safe harbor that al-lows taxpayers to claim a proportionateamount of 90 percent of the prior yeardepreciation expense for all assets placedin service in an earlier year.

By including the alternative rule in§1.6655–2(f)(2)(v)(A) of the proposedregulations, the IRS and Treasury Depart-ment intended to illustrate the minimumamount of depreciation a taxpayer is enti-tled to take for a taxable year. In responseto the comments referenced above, thefinal regulations do not include the alter-native method in §1.6655–2(f)(2)(v)(A) ofthe proposed regulations. The final regu-lations provide a general rule that permitstaxpayers to estimate their annual depreci-ation expense and include a proportionateamount of such expense for annualiza-tion purposes. The final regulations alsoprovide that, in determining the estimatedannual depreciation expense, a taxpayermay take into account purchases, sales orother dispositions, changes in use, addi-tional first-year depreciation deductions,and other similar events and provisionsthat, based on all the relevant informationavailable as of the last day of the annu-alization period (such as capital spendingbudgets, financial statement data and pro-jections, or similar reports that provideevidence of the taxpayer’s capital spend-ing plans for the current taxable year),are reasonably expected to occur or applyduring the taxable year. The IRS and Trea-sury Department believe that prescribingspecial rules for depreciation is appropri-ate because unlike many other deductions,depreciation generally accrues ratablythroughout the taxable year. Therefore, incontrast to the general annualization rules,the final regulations require depreciation

2007–38 I.R.B. 628 September 17, 2007

expense to be taken into account ratablythroughout the taxable year.

As an alternative to the general rule fordepreciation expense, the final regulationsprovide two safe harbors. The first safeharbor requires taxpayers to take into ac-count for an annualization period a propor-tionate amount of depreciation expense al-lowed for the taxable year from: (1) as-sets that were in service on the last day ofthe prior taxable year, are in service on thefirst day of the current taxable year, andhave not been disposed of during the annu-alization period; (2) assets that were placedin service during the annualization periodand have not been disposed of during thatperiod; and (3) assets that were in serviceon the last day of the prior taxable yearand that are disposed of during the annual-ization period. For purposes of additionalfirst-year depreciation deductions, the fi-nal regulations provide that only a propor-tionate amount of the current year’s addi-tional first-year depreciation deduction tobe taken into account in determining a tax-payer’s taxable income for the taxable yearis taken into account in computing taxableincome for an annualization period. In ad-dition, the final regulations provide thatamounts that the taxpayer deducts undersection 179 or any similar provision, aretreated the same as additional first-year de-preciation.

The second safe harbor included in thefinal regulations provides that a taxpayermay take into account a proportionateamount of 90 percent of its precedingyear’s depreciation that is taken on itsFederal income tax return for the pre-ceding taxable year. However, if thetaxpayer’s preceding taxable year is lessthan 12 months (a short taxable year), theamount of depreciation expense taken intoaccount for the preceding taxable yearmust be put on an annualized basis. Inaddition, a taxpayer must use whateverdepreciation safe harbor method it selectsunder §1.6655–2(f)(3)(iv)(B) of the finalregulations for all depreciation deductionswithin the annualization period for the an-nualized income installment but may usea different depreciation method providedin §1.6655–2(f)(3)(iv) for each annual-ized income installment during the taxableyear.

F. Events arising after the installment duedate

One commentator requested that the fi-nal regulations include examples of eventsthat would arise after the installment duedate that would be considered reasonablyunforeseeable to illustrate the rule pro-vided in §1.6655–2(h) of the proposedregulations. In considering the requestfor more specific guidance as to whatconstitutes an unforeseeable event, theIRS and Treasury Department determinedthat providing relief for certain unfore-seeable events would more appropriatelybe addressed through contemporaneousguidance. Furthermore, the unforeseeableevent exception provided in the proposedregulations was inherently subjective andretaining such a rule would be difficult toadminister. In addition, certain provisionsin the final regulations allow events thatoccur after the end of an annualizationperiod to be taken into account but only tothe extent the anticipated events actuallyoccur. Therefore, the final regulations donot retain the unforeseeable event excep-tion as provided in §1.6655–2(h) of theproposed regulations.

The final regulations do permit taxpay-ers in specific circumstances to take intoaccount transactions that are properly re-flected in the taxpayer’s return for a par-ticular year to be taken into account forannualization purposes regardless of whenthe underlying event giving rise to the itemoccurs. For example, the final regulationspermit taxpayers to defer income relatedto a transaction to which sections 1031 or1033 may apply even if the replacement ofproperty required under sections 1031 or1033 has not occurred as of the end of anannualization period to the extent the tax-payer has a reasonable belief that qualify-ing replacement property will be acquired.

G. Items that substantially affect taxableincome but cannot be determinedaccurately by the installment due date

Section 1.6655–2(g) of the proposedregulations provides that in determiningthe applicability of the annualized incomeinstallment method or the adjusted sea-sonal installment method, reasonable es-timates may be made from existing datafor items that substantially affect incomeif the amount of such items cannot be de-

termined with reasonable accuracy by theinstallment due date. Examples of theseitems are the inflation index for taxpay-ers using the dollar-value LIFO (last-in,first-out) inventory method, intercompanyadjustments for taxpayers that file consoli-dated returns, and the liquidation of a LIFOlayer at the installment date that the tax-payer reasonably believes will be replacedat the end of the year.

The IRS and Treasury Department be-lieve that the language in §1.6655–2(g) ofthe proposed regulations could be misin-terpreted and broadly applied to items towhich the rule was not intended. The finalregulations provide that §1.6655–2(g) ap-plies only to the items specifically listed.These items include the inflation indexfor taxpayers using the dollar-value LIFOinventory method, adjustments requiredunder section 263A, intercompany adjust-ments for taxpayers that file consolidatedreturns, the liquidation of a LIFO layerat the installment date that the taxpayerreasonably believes will be replaced at theend of the year, section 199 computations,deferred gain under sections 1031 and1033 that the taxpayer reasonably believeswill be replaced with qualifying property,and to any other item specifically desig-nated in guidance published in the InternalRevenue Bulletin.

H. Taking into account a section 199deduction

Commentators requested clarificationon how taxpayers using the annualized in-come installment method (or the adjustedseasonal installment method) should takeinto account a section 199 deduction. Onecommentator suggested that because thesection 199 deduction is calculated basedon income and expense items incurredduring the taxable year and has some char-acteristics of a credit, the final regulationsshould treat a section 199 deduction as acredit. Commentators also suggested thatthe final regulations require taxpayers toannualize income and compute the section199 deduction based on the annualizedamount. Another commentator requestedthat the final regulations treat a section199 deduction as an item that substantiallyaffects taxable income but cannot be accu-rately determined by the installment duedate. The commentator requested that thefinal regulations allow taxpayers to make

September 17, 2007 629 2007–38 I.R.B.

a reasonable estimate of the section 199deduction for purposes of determining theproportionate amount that should be takeninto account in determining annualizedtaxable income.

Although the section 199 deduction iscalculated based on income and expenseitems incurred during the taxable year, thesection 199 deduction is a deduction andnot a credit. Therefore, a section 199 de-duction must be taken into account to re-duce taxable income, not to reduce tax.Under the final regulations, a section 199deduction is computed prior to annualiz-ing the taxable income for the annualiza-tion period. However, in recognition thatqualification for the section 199 deductionis restricted by various annual limitationsthat may not be known as of the end anyspecific annualization period, the final reg-ulations provide that a section 199 deduc-tion should be treated as an item that sub-stantially affects taxable income but can-not be accurately determined by the install-ment due date. Therefore, the final regula-tions permit taxpayers to make a reason-able estimate of the section 199 deductionfor purposes of determining the amount tobe taken into account in determining annu-alized taxable income.

I. Section 263A expenses

One commentator suggested that theproposed regulations do not provide ruleson how taxpayers should account for sec-tion 263A adjustments to compute annu-alized taxable income. The commentatorrequested that the final regulations not re-quire taxpayers to compute an actual sec-tion 263A adjustment for an installmentperiod because this computation wouldcreate a significant administrative burdenfor taxpayers. The commentator also re-quested that the final regulations providesimplifying rules that allow taxpayers tocompute the section 263A adjustment foran installment period by multiplying theprior year’s absorption ratio by the inven-tory on hand at the end of the annualizationperiod or by estimating the annual adjust-ment and prorating it to each annualizationperiod.

Section 263A expenses are added tothe items covered by the rules provided in§1.6655–2(g) of the final regulations foritems that substantially affect taxable in-come but cannot be accurately determined

by the installment due date. Therefore,taxpayers may use reasonable estimatesfrom existing data with respect to theamount of adjustments required undersection 263A if that amount cannot bedetermined with reasonable accuracy bythe installment due date.

J. LIFO

One commentator noted that althoughthe proposed regulations provide simplify-ing rules to determine the internal inflationindex for taxpayers using internal dollar-value LIFO inventory methods, the pro-posed regulations do not provide rules fortaxpayers to determine an external infla-tion index under the inventory price indexcomputation (IPIC) LIFO method. Thecommentator requested that the final reg-ulations include a rule that allows taxpay-ers to determine an estimated external in-flation index by multiplying the prior yearinventory mix by the applicable inflationindex for the annualization period. Thecommentator also requested that the finalregulations include a rule that allows a tax-payer that elected to use final indices touse preliminary indices if the final indicesfor the appropriate month have not beenpublished. The dollar-value LIFO inven-tory method includes the use of externalindexes, such as the IPIC LIFO method,as well as internal indexes. Therefore, theIRS and Treasury Department do not be-lieve that a separate rule is necessary forthe use of external inflation indexes.

K. Advance payment

One commentator noted that the pro-posed regulations do not address how ataxpayer who defers revenue either un-der §1.451–5(c) or Rev. Proc. 2004–34,2004–1 C.B. 991, should account for anadvance payment to determine annualizedtaxable income. Section 1.451–5(c) andRev. Proc. 2004–34 generally allow ataxpayer to defer recognition of a quali-fying advance payment for a limited timebut only to the extent that financial state-ments also defer recognition of the income.The commentator requested that the fi-nal regulations include a rule that allowsa taxpayer using the deferral method un-der §1.451–5(c) or Rev. Proc. 2004–34to not recognize an advance payment asincome in the annualization period until

the advance payment is recognized in thetaxpayer’s applicable financial statementsfor the annualization period. The com-mentator also requested that the final reg-ulations allow a taxpayer using a defer-ral method to recognize any portion of anadvance payment on the last day of thetaxable year in which the advance pay-ment is required to be recognized under§1.451–5(c) or Rev. Proc. 2004–34, if thatportion of the advance payment is not rec-ognized in the taxpayer’s financial state-ments for any of the annualization periodsarising within the limited time provided in§1.451–5(c) or Rev. Proc. 2004–34. See§601.601(d)(2)(ii)(b).

The IRS and Treasury Departmentagree with the commentator that the fi-nal regulations should specifically ad-dress advance payments and that therule should be consistent with §1.451–5and Rev. Proc. 2004–34. Pursuant to§1.6655–2(f)(3)(i)(A) of the final regula-tions, if the taxpayer uses the method ofaccounting provided in §1.451–5(b)(1)(ii)for an advance payment, the advance pay-ment is includible in computing taxableincome under that method of accountingexcept that, if §1.451–5(c) applies, anyamount not included in computing taxableincome by the end of the second taxableyear following the year in which a substan-tial advance payment is received, and notpreviously included in accordance with thetaxpayer’s accrual method of accounting,is includible in computing taxable incomeon the last day of such second taxable year.In addition, §1.6655–2(f)(3)(i)(B) of thefinal regulations provides that if the tax-payer uses the deferral method provided insection 5.02 of Rev. Proc. 2004–34 for anadvance payment, the advance paymentis includible in computing taxable incomeunder that method of accounting for an-nualization purposes. But any amount notincluded in computing taxable income bythe end of the taxable year succeedingthe taxable year of receipt is includible incomputing taxable income on the last dayof such succeeding taxable year. The finalregulations provide an example involvingan advance payment.

L. Extraordinary items

One commentator suggested that thefinal regulations provide special treat-ment for extraordinary items for purposes

2007–38 I.R.B. 630 September 17, 2007

of computing annualized taxable incomeand suggested that the regulations con-sider the extraordinary items listed in§1.1502–76(b)(2)(ii)(C). The commenta-tor requested that the final regulations notrequire taxpayers to take into account ex-traordinary items under the general rules of§1.6655–2(f) of the proposed regulationsbecause doing so would result in a distor-tion of annualized taxable income. Thecommentator requested that extraordinaryitems be taken into account after annual-izing taxable income. The commentatorrequested that the final regulations pro-vide that taxpayers begin to account forextraordinary items in the annualizationperiod in which the extraordinary eventoccurs or, alternatively, in the annualiza-tion period in which it becomes reasonablyforeseeable that the extraordinary eventwill occur. The commentator also re-quested that the final regulations providean exclusive list of extraordinary items byreferring to the list of extraordinary itemsin §1.1502–76(b)(2)(ii)(C) with certainmodifications.

The IRS and Treasury Departmentagree with the commentator that the an-nualization of extraordinary items couldresult in a distortion of annualized taxableincome. The final regulations include a listof extraordinary items similar to the itemsin §1.1502–76(b)(2)(ii)(C). Included inthe list of extraordinary items in the finalregulations are NOL deductions and sec-tion 481(a) adjustments. In addition, thefinal regulations also provide a de minimisrule wherein only extraordinary items inexcess of $1,000,0000 will be required tobe accounted for after annualizing taxableincome. However, this de minimis ruledoes not apply to NOL deductions andsection 481(a) adjustments.

M. Section 481(a) adjustments

The rule in §1.6655–2(f)(2)(iv) ofthe proposed regulations provides thata taxpayer takes into account a section481(a) adjustment related to an automaticaccounting method change during an an-nualization period only if a copy of theForm 3115, “Application for Change inAccounting Method”, has been mailedto the IRS National Office on or beforethe last day of the annualization period.One commentator suggested that the ruleprovided by §1.6655–2(f)(2)(iv) of the

proposed regulations creates administra-tive burdens for taxpayers, is inconsistentwith the depreciation and amortizationrules provided in §1.6655–2(f)(2)(v) ofthe proposed regulations, and could re-sult in the filing of incomplete Forms3115. The commentator suggested thatthe rule in §1.6655–2(f)(2)(iv)(B)(1) ofthe proposed regulations causes an admin-istrative burden by requiring taxpayers torecompute taxable income using a differ-ent method of accounting than would beused to calculate taxpayers’ tax provisionfor financial accounting purposes, whichgenerally allows taxpayers to take intoaccount section 481(a) adjustments foran automatic accounting method changeif they anticipate that the change will betimely filed. The commentator also sug-gested that if the final regulations adoptthe rule in §1.6655–2(f)(2)(v) of the pro-posed regulations that allows taxpayers toanticipate capital expenditures to estimatedepreciation expense for an annualizationperiod, the final regulations should pro-vide a similar rule for automatic account-ing method changes by allowing taxpayersto take into account section 481(a) adjust-ments resulting from anticipated filingsfor automatic accounting method changes.

The final regulations provide that, ingeneral, any section 481(a) adjustmentthat results from a change in accountingmethod that is approved by the Com-missioner and properly reflected in thetaxpayer’s return for the tax year is takeninto account as an extraordinary itemdeemed to occur on the first day of thetax year for annualization purposes. Thefinal regulations provide that a section481(a) adjustment may be taken into ac-count in this manner notwithstanding (i)the annualization period in which theForm 3115 is filed (including requestsfiled after year-end), (ii) whether the re-quested change in accounting method isconsidered an automatic or non-automaticaccounting method change request, (iii)whether the section 481(a) adjustment ispositive or negative, and (iv) the date onwhich the taxpayer receives the approvalof the Commissioner. In allowing for asection 481(a) adjustment to be taken intoaccount in this manner, taxpayers shouldbe aware that they will be subject to asection 6655 addition to tax for an under-payment of estimated tax in an installmentperiod caused from taking into account

a section 481(a) adjustment the taxpayerexpected to be incurred but for which thetaxpayer does not receive the consent ofthe Commissioner to change its methodof accounting for that particular tax year.The final regulations also provide an ex-ception to the general rule. Under theexception a taxpayer may choose to treatthe filing of a Form 3115 as the date onwhich the extraordinary item is deemed tooccur rather than the first day of the taxyear but only with respect to the section481(a) adjustment (or a portion thereof)that is recognized in the year of change.Use of this exception will impact the pe-riod in which the taxpayer will be requiredto take into account the new method ofaccounting as provided in §1.6655–6.

N. Simplify the 52/53 week taxable yearrules

One commentator suggested that the52/53 week taxable year rules providedby §1.6655–2(e) of the proposed regu-lations are too complex and administra-tively burdensome. The commentatorsuggested that the final regulations not in-clude the 52/53 week taxable year rules in§1.6655–2(e) of the proposed regulationsand rely on the general concept of an-nualization. The commentator suggestedthat taxpayers with 52/53 week taxableyears under section 441(f) know howto annualize their applicable annualiza-tion period without the rules provided by§1.6655–2(e) of the proposed regulations.

The purpose of the annualized incomeinstallment method is to give taxpayersa method of determining annualized in-come based on the actual facts that oc-cur in the annualization period. Therefore,with limited exceptions, the IRS and Trea-sury Department drafted the proposed reg-ulations and these final regulations to pro-vide rules that only allow taxpayers to takeinto account items of income and expensethat arise in the applicable annualizationperiod. The IRS and Treasury Depart-ment recognize that the 52/53 week tax-able year rules provided by §1.6655–2(e)of the proposed regulations are complex.Although the final regulations retain the52/53 week taxable year rules provided by§1.6655–2(e) of the proposed regulations,the final regulations also provide a safeharbor that allows a taxpayer with a 52/53week taxable year to determine its annu-

September 17, 2007 631 2007–38 I.R.B.

alization period on the month that endsclosest to the end of its applicable thir-teen-week period or four-week period thatends within the applicable annualizationperiod. However, an eligible taxpayer mayonly use this safe harbor if it is used for de-termining annualization periods for all re-quired installments for the taxable year.

O. Controlled foreign corporations,partnerships, and other pass-throughentities

One commentator suggested that the fi-nal regulations provide rules on how tax-payers should take into account distribu-tions from a section 936 corporation ora controlled foreign corporation to deter-mine annualized taxable income for an in-stallment period. The commentator alsosuggested that the final regulations pro-vide rules on how taxpayers should takeinto account a distributive share of incomefrom passthrough entities other than part-nerships, such as trusts, S corporations,and real estate investment trusts (REITs),to determine annualized taxable incomefor an installment period. The commen-tator requested that the final regulationsexpand the scope of §1.6655–2(f)(2)(vi)of the proposed regulations to incorporatethe statutory provisions for section 936(h),section 951(a), and closely held REITs,and also provide rules to take into accountthe distributive share of income receivedfrom other types of passthrough entities.

Section 1.6655–2(f)(3)(v) of the fi-nal regulations expands the rule in§1.6655–2(f)(2)(vi) of the proposedregulations to provide for the statutoryrules in section 6655(e)(4) and section6655(e)(5) for taking into account sub-part F income, income under section936(h), and dividends received by closelyheld REITs when computing any annu-alized income installment. In addition,§1.6655–2(f)(3)(v)(D) adds a rule thatrequires items from passthrough entitiesother than partnerships and closely heldREITs to be taken into account in comput-ing any annualized income installment in amanner similar to the manner under whichpartnership items are taken into accountunder §1.6655–2(f)(3)(v)(A) of the finalregulations.

3. Comments Concerning §1.6655–3(Adjusted Seasonal Installment Method)of the Proposed Regulations

A. Adjusted seasonal installment methodand alternative minimum tax

One commentator suggested that thedetermination of whether a corporationqualifies for the adjusted seasonal install-ment method under section 6655(e)(3),and the amount of the required installmentunder this method, is based only on thecorporation’s taxable income and tax onthat taxable income. The commentatorrequested that the final regulations clarifythat a corporation using the adjusted sea-sonal installment method is only requiredto make estimated tax payments with re-spect to taxable income and tax on thattaxable income, and not on the alternativeminimum tax (AMT) or any other tax.Any required installment must includeAMT because AMT is included in thedefinition of tax in section 6655(g)(1) and§1.6655–1(g)(1) of the final regulations.Including AMT in the determination oftax is consistent with the general annu-alization method and adjusted seasonalinstallment method and recognizes theoverall separate and parallel nature of theAMT. Therefore, §1.6655–3(d)(4) of thefinal regulations provides that the amountof an installment determined using the ad-justed seasonal installment method mustproperly take into account the amount ofany AMT under section 55 that would ap-ply for the period of the computation. Forthis purpose, the amount of any AMT thatwould apply is determined by applyingto alternative minimum taxable income,tentative minimum tax, and AMT, therules provided in §1.6655–3(c) of the finalregulations for determining the amount ofan installment using the adjusted seasonalinstallment method.

B. Adjusted seasonal installment methodbase period percentage

Section 6655(e)(3)(D)(i) provides thatthe base period percentage for any pe-riod of months is the average percent thatthe taxable income for the correspondingmonths in each of the 3 preceding taxableyears bears to the taxable income for the3 preceding taxable years. One commen-tator requested that the final regulations

clarify whether the base period percentageprovided in §1.6655–3(d)(1) of the pro-posed regulations can be negative.

The rule provided in section6655(e)(3)(D)(i) requires that the baseperiod percentage be computed based ontaxable income. The rule does not pro-vide that taxpayers take into account aloss. Therefore, a taxpayer can never havea negative base period percentage. Thelowest number the base period percentagecan equal is zero. Section 1.6655–3(d)(1)of the final regulations provides that thebase period percentage is computed basedon taxable income, which the IRS andTreasury Department believe provides aclear rule that an overall loss for the appli-cable period of months used to calculatethe base period percentage cannot be usedto compute the base period percentage.If a taxpayer has an overall loss for anapplicable period of months used in thecomputation of the base period percent-age, the taxpayer must use zero in place ofthe loss.

4. Comments Concerning §1.6655–4(Large Corporations) of the ProposedRegulations

A. Section 381 transactions to determinelarge corporation status

One commentator requested that thefinal regulations modify the rules in§1.6655–4(c)(2) of the proposed regu-lations to clarify that, when computingtaxable income for a year in which thereis a section 381 transaction to determineif a corporation is a large corporation, theadjustment for the section 381 transactionrelates only to the portion of taxable in-come applicable to the transferred assets.

Generally, for a transaction to qualifyunder section 381, an acquiring corpo-ration must acquire a majority of theassets of the acquired corporation. Section1.6655–4(c)(2) of the proposed regula-tions provides that when determining ifa corporation is a large corporation for ataxable year in which a section 381 trans-action occurs, an acquiring corporationmust include in its income the distributoror transferor corporation’s income for thetaxable year up to and including the dateof distribution or transfer. This rule re-quires the acquiring corporation to include100 percent of the distributor or transferor

2007–38 I.R.B. 632 September 17, 2007

corporation’s taxable income (or loss) inthe acquiring corporation’s income evenif the acquiring corporation acquires lessthan 100 percent of the assets of the dis-tributor or transferor corporation as longas section 381 applies to the transaction.The final regulations do not include arule providing that the adjustment for asection 381 transaction relates only to theportion of taxable income applicable tothe transferred assets when computingtaxable income for a year in which thereis a section 381 transaction to determineif a corporation is a large corporation.The IRS and Treasury Department believethat such a rule would be unnecessarilycomplex considering that the rule in theproposed regulations is both taxpayer fa-vorable (if there are losses of the distribu-tor or transferor corporation) and taxpayerunfavorable (if there is taxable income ofthe distributor or transferor corporation)and considering that in these transactions,the acquiring corporation generally ac-quires a majority of the distributor ortransferor corporation’s assets. However,§1.6655–4(c)(2)(i)(B) of the final regu-lations amends §1.6655–4(c)(2)(i)(B) ofthe proposed regulations to clarify that anacquiring corporation takes into accountthe distributor or transferor corporation’staxable income or loss for purposes of de-termining whether a corporation is a largecorporation for a taxable year in which asection 381 transaction occurs.

B. Aggregation

One commentator suggested that therule provided by §1.6655–4(d)(2) of theproposed regulations, which does notallow taxpayers to take into account ataxable loss of a member of a controlledgroup of corporations for a taxable yearduring the testing period, results in a dis-torted view of the taxable income of thecontrolled group of corporations. Thecommentator requested that the final regu-lations modify the rule in §1.6655–4(d)(2)of the proposed regulations to allow tax-payers to take into account losses of amember of a controlled group of cor-porations when determining whether acorporation is considered a large taxpayerbecause this is consistent with the princi-ples for the computation of consolidatedtaxable income.

Section 6655(g)(2)(B)(ii) requires thatthe $1,000,000 exemption be dividedamong members of a controlled groupunder rules similar to the rules of section1561. The purpose of the statute is tolimit members of a controlled group, asan aggregate, to $1,000,000 of exemptionfrom large corporation treatment. Theaggregation rule in §1.6655–4(d)(2) isintended to allow a controlled group toquickly determine whether the controlledgroup must allocate the $1,000,000 limi-tation among the members of the group.It is not intended to treat the controlledgroup as a single taxpayer, in which allmembers of the group will be treated asa large corporation, if the taxable incomeof the controlled group, as an aggregate,is over $1,000,000. Thus, for example, ifmember A of a controlled group had tax-able income of $900,000 and member B ofthe group had taxable income greater than$1,000,000, the controlled group couldchoose to allocate $900,000 to member Aso that member A will not be treated asa large corporation, but member B wouldbe treated as a large corporation no matterhow much of the $1,000,000 limitation isallocated to member B. This is consistentwith the rules under section 1561.

5. Comments Concerning §1.6655–5(Short Taxable Years) of the ProposedRegulations

A. Taxpayer’s initial taxable year

One commentator noted that a taxpayeris not required to choose its taxable yearuntil it files a tax return on its chosen ba-sis in accordance with §1.441–1(c)(1).The commentator requested that thefinal regulations modify the rule in§1.6655–5(c)(1)(ii) of the proposed regu-lations to provide that a taxpayer will notbe penalized if, in its initial taxable year, itmakes estimated tax payments based on apresumption that the taxpayer will have ataxable year that is a calendar year even ifthe taxpayer subsequently chooses a fiscalyear.

Because a taxpayer has until the date itfiles its initial tax return to choose its tax-able year, the final regulations modify therule in §1.6655–5(c)(1)(ii) of the proposedregulations to allow a taxpayer with an ini-tial short taxable year to make estimatedtax payments as though it chose to be a cal-

endar year taxpayer until the taxpayer filesits return for its initial short taxable year.Pursuant to this modified rule, a taxpayerwith an initial short taxable year may makeestimated tax payments as though it were acalendar year taxpayer until it files its taxreturn for its initial taxable year.

B. Taxpayer’s final taxable year

One commentator suggested that§§1.6655–5(d)(1), 1.6655–5(d)(2), and1.6655–5(d)(3) of the proposed regula-tions provide rules that may require tax-payers with short taxable years to make in-stallment payments based on an applicablepercentage that is more than the standard25 percent per installment period. Thecommentator suggested that these rulesmay result in a section 6655 addition to taxbeing imposed on a taxpayer who makesannualization payments based on 25 per-cent of its annualized tax and later in theyear discovers that, due to an unforeseentermination of its tax year, it should havemade its annualization payments based ona higher applicable percentage because itwill have fewer than four installment pay-ments. The commentator also suggestedthat the rule in §1.6655–2(h) of the pro-posed regulations, which addresses eventsarising after an installment due date thatwere not reasonably foreseeable, does notappear to protect a taxpayer that makes aninstallment payment based on 25 percentof its annualized tax and later discoversthat it should have based its installmentpayment on a higher applicable percentagebecause it had an unforeseen terminationof its tax year resulting in a short taxableyear. The commentator requested thatthe final regulations revise the rules in§§1.6655–5(d)(1), 1.6655–5(d)(2), and1.6655–5(d)(3) of the proposed regula-tions so that payments made for an install-ment period in a short taxable year do notexceed 25 percent. As an alternative, thecommentator requested that the final reg-ulations revise the rules in §1.6655–2(h)of the proposed regulations to allow ataxpayer with an unexpected terminationof its tax year to make a payment withits final required installment equal to theremaining portion of 100 percent of its re-quired annual payment to avoid a penaltyon its earlier required installments.

A taxpayer should not be penalizedfor making payments based on the appli-

September 17, 2007 633 2007–38 I.R.B.

cable percentage of 25 percent for eachinstallment period when it does not knowthat it will have an early termination yearthat will result in it making less thanfour installment payments. Therefore,§1.6655–5(d)(4) of the final regulationsprovides a rule addressing the applica-ble percentage for an installment periodin which the taxpayer does not reason-ably expect that the taxable year will bean early termination year. In the case ofany required installment determined un-der section 6655(e) in which the taxpayerdoes not know that the taxable year will bean early termination year, the applicablepercentage under section 6655(e)(2)(B)(ii)and §1.6655–5(d)(3)(i) of the final regula-tions is the applicable percentage for eachinstallment period with the remaining bal-ance of the estimated tax payment for theyear due with the final installment.

C. Internal Revenue Manual provisionsand annualizing taxable income in aninitial or final taxable year

One commentator noted that InternalRevenue Manual Part 20.1.3.6.3(2) pro-vides that a corporation filing a short pe-riod return that is either an initial or finalreturn is not required to annualize its tax-able income to compute the penalty. Thecommentator requested that the final regu-lations clarify this rule.

The rule in IRM 20.1.3.6.3(2) providesthat if a taxpayer has a short taxable yearthat is either an initial or final year, thetaxpayer should not annualize its taxableincome based on a full 12 month period.Instead, the taxpayer should annualizeits taxable income based on the num-ber of months in the short taxable year.This rule was intended to be provided in§1.6655–5(g)(2) of the proposed regula-tions. However, the computational rulein §1.6655–5(g)(2) of the proposed reg-ulations is incorrect and does not resultin the computation of the correct amountfor every installment payment during ashort taxable year. The final regulationsrevise the rule in §1.6655–5(g)(2) of theproposed regulations to provide that ataxpayer computes its annualized incomeinstallment by determining the tax on thebasis of the annualized income for the an-nualization period, dividing the resultingtax by 12, multiplying that result by thenumber of months in the short taxable year,

and finally multiplying that result by theapplicable percentage for the annualizedincome installment. The final regulationsalso revise an example to reflect the newcomputational rule.

D. Preceding taxable year rule for largecorporations when the preceding taxableyear is a short year

One commentator suggested that therule provided in §1.6655–5(h) of theproposed regulations, which requires tax-payers to compute the preceding year taxon an annual basis if the preceding taxableyear was a short taxable year when usingsection 6655(d)(2) to determine their firstinstallment, is not authorized by section6655. Consistent with §1.6655–1(g)(3),the final regulations do not adopt the ruleprovided in §1.6655–5(h) of the proposedregulations.

6. Change in method of accounting

The rule in §1.6655–6(b) of the pro-posed regulations provides that if a tax-payer is making a change in method ofaccounting for the current taxable yearthat is permitted to be made with the au-tomatic consent of the Commissioner,the new method is used in determiningany required installment if, and only if, acopy of the Form 3115 has been mailedto the IRS National Office on or beforethe last day of the annualization period.One commentator suggested that the ruleprovided by §1.6655–6(b) of the proposedregulations creates administrative burdensfor taxpayers, is inconsistent with the de-preciation and amortization rules providedin §1.6655–2(f)(2)(v) of the proposed reg-ulations, and could result in the filing ofincomplete Forms 3115. The commenta-tor suggested that the rule in §1.6655–6(b)of the proposed regulations causes an ad-ministrative burden by requiring taxpayersto recompute taxable income using a dif-ferent method of accounting than would beused to calculate taxpayers’ tax provisionfor financial accounting purposes, whichgenerally allows taxpayers to take intoaccount an automatic accounting methodchange if they anticipate that the changewill be timely filed.

Consistent with the rules for section481(a) adjustments as discussed in heading(2)(M) above, the final regulations requirea taxpayer to take into account any change

in method of accounting for which the tax-payer has received the consent of the Com-missioner in the same manner the taxpayerchooses to treat the section 481(a) adjust-ment resulting from such a change (for ex-ample, as of the first day of the taxableyear or as of the date the Form 3115 wasfiled). For a change in accounting methodthat does not result in a section 481(a) ad-justment, the final regulations provide thatin the year of change the taxpayer will havethe choice for annualization purposes to ei-ther use the new method as of the first dayof the taxable year or as of the date theForm 3115 was filed.

Effect on Other Documents

The following publications are obsoletefor tax years beginning after September 6,2007:

Revenue Ruling 67–93, 1967–1 C.B.366.



Revenue Ruling 67–93, 1967–1 C.B.366, provides that the entire amount of anet operating loss carryover should be de-ducted from income prior to annualizationunder the annualized income installmentmethod. The rationale underlying the con-clusion in Rev. Rul. 67–93 was based onthe position that each annualization periodshould be treated as a short taxable year.The final regulations specifically providethat an annualization period is not treatedas a short taxable year. Therefore, Rev.Rul. 67–93 will be removed when the finalregulations are effective.

Revenue Ruling 76–450, 1976–2 C.B.444, provides that state property tax andfranchise tax are deductible from the in-come for an annualization period on thedate the taxpayer accrues the taxes underthe taxpayer’s method of accounting. Rev-enue Ruling 76–450 was issued prior tothe enactment of section 461(h) and doesnot take into account the application ofthe economic performance requirementsof section 461(h) for purposes of comput-ing an estimated tax payment using the an-nualized income installment method. Thefinal regulations provide specific rules re-lated to address the application of section461(h) and real property taxes for pur-poses of the annualized income installment

2007–38 I.R.B. 634 September 17, 2007

method. As a result of the rules provided inthe final regulations, Rev. Rul. 76–450 isno longer applicable and will be removedwhen the final regulations are effective.See §601.601(d)(2)(ii)(b).

Revenue Ruling 78–257, 1978–1 C.B.440, provides that the term tax, as definedin section 6655, includes the amount oftax resulting from the recomputation of aprior year’s investment credit at the appli-cable rate for the current year. In Rev. Rul.78–257, a corporation incurred a net oper-ating loss in 1975 but showed an amountof tax from the recomputation of the prioryear’s investment credit. For 1976 the cor-poration had a liability for income tax butmade no deposits of estimated tax, rely-ing on the former provision in section 6655that allowed a taxpayer to base its esti-mated tax payments on an amount equalto the tax computed at the rates applica-ble to the taxable year but otherwise onthe basis of the facts shown on the returnof the corporation for, and the law appli-cable to, the preceding taxable year. Therevenue ruling concludes that the corpora-tion was subject to an addition to tax for theunderpayment of estimated tax because itfailed to pay on or before the prescribed in-stallment due dates an amount equal to thetax resulting from the recomputation of theprior year’s investment credit. However,as discussed in heading (1)(A) of the pre-amble, based on the holding in BerkshireHathaway, Inc. v. United States, 802 F.2d429 (Fed. Cir. 1986), §1.6655–1(g)(1)(iii)of the final regulations provides that, un-less otherwise provided, for purposes ofthe definition of tax as used in section6655, a recapture of tax, such as a recap-ture provided by section 50(a)(1)(A) andany other similar provision, is not con-sidered to be a tax imposed by section11. Therefore, Rev. Rul. 78–257 isno longer applicable and will be removedwhen the final regulations are effective.See §601.601(d)(2)(ii)(b).

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. Except with respect to§1.6655–5, which deals with the rules ap-plicable to a short taxable year, it has beendetermined that section 553(b) of the Ad-

ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulationsand, because these provisions do not im-pose a collection of information on smallbusinesses, the Regulatory Flexibility Act(5 U.S.C. chapter 6) does not apply. Withrespect to §1.6655–5, it is hereby certifiedthat this provision of the regulations willnot have a significant economic impacton a substantial number of small entities.This certification is based on the fact thatnot many small businesses are going to besubject to the short taxable year rules be-cause: (1) existing small businesses gen-erally are not targets of mergers and ac-quisitions, which result in a short taxableyear; (2) start-up small businesses with ashort taxable year of less than four monthsdo not have to pay estimated taxes; and (3)start-up small businesses with a short tax-able year of four months or more are notlikely to have taxable income that wouldbe subject to the corporate estimated taxrules. Therefore, a Regulatory FlexibilityAnalysis under the Regulatory FlexibilityAct (5 U.S.C. chapter 6) is not required.Pursuant to section 7805(f) of the Inter-nal Revenue Code, the notice of proposedrulemaking preceding this regulation wassubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comment on its impact on small busi-nesses.


The principal authors of these regu-lations are Joseph P. Dewald, formerlyof the Office of Associate Chief Coun-sel (Procedure and Administration), andTimothy S. Sheppard, Office of AssociateChief Counsel (Procedure and Adminis-tration).

* * * * *


Accordingly, 26 CFR parts 1, 301, and602 are amended as follows:


Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.6655–5 also issued under 26

U.S.C. 6655(i)(2). * * *

Par. 2. In §1.56–0 the heading for para-graph (e)(5) is added to read as follows:

§1.56–0 Table of contents to §1.56–1,adjustment for book income ofcorporations.

* * * * *(e) * * *(5) Effective/applicability date.Par. 3. Section 1.56–1(e)(4) is revised

and paragraph (e)(5) is added to read asfollows:

§1.56–1 Adjustment for the book incomeof corporations.

* * * * *(e) * * *(4) Estimating the book income adjust-

ment for purposes of the estimated tax lia-bility. See §1.6655–7, as contained in 26CFR part 1 revised as of April 1, 2007,for special rules for estimating the corpo-rate alternative minimum tax book incomeadjustment under the annualization excep-tion.

(5) Effective/applicability date. Para-graph (e)(4) of this section is applicable fortaxable years beginning after September 6,2007.

§§1.6154–1, 1.6154–2, 1.6154–3,1.6154–4, and 1.6154–5 [Removed]

Par. 4. Sections 1.6154–1, 1.6154–2,1.6154–3, 1.6154–4, and 1.6154–5 are re-moved.

Par. 5. Section 1.6425–2(a) is revisedand paragraph (c) is added to read as fol-lows:

§1.6425–2 Computation of adjustment ofoverpayment of estimated tax.

(a) Income tax liability defined. Forpurposes of §1.6425–1, this section,§§1.6425–3 and 1.6655–7, relating toexcessive adjustment, the term income taxliability means the excess of—

(1) The sum of—(i) The tax imposed by section 11 or

1201(a), or subchapter L of chapter 1 ofthe Internal Revenue Code, whichever isapplicable; plus

(ii) The tax imposed by section 55; over(2) The credits against tax provided by

part IV of subchapter A of chapter 1 of theInternal Revenue Code.

September 17, 2007 635 2007–38 I.R.B.

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

graph (a) of this section is applicableto applications for adjustments of over-payments of estimated income tax thatare filed in taxable years beginning afterSeptember 6, 2007.

Par. 6. Section 1.6425–3 is amended byrevising paragraph (f) to read as follows:

§1.6425–3 Allowance of adjustments.

* * * * *(f) Effect of adjustment. (1) For pur-

poses of all sections of the Internal Rev-enue Code except section 6655, relatingto additions to tax for failure to pay esti-mated income tax, any adjustment undersection 6425 is to be treated as a reduc-tion of prior estimated tax payments as ofthe date the credit is allowed or the re-fund is paid. For the purpose of sections6655(a) through (g), (i), and (j), credit orrefund of an adjustment is to be treated as ifnot made in determining whether there hasbeen any underpayment of estimated in-come tax and, if there is an underpayment,the period during which the underpaymentexisted. However, an excessive adjust-ment under section 6425 is taken into ac-count in applying the addition to tax undersection 6655(h).

(2) For the effect of an excessive adjust-ment under section 6425, see §1.6655–7.

(3) Effective/applicability date: Thisparagraph (f) is applicable to applicationsfor adjustments of overpayments of esti-mated income tax that are filed in taxableyears beginning after September 6, 2007.

Par. 7. Section 1.6655–0 is added toread as follows:

§1.6655–0 Table of contents.

This section lists the table of contentsfor §§1.6655–1 through 1.6655–7.

§1.6655–1 Addition to the tax in the caseof a corporation.

(a) In general.(b) Amount of underpayment.(c) Period of the underpayment.(d) Amount of required installment.(1) In general.(2) Exception.(e) Large corporation required to pay

100 percent of current year tax.(1) In general.

(2) May use last year’s tax for first in-stallment.

(f) Required installment due dates.(1) Number of required installments.(2) Time for payment of installments.(i) Calendar year.(ii) Fiscal year.(iii) Short taxable year.(iv) Partial month.(g) Definitions.(h) Special rules for consolidated re-

turns.(i) Overpayments applied to subsequent

taxable year’s estimated tax.(1) In general.(2) Subsequent examinations.(j) Examples.(k) Effective/applicability date.

§1.6655–2 Annualized income installmentmethod.

(a) In general.(b) Determination of annualized in-

come installment—in general.(c) Special rules.(1) Applicable percentage.(2) Partial month.(3) Annualization period not a short tax-

able year.(d) Election of different annualization

periods.(e) 52–53 week taxable year.(f) Determination of taxable income for

an annualization period.(1) In general.(i) Items of income.(ii) Items of deduction.(iii) Losses.(2) Certain deductions required to be

allocated in a reasonably accurate manner.(i) In general.(ii) Application of the reasonably accu-

rate manner requirement to certain char-itable contributions, recurring items, and12-month rule items.

(iii) Reasonably accurate manner de-fined.

(iv) Special rule for certain real prop-erty tax liabilities.

(v) Examples.(3) Special rules.(i) Advance payments.(A) Advance payments under

§1.451–5(b)(1)(ii).(B) Advance payments under Rev.

Proc. 2004–34.(ii) Extraordinary items.

(A) In general.(B) De minimis extraordinary items.(C) Special rules for net operating

loss deductions and section 481(a) adjust-ments.

(iii) Credits.(A) Current year credits.(B) Credit carryovers.(iv) Depreciation and amortization.(A) Estimated annual depreciation and

amortization.(B) Safe harbors.(1) Proportionate depreciation al-

lowance.(2) 90 percent of preceding year’s de-

preciation.(3) Safe harbor operational rules.(C) Short taxable years.(v) Distributive share of items.(A) Member of partnership.(B) Treatment of subpart F income and

income under section 936(h).(1) General rule.(2) Prior year safe harbor.(i) General rule.(ii) Special rule for noncontrolling

shareholder.(C) Dividends from closely held real

estate investment trust.(1) General rule.(2) Closely held real estate investment

trust.(D) Other passthrough entities.(vi) Alternative minimum taxable in-

come exemption amount.(vii) Examples.(g) Items that substantially affect tax-

able income but cannot be determined ac-curately by the installment due date.

(1) In general.(2) Example.(h) Effective/applicability date.

§1.6655–3 Adjusted seasonal installmentmethod.

(a) In general.(b) Limitation on application of section.(c) Determination of amount.(d) Special rules.(1) Base period percentage.(2) Filing month.(3) Application of the rules related

to the annualized income installmentmethod to the adjusted seasonal install-ment method.

(4) Alternative minimum tax.(e) Example.

2007–38 I.R.B. 636 September 17, 2007

(f) Effective/applicability date.

§1.6655–4 Large corporations.

(a) Large corporation defined.(b) Testing period.(c) Computation of taxable income dur-

ing testing period.(1) Short taxable year.(2) Computation of taxable income in

taxable year when there occurs a transac-tion to which section 381 applies.

(d) Members of controlled group.(1) In general.(2) Aggregation.(3) Allocation rule.(4) Controlled group members.(e) Effect on a corporation’s taxable in-

come of items that may be carried back orcarried over from any other taxable year.

(f) Consolidated returns. [Reserved](g) Example.(h) Effective/applicability date.

§1.6655–5 Short taxable year.

(a) In general.(b) Exception to payment of estimated

tax.(c) Installment due dates.(1) In general.(i) Taxable year of at least four months

but less than twelve months.(ii) Exceptions.(2) Early termination of taxable year.(i) In general.(ii) Exception.(d) Amount due for required install-

ment.(1) In general.(2) Tax shown on the return for the pre-

ceding taxable year.(3) Applicable percentage.(4) Applicable percentage for install-

ment period in which taxpayer does notreasonably expect that the taxable year willbe an early termination year.

(e) Examples.(f) 52 or 53 week taxable year.(g) Use of annualized income or sea-

sonal installment method.(1) In general.(2) Computation of annualized income

installment.(3) Annualization period for final re-

quired installment.(4) Examples.(h) Effective/applicability date.

§1.6655–6 Methods of accounting.

(a) In general.(b) Accounting method changes.(c) Examples.(d) Effective/applicability date.

§1.6655–7 Addition to tax on account ofexcessive adjustment under section 6425.

Par. 8. Sections 1.6655–1 and1.6655–2 are revised to read as follows:

§1.6655–1 Addition to the tax in the caseof a corporation.

(a) In general. Section 6655 imposes anaddition to the tax under chapter 1 of theInternal Revenue Code in the case of anyunderpayment of estimated tax by a corpo-ration. An addition to tax due to the under-payment of estimated taxes is determinedby applying the underpayment rate estab-lished under section 6621 to the amountof the underpayment, for the period of theunderpayment. This addition to the taxis in addition to any applicable criminalpenalties and is imposed whether or notthere was reasonable cause for the under-payment.

(b) Amount of underpayment. Theamount of the underpayment for any re-quired installment is the excess of—

(1) The required installment; over(2) The amount, if any, of the install-

ment paid on or before the last date pre-scribed for such payment.

(c) Period of the underpayment. Theperiod of the underpayment of any re-quired installment runs from the date theinstallment was required to be paid to the15th day of the 3rd month following theclose of the taxable year, or to the datesuch underpayment is paid, whichever isearlier. For purposes of determining theperiod of the underpayment a paymentof estimated tax will be credited againstunpaid required installments in the orderin which such installments are required tobe paid.

(d) Amount of required install-ment—(1) In general. Except as otherwiseprovided in this section and §§1.6655–2through 1.6655–7, the amount of any re-quired installment is 25 percent of thelesser of—

(i) 100 percent of the tax shown on thereturn for the taxable year (or, if no return

is filed, 100 percent of the tax for suchyear); or

(ii) 100 percent of the tax shown on thereturn for the preceding taxable year.

(2) Exception. This paragraph (d)(1)(ii)does not apply if the preceding taxableyear was not a taxable year of 12 months orthe corporation did not file a return for thepreceding taxable year showing a liabilityfor tax.

(e) Large corporation required to pay100 percent of current year tax—(1) Ingeneral. Except as provided in para-graph (e)(2) of this section, paragraph(d)(1)(ii) of this section does not apply inthe case of a large corporation (as definedin §1.6655–4).

(2) May use last year’s tax for first in-stallment. Paragraph (e)(1) of this sectiondoes not apply for purposes of determiningthe amount of the 1st required installmentfor any taxable year. Any reduction in such1st installment by reason of the precedingsentence is recaptured by increasing theamount of the next required installmentdetermined under paragraph (d)(1)(i) ofthis section by the amount of such reduc-tion and, if the next required installment isreduced by use of the annualized incomeinstallment method under §1.6655–2 orthe adjusted seasonal installment methodunder §1.6655–3, by increasing subse-quent required installments determinedunder paragraph (d)(1)(i) of this sectionto the extent that the reduction has notpreviously been recaptured.

(f) Required installment due dates—(1)Number of required installments. Unlessotherwise provided, corporations mustmake 4 required installments for each tax-able year.

(2) Time for payment of install-ments—(i) Calendar year. Unless oth-erwise provided, in the case of a calendaryear taxpayer, the due dates of the requiredinstallments are as follows:

1st April 15

2nd June 15

3rd September 15

4th December 15

(ii) Fiscal year. In the case of a taxpayerother than a calendar year taxpayer, the duedates of the required installments are asfollows:

September 17, 2007 637 2007–38 I.R.B.

1st 15th day of 4th month of the taxable year

2nd 15th day of 6th month of the taxable year

3rd 15th day of 9th month of the taxable year

4th 15th day of 12th month of the taxable year

(iii) Short taxable year. See §1.6655–5for rules regarding required installmentsfor corporations with a short taxable year.

(iv) Partial month. Except as otherwiseprovided, for purposes of determining thedue date of any required installment, a par-tial month is treated as a full month.

(g) Definitions. (1) The term tax as usedin this section and §§1.6655–2 through1.6655–7 means the excess of—

(i) The sum of—(A) The tax imposed by section 11, sec-

tion 1201(a), or subchapter L of chapter 1of the Internal Revenue Code, whicheveris applicable;

(B) The tax imposed by section 55; plus(C) The tax imposed by section 887;

over(ii) The credits against tax provided by

part IV of subchapter A of chapter 1 of theInternal Revenue Code.

(2)(i) In the case of a foreign corpora-tion subject to taxation under section 11,section 1201(a), or subchapter L of chap-ter 1 of the Internal Revenue Code, the taximposed by section 881 is treated as a taximposed by section 11.

(ii) In the case of a partnership that istreated, pursuant to regulations issued un-der section 1446(f)(2), as a corporation forpurposes of this section, the tax imposedby section 1446 is treated as a tax imposedby section 11.

(iii) Unless otherwise provided in theInternal Revenue Code or Treasury regu-lations, for purposes of the definition of“tax” as used in this section, a recapture oftax, such as a recapture provided by section50(a)(1)(A), and any other similar provi-sion, is not considered to be a tax imposedby section 11.

(iv) For the purposes of paragraph (d)of this section, the return for the preceding

taxable year is the Federal income tax re-turn for such taxable year that is requiredby section 6012(a)(2). However, if anamended Federal income tax return hasbeen filed before the due date of an in-stallment, then the return for the precedingtaxable year is the Federal income tax re-turn as amended. If an amended Federalincome tax return has been filed on or af-ter the due date for an installment, then thereturn for the preceding taxable year doesnot include for such installment period theFederal income tax return as amended sub-sequent to the due date for such install-ment. Paragraph (d) of this section willapply without regard to whether the tax-payer’s Federal income tax return for thepreceding taxable year is filed in a timelymanner.

(h) Special rules for consolidated re-turns. For special rules relating to the de-termination of the amount of the underpay-ment in the case of a corporation whose in-come is included in a consolidated return,see §1.1502–5(b).

(i) Overpayments applied to subsequenttaxable year’s estimated tax—(1) In gen-eral. If a taxpayer elects under the provi-sions of sections 6402(b) and 6513(d) andthe regulations to apply an overpayment inyear one against the estimated tax liabilityfor year two, the overpayment will be ap-plied to the required installment paymentsfor year two in the order due and to the ex-tent necessary to satisfy such installments,similar to the manner in which an actualoverpayment of one installment is carriedforward to the next installment. No inter-est is accrued or paid on an overpaymentif the election to apply the overpaymentagainst estimated tax is made.

(2) Subsequent examinations. If a defi-ciency is determined in an examination of

a return for a taxable year that originallyreflected an overpayment that was appliedagainst estimated tax for the succeedingtaxable year, interest on the deficiencywill not begin to accrue on an amountapplied until that amount is used to satisfya required estimated tax payment in suchtaxable year. Regardless of whether thetaxpayer anticipated the application ofsuch overpayment from the prior taxableyear in calculating and paying its requiredestimated tax installment liabilities forthe current taxable year, the subsequentlydetermined underpayment and interestcomputation thereon will not change thetaxpayer’s original election to apply theoverpayment against the estimated taxliability of the succeeding taxable year.Any changes to the usage of the origi-nal overpayment from the prior taxableyear are hypothetical only and solely forthe purpose of computing deficiency in-terest. Overpayment interest will notbe impacted. For further guidance, seeRev. Rul. 99–40, 1999–2 C.B. 441, (see§601.601(d)(2)(ii)(b) of this chapter).

(j) Examples. The method prescribed inparagraphs (d) through (g) of this section isillustrated by the following examples:

Example 1. (i) X, a calendar year corporation,estimates its tax liability for its taxable year endingDecember 31, 2009, will be $85,000. X is not a largecorporation as defined in section 6655(g)(2) and§1.6655–4. X reported a liability of $74,900 on itsreturn for the taxable year ended December 31, 2008,with no credits against tax. X paid four installmentsof estimated tax, each in the amount of $18,725 (25percent of $74,900), on April 15, 2009, June 15,2009, September 15, 2009, and December 15, 2009,respectively. X reported a tax liability of $88,900on its return due March 15, 2010. X had a $5,000credit against tax for tax year 2009 as provided bypart IV of subchapter A of chapter 1 of the InternalRevenue Code. X did not underpay its estimated taxfor tax year 2009 for any of the four installments,determined as follows:

(A) Tax as defined in paragraph (g) of this section for 2009 ($88,900-$5,000) = $83,900

(B) Tax as defined in paragraph (g) of this section for 2008 = $74,900

(C) 100% of the lesser of this paragraph (j), Example 1 (i)(A) or (i)(B) = $74,900

2007–38 I.R.B. 638 September 17, 2007

(D) Amount of estimated tax required to be paid on or beforeeach installment date (25% of $74,900) = $18,725

(E) Deduct amount paid on or before each installment date = $18,725

(F) Amount of underpayment for each installment date = $0

(ii) [Reserved].Example 2. (i) Facts. Y, a calendar year corpora-

tion, estimates its tax liability for its taxable year end-ing December 31, 2009, will be $70,000. Y is not alarge corporation as defined in section 6655(g)(2) and§1.6655–4. Y reported a Federal income tax liabilityof $90,000 for its taxable year ending December 31,

2008. Y paid no installment of estimated tax on orbefore April 15, 2009, June 15, 2009, or September15, 2009, but made a payment of $63,000 on Decem-ber 15, 2009. On March 15, 2010, Y filed its incometax return showing a tax of $70,000. Y had no creditsagainst tax for tax year 2009. Of the $63,000 paid byY on December 15, 2009, $17,500 is applied to each

of the first three installments due on April 15, June 15,and September 15, 2009, and the remaining $10,500is applied to the fourth installment. Y has an under-payment of estimated tax for each of the first threeinstallments of $17,500 and for the fourth installmentof $7,000. The addition to tax under section 6655(a)is computed as follows:

(A) Tax as defined in paragraph (g) of this section for 2009 = $70,000

(B) Tax as defined in paragraph (g) of this section for 2008 = $90,000

(C) 100% of the lesser of this paragraph (j), Example 2 (i)(A) or (i)(B) = $70,000

(D) Amount of estimated tax required to be paid on or beforeeach installment date (25% of $70,000) = $17,500

(E) Amount paid on or before the first, second, and third installment dates = $0

(F) Amount paid on or before the fourth installment date = $63,000

(G) Amount of underpayment for each of the first, second, and third installment dates = $17,500

(H) Amount of underpayment for the fourth installment date = $ 7,000

(ii) Addition to tax. Assuming that neither the an-nualized income installment method nor the adjustedseasonal installment method described in §§1.6655–2

and 1.6655–3 would result in a lower payment for anyinstallment period, and the addition to tax is com-puted under section 6621(a)(2) at the rate of 8 per-

cent per annum for the applicable periods of under-payment, the addition to tax is determined as follows:

(A) First installment (underpayment period 4–16–09 through 12–15–09), computed as244/365 X $17,500 X 8% = $ 936

(B) Second installment (underpayment period 6–16–09 through 12–15–09), computed as183/365 X $17,500 X 8% = $ 702

(C) Third installment (underpayment period 9–16–09 through 12–15–09), computed as91/365 X $17,500 X 8% = $ 349

(D) Fourth installment (underpayment period 12–16–09 through 3–15–10), computed as90/365 X $7,000 X 8% = $ 138

(E) Total of this paragraph (j), Example 2 (ii)(A) through (D) = $2,125

(k) Effective/applicability date. Thissection applies to taxable years beginningafter September 6, 2007.

§1.6655–2 Annualized income installmentmethod.

(a) In general. In the case of any re-quired installment, if the corporation es-tablishes that the annualized income in-stallment determined under this section,or the adjusted seasonal installment deter-mined under §1.6655–3, is less than theamount determined under §1.6655–1—

(1) The amount of such required install-ment is the annualized income installment(or, if less, the adjusted seasonal install-ment); and

(2) Any reduction in a required install-ment resulting from the application of thissection will be recaptured by increasingthe amount of the next required install-ment determined under §1.6655–1 by theamount of such reduction (and, if the nextrequired installment is similarly reduced,by increasing subsequent required install-ments to the extent that the reduction hasnot previously been recaptured).

(b) Determination of annualized in-come installment—in general. In the caseof any required installment, the annualizedincome installment is the excess (if any)of—

(1) The product of the applicable per-centage and the tax (after reducing the an-nualized tax by the amount of any allow-

able credits) for the taxable year computedby annualizing the taxable income and al-ternative minimum taxable income—

(i) For the first 3 months of the taxableyear, in the case of the first required install-ment;

(ii) For the first 3 months of the taxableyear, in the case of the second requiredinstallment;

(iii) For the first 6 months of the tax-able year, in the case of the third requiredinstallment; and

(iv) For the first 9 months of the taxableyear, in the case of the fourth required in-stallment; over

(2) The aggregate amount of any priorrequired installments for the taxable year.

September 17, 2007 639 2007–38 I.R.B.

(c) Special rules—(1) Applicable per-centage. Except as otherwise provided in

§1.6655–5(d) with respect to short taxableyears—

In the case of the followingrequired installments:

The applicablepercentage is:

1st 25%

2nd 50%

3rd 75%

4th 100%

(2) Partial month. Except as otherwiseprovided, for purposes of paragraph (b) ofthis section a partial month is treated as amonth.

(3) Annualization period not a shorttaxable year. An annualization period isnot treated as a short taxable year for pur-poses of determining the taxable income ofan annualization period.

(d) Election of different annualizationperiods. (1) If the taxpayer timely filesForm 8842, “Election To Use DifferentAnnualization Periods for Corporate Es-timated Tax,” in accordance with section6655(e)(2)(C)(iii), and elects Option 1—

(i) Paragraph (b)(1)(i) of this sectionwill be applied by using the language “2months” instead of “3 months”;

(ii) Paragraph (b)(1)(ii) of this sectionwill be applied by using the language “4months” instead of “3 months”;

(iii) Paragraph (b)(1)(iii) of this sectionwill be applied by using the language “7months” instead of “6 months”; and

(iv) Paragraph (b)(1)(iv) of this sectionwill be applied by using the language “10months” instead of “9 months”.

(2) If the taxpayer timely filesForm 8842, in accordance with section6655(e)(2)(C)(iii), and elects Option 2—

(i) Paragraph (b)(1)(ii) of this sectionwill be applied by using the language “5months” instead of “3 months”;

(ii) Paragraph (b)(1)(iii) of this sectionwill be applied by using the language “8months” instead of “6 months”; and

(iii) Paragraph (b)(1)(iv) of this sectionwill be applied by using the language “11months” instead of “9 months”.

(3) The application of the annualizedincome installment method is illustratedby the following example:

Example. (i) ABC, a calendar year corporation,had a taxable year of less than twelve months for taxyear 2008 and no credits against tax for tax year 2009.ABC made an estimated tax payment of $15,000 onthe installment dates of April 15, 2009, June 15, 2009,September 15, 2009, and December 15, 2009, respec-tively. Assume that, under paragraph (d)(1) of this

section, ABC elected Option 1 by timely filing Form8842, in accordance with section 6655(e)(2)(C)(iii),and determined that its taxable income for the first 2,4, 7 and 10 months was $25,000, $64,000, $125,000,and $175,000 respectively. The income for each pe-riod is annualized as follows:

$25,000 X 12/2 = $150,000

$64,000 X 12/4 = $192,000

$125,000 X 12/7 = $214,286

$175,000 X 12/10 = $210,000

(ii)(A) To determine whether the installment pay-ment made on April 15, 2009, equals or exceeds theamount that would have been required to have beenpaid if the estimated tax were equal to 100 percentof the tax computed on the annualized income for the2-month period, the following computation is neces-sary:

(1) Annualized income for the 2 month period = $150,000

(2) Tax on this paragraph (d)(3), Example (ii)(A)(1) = $ 41,750

(3) 100% of this paragraph (d)(3), Example (ii)(A)(2) = $ 41,750

(4) 25% of this paragraph (d)(3), Example (ii)(A)(3) = $ 10,438

(B) Because the total amount of estimated tax thatwas timely paid on or before the first installment date($15,000) exceeds the amount required to be paid onor before this date if the estimated tax were 100 per-cent of the tax determined by placing on an annual-ized basis the taxable income for the first 2-month pe-riod ($10,438), the exception described in paragraphs

(a) and (b) of this section applies, and no addition totax will be imposed for the installment due on April15, 2009.

(iii)(A) To determine whether the installment pay-ments made on or before June 15, 2009, equal or ex-ceed the amount that would have been required tohave been paid if the estimated tax were equal to 100

percent of the tax computed on the annualized incomefor the 4-month period, the following computation isnecessary:


(2) Tax on this paragraph (d)(3), Example (iii)(A)(1) = $ 58,130

(3) 100% of this paragraph (d)(3), Example (iii)(A)(2) = $ 58,130

(4) 50% of this paragraph (d)(3), Example (iii)(A)(3) less$10,438 (amount due with the first installment) = $ 18,627

2007–38 I.R.B. 640 September 17, 2007

(B) Because the total amount of estimated tax ac-tually paid on or before the second installment date($19,562 ($15,000 second required installment pay-ment plus $4,562 overpayment of first required in-stallment)) exceeds the amount required to be paid onor before this date if the estimated tax were 100 per-cent of the tax determined by placing on an annual-

ized basis the taxable income for the first 4-month pe-riod ($18,627), the exception described in paragraphs(a) and (b) of this section applies, and no addition totax will be imposed for the installment due on June15, 2009.

(iv)(A) To determine whether the installment pay-ments made on or before September 15, 2009, equal

or exceed the amount that would have been requiredto have been paid if the estimated tax were equal to100 percent of the tax computed on the annualizedincome for the 7-month period, the following com-putation is necessary:


(2) Tax on this paragraph (d)(3), Example (iv)(A)(1) = $ 66,821

(3) 100% of this paragraph (d)(3), Example (iv)(A)(2) = $ 66,821

(4) 75% of this paragraph (d)(3), Example (iv)(A)(3) less$29,065 (amount due with the first and second installment) = $ 21,051

(B) Because the total amount of estimated taxactually paid on or before the third installment date($15,935 ($15,000 third required installment pay-ment plus $935 overpayment of second requiredinstallment)) does not equal or exceed the amountrequired to be paid on or before this date if the esti-mated tax were 100 percent of the tax determined by

placing on an annualized basis the taxable income forthe first 7-month period ($21,051), the exception de-scribed in paragraphs (a) and (b) of this section doesnot apply, and an addition to tax will be imposed withrespect to the underpayment of the September 15,2009, installment unless another exception applies tothis installment payment.

(v)(A) To determine whether the installment pay-ments made on or before December 15, 2009, equalor exceed the amount that would have been requiredto have been paid if the estimated tax were equal to100 percent of the tax computed on the annualizedincome for the 10-month period, the following com-putation is necessary:


(2) Tax on this paragraph (d)(3), Example (v)(A)(1) = $ 65,150

(3) 100% of this paragraph (d)(3), Example (v)(A)(2) = $ 65,150

(4) 100% of this paragraph (d)(3), Example (v)(A)(3) less$50,116 (amount due with the first, second and third installment) = $ 15,034

(B) Because the total amount of estimated taxpayments made on or before the fourth installmentdate that is available to be applied to the estimatedtax due for the fourth installment ($9,884 ($15,000fourth required installment payment less $5,116 un-derpayment for the third installment of estimated tax($21,051 third installment of estimated tax due less$15,935 payments available to be applied to the third

installment of estimated tax))) does not equal or ex-ceed the amount required to be paid on or before thisdate if the estimated tax were 100 percent of the taxdetermined by placing on an annualized basis the tax-able income for the first 10-month period ($15,034),the exception described in paragraphs (a) and (b) ofthis section does not apply, and an addition to tax willbe imposed with respect to the underpayment of the

December 15, 2009, installment unless another ex-ception applies to this installment payment.

(vi) Assuming that no other exceptions applyand the addition to tax is computed under section6621(a)(2) at the rate of 8 percent per annum for theapplicable periods of underpayment, the amount ofthe addition to tax is as follows:

(A) First installment (no underpayment) = $0

(B) Second installment (no underpayment) = $0

(C) Third installment (underpayment period 9–16–09through 12–15–09), computed as 91/365 X $5,116 X 8% = $102

(D) Fourth installment (underpayment period 12–16–09through 3–15–10), computed as 90/365 X $5,150 X 8% = $102

(E) Total of this paragraph (d)(3), Example (vi)(A) through (D) = $204

(e) 52–53 week taxable year. (1) Gen-erally, except as provided in the alternativerule in paragraph (e)(4) of this section, inthe case of a taxpayer whose taxable yearconstitutes 52 or 53 weeks in accordancewith section 441(f), the rules prescribed by§1.441–2 are applicable in determining—

(i) Whether a taxable year is a taxableyear of 12 months; and

(ii) When the 2-, 3- ,4-, 5-, 6-, 7-, 8-,9-, 10-, or 11-month period (whicheveris applicable) commences and ends for

purposes of paragraphs (b)(1), (d)(1) and(d)(2) of this section.

(2) If a taxpayer employs four 13-weekperiods or thirteen 4-week accounting pe-riods and the end of any accounting periodemployed by the taxpayer does not corre-spond to the end of the 2-, 3- ,4-, 5-, 6-, 7-,8-, 9-, 10-, or 11-month period (whicheveris applicable), then, provided the taxpayerhas at least one full 4-week or 13-week ac-counting period, as appropriate, within the

applicable period, annualized taxable in-come for the applicable period is—

(i) [(x/(y*13))*z], in the case of a tax-payer using four 13-week periods, if—

(A) x = Taxable income for the numberof full 13-week periods in the applicableperiod;

(B) y = The number of full 13-weekperiods in the applicable period; and

(C) z = The number of weeks in thetaxable year; or

September 17, 2007 641 2007–38 I.R.B.

(ii) [(x/(y*4))*z], in the case of a tax-payer using thirteen 4-week periods, if—

(A) x = Taxable income for the numberof full 4-week periods in the applicableperiod;

(B) y = The number of full 4-week pe-riods in the applicable period; and

(C) z = The number of weeks in thetaxable year.

(3) If a taxpayer employs four 13-weekperiods and the taxpayer does not have atleast one 13-week period within the appli-cable 2-, 3- ,4-, 5-, 6-, 7-, 8-, 9-, 10-, or11-month period, the taxpayer is permittedto determine annualized taxable incomefor the applicable period based upon—

(i) The taxable income for the numberof weeks in the applicable period; or

(ii) The taxable income for the full13-week periods that end before the duedate of the required installment.

(4) As an alternative to using the 52/53week taxable year rules provided in para-graphs (e)(1), (e)(2), and (e)(3) of this sec-tion, a taxpayer whose taxable year con-stitutes 52 or 53 weeks in accordance withsection 441(f) may base its annualizationperiod on the month that ends closest tothe end of its applicable 4-week period or13-week period that ends within the appli-cable annualization period. This alterna-tive may only be used if it is used for de-termining annualization periods for all re-quired installments for the taxable year.

(5) The following examples illustratethe rules of this paragraph (e):

Example 1. Corporation ABC, an accrual methodtaxpayer, uses a 52/53 week year-end ending on thelast Friday in December and uses four thirteen-weekperiods. For its year beginning December 28, 2007,ABC uses the annualized income installment methodunder section 6655(e)(2)(A)(i) to calculate all ofits required installments. For purposes of comput-ing its first and second required installments, thefirst 3 months of A’s taxable year under paragraph(b)(1)(i) of this section will end on March 28th,the thirteenth Friday of ABC’s taxable year. Forpurposes of its third required installment, the first 6months of ABC’s taxable year will end on June 27th,the twenty-sixth Friday of ABC’s taxable year. Forpurposes of its fourth required installment, the first 9months of ABC’s taxable year will end on September26th, the thirty-ninth Friday of ABC’s taxable year.

Example 2. Same facts as Example 1 except thatABC uses thirteen four-week periods and there are52 weeks during ABC’s taxable year beginning De-cember 28, 2007, and ending December 26, 2008.For purposes of computing ABC’s first and secondrequired installments, ABC’s annualized taxable in-come for the first three months will be the taxable in-come for the first three four-week periods of ABC’staxable year (December 28, 2007, through March 21,

2008) divided by 12 (number of full four-week peri-ods in the first three months (3) multiplied by 4) andmultiplied by 52 (the number of weeks in the taxableyear). For purposes of computing ABC’s third re-quired installment, ABC’s annualized taxable incomefor the first six months will be the taxable income forthe first six four-week periods of ABC’s taxable year(December 28, 2007, through June 13, 2008) dividedby 24 and multiplied by 52. For purposes of comput-ing ABC’s fourth required installment, ABC’s annu-alized taxable income for the first nine months willbe the taxable income for the first nine four-weekperiods of ABC’s taxable year (December 28, 2007,through September 5, 2008) divided by 36 and mul-tiplied by 52.

Example 3. Same facts as Example 1 except thatABC uses the alternative method under paragraph(e)(4) of this section for computing its requiredinstallments for 2008. For purposes of computingits first and second required installments, the firstthree months of ABC’s taxable year under paragraph(b)(1)(i) of this section will end on March 31, 2008,the month that ends closest to the end of ABC’s ap-plicable thirteen-week period for the first and secondrequired installments. For purposes of ABC’s thirdrequired installment, the first six months of ABC’staxable year will end on June 30, 2008, the monththat ends closest to the end of ABC’s applicable thir-teen-week period for the third required installment.For purposes of ABC’s fourth required installment,the first nine months of ABC’s taxable year will endon September 30, 2008, the month that ends closestto the end of ABC’s applicable thirteen-week periodfor the fourth required installment.

(f) Determination of taxable income foran annualization period—(1) In general.This paragraph (f) applies for purposes ofdetermining the applicability of the excep-tion described in paragraphs (a) and (b) ofthis section (relating to the annualizationof income) and the exception described in§1.6655–3 (relating to annualization of in-come for corporations with seasonal in-come). An item of income, deduction, gainor loss is to be taken into account in de-termining the taxable income and alterna-tive minimum taxable income (and appli-cable tax and alternative minimum tax) foran annualization period in the manner pro-vided in this paragraph (f). An item maynot be taken into account in determiningtaxable income for any annualization pe-riod unless the item is properly taken intoaccount by the last day of that annualiza-tion period and the item is properly takeninto account in determining the taxpayer’staxable income and alternative minimumtaxable income (and applicable tax andalternative minimum tax) for the taxableyear that includes the annualization period.

(i) Items of income. An item of incomeis taken into account in the annualizationperiod in which the item is properly in-

cludible under the method of accountingemployed by the taxpayer with respect tothe item and in accordance with the appro-priate provision of the Internal RevenueCode (for example, section 451 for accrualmethod taxpayers, section 453 for install-ment sales or section 460 for long-termcontracts).

(ii) Items of deduction. An item ofdeduction is taken into account in theannualization period in which the itemis properly deductible under the methodof accounting employed by the taxpayerwith respect to the item and in accor-dance with the appropriate provision ofthe Internal Revenue Code (for example,under the cash receipts and disburse-ments method of accounting, the deduc-tion must be paid under §1.461–1(a)(1)and be otherwise deductible in comput-ing taxable income; under an accrualmethod of accounting, the deductionmust be incurred under §1.461–1(a)(2)and be otherwise deductible in comput-ing taxable income). Section 170(a)(2)and §1.170A–11(b) (charitable contribu-tions by accrual method corporations)and §1.461–5 (recurring item exception)may not be taken into consideration by anaccrual method taxpayer in any annual-ization period in determining whether anitem of deduction has been incurred under§1.461–1(a)(2) during that annualizationperiod.

(iii) Losses. An item of loss is to betaken into account during the annualiza-tion period in which events have occurredthat permit the loss to be taken into accountunder the appropriate provision of the In-ternal Revenue Code.

(2) Certain deductions required to beallocated in a reasonably accurate man-ner—(i) In general. The following de-ductions allowed for a taxable year mustbe allocated throughout the taxable yearin a reasonably accurate manner (as de-fined in paragraph (f)(2)(iii) of this sec-tion), regardless of the annualization pe-riod in which the item is paid or incurred:

(A) Real property tax deductions.(B) Employee and independent con-

tractor bonus compensation deductions(including the employer’s share of em-ployment taxes related to such compensa-tion).

(C) Deductions under sections 404 (de-ferred compensation) and 419 (welfarebenefit funds).

2007–38 I.R.B. 642 September 17, 2007

(D) Items allowed as a deduction forthe taxable year by reason of section170(a)(2) and §1.170A–11(b) (certaincharitable contributions by accrual methodcorporations), §1.461–5 (recurring itemexception) or §1.263(a)–4(f) (12-monthrule).

(E) Items of deduction designatedby the Secretary by publication inthe Internal Revenue Bulletin (see§601.601(d)(2)(ii)(b) of this chapter).

(ii) Application of the reasonably ac-curate manner requirement to certaincharitable contributions, recurring items,and 12-month rule items. For purposes ofparagraph (f)(2)(i)(D) of this section, thetotal amount of the item deducted in thecomputation of taxable income for the tax-able year must be allocated in a reasonablyaccurate manner, notwithstanding the factthat section 170(a)(2) and §1.170A–11(b),§1.461–5, or §1.263(a)–4(f) applies toonly a portion of the total amount of theitem deducted for the taxable year. Forexample, if a portion of a taxpayer’s rebateliabilities are deducted in the computationof taxable income under the recurring itemexception, all rebate liabilities deductedin the computation of taxable income forthe taxable year must be allocated in areasonably accurate manner.

(iii) Reasonably accurate manner de-fined. (A) An item is allocated through-out the taxable year in a reasonably accu-rate manner if the item is allocated ratablythroughout the taxable year or if the allo-cation provides a reasonably accurate esti-mate of taxable income for the taxable yearbased upon the facts known as of the endof the annualization period. In determin-ing that an allocation of an item providesa reasonably accurate estimate of taxableincome for the taxable year, relevant con-siderations include—

(1) The extent to which the allocationis consistent with the taxpayer’s account-ing for the item on its non-tax books andrecords;

(2) The extent to which the allocableportion of the item becomes fixed and de-terminable (under §1.461–1(a)(2)) duringthe applicable annualization period; and

(3) The extent to which the allocation,if compared to the ratable allocation of theitem, results in a better matching of theitem of deduction to revenue, earnings, theuse of property or the provision of servicesoccurring during the annualization period.

(B) None of the relevant considerationsabove override the general requirementthat the allocation must be done in a rea-sonably accurate manner based upon thefacts known as of the end of the annu-alization period. For example, the factthat a liability for an annual expense be-comes fixed and determinable during anannualization period will not establishthat allocating all of the expense to thatannualization period has been done in areasonably accurate manner if the factsknown as of the end of the annualizationperiod indicate otherwise.

(iv) Special rule for certain real prop-erty tax liabilities. Notwithstanding para-graph (f)(2)(iii) of this section, real prop-erty tax liabilities for which an election un-der section 461(c) is in effect must be allo-cated ratably throughout the taxable yearfor purposes of this section.

(v) Examples. Unless otherwise stated,the following examples assume that thetaxpayer uses the 3–3-6–9 annualizationperiod:

Example 1. (i) Corporation ABC, a calendar yeartaxpayer, uses an accrual method of accounting andthe annualized income installment method under sec-tion 6655(e)(2)(A)(i) to calculate all of its requiredinstallment payments for its 2008 taxable year. ABChas adopted a plan under which ABC pays an an-nual bonus to its employees. As of March 31, 2008,ABC estimates that it will pay a year-end bonus of$500,000 to its employees if earnings remain constantthroughout the tax year. ABC does not pay any of theestimated bonus liability as of March 31, 2008. OnOctober 31, 2008, ABC declares a $600,000 bonusto its employees which is paid out on November 15,2008, and properly deducted in ABC’s December 31,2008, tax year. No other bonus liabilities are incurredby ABC during the tax year.

(ii) Under the general rule provided in paragraph(f)(2)(i) of this section, ABC is required to allocateits employee bonus liability in a reasonably accuratemanner for annualization purposes. Under paragraph(f)(2)(iii) of this section, ABC’s employee bonus li-ability will be deemed to be allocated in a reason-ably accurate manner if the item is allocated ratablythroughout the taxable year. Therefore, ABC is per-mitted to recognize a $150,000 bonus deduction (onequarter of the $600,000 bonus liability properly rec-ognized by ABC in the tax year ending December 31,2008) in the first annualization period ending March31, 2008.

Example 2. (i) Corporation ABC, a calendar yeartaxpayer, uses an accrual method of accounting andthe annualized income installment method under sec-tion 6655(e)(2)(A)(i) to calculate all of its requiredinstallment payments for its 2008 taxable year. ABChas adopted a plan under which ABC pays an annualbonus to its employees. ABC’s employee bonusplan generally calls for an annual bonus equal to2% of earnings. A bonus reserve for this amountis reported each quarter in ABC’s non-tax books

and records. ABC’s quarterly revenues throughoutthe year are $10,000,000; $6,000,000; $7,000,000;and $7,000,000 respectively. As of March 31, 2008,ABC estimates that it will pay a year-end bonus of$800,000 ($10,000,000 x 4 x 2%) to its employees ifearnings remain constant throughout the year. ABCdoes not pay any of the estimated bonus payment asof March 31, 2008. On December 31, 2008, ABCdeclares a $600,000 bonus to its employees which ispaid out on January 15, 2009, and properly deductedin ABC’s December 31, 2008, tax year.

(ii) Under the general rule provided in para-graph (f)(2)(i) of this section, ABC must allocate itsemployee bonus liability in a reasonably accuratemanner for annualization purposes. Under paragraph(f)(2)(iii) of this section, ABC’s employee bonusliability will be deemed to be allocated in a reason-ably accurate manner if the allocation provides areasonable estimate of taxable income based uponthe facts known as of the end of the annualizationperiod. Based upon its earnings activities and otherinformation available as of March 31, 2008, ABC es-timated that its total deduction for employee bonusesfor the taxable year ending December 31, 2008,would be $800,000 ($10,000,000 first quarter earn-ings x 4 x 2%). Allocating $200,000 ($10,000,000x 2%) of ABC’s annual bonus liability of $600,000to ABC’s first quarter based upon earnings duringthe quarter represents a better matching of ABC’sbonus expense to earnings in the quarter as comparedto allocating $150,000 to ABC’s first quarter undera ratable accrual method and is consistent with theallocation provided in ABC’s non-tax books andrecords. Accordingly, allocating ABC’s employeebonus deductions based upon ABC’s earnings willbe considered allocated in a reasonably accuratemanner.

Example 3. (i) Corporation ABC, a calendaryear taxpayer, uses an accrual method of account-ing and the annualized income installment methodunder section 6655(e)(2)(A)(i) to calculate all of itsrequired installment payments for its 2008 taxableyear. ABC has adopted a plan under which ABCpays a bonus to its employees each quarter basedupon earnings for that quarter. On March 31, 2008,ABC pays out $2,000,000 to its employees as aquarterly bonus based upon the earnings of ABC forthe period January 1, 2008, through March 31, 2008.The $2,000,000 bonus is recognized as an expenseon ABC’s audited financial statements in the quarterending March 31, 2008. As of March 31, 2008, ABCanticipates that its earnings will continue throughoutthe year resulting in future quarterly bonus paymentsin 2008 similar to the $2,000,000 first quarter pay-ment.

(ii) Under the general rule provided in paragraph(f)(2)(i) of this section, ABC is required to allocateits employee bonus liability in a reasonably accuratemanner for annualization purposes. Under paragraph(f)(2)(iii) of this section , ABC’s employee bonus li-ability will be deemed to be allocated in a reason-ably accurate manner if the item is allocated ratablythroughout the taxable year. Therefore, ABC mayrecognize a $500,000 bonus deduction (one quarterof the $2,000,000 bonus liability properly recognizedby ABC in the tax year ending December 31, 2008) inthe first annualization period ending March 31, 2008(as well as one quarter of any additional bonus liabil-

September 17, 2007 643 2007–38 I.R.B.

ity properly recognized by ABC in the tax year endingDecember 31, 2008).

(iii) In addition, paragraph (f)(2)(iii) of this sec-tion provides that an allocation will be consideredreasonable if the allocation provides an accurateestimate of taxable income for the taxable year basedupon the facts known as of the end of the annual-ization period. Based upon its earnings activitiesand other information available as of March 31,2008, ABC estimates that its total deduction foremployee bonuses for the taxable year ending De-cember 31, 2008, would be $8,000,000. In addition,the $2,000,000 bonus liability became fixed anddeterminable during the first quarter. Allocating$2,000,000 to ABC’s first quarter earnings is alsoconsistent with ABC’s non-tax books and recordsand represents a better matching of ABC’s bonusexpense to earnings in the quarter as compared toa ratable accrual. Accordingly, allocating ABC’sbonus liability based upon earnings will be consid-ered a reasonably accurate manner for estimated taxpurposes.

Example 4. (i) Corporation ABC, a calendaryear taxpayer, uses an accrual method of accountingwith the recurring item exception and the annu-alized income installment method under section6655(e)(2)(A)(i) to calculate all of its required in-stallment payments for its 2009 taxable year. ABCregularly incurs rebate obligations related to the saleof its products. Rebate coupons that are received andvalidated by ABC are generally paid in the followingmonth. During the tax year ending December 31,2009, ABC received, validated and paid $400,000in rebates. In addition, as of the end of December31, 2009, ABC had received and validated $100,000in rebate claims that were paid in January of 2010and deducted in ABC’s December 31, 2009, taxyear under the recurring item exception. Therefore,ABC properly recognized a $500,000 rebate liabilitydeduction on ABC’s December 31, 2009, tax return.

(ii) Under the rule provided in paragraph (f)(2)(ii)of this section, an item must be allocated in a rea-sonably accurate manner if any portion of the itemis deducted under the recurring item exception.Therefore, ABC will be required to allocate its entire$500,000 rebate liability deduction in a reasonablyaccurate manner as defined in paragraph (f)(2)(iii) ofthis section.

(3) Special rules—(i) Advance pay-ments—(A) Advance payments under§1.451–5(b)(1)(ii). An advance paymentfor which the taxpayer uses the method ofaccounting provided in §1.451–5(b)(1)(ii)is includible in computing taxable incomefor an annualization period in accordancewith that method of accounting exceptthat, if §1.451–5(c) applies, any amountnot included in computing taxable incomeby the end of the second taxable yearfollowing the year in which substantialadvance payments are received, and notpreviously included in accordance with thetaxpayer’s accrual method of accounting,is includible in computing taxable incomeon the last day of such second taxable year.

(B) Advance payments under Rev.Proc. 2004–34. An advance paymentfor which the taxpayer uses the DeferralMethod provided in section 5.02 of Rev.Proc. 2004–34, 2004–1 C.B. 991, (see§601.601(d)(2)(ii)(b) of this chapter) is in-cludible in computing taxable income foran annualization period in accordance withthat method of accounting, except that anyamount not included in computing taxableincome by the end of the taxable yearsucceeding the taxable year of receipt isincludible in computing taxable incomeon the last day of such succeeding taxableyear.

(ii) Extraordinary items—(A) In gen-eral. In general, extraordinary items mustbe taken into account after annualizingthe taxable income for the annualizationperiod. For purposes of the precedingsentence an extraordinary item is any itemidentified in §1.1502–76(b)(2)(ii)(C)(1),(2), (3), (4), (7), and (8), a net operatingloss carryover, a section 481(a) adjust-ment, net gain or loss from the dispositionof 25 percent or more of the fair mar-ket value of a taxpayer’s business assetsduring a taxable year, and any other itemdesignated by the Secretary by publica-tion in the Internal Revenue Bulletin (see§601.601(d)(2)(ii)(b) of this chapter).

(B) De minimis extraordinary items. Ataxpayer may treat any de minimis extraor-dinary item, other than a net operating losscarryover or section 481(a) adjustment, asan item under the general rule of paragraph(f)(1) of this section rather than an extra-ordinary item as provided for in paragraph(f)(3)(ii) of this section. A de minimis ex-traordinary item is any item identified inparagraph (f)(3)(ii)(A) of this section re-sulting from a transaction in which the to-tal extraordinary items resulting from suchtransaction is less than $1,000,000.

(C) Special rule for net operatingloss deductions and section 481(a) ad-justments. For purposes of paragraph(f)(3)(ii) of this section, a taxpayer musttreat a net operating loss deduction andsection 481(a) adjustment as extraordi-nary items arising on the first day of thetax year in which the item is taken intoaccount in determining taxable income.Notwithstanding the preceding sentence,a taxpayer may choose to treat the portionof a section 481(a) adjustment recognizedduring the tax year of the accountingmethod change as an extraordinary item

arising on the date the Form 3115, “Appli-cation for Change in Accounting Method,”requesting the change was filed with thenational office of the Internal RevenueService.

(iii) Credits—(A) Current year credits.With respect to a current year credit, theitems upon which the credit is computedare annualized, the amount of the credit iscomputed based on the annualized items,and the amount of the credit is deductedfrom the annualized tax. For example, foran annualization period consisting of threemonths in a full 12-month taxable year,the items upon which the credit is basedthat are taken into account for the threemonth period are multiplied by four, thecredit is determined based on the annual-ized amount of the items, and the credit re-duces the annualized tax.

(B) Credit carryovers. Any credit car-ryover to the current taxable year is takeninto account in computing an annualizedincome installment only after annualizingthe taxable income for the annualizationperiod and computing the applicable tax,and before applying the applicable per-centage.

(iv) Depreciation and amortiza-tion—(A) Estimated annual depreciationand amortization. In general, in determin-ing taxable income for any annualizationperiod, a proportionate amount of the tax-payer’s estimated annual depreciation andamortization (depreciation) expense maybe taken into account. For purposes ofthe preceding sentence, estimated annualdepreciation expense is the estimated de-preciation expense to be properly takeninto account in determining the taxpayer’staxable income for the taxable year. Indetermining the estimated annual depre-ciation expense, a taxpayer may take intoaccount purchases, sales or other disposi-tions, changes in use, additional first-yeardepreciation and expense deductions andsection 179 or any similar provision, andother events that, based on all the relevantinformation available as of the last day ofthe annualization period (such as capitalspending budgets, financial statement dataand projections, or similar reports thatprovide evidence of the taxpayer’s capi-tal spending plans for the current taxableyear), are reasonably expected to occur orapply during the taxable year.

(B) Safe harbors—(1) Proportionatedepreciation allowance. In determin-

2007–38 I.R.B. 644 September 17, 2007

ing taxable income for any annualizationperiod, in lieu of the rule provided inparagraph (f)(3)(iv)(A) of this section ataxpayer may take into account a propor-tionate amount of the depreciation andamortization (depreciation) expense, in-cluding special depreciation and expensedeductions such as those provided for insection 168(k) and section 179 or any sim-ilar provision, allowed for the taxable yearfrom—

(i) Assets that were in service on the lastday of the prior taxable year, are in serviceon the first day of the current taxable year,and that have not been disposed of duringthe annualization period;

(ii) Assets placed in service during theannualization period and have not beendisposed of during that period; and

(iii) Assets that were in service on thelast day of the prior taxable year and thatare disposed of during the annualizationperiod.

(2) 90 percent of preceding year’s de-preciation. In determining taxable incomefor any annualization period, in lieu ofthe general rule provided in paragraph(f)(3)(iv)(A) of this section, a proportion-ate amount of 90 percent of the amountof depreciation and amortization (depre-ciation) expense taken on the taxpayer’sFederal income tax return for the preced-ing taxable year may be taken into account.If the taxpayer’s preceding taxable year isless than 12 months (a short taxable year),the amount of depreciation expense takeninto account is annualized by multiplyingthe depreciation and amortization for theshort taxable year by 12, and dividing theresult by the number of months in the shorttaxable year.

(3) Safe harbor operational rules. If ataxpayer selects one of the two safe har-bors provided in paragraph (f)(3)(iv)(B)(1)or paragraph (f)(3)(iv)(B)(2) of this sec-tion, the taxpayer must use that safe har-bor for all depreciation expenses within theannualization period for the annualized in-come installment. However, a taxpayermay use either the method provided for inparagraph (f)(3)(iv)(A) of this section ora method provided for in this paragraph(f)(3)(iv)(B) of this section for each annu-alized income installment during the tax-able year. For example, a taxpayer mayuse the safe harbor provided in paragraph(f)(3)(iv)(B)(1) of this section for its firstannualized income installment and may

use the general rule provided in paragraph(f)(3)(iv)(A) of this section for its secondannualized income installment.

(C) Short taxable years. If the taxableyear is, or will be, a short taxable year(based on all relevant information avail-able as of the last day of the annualizationperiod), annual depreciation expense iscomputed using the rules applicable forcomputing depreciation during a shorttaxable year for purposes of determiningthe annual depreciation expense to be al-located to an annualization period. Forthis purpose, the rules applicable for com-puting depreciation during a short taxableyear are applied on the basis of the datethe taxable year is expected to end basedon all relevant information available as ofthe last day of the annualization period.See Rev. Proc. 89–15, 1989–1 C.B. 816,for computing depreciation expense undersection 168 (see §601.601(d)(2)(ii)(b) ofthis chapter). An annualization periodis not treated as a short taxable year forpurposes of determining the depreciationexpense for an annualization period. Seeparagraph (c)(3) of this section.

(v) Distributive share of items—(A)Member of partnership. In determining apartner’s distributive share of partnershipitems that must be taken into account dur-ing an annualization period, the rules setforth in §1.6654–2(d)(2) are applicable.

(B) Treatment of subpart F income andincome under section 936(h)—(1) Generalrule. Any amounts required to be includedin gross income under section 936(h) orsection 951(a), and credits properly allo-cable thereto, are taken into account incomputing any annualized income install-ment in a manner similar to the manner un-der which partnership inclusions, and cred-its properly allocable thereto, are takeninto account in accordance with paragraph(f)(3)(v)(A) of this section.

(2) Prior year safe harbor—(i) Generalrule. If a taxpayer elects to have the safeharbor in this paragraph (f)(3)(v)(B)(2) ap-ply for any taxable year, then paragraph(f)(3)(v)(B)(1) of this section does not ap-ply; and, for purposes of computing anyannualized income installment for the tax-able year, the taxpayer is treated as havingreceived ratably during the taxable yearitems of income and credit described inparagraph (f)(3)(v)(B)(1) of this sectionin an amount equal to 115 percent of theamount of such items shown on the return

of the taxpayer for the preceding taxableyear (the second preceding taxable year inthe case of the first and second required in-stallments for such taxable year).

(ii) Special rule for noncontrollingshareholder. If a taxpayer making theelection under paragraph (f)(3)(v)(B)(2)(i)of this section is a noncontrolling share-holder of a corporation, paragraph(f)(3)(v)(B)(2)(i) of this section is ap-plied with respect to items of such corpo-ration by substituting “100 percent” for“115 percent”. For purposes of paragraph(f)(3)(v)(B)(2)(ii) of this section, the termnoncontrolling shareholder means, withrespect to any corporation, a shareholderthat, as of the beginning of the taxableyear for which the installment is beingmade, does not own within the meaning ofsection 958(a), and is not treated as own-ing within the meaning of section 958(b),more than 50 percent by vote or value ofthe stock in the corporation.

(C) Dividends from closely held realestate investment trust—(1) General rule.Any dividend received from a closely heldreal estate investment trust by any personthat owns, after the application of section856(d)(5), 10 percent or more by vote orvalue of the stock or beneficial interests inthe trust is taken into account in computingannualized income installments in a man-ner similar to the manner under which part-nership income inclusions are taken intoaccount.

(2) Closely held real estate invest-ment trust. For purposes of paragraph(f)(3)(v)(C)(1) of this section, the termclosely held real estate investment trustmeans a real estate investment trust withrespect to which 5 or fewer persons own,after the application of section 856(d)(5),50 percent or more by vote or value of thestock or beneficial interests in the trust.

(D) Other passthrough entities. A tax-payer’s distributive share of items froma passthrough entity, other than those de-scribed in paragraphs (f)(3)(v)(A) and(f)(3)(v)(C) of this section, is taken intoaccount in computing any annualized in-come installment in a manner similar tothe manner under which partnership itemsare taken into account under paragraph(f)(3)(v)(A) of this section.

(vi) Alternative minimum taxable in-come exemption amount. The alterna-tive minimum taxable income exemptionamount provided by section 55(d)(2) is

September 17, 2007 645 2007–38 I.R.B.

applied after the alternative minimum tax-able income for the annualization periodis annualized.

(vii) Examples. The provisions of thisparagraph (f) are illustrated by the follow-ing examples. Unless otherwise stated, thefollowing examples assume that the tax-payer uses the 3–3-6–9 annualization pe-riod.

Example 1. Expense paid or incurred in theinstallment period. Corporation ABC, a calendaryear taxpayer, uses an accrual method of account-ing and the annualized income installment methodunder section 6655(e)(2)(A)(i) to calculate all of itsrequired installment payments for its 2008 taxableyear. ABC has licensed technology from Corpora-tion XYZ. Pursuant to the license agreement, ABCpays a license fee to XYZ equal to $.01 for everydollar of gross receipts earned by ABC. For 2008,ABC projects gross receipts of $200,000,000, ofwhich $100,000,000 is earned by March 31, 2008.Pursuant to paragraph (f)(1) of this section, a licensefee expense of $1,000,000 ($100,000,000 X $.01)is incurred by March 31, 2008, and may be takeninto account for purposes of determining the taxableincome to be annualized in computing ABC’s firstannualized income installment.

Example 2. Expense not paid or incurred in theinstallment period. Same facts as Example 1 exceptthat ABC does not earn any gross receipts by March31, 2008. In accordance with paragraph (f)(1) of thissection, because the license fee expense was not in-curred under §1.461–1(a)(2) by the last day of theannualization period, no license fee expense is takeninto account for purposes of determining the taxableincome to be annualized in computing ABC’s first an-nualized income installment, which is based on theincome and deductions from the first three months ofthe taxable year.

Example 3. Bad debt expense. Corporation ABC,a calendar year taxpayer, uses an accrual method ofaccounting and the annualized income installmentmethod under section 6655(e)(2)(A)(i) to calculateall of its required installment payments for its 2008taxable year. As of December 31, 2007, ABC hada $100,000 account receivable due from XYZ re-lated to the sale of goods from ABC to XYZ during2007. On March 30, 2008, ABC determined that itsreceivable from XYZ was worthless under section166 and the regulations. No other receivables weredetermined to be worthless between January 1, 2008,and March 31, 2008. In accordance with paragraph(f)(1) of this section, a $100,000 bad debt write-offis taken into account for purposes of determiningthe taxable income to be annualized in computingABC’s first annualized income installment.

Example 4. Bad debt expense. Same facts as Ex-ample 3 except that ABC determines that the receiv-able from XYZ was worthless under section 166 andthe regulations on April 10, 2008. As of March 31,2008, ABC had not determined that any receivableswere worthless under section 166 and the regulations.In accordance with paragraph (f)(1) of this section,the $100,000 bad debt expense attributable to the re-ceivable from XYZ is not taken into account for pur-poses of determining the taxable income to be annu-alized in computing ABC’s first annualized income

installment, which is based on the income and deduc-tions from the first three months of the taxable year,because the receivable from XYZ became worthlessafter the last day of the annualization period.

Example 5. Employer deductions under section404 and 419. (i) Corporation ABC, a calendar yeartaxpayer, uses an accrual method of accounting anduses the annualized income installment method undersection 6655(e)(2)(A)(i) to calculate all of its requiredinstallment payments for its 2008 taxable year. OnMarch 1, 2008, the board of directors of ABC makesa binding, irrevocable commitment to fund a mini-mum contribution of $10,000,000 to ABC’s qualifiedretirement plan by March 14, 2009. ABC remits a$1,000,000 payment to the retirement plan on March1, 2008, and a $9,000,000 payment on March 3, 2009.ABC does not incur any other related retirement plandeductions during its 2008 taxable year.

(ii) Under the rule provided in paragraph (f)(2)(i)of this section, ABC’s employer deduction for pay-ment made to the qualified plan must be allocatedthroughout the tax year for estimated tax purposes ina reasonably accurate manner. Therefore, ABC willnot be permitted to allocate the $10,000,000 deduc-tion to its first installment period. Under paragraph(f)(2)(iii) of this section, ABC’s qualified plan de-duction will be deemed to be allocated in a reason-ably accurate manner if the item is allocated ratablythroughout the taxable year. Therefore, ABC will bepermitted to allocate $2,500,000 of its qualified plandeduction in its first installment period.

Example 6. Prepaid expense. (i) CorporationABC, a calendar year taxpayer, uses an accrualmethod of accounting and does not capitalize qual-ifying costs under the exception provided for in§1.263(a)–4(f). ABC uses the annualized incomeinstallment method under section 6655(e)(2)(A)(i)to calculate all of its required installment paymentsfor its 2008 taxable year. On July 1, 2008, ABCpurchases an annual business license from State Xwhich permits ABC to operate its business in State Xfrom July 1, 2008, through June 30, 2009. An annualpayment of $12,000 is due on July 1, 2008, and ABCpays the fee on this date. ABC has not elected outof the 12-month rule provided by §1.263(a)–4(f)and therefore ABC is not required to capitalize anyamount paid for the license and will recognize a$12,000 deduction for the tax year ending December31, 2008, with respect to this license.

(ii) Under the rule provided in paragraph (f)(2)(ii)of this section, ABC’s $12,000 business license ex-pense must be allocated in a reasonably accurate man-ner because ABC utilizes the 12-month rule excep-tion provided for in the §1.263(a)–4(f). Under para-graph (f)(2)(iii) of this section, ABC’s deduction willbe deemed to be allocated in a reasonably accuratemanner if the item is allocated ratably throughout thetaxable year. Therefore, ABC will be permitted to al-locate $3,000 of its business license deduction in itsfirst installment period.

Example 7. Real property tax liability. (i) Corpo-ration ABC, a calendar year taxpayer, uses an accrualmethod of accounting and the annualized income in-stallment method under section 6655(e)(2)(A)(i) tocalculate all of its required installment payments forits 2008 taxable year. ABC owns real property inState Y and uses the real property in its trade or busi-ness. ABC incurs a $400,000 deduction for State Yreal estate taxes during ABC’s December 31, 2008,

taxable year. ABC has elected to recognize its realproperty taxes ratably under section 461(c).

(ii) Under the rule provided in paragraph (f)(2)(i)of this section, ABC’s $400,000 real property tax li-abilities must be allocated in a reasonably accuratemanner. However, paragraph (f)(2)(iv) of this sec-tion provides that with respect to real property taxesfor which an election has been made under section461(c), ratable accrual is the only method which willbe considered a reasonably accurate method. There-fore, ABC will be required to allocate its $400,000real property taxes ratably for estimated tax purposesand thus $100,000 will be allocated to the ABC’s firstannualized income installment.

Example 8. NOL (Net Operating Loss) deduc-tion. Corporation ABC, a calendar year taxpayer,uses an accrual method of accounting and the an-nualized income installment method under section6655(e)(2)(A)(i) to calculate all of its required install-ment payments for its 2008 taxable year. ABC has anet operating loss carryover to 2008 of $2,000,000.ABC’s taxable income from January 1, 2008, throughMarch 31, 2008, without regard to any net operat-ing loss deduction, is $1,500,000 (pre-NOL taxableincome). Under the special rule for net operatingloss deductions provided in paragraph (f)(3)(ii) of thissection, the NOL deduction is treated as an extraor-dinary item incurred on the first day of ABC’s De-cember 31, 2008, tax year. Therefore, the NOL de-duction is taken into account after annualization forpurposes of determining ABC’s first annualized in-come installment.

Example 9. Advance payment. (i) CorporationABC, a calendar year taxpayer, uses an accrualmethod of accounting and the annualized incomeinstallment method under section 6655(e)(2)(A)(i) tocalculate all of its required installment payments forits 2008 and 2009 taxable years. ABC is in the busi-ness of giving dancing lessons and receives advancepayments. For Federal income tax purposes, ABCuses the Deferral Method provided in section 5.02of Rev. Proc. 2004–34 for the advance payments itreceives for dance lessons. On November 1, 2008,ABC receives an advance payment of $2,400 for a2-year contract commencing on November 1, 2008,and providing for up to 24 individual, 1-hour lessons.ABC provides 2 lessons in 2008, 12 lessons in 2009,and 10 lessons in 2010. ABC recognizes $200 inrevenues in its financial statements for the last quar-ter of 2008. ABC recognizes $300 in revenues in itsfinancial statements for each quarter of 2009 for a to-tal of $1,200 in 2009. ABC recognizes the remaining$1,000 in revenues in its financial statements during2010. For tax purposes, ABC recognizes $200 intorevenue in 2008 and $2,200 into revenue in 2009 un-der Rev. Proc. 2004–34. See §601.601(d)(2)(ii)(b).

(ii) Pursuant to paragraph (f)(3)(i)(B) of this sec-tion, ABC is not required to take into account any ofthe advance payment for purposes of computing anyrequired installment payment for ABC’s 2008 taxableyear because no part of the $2,400 advance paymentwas recognized as income in ABC’s financial state-ments during the first nine months of ABC’s 2008taxable year. In 2009, ABC must take into account$300 of revenue for purposes of computing its firstand second required installment payments, $600 ofrevenue for purposes of computing its third requiredinstallment payment and $900 for purposes of com-puting its fourth required installment payment. Pur-

2007–38 I.R.B. 646 September 17, 2007

suant to paragraph (f)(3)(i)(B) of this section, the re-maining deferred revenue is recognized on December31, 2009, for purposes of computing ABC’s annual-ized income installments for 2009.

Example 10. Section 481(a) adjustment. Corpo-ration ABC, a calendar year taxpayer, uses an accrualmethod of accounting and the annualized income in-stallment method under section 6655(e)(2)(A)(i) tocalculate all of its required installment payments forits 2008 taxable year. On December 20, 2008, ABCfiles a Form 3115 requesting permission to change itsmethod of accounting. The requested change resultsin a negative section 481(a) adjustment of $80,000.ABC subsequently receives the consent of the Com-missioner to make the change and therefore, the neg-ative $80,000 section 481(a) adjustment is properlyrecognized in ABC’s tax return for the year endingDecember 31, 2008. Under paragraph (f)(3)(ii) ofthis section ABC is permitted to recognize the neg-ative $80,000 section 481(a) adjustment as an extra-ordinary item occurring on January 1, 2008 (the firstday of ABC’s December 31, 2008, tax year), or De-cember 20, 2008 (the date ABC filed the Form 3115).ABC chooses to recognize the negative $80,000 sec-tion 481(a) adjustment as an extraordinary item oc-curring in January 1, 2008. Accordingly, $80,000 ofthe negative section 481(a) adjustment is taken intoaccount after annualization for purposes of determin-ing ABC’s first annualized income installment. In ad-dition, under §1.6655–6(b), ABC is required to useits new method of accounting as of January 1, 2008for estimated tax purposes, consistent with the recog-nition of the section 481(a) adjustment for estimatedtax purposes. Therefore, ABC will be required to usethe new method of accounting in determining taxableincome to be annualized in computing ABC’s first an-nualized income installment.

Example 11. Section 481(a) adjustment. Cor-poration ABC, a calendar year taxpayer, uses anaccrual method of accounting and uses the annu-alized income installment method under section6655(e)(2)(A)(i) to calculate all of its required in-stallment payments for its 2008 taxable year. OnJune 15, 2008, ABC files a Form 3115 requestingpermission to change its method of accounting. Therequested change results in a positive section 481(a)adjustment of $240,000. ABC subsequently receivesthe consent of the Commissioner to make the changeand therefore, $60,000 of the section 481(a) adjust-ment (one quarter of the positive $240,000 section481(a) adjustment) is properly recognized in ABC’stax return for the year ending December 31, 2008.Under paragraph (f)(3)(ii) of this section, ABC ispermitted to recognize the positive $60,000 section481(a) adjustment as an extraordinary item occurringon January 1, 2008 (the first day of ABC’s December31, 2008, tax year), or June 15, 2008 (the date ABCfiled the Form 3115). ABC chooses to recognizethe positive $60,000 section 481(a) adjustment asan extraordinary item occurring on June 15, 2008.Accordingly, the $60,000 positive section 481(a)adjustment is not taken into account for purposes ofdetermining ABC’s first annualized income install-ment. However, in all futures years any portion ofthe section 481(a) adjustment related to this changein method of accounting will be treated as an extraor-dinary item occurring on the first day of the tax yearunder paragraph (f)(3)(ii) of this section. In addition,under §1.6655–6(b), ABC is required to use its new

method of accounting as of June 15, 2008 for esti-mated tax purposes, consistent with the recognitionof the section 481(a) adjustment for estimated taxpurposes. Therefore, ABC will be required to usethe new method of accounting (as of the beginningof the tax year) for purposes of determining taxableincome to be annualized in computing ABC’s thirdand fourth annualized income installments (whichare based upon annualization periods that includeJune 15, 2008.)

Example 12. Extraordinary item. CorporationABC, a calendar year taxpayer, uses an accrualmethod of accounting and the annualized incomeinstallment method under section 6655(e)(2)(A)(i)to calculate all of its required installment paymentsfor its 2008 taxable year. On May 10, 2008, ABCreaches a settlement agreement with XYZ over a tortaction filed by ABC. As a result, ABC receives apayment of $10,000,000 on June 15, 2006, that isrecognized as income by ABC. The settlement of atort action is an extraordinary item defined in para-graph (f)(3)(ii)(A) of this section. Accordingly, the$10,000,000 of income will be taken into account byABC on May 10, 2008, for purposes of computingABC’s annualized income installments for 2008.Therefore, the $10,000,000 settlement will only betaken into account in computing ABC’s third andfourth annualized income installments (which arebased upon annualization periods that include May10, 2008.) In addition, the $10,000,000 settlementincome will be taken into account as an extraordi-nary item of income after annualization for purposesof determining ABC’s third and fourth annualizedinstallment payments.

Example 13. Credit carryover. CorporationABC, a calendar year taxpayer, uses an accrualmethod of accounting and the annualized incomeinstallment method under section 6655(e)(2)(A)(i) tocalculate all of its required installment payments forits 2008 taxable year. ABC projects its annualizedtax for its 2008 taxable year, based on annualizingABC’s taxable income for its first annualization pe-riod from January 1, 2008, through March 31, 2008,to be $1,500,000 before reduction for any credits.ABC has an unused section 38 credit from 2007 forincreasing research activities from 2007 of $500,000that is carried over to 2008. For purposes of deter-mining ABC’s first annualized income installment,ABC’s annualized tax for 2008 is $1,000,000, de-termined as the tax for the taxable year computedby placing on an annualized basis ABC’s taxableincome from its first annualization period from Jan-uary 1, 2008, through March 31, 2008 ($1,500,000)reduced by the $500,000 credit carryover from 2007.Therefore, ABC’s first required installment paymentfor 2008 is $250,000 ($1,000,000 x 25%).

Example 14. Current year credit. CorporationABC, a calendar year taxpayer, uses an accrualmethod of accounting and the annualized incomeinstallment method under section 6655(e)(2)(A)(i) tocalculate all of its required installment payments forits 2008 taxable year. ABC projects its annualizedtax for its 2008 taxable year, based on annualizingABC’s taxable income for its first annualization pe-riod from January 1, 2008, through March 31, 2008,to be $2,000,000 before reduction for any credits.ABC has historically earned a section 41 credit forincreasing research activities and, for 2008, ABCestimates that it will earn a credit for increasing

research activities under section 41 of $1,200,000.However, pursuant to paragraph (f)(3)(iii) of thissection, if ABC were to annualize all componentsinvolved in computing the current year credit basedon ABC’s activity from January 1, 2008, throughMarch 31, 2008, ABC would generate a credit of$1,600,000 for 2008. For purposes of determiningABC’s first annualized income installment, ABC’sannualized tax for 2008 is $400,000, determinedas the tax for the 2008 taxable year ($2,000,000)computed by placing on an annualized basis ABC’staxable income from its first annualization periodJanuary 1, 2008, through March 31, 2008, reducedby a $1,600,000 current year section 41 credit fromincreasing research activities. Therefore, ABC’s firstrequired installment payment for 2008 is $100,000($400,000 x 25%).

Example 15. Current year credit. Same factsas Example 14 except that ABC does not begin anyresearch activities until April 3, 2008, and will notincur any research expenses described in paragraph(f)(1)(ii) of this section. As a result, if ABC were toannualize all components involved in computing thecurrent year credit based on ABC’s activity from Jan-uary 1, 2008, through March 31, 2008, ABC wouldgenerate no section 41 research credit for purposes ofdetermining its first annualized income installment.Pursuant to paragraph (f)(3)(iii) of this section, ABCcannot take into account any credit for its first annu-alization period because ABC did not incur any qual-ified research expenses by the last day of the firstannualization period. Accordingly, for purposes ofdetermining ABC’s first annualized income install-ment, ABC’s annualized tax for its first annualizationperiod January 1, 2008, through March 31, 2008, is$2,000,000. Therefore, ABC’s first required install-ment payment for 2008 is $500,000 ($2,000,000 x25%).

Example 16. Depreciation and amortization ex-pense. Corporation ABC, a calendar year taxpayerthat began business on January 2, 2007, adopted anaccrual method of accounting and will use the an-nualized income installment method under section6655(e)(2)(A)(i) to calculate all of its required in-stallment payments for its 2008 taxable year. OnJanuary 2, 2007, ABC purchased and placed in ser-vice a tangible depreciable asset that costs $50,000and is 5-year property under section 168(e). ABCdepreciates its 5-year property placed in service in2007 under the general depreciation system using the200-percent declining balance method, a 5-year re-covery period, and the half year convention. On Jan-uary 2, 2008, ABC purchased and placed in servicequalified Gulf Opportunity Zone property (GO Zoneproperty) that costs $30,000 and is 5-year propertyunder section 168(e). ABC will depreciate its 5-yearproperty placed in service in 2008 under the generaldepreciation system using the 200-percent decliningbalance method, a 5-year recovery period, and thehalf-year convention. ABC will deduct the 50% ad-ditional first year depreciation deduction under sec-tion 1400N(d) with respect to the GO Zone property.For tax year 2007, ABC takes a depreciation deduc-tion under section 168 of $10,000 ($50,000 X 20% =$10,000). ABC does not anticipate being subject tothe mid-quarter convention for the 2008 taxable year,does not anticipate making any depreciation electionsfor any class of property, does not anticipate makinga section 179 election, does not anticipate any sales

September 17, 2007 647 2007–38 I.R.B.

or other dispositions of depreciable property, and noevents have occurred, nor does ABC know, based onall relevant information available as of the due dateof ABC’s first required installment for 2008, of anyevent that will occur to cause ABC’s 2008 taxableyear to be a short taxable year. The optional amountsof depreciation expense ABC may take into accountfor its first annualized income installment for its 2008taxable year are determined as follows:

(i) General rule — Estimated annual deprecia-tion. In accordance with the general rule provided inparagraph (f)(3)(iv)(A) of this section, ABC may takea depreciation expense of $8,500 ($34,000 X 3/12 =$8,500) into account in computing ABC’s January1, 2008, through March 31, 2008, taxable income.ABC’s estimated annual depreciation expense for2008 of $34,000 is computed as follows: $15,000 forthe 50% additional first year depreciation deductionunder section 1400N(d) ($30,000 X 50% = $15,000)plus annual depreciation of $16,000 ($40,000 X 40%= $16,000) and $3,000 ($15,000 X 20% = $3,000).Under paragraphs (c)(3) and (f)(3)(iv)(C) of thissection, ABC may not consider its first annualiza-tion period to be a short taxable year for purposesof determining the depreciation allowance for suchannualization period.

(ii) Safe Harbor — Proportionate depreciationallowance. In accordance with the safe harbor pro-vided in paragraph (f)(3)(iv)(B)(1) of this section,ABC may take a depreciation expense of $8,500($34,000 X 3/12 = $8,500) into account in com-puting ABC’s January 1, 2008, through March 31,2008, taxable income based on annual depreciationexpense for 2008 of $34,000, computed as follows:$15,000 for the 50% additional first year deprecia-tion deduction under section 1400N(d) ($30,000 X50% = $15,000) plus annual depreciation of $16,000($40,000 X 40% = $16,000) and $3,000 ($15,000X 20% = $3,000). Under paragraphs (c)(3) and(f)(3)(iv)(C) of this section, ABC may not considerits first annualization period to be a short taxableyear for purposes of determining the depreciationallowance for such annualization period.

(iii) Safe Harbor — 90 percent of precedingyear’s depreciation. In accordance with the safeharbor in paragraph (f)(3)(iv)(B)(2) of this section,ABC may take a depreciation expense of $2,250($10,000 prior year’s depreciation X 90% = $9,000X 3/12 = $2,250) into account in computing ABC’sJanuary 1, 2008, through March 31, 2008, taxableincome. Under paragraphs (c)(3) and (f)(3)(iv)(C) ofthis section, ABC may not consider its first annual-ization period to be a short taxable year for purposesof determining the depreciation allowance for suchannualization period.

(g) Items that substantially affect tax-able income but cannot be determined ac-curately by the installment due date—(1)In general. In determining the applica-bility of the annualization exceptions de-scribed in paragraphs (a) and (b) of thissection and §1.6655–3, reasonable esti-mates may be made from existing data foritems that substantially affect income ifthe amount of such items cannot be de-termined accurately by the installment duedate. This paragraph (g) applies only to

the inflation index for taxpayers using thedollar-value LIFO (last-in, first-out) in-ventory method, adjustments required un-der section 263A, the computation of ataxpayer’s section 199 deduction, inter-company adjustments for taxpayers thatfile consolidated returns, the liquidationof a LIFO layer at the installment datethat the taxpayer reasonably believes willbe replaced at the end of the year, de-ferred gain on a qualifying conversion orexchange of property under sections 1031and 1033 that the taxpayer reasonably be-lieves will be replaced with qualifying re-placement property, and any other itemdesignated by the Secretary by publica-tion in the Internal Revenue Bulletin (see§601.601(d)(2)(ii)(b) of this chapter).

(2) Example. The following exampleillustrates the rules of this paragraph (g):

Example. Section 199 deduction. CorporationABC, a calendar year taxpayer, uses an accrualmethod of accounting and the annualized incomeinstallment method under section 6655(e)(2)(A)(i)to calculate all of its required installment paymentsfor its 2008 taxable year. ABC engages in produc-tion activities that generate qualified productionactivities income (QPAI), as defined in §1.199–1(c),and projects taxable income of $50,000 for its firstannualization period from January 1, 2008, throughMarch 31, 2008, without taking into account thesection 199 deduction. During its first annualiza-tion period from January 1, 2008, through March31, 2008, ABC incurs W–2 wages allocable to do-mestic production gross receipts pursuant to section199(b)(2) of $10,000. Pursuant to paragraph (g)(1) ofthis section, ABC is permitted to take into account itsestimated section 199 deduction before annualizingtaxable income based on the lesser of its estimatedQPAI or taxable income and W–2 wages for its firstinstallment period for 2008. For the first installmentperiod in 2008, ABC is permitted to recognize a de-duction under section 199 of $3,000 ($50,000 x .06 =$3,000) subject to the wage limitation of $5,000 (50percent of $10,000 of W–2 wages incurred duringthe first installment period). Accordingly, ABC’sannualized income for the first installment for 2008is $188,000 (($50,000 - $3,000) x 12/3 = $188,000).The tax on $188,000 is $56,570 and ABC’s firstrequired installment for 2008 is $14,143 ($56,570 x.25 = $14,143).

(h) Effective/applicability date. Thissection applies to taxable years beginningafter September 6, 2007.

Par. 8a. Section 1.6655–3 is revised toread as follows:

§1.6655–3 Adjusted seasonal installmentmethod.

(a) In general. In the case of any re-quired installment, the amount of the ad-

justed seasonal installment is the excess (ifany) of—

(1) 100 percent of the amount deter-mined under paragraph (c) of this section;over

(2) The aggregate amount of all priorrequired installments for the taxable year.

(b) Limitation on application of sec-tion. This section applies only if the baseperiod percentage (as defined in section6655(e)(3)(D)(i) and paragraph (d)(1)of this section) for any six consecutivemonths of the taxable year equals or ex-ceeds seventy percent.

(c) Determination of amount. Theamount determined under this paragraph(c) for any installment will be determinedin the following manner—

(1) Take the taxable income for allmonths during the taxable year precedingthe filing month;

(2) Divide such amount by the base pe-riod percentage for all months during thetaxable year preceding the filing month;

(3) Determine the tax on the amountdetermined under paragraph (c)(2) of thissection; and

(4) Multiply the tax computed underparagraph (c)(3) of this section by the baseperiod percentage for the filing month andall months during the taxable year preced-ing the filing month.

(d) Special rules—(1) Base period per-centage. The base period percentage forany period of months is the average per-cent that the taxable income for the cor-responding months in each of the threepreceding taxable years bears to the tax-able income for the three preceding taxableyears. If there is no taxable income for thecorresponding months, taxable income forthis purpose is zero.

(2) Filing month. The term filing monthmeans the month in which the installmentis required to be paid.

(3) Application of the rules relatedto the annualized income installmentmethod to the adjusted seasonal install-ment method. The rules governing thecomputation of taxable income (and re-sulting tax) for purposes of determiningany required installment payment of es-timated tax under the annualized incomeinstallment method under §1.6655–2 ap-ply to the computation of taxable income(and resulting tax) for purposes of deter-mining any required installment payment

2007–38 I.R.B. 648 September 17, 2007

of estimated tax under the adjusted sea-sonal installment method.

(4) Alternative minimum tax. Theamount determined under paragraph (c)of this section must properly take intoaccount the amount of any alternativeminimum tax under section 55 that wouldapply for the period of the computation.The amount of any alternative minimumtax that would apply is determined byapplying to alternative minimum taxable

income, tentative minimum tax, and alter-native minimum tax, the rules describedin paragraph (c) of this section for taxableincome and tax.

(e) Example. The provisions of this sec-tion may be illustrated by the following ex-ample:

Example. (i) X, a corporation that reports on acalendar year basis, expects to have an estimated taxliability of $1,200,000 for its taxable year ending De-cember 31, 2009. On its 2008 tax return, X reports atax liability of $652,800. X pays four installments

of estimated tax, each in the amount of $250,000,$250,000, $250,000, and $450,000 on April 15, 2009,June 15, 2009, September 15, 2009, and December15, 2009, respectively. X reports a tax liability of$1,152,600 on its return due March 15, 2010, withno credits against tax. Under the general provisionof section 6655(b) and section 6655(d), there wasan underpayment in the amount of $76,300 for thesecond installment through September 15, 2009, and$114,450 for the third installment through December15, 2009, determined as follows:

(A) Tax as defined in section 6655(g) = $1,152,600

(B) 100% of this paragraph (e), Example (i)(A) = $1,152,600

(C) Amount of estimated tax required to be paid on or before the firstinstallment (25% of $652,800) = $ 163,200

(D) Deduction of amount timely paid on or before the first installment duedate under the general rule of section 6655(b) = $ 250,000

(E) Amount of overpaid estimated tax for the first installment date = $ 86,800

(F) Amount of estimated tax required to be paid on or before the secondinstallment (25% of $1,152,600 plus the recapture amount under section6655(d)(2)(B) of $124,950 (25% of $1,152,600 less $163,200)) = $ 413,100

(G) Deduction of amount paid on or before the due date of the second installmentless amount applied towards the first installment under the general rule ofsection 6655(b) ($250,000 paid in each of the first and second installmentsless this paragraph (e), Example (i)(C)) = $ 336,800

(H) Amount of underpayment for the second installment date = $ 76,300

(I) Amount of estimated tax required to be paid on or before the thirdinstallment (25% of $1,152,600) = $ 288,150

(J) Deduction of amount paid on or before the due date of the third installment lessamount applied towards the first and second installments under the general rule ofsection 6655(b) ($250,000 paid in each of the first, second, and third installmentsless this paragraph (e), Example (i)(C) less this paragraph (e), Example (i)(F)) = $ 173,700

(K) Amount of underpayment for the third installment date = $ 114,450

(L) Amount of estimated tax required to be paid on or before the fourth installment(25% of $1,152,600) = $ 288,150

(M) Deduction of amount paid on or before the due date of the fourth installmentless amount applied towards the first, second, and third installments under the generalrule of section 6655(b) ($250,000 paid in each of the first, second, and thirdinstallments plus $450,000 paid in the fourth installment less this paragraph (e),Example (i)(C) less this paragraph (e), Example (i)(F) less this paragraph (e), Example (i)(I)) = $ 335,550

(N) Amount of overpaid estimated tax for the fourth installment date = $ 47,400

(ii) X wants to determine if it qualifies for theadjusted seasonal installment method. X determines

that its monthly taxable income for the preceding three taxable years and for the current taxable year2009 is as follows:

January2006

February March April May June

$100,000 $ 90,000 $ 80,000 $ 70,000 $ 60,000 $ 20,000

2007

$200,000 $170,000 $170,000 $130,000 $125,000 $ 45,000

2008

$410,000 $350,000 $330,000 $270,000 $240,000 $ 80,000

2009

$600,000 $680,000 $650,000 $560,000 $460,000 $170,000

September 17, 2007 649 2007–38 I.R.B.

July2006

August September October November December

$10,000 $10,000 $10,000 $10,000 $10,000 $10,000

2007

$21,000 $19,000 $20,000 $20,000 $20,000 $20,000

2008

$40,000 $40,000 $40,000 $40,000 $40,000 $40,000

2009

$70,000 $60,000 $50,000 $40,000 $30,000 $20,000

(iii) X must initially determine if its base periodpercentage for the same 6 consecutive months of the 3preceding taxable years equals or exceeds 70 percent

(see section 6655(e)(3) and paragraphs (b) and (c) ofthis section). By using its taxable income for the first6 months of 2006, 2007, and 2008, X qualifies for the

adjusted seasonal installment method because its baseperiod percentage is 87.5 percent (which exceeds 70percent) computed as follows:

(A) Taxable income for first 6 months of 2006 = $ 420,000

(B) Total taxable income for 2006 = $ 480,000

(C) Divide this paragraph (e), Example (iii)(A) by this paragraph (e),Example (iii)(B) = .875

(D) Taxable income for first 6 months of 2007 = $ 840,000

(E) Total taxable income for 2007 = $ 960,000

(F) Divide this paragraph (e), Example (iii)(D) by this paragraph (e),Example (iii)(E) = .875

(G) Taxable income for first 6 months of 2008 = $1,680,000

(H) Total taxable income for 2008 = $1,920,000

(I) Divide this paragraph (e), Example (iii)(G) bythis paragraph (e), Example (iii)(H) = .875

(J) Add this paragraph (e), Example (iii)(C), (F), and (I) = 2.625

(K) Divide this paragraph (e), Example (iii)(J) by 3 = .875

(iv) To determine the amount of the first install-ment under the rules of section 6655(e)(3) and para-

graph (a) of this section, the following computationis necessary:

(A) Taxable income for first 3 months of 2009 = $1,930,000

(B) Taxable income for first 3 months of 2006 ($270,000) divided by totaltaxable income for 2006 ($480,000) = .5625

(C) Taxable income for first 3 months of 2007 ($540,000) divided by total taxableincome for 2007 ($960,000) = .5625

(D) Taxable income for first 3 months of 2008 ($1,090,000) divided by total taxableincome for 2008 ($1,920,000) = .5677

(E) Add this paragraph (e), Example (iv)(B), (C), and (D) and divide by 3 = .5642

(F) Divide this paragraph (e), Example (iv)(A) by this paragraph (e), Example (iv)(E) = $3,420,773

(G) Determine the tax on this paragraph (e), Example (iv)(F) = $1,163,049

(H) Taxable income for first 4 months of 2006 ($340,000) divided by total taxableincome for 2006 ($480,000) = .7083

(I) Taxable income for first 4 months of 2007 ($670,000) divided by total taxableincome for 2007 ($960,000) = .6979

(J) Taxable income for first 4 months of 2008 ($1,360,000) divided by total taxableincome for 2008 (1,920,000) = .7083

(K) Add this paragraph (e), Example (iv)(H), (I), and (J) and divide by 3 = .7048

(L) Multiply this paragraph (e), Example (iv)(G) by this paragraph (e),Example (iv)(K) = $ 819,717

2007–38 I.R.B. 650 September 17, 2007

(M) 100% of this paragraph (e), Example (iv)(L) = $ 819,717

(N) Amount of all prior required installments for 2009 = $0

(O) Amount of adjusted seasonal installment for the first installment payment(this paragraph (e), Example (iv)(M) less this paragraph (e), Example (iv)(N)) = $ 819,717

(v) To determine the amount of the second install-ment under the rules of section 6655(e)(3) and para-



(B) Taxable income for first 5 months of 2006 ($400,000) divided by total taxableincome for 2006 ($480,000) = .8333



(E) Add this paragraph (e), Example (v)(B), (C), and (D) and divide by 3 = .8316

(F) Divide this paragraph (e), Example (v)(A) by this paragraph (e),Example (v)(E) = $3,547,379

(G) Determine the tax on this paragraph (e), Example (v)(F) = $1,206,109



(J) Taxable income for first 6 months of 2008 ($1,680,000) divided by total taxableincome for 2008 ($1,920,000) = .875

(K) Add this paragraph (e), Example (v)(H), (I), and (J) and divide by 3 = .875

(L) Multiply this paragraph (e), Example (v)(G) by this paragraph (e),Example (v)(K) = $1,055,345

(M) 100% of this paragraph (e), Example (v)(L) = $1,055,345

(N) Amount of all prior required installments for 2009 = $ 163,200

(O) Amount of adjusted seasonal installment for the second installment payment(this paragraph (e), Example (v)(M) less this paragraph (e), Example (v)(N)) = $ 892,145

(vi) To determine the amount of the third install-ment under the rules of section 6655(e)(3) and para-






(E) Add this paragraph (e), Example (vi)(B), (C), and (D) and divide by 3 = .9167

(F) Divide this paragraph (e), Example (vi)(A) by this paragraph (e),Example (vi)(E) =

$3,545,326

(G) Determine the tax on this paragraph (e), Example (vi)(F) = $1,205,411



September 17, 2007 651 2007–38 I.R.B.

(J) Taxable income for first 9 months of 2008 ($1,800,000) divided by total taxableincome for 2008 ($1,920,000) = .9375

(K) Add this paragraph (e), Example (vi)(H), (I), and (J) and divide by 3 = .9375

(L) Multiply this paragraph (e), Example (vi)(G) by this paragraph (e),Example (vi)(K) = $1,130,073

(M) 100% of this paragraph (e), Example (vi)(L) = $1,130,073


(O) Amount of adjusted seasonal installment for the third installment payment(this paragraph (e), Example (vi)(M) less this paragraph (e), Example (vi)(N)) = $ 553,773

(vii) To determine the amount of the fourth install-ment under the rules of section 6655(e)(3) and para-






(E) Add this paragraph (e), Example (vii)(B), (C), and (D) and divide by 3 = .9792

(F) Divide this paragraph (e), Example (vii)(A) by this paragraph (e),Example (vii)(E) = $3,441,585

(G) Determine the tax on this paragraph (e), Example (vii)(F) = $1,170,139

(H) Taxable income for first 12 months of 2006 ($480,000) divided by total taxableincome for 2006 ($480,000) = 1.0000

(I) Taxable income for first 12 months of 2007 ($960,000) divided by total taxableincome for 2007 ($960,000) = 1.0000

(J) Taxable income for first 12 months of 2008 ($1,920,000) divided by total taxableincome for 2008 ($1,920,000) = 1.0000

(K) Add this paragraph (e), Example (vii)(H), (I), and (J) and divide by 3 = 1.0000

(L) Multiply this paragraph (e), Example (vii)(G) by this paragraph (e), Example (vi)(K) = $1,170,139

(M) 100% of this paragraph (e), Example (vii)(L) = $1,170,139


(O) Amount of adjusted seasonal installment for the fourth installment payment(this paragraph (e), Example (vii)(M) less this paragraph (e), Example (vii)(N)) = $ 305,689

(viii) Because the total amount of each requiredestimated tax payment determined under section6655(e)(3) and paragraph (a) of this section exceedsthe amount of each required estimated tax paymentdetermined under section 6655(d) and §1.6655–1(d)and (e), the exception described in section 6655(e)and this section does not apply and the addition tothe tax with respect to the underpayment for the June15, 2009, and September 15, 2009, installments willbe imposed unless another exception (for example,see section 6655(e)(2)) applies with respect to theseinstallments.

(f) Effective/applicability date. Thissection applies to taxable years beginningafter September 6, 2007.

Par. 9. Section 1.6655–4 is added toread as follows:

§1.6655–4 Large corporations.

(a) Large corporation defined. Theterm large corporation means any corpo-ration (or a predecessor corporation) thathad taxable income of at least $1,000,000for any taxable year during the testingperiod. For purposes of this section, a pre-decessor corporation is the distributor ortransferor corporation in a transaction towhich section 381 (relating to carryoversin certain corporate acquisitions) applies.

(b) Testing period. For purposes ofparagraph (a) of this section, the term test-ing period means the 3 taxable years im-mediately preceding the taxable year for

which estimated tax is being determined(the current taxable year) or, if less, thenumber of taxable years the taxpayer hasbeen in existence.

(c) Computation of taxable income dur-ing testing period—(1) Short taxable year.In the case of a corporation (or predecessorcorporation) that had a short taxable yearduring the testing period, for purposesof determining whether the $1,000,000amount referred to in paragraph (a) of thissection is equaled or exceeded, the taxableincome for the short taxable year is com-puted by—

(i) Multiplying the taxable income forthe short taxable year by 12; and

2007–38 I.R.B. 652 September 17, 2007

(ii) Dividing the resulting amount bythe number of months in the short taxableyear.

(2) Computation of taxable income intaxable year when there occurs a trans-action to which section 381 applies. (i)For purposes of determining whether anacquiring corporation had taxable incomeof $1,000,000 or more for a taxable yearin which a section 381 transaction occurs,the acquiring corporation’s taxable incomewill be the sum of—

(A) The taxable income of the acquiringcorporation for its taxable year; plus

(B) The taxable income (or loss) ofthe distributor or transferor corporationfor that portion of its taxable year corre-sponding to the acquiring corporation’staxable year up to and including the dateof distribution or transfer (as defined in§1.381(b)–1(b)).

(ii) For purposes of determiningwhether a transferor or distributor corpo-ration had taxable income of $1,000,000or more for a taxable year in which a sec-tion 381 transaction occurs, the distributoror transferor corporation’s taxable income(or loss) is reduced by the amount of tax-able income (or loss) that is included inthe acquiring corporation’s taxable in-come for the taxable year in which thedistribution or transfer (as defined in§1.381(b)–1(b)) occurs, as described inparagraph (c)(2)(i)(B) of this section.

(d) Members of controlled group—(1)In general. For purposes of applyingparagraph (a) of this section, the taxableincome of members of a controlled groupof corporations (as defined in section1563(a)) must be aggregated for each yearof the testing period. The provisions ofthis section do not apply to a controlledgroup for any taxable year in which theaggregate taxable income of the mem-bers of the controlled group is less than$1,000,000.

(2) Aggregation. For purposes of para-graph (d)(1) of this section, a taxable lossof any member of the controlled group fora taxable year during the testing period isnot taken into account.

(3) Allocation rule. If the aggregate tax-able income of members of a controlledgroup computed pursuant to paragraph(d)(1) of this section exceeds $1,000,000during the testing period, the $1,000,000amount that is relevant for purposes of de-termining, under paragraph (a)(1) of this

section, whether a corporation is a largecorporation is divided equally among thecomponent members of such group (in-cluding component members excludedpursuant to paragraph (d)(2) of this sec-tion) unless all of such component mem-bers consent to an apportionment planproviding for an alternative allocation ofsuch amount. The procedure for makingand filing this plan will be the same as theprocedure used for making and filing anapportionment plan under section 1561.See section 1561 and the regulations.

(4) Controlled group members. (i) Inthe case of any corporation that was amember of a controlled group of corpora-tions at any time during the testing periodbut is not a member of such group duringthe taxable year involved, the taxable in-come of the former member for the test-ing period is determined as if such corpo-ration were not a member of a group at anytime during that period. With respect tothe controlled group, the taxable income ofits former member will not be taken intoaccount in determining such group’s tax-able income for any taxable year duringthe testing period for purposes of applyingparagraph (a)(1) of this section.

(ii) For purposes of paragraph (d)(4)(i)of this section, the determination ofwhether a corporation is a member ofa controlled group during the testing pe-riod is based on whether the corporationwas a member of the controlled group onthe last day of the month preceding thedue date of the required installment.

(e) Effect on a corporation’s taxable in-come of items that may be carried back orcarried over from any other taxable year.In determining whether a corporation (orpredecessor corporation) is a large corpo-ration for its current taxable year, itemsthat could offset taxable income during ataxable year included in the testing period(for example, those described in sections172 and 1212) are not to be taken into ac-count and the taxable income of a corpo-ration for any taxable year during the test-ing period is determined without regard toitems carried back or carried over from anyother taxable year.

(f) Consolidated returns. [Reserved].(g) Example. The provisions of this

section may be illustrated by the followingexample:

Example. Y Corporation and Z Corporation arecalendar year taxpayers. In 2008, Z acquires all of

the assets of Y in a transaction to which section 381applies. Z’s taxable income for both 2006 and 2007was less than $1,000,000. Y’s taxable income for2008 is determined under paragraph (c)(2) of this sec-tion to be $300,000 for that portion of Y’s taxableyear corresponding to Z’s taxable year up to and in-cluding the date of transfer. Z’s taxable income for2008 is $800,000. Under the provisions of paragraph(c)(2) of this section, Z’s 2008 taxable income forpurposes of determining whether it is a large corpo-ration for taxable year 2009 is $1,100,000 ($800,000+ $300,000). Thus, Z is a large corporation for the2009 taxable year. In addition, if Z’s 2008 taxableincome, as determined under paragraph (c)(2) of thissection, had been less than $1,000,000 but Y’s tax-able income in 2006 or 2007 had been $1,000,000 ormore, Z would be a large corporation for taxable year2009 because Y is a predecessor corporation.


§1.6655–7 [Removed]

Par. 10. Section 1.6655–7 is removed.

§1.6655–5 [Redesignated as §1.6655–7]

Par. 11. Section 1.6655–5 is redesig-nated as §1.6655–7.

Par. 12. Sections 1.6655–5 and1.6655–6 are added to read as follows:

§1.6655–5 Short taxable year.

(a) In general. Except as otherwise pro-vided in this section, the provisions of sec-tion 6655 and these regulations are appli-cable in the case of a short taxable year (in-cluding an initial taxable year) for which apayment of estimated tax is required to bemade.

(b) Exception to payment of estimatedtax. In the case of a short taxable year, nopayment of estimated tax is required if—

(1) The short taxable year is a period ofless than 4 full calendar months; or

(2) The tax shown on the return for suchtaxable year (or, if no return is filed, thetax) is less than $500.

(c) Installment due dates—(1) In gen-eral—(i) Taxable year of at least fourmonths but less than twelve months. Ex-cept as otherwise provided, in the caseof a short taxable year, if such year re-sults in a taxable year of four or more fullcalendar months but less than twelve fullcalendar months, the due dates prescribedin §1.6655–1(f)(2) apply.

(ii) Exceptions. (A) If the date de-termined under paragraph (c)(1)(i) of thissection for the first required installment

September 17, 2007 653 2007–38 I.R.B.

due during the taxpayer’s short taxableyear is earlier than the 15th day of thefourth month of the taxpayer’s short tax-able year, the taxpayer’s first required in-stallment is due on the first due date other-wise determined under paragraph (c)(1)(i)of this section that is on or after the 15th

day of the fourth month of the short tax-able year.

(B) A taxpayer with an initial short tax-able year may make estimated tax pay-ments as though it were a calendar yeartaxpayer until it files its tax return for itsinitial taxable year and will not be subjectto an addition to tax under section 6655 formaking estimated tax payments as thoughit were a calendar year taxpayer for the pe-riod beginning with its initial short taxableyear to the time it files its tax return for itsinitial short taxable year if, when filing itstax return for its initial short taxable year,the taxpayer chooses to be a fiscal year tax-payer.

(2) Early termination of taxableyear—(i) In general. Except as providedin paragraph (c)(2)(ii) of this section, if ataxable year ends early (for example, asa result of an acquisition or a change intaxable year), the due date for the finalrequired installment is the date that wouldhave been the due date of the next requiredinstallment if the event that gave rise tothe short taxable year had not occurred.

(ii) Exception. If the date determinedunder paragraph (c)(2)(i) of this section iswithin thirty days of the last day of theshort taxable year, the due date for the finalrequired installment is the fifteenth day ofthe second month following the month thatincludes the last day of the short taxableyear.

(d) Amount due for required install-ment—(1) In general. The amount due forany required installment determined undersection 6655(d)(1)(B)(i) for a short tax-able year is 100% of the required annualpayment for the short taxable year dividedby the number of required installmentsdue (as determined under this section) forthe short taxable year.

(2) Tax shown on the return for the pre-ceding taxable year. If the current taxableyear is a short taxable year, the amount duefor any required installment determinedunder section 6655(d)(1)(B)(ii) is deter-mined in the following manner—

(i) Take 100% of the tax shown on thereturn of the corporation for the precedingtaxable year;

(ii) Multiply such amount by the num-ber of full calendar months in the currentshort taxable year and divide by 12; and

(iii) Divide the amount determined un-der paragraph (d)(2)(ii) of this section bythe number of required installments due(as determined under this section) for thecurrent short taxable year.

(3) Applicable percentage. In the caseof any required installment determinedunder section 6655(e), the applicable per-centage under section 6655(e)(2)(B)(ii)is—

(i) 25%, 50%, 75%, and 100% for thefirst, second, third, and fourth (last) re-quired installments, respectively, if thetaxpayer will have four required install-ments due for the short taxable year;

(ii) 33.33%, 66.67%, and 100% forthe first, second, and third (last) requiredinstallments, respectively, if the taxpayerwill have three required installments duefor the short taxable year;

(iii) 50% and 100% for the first andsecond (last) required installments, respec-tively, if the taxpayer will have two re-quired installments due for the short tax-able year; or

(iv) 100% for the first (and last) re-quired installment if the taxpayer will haveone required installment for the short tax-able year.

(4) Applicable percentage for install-ment period in which taxpayer does notreasonably expect that the taxable yearwill be an early termination year. In thecase of any required installment deter-mined under section 6655(e) in which thetaxpayer does not reasonably expect thatthe taxable year will be an early termina-tion year, the applicable percentage undersection 6655(e)(2)(B)(ii) is the applicablepercentage provided by paragraph (d)(3)(i)of this section with the remaining balanceof the estimated tax payment for the yeardue with the final installment.

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

Example 1. Short year of less than 4 months. Cor-poration A is a calendar year taxpayer that was ac-quired by corporation B, a member of a consolidatedgroup (as defined in §1.1502–1(h)) on April 16, 2009,resulting in A having a short taxable year from Jan-uary 1, 2009, through April 16, 2009. Because A hasa taxable year of less than four full calendar months,

no estimated tax payments are required by A for theshort taxable year.

Example 2. Initial short year with four requiredinstallments. Corporation B began business on Jan-uary 9, 2009, and adopted a calendar year as itstaxable year. B computes its required installmentsbased on 100 percent of the tax shown on the re-turn for the taxable year in accordance with section6655(d)(1)(B)(i). Pursuant to §1.6655–1(f)(2)(i),the due dates of B’s required installments for B’sinitial taxable year from January 9, 2009, throughDecember 31, 2009, are April 15, 2009, June 15,2009, September 15, 2009, and December 15, 2009.Pursuant to paragraph (d)(1) of this section, theamount due with each required installment is 25%of the required annual payment for B’s first requiredinstallment, 50% of the required annual payment forB’s second required installment, 75% of the requiredannual payment for B’s third required installment,and 100% of the required annual payment for B’sfourth required installment.

Example 3. Initial short year with three requiredinstallments. Corporation C began business on Feb-ruary 12, 2009, and adopted a calendar year as itstaxable year. C computes its required installmentsbased on 100 percent of the tax shown on the re-turn for the taxable year in accordance with section6655(d)(1)(B)(i). Pursuant to §1.6655–1(f)(2)(i), thedue dates of C’s required installments for C’s initialtaxable year from February 12, 2009, through De-cember 31, 2009, are April 15, 2009, June 15, 2009,September 15, 2009, and December 15, 2009. How-ever, in accordance with paragraph (c)(1)(ii)(A) ofthis section, C’s first required installment is due June15, 2009, because April 15, 2009, is earlier than thefifteenth day of the fourth month of C’s taxable year.As a result, C’s second required installment is dueSeptember 15, 2009, and C’s third (and last) install-ment is due December 15, 2009. Pursuant to para-graph (d)(1) of this section, the amount due with eachrequired installment is 33.33% of the required annualpayment for C’s first required installment, 66.67% ofthe required annual payment for C’s second requiredinstallment, and 100% of the required annual pay-ment for C’s third (and last) required installment.

Example 4. Initial short year with two requiredinstallments. Same facts as Example 3 except C be-gan business on April 10, 2009. In accordance withparagraph (c)(1)(ii)(A) of this section, C’s first re-quired installment is due September 15, 2009, be-cause April 15, 2009, and June 15, 2009, are earlierthan the fifteenth day of the fourth month of C’s tax-able year. As a result, C’s second (and last) requiredinstallment is due December 15, 2009. Pursuant toparagraph (d)(1) of this section, the amount due witheach required installment is 50% of the required an-nual payment for C’s first required installment, and100% of the required annual payment for C’s second(and last) required installment.

Example 5. Initial short year for fiscal year tax-payer with two required installments. Corporation Dbegan business on February 12, 2009, and adopted afiscal year ending October 31 as its taxable year. Dcomputes its required installments based on 100 per-cent of the tax shown on the return for the taxable yearin accordance with section 6655(d)(1)(B)(i). Pur-suant to §1.6655–1(f)(2)(ii), the due dates of D’s re-quired installments for D’s initial taxable year fromFebruary 12, 2009, through October 31, 2009, are

2007–38 I.R.B. 654 September 17, 2007

February 15, 2009, April 15, 2009, July 15, 2009, andOctober 15, 2009. However, in accordance with para-graph (c)(1)(ii)(A) of this section, D’s first requiredinstallment is due July 15, 2009, because February15, 2009, and April 15, 2009, are earlier than the fif-teenth day of the fourth month of D’s taxable year. Asa result, D’s second (and last) installment is due Oc-tober 15, 2009. Pursuant to paragraph (d)(1) of thissection, the amount due with each required install-ment is 50% of the required annual payment for D’sfirst required installment, and 100% of the requiredannual payment for D’s second (and last) required in-stallment.

Example 6. Initial short year for fiscal yeartaxpayer with one required installment. Same factsas Example 5 except D corporation began businesson May 11, 2009. In accordance with paragraph(c)(1)(ii)(A) of this section, D’s first (and last) in-stallment is due October 15, 2009, because July 15,2009, is earlier than the fifteenth day of the fourthmonth of D’s taxable year. Pursuant to paragraph(d)(1) of this section, the amount due with D’s re-quired installment is 100% of the required annualpayment, computed as 100% divided by the numberof required installments due for the short taxableyear.

Example 7. Short termination year with threerequired installments. Corporation E is a calendaryear taxpayer that computes its required installmentsbased on 100 percent of the tax shown on the re-turn for the taxable year in accordance with section6655(d)(1)(B)(i). E computes its 2009 required in-stallments based on a projected 2009 total tax lia-bility of $600,000. On July 31, 2009, E is acquiredby corporation F, a member of a consolidated group(as defined in §1.1502–1(h)), resulting in E havinga short taxable year from January 1, 2009, throughJuly 31, 2009. E determines that its total tax liabilityfor the short period is $350,000. The due dates forE’s first and second required installments are April15, 2009, and June 15, 2009, respectively. Pursuantto section 6655(d)(1)(A), E paid $150,000 with eachrequired installment. Pursuant to paragraph (c)(2) ofthis section, E’s third (and last) required installmentof estimated tax is due on September 15, 2009, andthe percentage of the required annual payment duewith such installment is 100% pursuant to paragraph(d)(1) of this section. Accordingly, E is required topay $50,000 with its final required installment onSeptember 15, 2009 ($350,000 total tax liability forthe short taxable year less prior installment paymentsof $300,000).

Example 8. Unexpected short termination yearwith three required installments using the annualiza-tion method. Same facts as Example 7 except that Euses the annualized income installment method un-der section 6655(e)(2)(A)(i) to calculate all of its re-quired installment payments for its 2009 taxable year.In addition, E does not reasonably expect until July28, 2009, that it will have a short termination year

caused by E being acquired by F on July 31, 2009.Had E known about its acquisition by F in the firstquarter of 2009, E’s applicable percentages for com-puting the amount of its three required installmentswould be 33.33%, 66.67%, and 100% for the first,second, and third (last) required installments, respec-tively, pursuant to paragraph (d)(3)(ii) of this section.However, because E had an unexpected short termi-nation year that E was not aware of until after itssecond required installment payment, E’s applicablepercentages for computing the amount of its three re-quired installment are 25%, 50%, and 100% for thefirst, second, and third (last) required installments,respectively, pursuant to paragraph (d)(4) of this sec-tion.

Example 9. Short termination year ending within30 days of the regular final installment due date.Same facts as Example 7 except that E is acquiredby F on August 31, 2009. Pursuant to paragraph(c)(2)(ii) of this section, E’s third (and last) requiredinstallment of estimated tax is due on October 15,2009, because September 15, 2009, the date thatwould have been the due date of E’s next requiredinstallment if F’s acquisition of E had not occurred, iswithin thirty days of the last day of E’s short taxableyear, and 100% of the required annual payment isdue with such installment.

Example 10. Short termination year endingwithin 30 days of the regular final installment duedate. Corporation F is a calendar year taxpayer thatcomputes its required installments based on 100percent of the tax shown on the return for the taxableyear in accordance with section 6655(d)(1)(B)(i).F computes its 2009 estimated tax payments basedon a projected 2009 total tax liability of $900,000.On December 3, 2009, F is acquired by corporationG, a member of a consolidated group (as defined in§1.1502–2(h)), resulting in F having a short taxableyear from January 1, 2009, through December 3,2009. F determined its total tax liability for the shortperiod to be $800,000. The due dates for F’s first,second, and third required installments are April15, 2009, June 15, 2009, and September 15, 2009,respectively. Pursuant to section 6655(d)(1)(A),F paid $225,000 with each required installment.Pursuant to paragraph (c)(2)(ii) of this section, F’sfourth (and last) required installment of estimatedtax is due on February 15, 2010, and the percent-age of the required annual payment due with suchinstallment is 100% pursuant to paragraph (d)(1) ofthis section. However, because the due date for thefourth required installment falls on a legal holiday,F’s required installment payment will be timely ifpaid on or before the first business day following theactual due date of the fourth required installment,that is, February 16, 2010. Accordingly, F is requiredto pay $125,000 with its final required installmenton February 16, 2010 ($800,000 total tax liability forthe short taxable year less prior installment paymentsof $675,000).

Example 11. Short termination year using the taxshown on the return for the preceding taxable year.Corporation G, a calendar year taxpayer, reported atax liability of $75,000 on its return for the taxableyear ending December 31, 2008, and is not a largecorporation as defined in section 6655(g). On July 31,2009, G makes a final distribution of its assets, in con-nection with a plan of complete liquidation, resultingin a short taxable year from January 1, 2009, throughJuly 31, 2009. To satisfy the requirements of theexception described in section 6655(d)(1)(B)(ii) forpayments determined by reference to the tax shownon the return of the corporation for the preceding tax-able year, pursuant to paragraph (d)(2) of this section,G must pay in a proportionate amount of its 2008 taxliability based on the number of months in the cur-rent taxable year. Accordingly, G must pay $43,750($75,000 X 7/12) through payments of estimated taxpayments in 2009, with $14,583 due on April 15,2009, June 15, 2009, and September 15, 2009.

Example 12. Short termination year using the taxshown on the return for the preceding taxable year.Same facts as Example 11 except that G makes a finaldistribution of its assets, in connection with a plan ofcomplete liquidation, on October 1, 2009, resultingin a short taxable year from January 1, 2009, throughOctober 1, 2009. To satisfy the requirements of theexception described in section 6655(d)(1)(B)(ii), Gmust pay $56,250 ($75,000 x 9/12) through paymentsof estimated tax in 2009, with $14,063 due on April15, 2009, June 15, 2009, September 15, 2009, andDecember 15, 2009, respectively.

Example 13. Short initial year with three requiredinstallments resulting in an underpayment. (i) Cor-poration H began business on February 17, 2009, andadopted a calendar year. H computes its required in-stallments based on 100 percent of the tax shown onthe return for the taxable year in accordance with sec-tion 6655(d)(1)(B)(i). H estimated at the beginningof its short taxable year that its estimated tax liabil-ity for short taxable year February 17, 2009, throughDecember 31, 2009, would be $180,000. H paid itsfirst required installment of estimated tax of $60,000on June 15, 2009, its second required installment ofestimated tax of $60,000 on September 15, 2009, andits third (and last) required installment of estimatedtax of $60,000 on December 15, 2009 ($180,000 to-tal estimated tax liability for the short taxable yearless prior installment payments of $120,000). H re-ported a tax liability of $240,000 on its return forthe short period February 17, 2009, through Decem-ber 31, 2009, with no credits against tax. There wasan underpayment in the amount of $20,000 on thefirst installment date through September 15, 2009,$40,000 on the second installment date through De-cember 15, 2009, and $60,000 on the third (and last)installment date through March 15, 2010, determinedas follows:

(A) Tax as defined in section 6655(d)(1)(B)(i) = $240,000

(B) 100% of this paragraph (e), Example 13 (A) = $240,000

(C) Amount of estimated tax required to be paid by the first installmentdate (33.33% of $240,000) = $ 80,000

September 17, 2007 655 2007–38 I.R.B.

(D) Amount of estimated tax required to be paid by the second installmentdate (66.67% of $240,000 less $80,000 (amount due with first installment)) = $ 80,000

(E) Amount of estimated tax required to be paid by the third installmentdate (100% of $240,000 less $160,000 (amount due with first and second installment)) = $ 80,000

(F) Deduction of amount paid on or before the first installment date = $ 60,000

(G) Amount of underpayment for the first installment date (this paragraph (e),Example 13 (i)(C) minus this paragraph (e), Example 13 (i)(F)) = $ 20,000

(H) Deduction of amount available for the second installment date ($60,000second installment payment less this paragraph (e), Example 13 (i)(G) applied towards the first installmentunderpayment) = $ 40,000

(I) Amount of underpayment for the second installment date (this paragraph (e),Example 13 (i)(D) minus this paragraph (e), Example 13 (i)(H)) = $ 40,000

(J) Deduction of amount available for the third installment date ($60,000 thirdinstallment payment less this paragraph (e), Example 13 (i)(I) applied towards thesecond installment underpayment) = $ 20,000

(K) Amount of underpayment for the third installment date (this paragraph (e),Example 1 (i)(E) minus this paragraph (e), Example 13 (i)(J)) = $ 60,000

(ii) [Reserved].(f) 52 or 53 week taxable year. For pur-

poses of this section, a taxable year of 52 or53 weeks is deemed a period of 12 monthsin the case of a corporation that computesits taxable income in accordance with theelection permitted by section 441(f).

(g) Use of annualized income or sea-sonal installment method—(1) In gen-eral. Regardless of the annual accountingperiod used by a corporation (for ex-ample, calendar year, fiscal year) thetaxpayer may use the method described in§1.6655–2 (annualized income installmentmethod) or §1.6655–3 (adjusted seasonalinstallment method) to compute its re-quired installments of estimated tax whenthe current taxable year is a short taxableyear.

(2) Computation of annualized incomeinstallment. To the extent a short tax-able year includes an annualization periodelected by the taxpayer, the taxpayer com-putes its annualized income installment bydetermining the tax on the basis of such an-nualized income for the annualization pe-riod, divided by 12, multiplied by the num-ber of months in the short taxable year, andmultiplied by the applicable percentage forthe required installment.

(3) Annualization period for final re-quired installment. For purposes of deter-mining the final required installment (as

described in paragraph (c)(2) of this sec-tion) for a short taxable year, annualizedtaxable income is determined by placingon an annualized basis the taxable incomefor the last complete annualization periodthat occurs within the short taxable year.

(4) Examples. The provisions of para-graph (g) of this section may be illustratedby the following examples:

Example 1. Corporation X began business onFebruary 12, 2009, and adopted a calendar year asits taxable year. X adopts an accrual method of ac-counting and uses the annualized income installmentmethod under section 6655(e)(2)(A)(i) to calculateall of its required installment payments for its 2009taxable year. Pursuant to §1.6655–1(f)(2)(i), the duedates of X’s required installments for X’s initial tax-able year from February 12, 2009, through December31, 2009, are April 15, 2009, June 15, 2009, Septem-ber 15, 2009, and December 15, 2009. However, inaccordance with paragraph (c)(1)(ii)(A) of this sec-tion, X’s first required installment is due June 15,2009. As a result, X’s second required installmentis due September 15, 2009, and X’s third (and last)required installment is due December 15, 2009. Theamount of X’s first and second required installmentsare each based on annualizing X’s taxable incomefrom February 12, 2009, through April 30, 2009, (thefirst three months of X’s taxable year) and X’s third(and last) required installment is based on annual-izing X’s taxable income from February 12, 2009,through July 31, 2009 (the first six months of X’staxable year). Because X will have three requiredinstallments due for its short taxable year, pursuantto paragraph (d)(3)(ii) of this section, the applicablepercentage is 33.33% for X’s first required install-ment, 66.67% for X’s second required installment,

and 100% for X’s third (and last) required install-ment.

Example 2. (i) Y, a calendar year corporation,made a final distribution of its assets, in connectionwith a plan of complete liquidation, on August 3,2009. Y filed a timely election to use the alterna-tive annualization periods described under section6655(e)(2)(C)(i) and determined that its taxable in-come for the first 2, 4 and 7 months of the taxableyear was $25,000, $50,000 and $140,000. The duedates for Y’s required installments for its short tax-able year January 1, 2009, through August 3, 2009,are April 15, 2009, June 15, 2009, and September15, 2009. Y made installment payments of $10,000,$10,000, and $20,000, respectively, on April 15,2009, June 15, 2009, and September 15, 2009. Thetaxable income for each period is annualized asfollows:

$25,000 X 12/2 = $150,000

$50,000 X 12/4 = $150,000

$140,000 x 12/7 = $240,000

(ii)(A) To determine whether the first required in-stallment equals or exceeds the amount that wouldhave been required to have been paid if the estimatedtax were equal to one hundred percent of the tax com-puted on the annualized income for the 2-month pe-riod taking into account the number of months in theshort taxable year, the following computation is nec-essary:


(2) Tax on this paragraph (g)(4), Example 2 (ii)(A)(1) = $ 41,750

(3) Tax determined under this paragraph (g)(4), Example 2 (ii)(A)(2) dividedby 12 multiplied by 7 (the number of months in the short taxable year) = $ 24,354

2007–38 I.R.B. 656 September 17, 2007

(4) 100% of this paragraph (g)(4), Example 2 (ii)(A)(3) = $ 24,354

(5) 33.33% of this paragraph (g)(4), Example 2 (ii)(A)(4) = $ 8,117

(B) Because the total amount of estimated tax thatis timely paid on or before the first installment date($10,000) exceeds the amount required to be paidon or before this date if the estimated tax were onehundred percent of the tax determined by placing onan annualized basis the taxable income for the first2-month period taking into account the number of

months in the short taxable year, the exception de-scribed in §1.6655–2(a) applies and no addition to taxwill be imposed for the installment due on April 15,2009.

(iii)(A) To determine whether the required install-ments made on or before June 15, 2009, equal or ex-ceed the amount that would have been required to

have been paid if the estimated tax were equal to onehundred percent of the tax computed on the annual-ized income for the 4-month period taking into ac-count the number of months in the short taxable year,the following computation is necessary:


(2) Tax on this paragraph (g)(4), Example 2 (iii)(A)(1) = $ 41,750

(3) Tax determined under this paragraph (g)(4), Example 2 (iii)(A)(2) divided by 12multiplied by 7 (the number of months in the short taxable year) = $ 24,354

(4) 100% of this paragraph (g)(4), Example 2 (iii)(A)(3) = $ 24,354

(5) 66.67% of this paragraph (g)(4), Example 2 (iii)(A)(4) less $8,117 (amount duewith first installment) = $ 8,120

(B) Because the total amount of estimated taxavailable to apply towards the amount due for the sec-ond installment ($11,883 ($10,000 paid on the secondinstallment date plus $1,883 overpayment of the firstinstallment)) exceeds the amount required to be paidon or before this date if the estimated tax were onehundred percent of the tax determined by placing onan annualized basis the taxable income for the first4-month period for the taxable year taking into ac-

count the number of months in the short taxable year,the exception described in §1.6655–2(a) applies andno addition to tax will be imposed for the installmentdue on June 15, 2009.

(iv)(A) Pursuant to paragraph (c) and (d) ofthis section, the final required installment is due bySeptember 15, 2009, and the applicable percentagedue for the final required installment is 100%. Todetermine whether the installment payments made

on or before September 15, 2009, equal or exceedthe amount that would have been required to havebeen paid if the estimated tax were equal to one hun-dred percent of the tax computed on the annualizedincome for the 7-month period taking into accountthe number of months in the short taxable year, thefollowing computation is necessary:


(2) Tax on this paragraph (g)(4), Example 2 (iv)(A)(1) = $ 76,850

(3) Tax determined under this paragraph (g)(4), Example 2 (iv)(A)(2) divided by 12 multiplied by 7 (the numberof months in the short taxable year) = $ 44,829

(4) 100% of this paragraph (g)(4), Example 2 (iv)(A)(3) = $ 44,829

(5) 100% of this paragraph (g)(4), Example 2 (iv)(A)(4) less $16,237 (amount due with first and secondinstallment) = $ 28,592

(B) Because the total amount of estimated taxavailable to apply towards the amount due for thefinal installment ($23,763 ($20,000 that is timelypaid on the third installment date plus $3,763 over-payment of the second installment)) does not exceedthe amount required to be paid on or before thisdate if the estimated tax were one hundred percentof the tax determined by placing on an annualizedbasis the taxable income for the first 7-month periodfor the taxable year taking into account the numberof months in the short taxable year, the exceptiondescribed in §1.6655–2(a) does not apply and an ad-dition to tax will be imposed for the final installmentdue on September 15, 2009, unless another exception(for example, see section 6655(e)(3)) applies withrespect to these installments.


§1.6655–6 Methods of accounting.

(a) In general. In computing any re-quired installment, a corporation must usethe methods of accounting used in comput-ing taxable income for the taxable year forwhich estimated tax is being determined(the current taxable year).

(b) Accounting method changes. A tax-payer that changes its method of account-ing with the consent of the Commissionerfor the current taxable year must use thenew method of accounting (as of the be-ginning of the taxable year) in the determi-nation of taxable income for annualizationperiods ending on or after the date the re-lated section 481(a) adjustment is treatedas arising. See §1.6655–2(f)(3)(ii)(C) forthe date a section 481(a) adjustment istreated as arising. If the change in method

of accounting does not result in a sec-tion 481(a) adjustment, the taxpayer maychoose to use the new method of account-ing (as of the beginning of the taxable year)in the determination of taxable income forall annualization periods during the yearof change or only those annualization pe-riods ending on or after the date the Form3115 “Application for Change in Account-ing Method” was filed with the national of-fice of the Internal Revenue Service. Thisparagraph (b) only applies to the extent ataxpayer changes a method of accountingfor the taxable year with the consent of theCommissioner. Therefore, a taxpayer maybe subject to a section 6655 addition to taxfor an underpayment of estimated tax if anunderpayment results from a change in amethod of accounting the taxpayer antici-pates making for the taxable year but for

September 17, 2007 657 2007–38 I.R.B.

which the consent of the Commissioner isnot subsequently received.

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

Example 1. Accounting method used in comput-ing taxable income for the taxable year. CorporationABC, a calendar year taxpayer, uses an accrualmethod of accounting and the annualization methodunder section 6655(e)(2)(A)(i) to calculate all of its2008 required installments. ABC receives advancepayments each taxable year with respect to agree-ments for the sale of goods properly includible inABC’s inventory. The advance payments receivedby ABC qualify for deferral under §1.451–5(c).Although ABC is eligible to defer the advancepayments in accordance with §1.451–5(c), ABC’smethod of accounting with respect to the advancepayments is to include the advance payments inincome when received and ABC does not changeits accounting method for advance payments for the2008 taxable year. ABC must use its current methodof recognizing advance payments as income in theyear received for purposes of computing its 2008required installments.

Example 2. Change of accounting method.Corporation ABC, a calendar year taxpayer, usesan accrual method of accounting and the annual-ization method under section 6655(e)(2)(A)(i) tocalculate all of its 2008 required installments. OnJune 15, 2008, ABC files a Form 3115 requestingpermission to change its method of accounting forfuture litigation reserves for the tax year endingDecember 31, 2008. On February 15, 2009, ABCreceives consent from the Commissioner to makethe change for the tax year ending December 31,2008. The change results in a positive section 481(a)adjustment of $100,000. Under the provisions of§1.6655–2(f)(3)(ii), ABC chooses to treat the section481(a) adjustment as arising on the date the Form3115 is filed with the national office of the InternalRevenue Service. Therefore, ABC is required to usethe new method of accounting (as of the beginningof the year) in the determination of taxable incomefor annualization periods ending on or after June 15,2008.

(d) Effective/applicability date. Thissection applies to taxable years beginningafter September 6, 2007.

Par. 13. Newly-designated §1.6655–7is revised to read as follows:

§1.6655–7 Addition to tax on account ofexcessive adjustment under section 6425.

(a) Section 6655(h) imposes an additionto the tax under chapter 1 of the InternalRevenue Code in the case of any exces-sive amount (as defined in paragraph (c)of this section) of an adjustment under sec-tion 6425 that is made before the 15th dayof the third month following the close ofa taxable year beginning after December31, 1967. This addition to tax is imposedwhether or not there was reasonable causefor an excessive adjustment.

(b) If the amount of an adjustment un-der section 6425 is excessive, there shallbe added to the tax under chapter 1 of theInternal Revenue Code for the taxable yearan amount determined at the annual rate re-ferred to in the regulations under section6621 upon the excessive amount from thedate on which the credit is allowed or re-fund paid to the 15th day of the third monthfollowing the close of the taxable year. Arefund is paid on the date it is allowed un-der section 6407.

(c) The excessive amount is equal to thelesser of the amount of the adjustment orthe amount by which—

(1) The income tax liability (as definedin section 6425(c)) for the taxable year, asshown on the return for the taxable year;exceeds

(2) The estimated income tax paidduring the taxable year, reduced by theamount of the adjustment.

(d) The computation of the addition tothe tax imposed by section 6425 is madeindependent of, and does not affect thecomputation of, any addition to the taxthat a corporation may otherwise owe foran underpayment of an installment of esti-mated tax.

(e) The following example illustratesthe rules of this section:

Example. (i) Corporation X, a calendar year tax-payer, had an underpayment as defined in section6655(b), for its fourth installment of estimated taxthat was due on December 15, 2009, in the amount of$10,000. On January 4, 2010, X filed an applicationfor adjustment of overpayment of estimated incometax for 2009 in the amount of $20,000.

(ii) On February 16, 2010, the Internal RevenueService, in response to the application, refunded$20,000 to X. On March 15, 2010, X filed its 2009tax return and made a payment in settlement of itstotal tax liability. Assuming that the addition to taxis computed under section 6621(a)(2) at a rate of8% per annum for the applicable periods of under-payment, under section 6655(a), X is subject to anaddition to tax in the amount of $197 (90/365 X$10,000 X 8%) on account of X’s December 15,2009, underpayment. Under section 6655(h), X issubject to an addition to tax in the amount of $118(27/365 X $20,000 X 8%) on account of X’s exces-sive adjustment under section 6425. In determiningthe amount of the addition to tax under section6655(a) for failure to pay estimated income tax, theexcessive adjustment under section 6425 is not takeninto account.

(f) An adjustment is generally to betreated as a reduction of estimated incometax paid as of the date of the adjustment.However, for purposes of §§1.6655–1through 1.6655–6, the adjustment is tobe treated as if not made in determining

whether there has been any underpaymentof estimated income tax and, if there is anunderpayment, the period during whichthe underpayment existed.

(g) Effective/applicability date: Thissection applies to taxable years beginningafter September 6, 2007.


Par. 14. The authority citation for part301 continues to read in part as follows:

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

§301.6154–1 [Removed]

Par. 15. Section 301.6154–1 is re-moved.

Par. 16. Section 301.6655–1 is revisedto read as follows:

§301.6655–1 Failure by corporation topay estimated income tax.

(a) For regulations under section 6655,see §§1.6655–1 through 1.6655–7 of thischapter.

(b) Effective/applicability date: Thissection applies to taxable years beginningafter September 6, 2007.

PART 602—OMB CONTROLNUMBERS UNDER THE PAPERWORKREDUCTION ACT

Par. 17. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.

§602.101 [Amended]

Par. 18. Section 602.101, paragraph(b) is amended by removing the entriesfor §§1.6154–2, 1.6154–3, 1.6154–5,1.6655–1, 1.6655–2, 1.6655–3 and1.6655–7.





(Filed by the Office of the Federal Register on August 6,2007, 8:45 a.m., and published in the issue of the FederalRegister for August 7, 2007, 72 F.R. 44337)

2007–38 I.R.B. 658 September 17, 2007

Part IV. Items of General InterestNotice of ProposedRulemaking

Public Inspection of MaterialRelating to Tax-ExemptOrganizations

REG–116215–07

AGENCY: Internal Revenue Service,Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations that amend existing reg-ulations issued under sections 6104 and6110 of the Internal Revenue Code. Thepurpose of the proposed regulations is toclarify rules relating to information that ismade available by the IRS for public in-spection under section 6104(a) and mate-rials that are made publicly available un-der section 6110. The changes reflect IRSpractice as well as the United States Courtof Appeals for the District of ColumbiaCircuit’s decision in Tax Analysts v. IRS,350 F.3d 100 (D.C. Cir. 2003). The TaxAnalysts decision invalidated the portionsof §§301.6104(a)–1(i) and 301.6110–1(a)that excepted rulings that denied or re-voked an organization’s tax exempt sta-tus from the public disclosure provisionsof both sections 6104 and 6110. The pro-posed regulations will affect organizationsexempt from Federal income tax undersection 501(a) or 527, organizations thatwere exempt but are no longer exemptfrom Federal income tax, and organiza-tions that were denied tax-exempt status.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by November 13, 2007.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–116215–07), room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand-delivered between the hours of8 a.m. and 4 p.m. to CC:PA:LPD:PR(REG–116215–07), Courier’s Desk, In-ternal Revenue Service, 1111 ConstitutionAvenue, N.W., Washington, DC, or sent

electronically via the Federal eRulemak-ing Portal at www.regulations.gov (IRSREG–116215–07).

FOR FURTHER INFORMATIONCONTACT: Concerning submission ofcomments, Kelly Banks, (202) 622–7180(not a toll-free number); concerning theproposed regulations, Mary Ellen Keys,(202) 622–4570 (not a toll-free number).


Background

Since 1950, the Internal Revenue Codehas provided for the public inspection ofinformation that is submitted to the IRSby certain exempt organizations and cer-tain trusts. Under section 6104(a), the IRSmakes available for public inspection ap-proved applications for exemption fromFederal income tax for organizations de-scribed in section 501(c) or (d) and exemptunder section 501(a), notices of status filedunder section 527(i) by political organi-zations exempt from taxation under sec-tion 527, and certain related documents.Section 6104(a) also permits the IRS todisclose whether an organization is cur-rently recognized as exempt and the sub-section and paragraph number of section501 under which it is recognized. Section6104(b) imposes an additional obligationon the IRS to make available for public in-spection annual information returns filedby organizations exempt from Federal in-come tax. Section 6104(c) governs whenthe IRS may disclose certain informationabout charitable and certain other exemptorganizations to state officials. Section6104(d) imposes a parallel obligation onorganizations and trusts to make availablefor public inspection annual returns, appli-cations for exemption and notices of sta-tus. The proposed regulations do not ad-dress the obligations imposed by subsec-tions (b), (c) and (d).

The decision in Tax Analysts v. IRS, 350F.3d 100 (D.C. Cir. 2003), invalidated theportions of existing §301.6104(a)–1(i)(1),(2), and (3) and §301.6110–1(a) that ex-cluded rulings that denied or revokedan organization’s tax exempt statusfrom the public disclosure provisionsof both sections 6104 and 6110. Sections

301.6104(a)–1(i)(1), (2) and (3) excludedfrom disclosure by the IRS unfavorablerulings or determination letters in responseto exemption applications, rulings or de-termination letters that make or modify afavorable determination letter, and tech-nical advice memoranda that relate to adisapproved exemption application or therevocation or modification of a favor-able determination letter. Thus, because§301.6110–1(a) provided that the disclo-sure of such rulings, determination lettersand technical advice memoranda is to bedetermined under section 6104, they alsowere not available under section 6110.The IRS has already modified its admin-istrative practice to follow the court’sholding by making these documents avail-able to the public. See AOD 2004–2,2004–29 I.R.B., §601.601(d)(2)(ii)(a).The Treasury Department and IRS nowpropose to revise the existing regulationsat §301.6104(a)–1 and §301.6110–1(a)to conform to the court’s holding in TaxAnalysts.

Explanation of Provisions

The proposed regulations remove ex-isting §301.6104(a)–1(i) and portions of§301.6110–1(a), in light of the holdingin Tax Analysts. The proposed regula-tions clarify that the term “application” in-cludes information submitted to the IRSrelating to group exemption applications.The proposed regulations provide that no-tices of status filed under section 527(i)and the documents comprising the noticesare available for public inspection undersection 6104(a). The proposed regulationsalso add to the material that is available forpublic inspection the letters or documentsfiled with or issued by the IRS relating toan organization’s status as an organizationdescribed in sections 509(a), 4942(j)(3),or 4943(f), including a final determinationletter that the organization is or is not a pri-vate foundation.

The proposed regulations clarify thatthe IRS may disclose, in response to orin anticipation of a request, the subsec-tion and paragraph number of section 501under which an organization or group hasbeen determined, on the basis of its appli-cation, to qualify for exemption from Fed-eral income tax, and whether an organiza-

September 17, 2007 659 2007–38 I.R.B.

tion or group is currently recognized as ex-empt.

Section 6104(a) applies to the publica-tion of certain information related to orga-nizations that are exempt from Federal in-come taxation under section 501(a). Theinformation covered by section 6104(a) in-cludes material for any taxable year duringwhich the organization was exempt. Underthe proposed regulations, written determi-nations issued by the IRS, including, forexample, unfavorable rulings or determi-nation letters issued in response to applica-tions for tax exemption and rulings or de-termination letters revoking or modifyinga favorable determination letter, are madeavailable for public inspection under sec-tion 6110.

Other changes to the existing regulations

The proposed regulations reorganizeor revise certain provisions of the exist-ing regulations to eliminate redundancyand/or to provide greater clarity. First,§301.6104(a)–1(a) is revised to clarifythat applications for exemption from Fed-eral income tax and supporting documentsshall be open for public inspection, even ifthe IRS subsequently revokes the organi-zation’s exempt status.

Second, new §301.6104(a)–1(b) isadded to clarify that notices of status filedby political organizations described insection 527 are open for public inspection.

Third, §301.6104(a)–1(c) (formerly§301.6104(a)–1(b)) is revised to clarifythat group exemption letters are includedamong the information that is available forpublic inspection under section 6104(a).

Fourth, §301.6104(a)–1(d) (formerly§301.6104(a)–1(c)) is revised to clarifythat, where an organization is determinedto be exempt for any taxable year, mate-rial shall not be withheld on the basis thatthe organization is determined not to beexempt for any other taxable year.

Fifth, §301.6104(a)–1(g) (formerly§301.6104(a)–1(e)), which defines theterm “supporting document” with respectto an application for exemption from Fed-eral income tax, is revised to clarify thatthere are no supporting documents withrespect to notices of status filed by politi-cal organizations.

Sixth, new §301.6104(a)–1(h) is addedto clarify that the IRS may disclose, inresponse to or in anticipation of a request,

the subsection and paragraph number ofsection 501 under which an organization orgroup has been determined to be exemptfrom Federal income taxation, whetheran organization or group is exempt, orwhether the IRS has revoked an organiza-tion’s or group’s exemption under section501(c)(3).

Finally, new §301.6104(a)–1(i) isadded to refer the reader to section 6033(j),added to the Code by the Pension Protec-tion Act of 2006, Pub. L. 109–280, 120Stat. 780, which is an additional statutoryprovision that requires disclosure of infor-mation by the IRS regarding organizationsformerly exempt from Federal income tax.Section 6033(j) governs the publicationand maintenance of a list of organizationswhose tax exempt status was revoked forfailure to file required returns or noticesfor three consecutive years. Likewise,this paragraph cross-references section7428(c), which relates to the revocationof a determination of exempt status, andsection 501(p), added to the Code by theMilitary Family Tax Relief Act of 2003,Pub. L. 108–121, 117 Stat. 1335, whichrelates to suspension of the tax-exemptstatus of terrorist organizations, includingpublic notice of suspensions.

Special Analyses

It has been determined that the pro-posed regulations are not a significant reg-ulatory action as defined in Executive Or-der 12866. Therefore, a regulatory assess-ment is not required. It has also been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) and the Regulatory Flexibility Act(5 U.S.C. chapter 6) do not apply to theregulations, and, therefore, a regulatoryflexibility analysis is not required. Pur-suant to section 7805(f) of the InternalRevenue Code, this regulation has beensubmitted to the Chief Counsel for Advo-cacy of the Small Business Administrationfor comments on its impact on small busi-nesses.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written (a signedoriginal and eight (8) copies) or electronic

comments that are submitted timely tothe IRS. The IRS and Treasury Depart-ment request comments on the clarity ofthe proposed rules and how they can bemade easier to understand. All commentswill be available for public inspection andcopying. A public hearing will be sched-uled if requested in writing by any personthat timely submits written comments. If apublic hearing is scheduled, notice of thedate, time, and place for the public hearingwill be published in the Federal Register.


The principal author of the regulationsis Mary Ellen Keys, Office of the Asso-ciate Chief Counsel (Procedure & Admin-istration).

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 301 is pro-posed to be amended as follows:


Paragraph 1. The authority citation forpart 301 continues to read as follows:

Authority: 26 U.S.C. 7805 ***Par. 2. §301.6104(a)–1 is revised to

read as follows:

§301.6104(a)–1 Public inspectionof material relating to tax-exemptorganizations.

(a) Applications for exemption fromFederal income tax, applications for agroup exemption letter and supportingdocuments. If the Internal Revenue Ser-vice determines that an organization de-scribed in section 501(c) or (d) is exemptfrom Federal income tax for any taxableyear, the application upon which the de-termination is based, together with anysupporting documents, shall be open topublic inspection. Such applications andsupporting documents shall be open forpublic inspection even after any revocationof the Internal Revenue Service’s deter-mination that the organization is exemptfrom Federal income tax. Some applica-tions have been destroyed and thereforeare not available for inspection. For pur-poses of determining the availability forpublic inspection, a claim for exemption

2007–38 I.R.B. 660 September 17, 2007

from Federal income tax filed to reestab-lish exempt status after denial thereofunder the provisions of section 503 or 504(as in effect on December 31, 1969), orunder the corresponding provisions of anyprior revenue law, is considered an appli-cation for exemption from Federal incometax.

(b) Notices of status filed by politicalorganizations. If, in accordance with sec-tion 527(i), an organization notifies the In-ternal Revenue Service that it is a politicalorganization as described in section 527,exempt from Federal income tax for anytaxable year, the notice of status filed bythe political organization shall be open topublic inspection.

(c) Letters or documents issued by theInternal Revenue Service with respect toan application for exemption from Federalincome tax. If an application for exemp-tion from Federal income tax is filed withthe Internal Revenue Service after Octo-ber 31, 1976, and is open to public inspec-tion under paragraph (a) of this section,then any letter or document issued to theapplicant by the Internal Revenue Servicethat relates to the application is also opento public inspection. For rules relating towhen a letter or document is issued, see§301.6110–2(h). Letters or documents towhich this paragraph applies include, butare not limited to—

(1) Favorable rulings and determinationletters, including group exemption letters,issued in response to applications for ex-emption from Federal income tax;

(2) Technical advice memoranda issuedwith respect to the approval, or subsequentapproval, of an application for exemptionfrom Federal income tax;

(3) Letters issued in response to anapplication for exemption from Federalincome tax (including applications for agroup exemption letter) that propose afinding that the applicant is not entitled tobe exempt from Federal income tax, if theapplicant is subsequently determined, onthe basis of that application, to be exemptfrom Federal income tax; and

(4) Any letter or document issued bythe Internal Revenue Service relating toan organization’s status as an organizationdescribed in sections 509(a), 4942(j)(3),or 4943(f), including a final determinationletter that the organization is or is not aprivate foundation.

(d) Requirement of exempt status. Anapplication for exemption from Federalincome tax (including applications for agroup exemption letter), supporting docu-ments, and letters or documents issued bythe Internal Revenue Service that relate tothe application shall not be open to publicinspection before the organization is de-termined, on the basis of that application,to be exempt from Federal income taxfor any taxable year. If an organizationis determined to be exempt from Federalincome tax for any taxable year, these ma-terials shall not be withheld from publicinspection on the basis that the organiza-tion is subsequently determined not to beexempt for any other taxable year.

(e) Documents included in the term“application for exemption from Federalincome tax.” For purposes of this sec-tion—

(1) Prescribed application form. If aform is prescribed for an organization’s ap-plication for exemption from Federal in-come tax, the application includes the formand all documents and statements that theInternal Revenue Service requires to befiled with the form, any amendments or re-visions to the original application, or anyresubmitted applications where the origi-nal application was submitted in draft formor was withdrawn. An application submit-ted in draft form or an application submit-ted and later withdrawn is not consideredan application.

(2) No prescribed application form.If no form is prescribed for an organi-zation’s application for exemption fromFederal income tax, the application in-cludes the submission by letter requestingrecognition of tax exemption and anystatements or documents as prescribed byRevenue Procedure 2007–52, 2007–30I.R.B. 222, and any successor guidance.(See §601.201(n)(7)(i) of the Statement ofProcedural Rules, 26 CFR part 601.)

(3) Application for a Group Exemp-tion Letter. The application for a groupexemption letter includes the letter sub-mitted by or on behalf of subordinateorganizations that seek exempt status pur-suant to a group exemption letter and anystatements or documents as prescribed byRevenue Procedure 80–27, 1980–1 C.B.677, and any successor guidance. (See§601.201(n)(8)(i) of the Statement of Pro-cedural Rules, 26 CFR part 601.)

(4) Notice of status filed under section527(i). For purposes of this section, docu-ments included in the term “notice of statusfiled under section 527(i)” include—

(i) Form 8871, Political OrganizationNotice of Section 527 Status;

(ii) Form 8453–X, Political Organiza-tion Declaration for Electronic Filing ofNotice of Section 527 Status; and

(iii) Any other additional forms or doc-uments that the Internal Revenue Servicemay prescribe.

(f) Material open to public inspectionunder section 6110. Under section 6110,certain written determinations issued bythe Internal Revenue Service are madeavailable for public inspection. Section6110 does not apply, however, to materialthat is open to public inspection undersection 6104. See section 6110(l)(1).

(g) Supporting documents defined. Forpurposes of this section, “supporting doc-uments,” with respect to an applicationfor exemption from Federal income tax,means any statement or document not de-scribed in paragraph (e) of this section thatis submitted by the organization or groupin support of its application prior to a de-termination described in paragraph (c) ofthis section. Items submitted in connec-tion with an application in draft form, orwith an application submitted and laterwithdrawn, are not supporting documents.There are no supporting documents withrespect to Notices of Status filed by politi-cal organizations.

(h) Statement of exempt status. Forefficient tax administration, the InternalRevenue Service may publish, in paper orelectronic format, the names of organiza-tions currently recognized as exempt fromFederal income tax, including organiza-tions recognized as exempt from Federalincome tax under particular paragraphs ofsection 501(c) or section 501(d). In addi-tion to having the opportunity to inspectmaterial relating to an organization exemptfrom Federal income tax, a person may re-quest a statement, or the Internal RevenueService may disclose, in response to or inanticipation of a request, the following in-formation—

(1) The subsection and paragraph ofsection 501 (or the corresponding provi-sion of any prior revenue law) under whichthe organization or group has been deter-mined, on the basis of an application open

September 17, 2007 661 2007–38 I.R.B.

to public inspection, to qualify for exemp-tion from Federal income tax; and

(2) Whether an organization or group iscurrently recognized as exempt from Fed-eral income tax.

(i) Publication of non-exempt sta-tus—(1) For publication of the notice ofthe revocation of a determination thatan organization is described in section501(c)(3), see section 7428(c).

(2) For publication of a list includ-ing any organization the tax exemptionof which is revoked for failure to filerequired returns or notices for three con-secutive years, see section 6033(j).

(3) For publication of notice of suspen-sion of tax exemption of terrorist organiza-tions, see section 501(p).

(j) Withholding of certain informationfrom public inspection. For rules relatingto certain information contained in an ap-plication for exemption from Federal in-come tax and supporting documents thatwill be withheld from public inspection,see §301.6104(a)–5(a).

(k) Procedures for inspection. For rulesrelating to procedures for public inspectionof applications for exemption from Federalincome tax and supporting documents, see§301.6104(a)–6.

(l) Effective/applicability date. Therules of this section apply to taxable yearsending on or after the date of publicationof the Treasury decision adopting theserules as final regulations in the FederalRegister.

Par. 3. §301.6110–1 is amended by:1. Revising paragraph (a).2. Adding paragraph (d).The addition and revision read as fol-

lows:

§301.6110–1 Public inspection of writtendeterminations and background filedocuments.

(a) General rule. Except as provided in§301.6110–3, relating to deletion of cer-tain information, §301.6110–5(b), relatingto actions to restrain disclosure, paragraph(b)(2) of this section, relating to technicaladvice memoranda involving civil fraudand criminal investigations, and jeopardyand termination assessments, and para-graph (b)(3) of this section, relating togeneral written determinations relating toaccounting or funding periods and meth-ods, the text of any written determination

(as defined in §301.6110–2(a)) issuedpursuant to a request postmarked or handdelivered after October 31, 1976, shallbe open to public inspection in the placesprovided in paragraph (c)(1) of this sec-tion. The text of any written determinationissued pursuant to a request postmarked orhand delivered before November 1, 1976,shall be open to public inspection pur-suant to section 6110(h) and §301.6110–6,when funds are appropriated by Congressfor such purpose. The procedures andrules set forth in §§301.6110–1 through301.6110–5 and §301.6110–7 do not applyto written determinations issued pursuantto requests postmarked or hand deliv-ered before November 1, 1976, unless§301.6110–6 states otherwise. There shallalso be open to public inspection in eachplace of public inspection an index tothe written determinations subject to in-spection at such place. Each such indexshall be arranged by section of the Inter-nal Revenue Code, related statute or taxtreaty and by subject matter descriptionwithin such section in such manner asthe Commissioner may from time to timeprovide. The Commissioner shall not berequired to make any written determina-tion or background file document open topublic inspection pursuant to section 6110or refrain from disclosure of any such doc-uments or any information therein, exceptas provided by section 6110 or with respectto a discovery order made in connectionwith a judicial proceeding. The provisionsof section 6110 shall not apply to materialthat is open to public inspection undersection 6104. See section 6110(l)(1).

* * * * *(d) Effective/applicability date. The

rules of paragraph (a) of this section applyto taxable years ending on or after the dateof publication of the Treasury decisionadopting these rules as final regulations inthe Federal Register.



Qualified Films Under Section199; Correction

Announcement 2007–77


ACTION: Correction to notice of pro-posed rulemaking.

SUMMARY: This document contains cor-rections to a notice of proposed rulemak-ing (REG–103842–07, 2007–28 I.R.B. 79)that was published in the Federal Reg-ister on Thursday, June 7, 2007 (72 FR31478). These regulations involve the de-duction for income attributable to domes-tic production activities under section 199and affect taxpayers who produce qualifiedfilms under section 199(c)(4)(A)(i)(II) and(c)(6) and taxpayers who are members ofan expanded affiliated group under section199(d)(4).

FOR FURTHER INFORMATIONCONTACT: Concerning §1.199–3(k)of the proposed regulations,David McDonnell at (202) 622–3040;concerning §1.199–7 of the proposedregulations, Ken Cohen (202) 622–7790(not toll-free numbers).


Background

The notice of proposed rulemaking(REG–103842–07) that is the subject ofthe correction is under section 199 of theInternal Revenue Code.

Need for Correction

As published, the notice of proposedrulemaking (REG–103842–07) containserrors that may prove to be misleading andare in need of clarification.

Correction of Publication

Accordingly, the publication ofthe notice of proposed rulemaking(REG–103842–07), that is the subjectof FR Doc. E7–10821, is corrected asfollows:

1. On page 31480, column 2, in the pre-amble, under the paragraph heading “Ex-panded Affiliated Groups”, second para-graph of the column, lines 25 through 28,

2007–38 I.R.B. 662 September 17, 2007

the language “assume that X and Y eachhave $60 of taxable income and QPAI in2007, Z has $170 of taxable income andQPAI in 2008, and that X, Y, and Z eachhave” is corrected to read “assume that Xand Y each has $60 of taxable income andQPAI in 2007, Z has $170 of taxable in-come and QPAI in 2008, and that X, Y, andZ each has”.

§1.199–3 [Corrected]

2. On page 31482, column 1,§1.199–3(k)(7)(i), line 2 from the bottomof the paragraph, the language “Paragraph(g)(4)(ii)(A) of this section” is correctedto read “Paragraph (g)(3)(ii)(A) of thissection”.

§1.199–7 [Corrected]

3. On page 31482, column 3,§1.199–7(e) Example 10. paragraph (i),line 5 of the paragraph, the language “Beach use the section 861 method for” iscorrected to read “B each uses the section861 method for”.

4. On page 31482, column 3,§1.199–7(e) Example 10. paragraph (iii),line 8 of the paragraph, the language “Bbecomes a non-member of the consoli-dated” is corrected to read “B becomes anonmember of the consolidated”.

5. On page 31483, column 1,§1.199–7(g)(3) Example. paragraph (i),lines 9 through 11 of the paragraph, thelanguage “year, neither X, Y, nor Z joinin the filing of a consolidated Federal in-come tax return. Assume that X, Y, and Zeach have W–2” is corrected to read “year,neither X, Y, nor Z joins in the filing ofa consolidated Federal income tax return.Assume that X, Y, and Z each has W–2”.

6. On page 31483, column 1,§1.199–7(g)(3) Example. paragraph (ii),line 5 from the bottom of the column, thelanguage “allocated $96 of the deduction.For the” is corrected to read “allocated$96 of the EAG’s section 199 deduction.For the”.

LaNita Van Dyke,Chief, Publications and

Regulations Branch,Legal Processing Division,

Associate Chief Counsel(Procedure and Administration).

(Filed by the Office of the Federal Register on July 19, 2007,8:45 a.m., and published in the issue of the Federal Registerfor July 20, 2007, 72 F.R. 39770)

Application of Section 409Ato Nonqualified DeferredCompensation Plans;Correction


ACTION: Correcting amendments.


SUMMARY: This document contains cor-rections to final regulations (T.D. 9321,2007–19 I.R.B. 1123) that were publishedin the Federal Register on Tuesday, April17, 2007 (73 FR 19234), relating to section409A.

DATES: This correction is effective April17, 2007.

FOR FURTHER INFORMATIONCONTACT: Stephen Tackney, (202)622–9639 (not a toll-free number).


Background

The final regulations that are subject tothese corrections are under section 409Aof the Internal Revenue Code.

Need for Correction

As published, final regulations (T.D.9321) contain errors that may prove mis-leading and are in need of clarification.

Accordingly, 26 CFR part 1 is cor-rected by making the following correctingamendments:

* * * * *

Part 1—INCOME TAXES

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

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

§1.409A–1 [Corrected]

Par. 2. Section 1.409A–1 is amendedas follows:

1. Paragraph (a)(3)(i) is revised.

2. The first and second sentences ofparagraph (a)(5) are revised.

3. The first sentences of paragraphs(b)(4)(i) and (b)(4)(i)(D) are revised.

4. Examples 3 and 5 in paragraph(b)(4)(iii) are amended by revising the lastsentences of the paragraphs.

5. Paragraph (b)(5)(iv)(B)(2)(ii) is re-vised.

6. In paragraph (b)(8)(iii) the first sen-tence is revised.

7. The first sentence of paragraph(b)(9)(v)(A) is revised.

8. Paragraph (c)(2)(i)(H) is revised.9. Paragraph (c)(3)(viii) is revised.10. The last sentence of paragraph

(f)(1) is revised.11. The ninth sentence of paragraph

(h)(1)(ii) is revised.12. The first sentence of paragraph

(i)(2) is revised.

§1.409A–1 Definitions and covered plans.

(a) * * *(3) * * *(i) * * * With respect to an individual

for a taxable year, the term nonqualifieddeferred compensation plan does not in-clude any scheme, trust, arrangement,or plan maintained with respect to suchindividual, to the extent contributionsmade by or on behalf of such individual tosuch scheme, trust, arrangement, or plan,or credited allocations, accrued benefits,earnings, or other amounts constitutingincome, of such individual under suchscheme, trust, arrangement, or plan, areexcludable by such individual for Federalincome tax purposes pursuant to any bi-lateral income tax convention, or otherbilateral or multilateral agreement, towhich the United States is a party.

* * * * *(5) * * * The term nonqualified deferred

compensation plan does not include a plan,or a portion of a plan, to the extent that theplan provides bona fide vacation leave,sick leave, compensatory time, disabilitypay, or death benefits. For these purposes,the terms “disability pay” and “death ben-efits” have the same meanings as providedin §31.3121(v)(2)–1(b)(4)(iv)(C) of thischapter, provided that for purposes of thisparagraph, such disability pay and deathbenefits may be provided through insur-ance and the lifetime benefits payable

September 17, 2007 663 2007–38 I.R.B.

under the plan are not treated as includingthe value of any taxable term life insurancecoverage or taxable disability insurancecoverage provided under the plan. * * *

(b) * * *(4) * * * (i) In general. A deferral

of compensation does not occur under aplan with respect to any payment (as de-fined in §1.409A–2(b)(2)) that is not adeferred payment, provided that the ser-vice provider actually or constructively re-ceives such payment on or before the lastday of the applicable 21/2 month period.* * *

* * * * *(D) A payment is a deferred payment if

it is made pursuant to a provision of a planthat provides for the payment to be made orcompleted on or after any date, or upon orafter the occurrence of any event, that willor may occur later than the end of the appli-cable 21/2 month period, such as a separa-tion from service, death, disability, changein control event, specified time or scheduleof payment, or unforeseeable emergency,regardless of whether an amount is actu-ally paid as a result of the occurrence ofsuch a payment date or event during the ap-plicable 21/2 month period. * * *

* * * * *(iii) * * *Example 3. * * * The bonus plan will not be con-

sidered to have provided for a deferral of compen-sation if the bonus is paid or made available to Em-ployee C on or before March 15, 2011.

* * * * *Example 5. * * * The bonus plan provides for

a deferral of compensation, and will not qualify as ashort-term deferral regardless of whether the bonusis paid or made available on or before March 15,2011 (and generally any payment before June 1, 2011would constitute an impermissible acceleration of apayment).

* * * * *(5) * * *(iv) * * *(B) * * *(2) * * *(ii) A valuation based upon a formula

that, if used as part of a nonlapse restric-tion (as defined in §1.83–3(h)) with respectto the stock, would be considered to be thefair market value of the stock pursuant to§1.83–5, provided that such stock is val-ued in the same manner for purposes ofany transfer of any shares of such classof stock (or any substantially similar classof stock) to the issuer or any person that

owns stock possessing more than 10 per-cent of the total combined voting power ofall classes of stock of the issuer (applyingthe stock attribution rules of §1.424–1(d)),other than an arm’s length transaction in-volving the sale of all or substantially allof the outstanding stock of the issuer, andsuch valuation method is used consistentlyfor all such purposes, and provided fur-ther that this paragraph (b)(5)(iv)(B)(2)(ii)does not apply with respect to stock sub-ject to a stock right payable in stock, wherethe stock acquired pursuant to the exerciseof the stock right is transferable other thanthrough the operation of a nonlapse restric-tion.

* * * * *(8) * * *(iii) * * * A tax equalization agreement

does not provide for a deferral of com-pensation if payments made under suchtax equalization agreement are made nolater than the end of the second taxableyear of the service provider beginning af-ter the taxable year of the service providerin which the service provider’s U.S. Fed-eral income tax return is required to befiled (including any extensions) for theyear to which the compensation subjectto the tax equalization payment relates,or, if later, the second taxable year of theservice provider beginning after the lat-est such taxable year in which the serviceprovider’s foreign tax return or payment isrequired to be filed or made for the year towhich the compensation subject to the taxequalization payment relates. * * *

* * * * *(9) * * *(v) * * *(A) * * * To the extent a separation pay

plan (including a plan providing paymentsupon a voluntary separation from service)entitles a service provider to payment bythe service recipient of reimbursementsthat are not otherwise excludible fromgross income for expenses that the serviceprovider could otherwise deduct undersection 162 or section 167 as businessexpenses incurred in connection with theperformance of services (ignoring any ap-plicable limitation based on adjusted grossincome), or of reasonable outplacementexpenses and reasonable moving expensesactually incurred by the service providerand directly related to the termination ofservices for the service recipient, such

plan does not provide for a deferral ofcompensation to the extent such rightsapply during a limited period of time (re-gardless of whether such rights extendbeyond the limited period of time). * * *

* * * * *(c) * * *(2) * * *(i) * * *(H) All deferrals of compensation with

respect to that service provider under allplans of the service recipient to the extentsuch plans are stock rights (as defined inparagraph (l) of this section) subject to sec-tion 409A, are treated as deferred under asingle plan.

* * * * *(3) * * *(viii) * * * The plan aggregation rules

of paragraph (c)(2)(i) of this section donot apply to the written plan requirementsof this paragraph (c)(3). Accordingly, de-ferrals of compensation under an agree-ment, method, program, or other arrange-ment that fails to meet the requirements ofsection 409A solely due to a failure to meetthe written plan requirements of this para-graph (c)(3) are not aggregated with de-ferrals of compensation under other agree-ments, methods, programs, or other ar-rangements that meet such requirements.

* * * * *(f) * * *(1) In general. * * * The term service

provider generally includes a person whohas separated from service (a former ser-vice provider).

* * * * *(h) * * *(1) * * *(ii) Termination of employment. * * *

Notwithstanding the foregoing provisionsof this paragraph (h)(1)(ii), a plan maytreat another level of reasonably antici-pated permanent reduction in the level ofbona fide services as a separation from ser-vice, provided that the level of reductionrequired must be designated in writing asa specific percentage, and the reasonablyanticipated reduced level of bona fide ser-vices must be greater than 20 percent butless that 50 percent of the average level ofbona fide services provided in the immedi-ately preceding 36 months. * * *

* * * * *(i) * * *

2007–38 I.R.B. 664 September 17, 2007

(2) * * * For purposes of identifyinga specified employee by applying the re-quirements of section 416(i)(1)(A)(i), (ii),and (iii), the definition of compensationunder §1.415(c)–2(a) is used, applied asif the service recipient were not using anysafe harbor provided in §1.415(c)–2(d),were not using any of the elective specialtiming rules provided in §1.415(c)–2(e),and were not using any of the electivespecial rules provided in §1.415(c)–2(g).* * *

* * * * *



1. The first sentences of paragraphs(a)(6) and (a)(9) are revised.

2. The third sentence of paragraph(b)(2)(ii)(A) is revised.

3. A new sentence is added after thethird sentence of paragraph (b)(2)(ii)(A).

§1.409A–2 Deferral elections.

(a) * * *(6) * * * In the case of a service recipi-

ent with a taxable year that is not the sameas the taxable year of the service provider,a plan may provide that fiscal year com-pensation may be deferred at the serviceprovider’s election if the election to defersuch compensation is made not later thanthe close of the service recipient’s taxableyear immediately preceding the first tax-able year of the service recipient in whichany services are performed for which suchcompensation is payable. * * *

* * * * *(9) * * * If a nonqualified deferred com-

pensation plan provides that the amountdeferred under the plan is determinedunder the formula for determining ben-efits under a qualified employer plan(as defined in §1.409A–1(a)(2)) or abroad-based foreign retirement plan (asdefined in §1.409A–1(a)(3)(v)) main-tained by the service recipient but appliedwithout regard to one or more limitationsapplicable to the qualified employer planunder the Internal Revenue Code or to thebroad-based foreign retirement plan underother applicable law, or that the amountdeferred under the nonqualified deferredcompensation plan is determined as an

amount offset by some or all of the bene-fits provided under the qualified employerplan or the broad-based foreign retirementplan, an increase in amounts deferredunder the nonqualified deferred compen-sation plan that results directly from theoperation of the qualified employer planor broad-based foreign retirement plan(other than service provider actions de-scribed in paragraphs (a)(9)(iii) and (iv)of this section) including changes in ben-efit limitations applicable to the qualifiedemployer plan or the broad-based foreignretirement plan under the Internal Rev-enue Code or other applicable law doesnot constitute a deferral election underthe nonqualified deferred compensationplan, provided that such operation doesnot otherwise result in a change in thetime or form of a payment under the non-qualified deferred compensation plan, andprovided further that such change in theamounts deferred under the nonqualifieddeferred compensation plan does not ex-ceed that change in the amounts deferredunder the qualified employer plan or thebroad-based foreign retirement plan, asapplicable. * * *

* * * * *(b) * * *(2) * * *(ii) * * *(A) * * * For purposes of §1.409A–1,

this section, and §§1.409A–3 through1.409A–6, the term life annuity means aseries of substantially equal periodic pay-ments, payable not less frequently thanannually, for the life (or life expectancy)of the service provider, or a series ofsubstantially equal periodic payments,payable not less frequently than annu-ally, for the life (or life expectancy) ofthe service provider, followed upon thedeath or end of the life expectancy of theservice provider by a series of substan-tially equal periodic payments, payablenot less frequently than annually, for thelife (or life expectancy) of the serviceprovider’s designated beneficiary (if any).Notwithstanding the foregoing, a scheduleof payments does not fail to be an annu-ity solely because such plan provides foran immediate payment of the actuarialpresent value of all remaining annuitypayments if the actuarial present valueof the remaining annuity payments fallsbelow a predetermined amount, and the

immediate payment of such amount doesnot constitute an accelerated payment forpurposes of §1.409A–3(j), provided thatsuch feature, including the predeterminedamount, is established by no later than thetime and form of payment is otherwiserequired to be established, and providedfurther that any change in such feature,including the predetermined amount, is achange in the time and form of payment.* * *

* * * * *



1. The first sentence of paragraph (c) isrevised.

2. The last sentence of paragraph(i)(1)(ii)(B) is revised.

3. The fourth sentence of paragraph(i)(3)(ii) is revised.

4. The last sentence of paragraph(j)(4)(vi) is revised.

5. The last sentence of paragraph(j)(4)(ix)(B) is revised.

6. The first sentence of paragraph (j)(5)is revised.

7. Paragraph (j)(5)(iv) is revised.

§1.409A–3 Permissible payments.

* * * * *(c) * * * Except as otherwise provided

in this paragraph (c), for an amount ofdeferred compensation under a plan, theplan may designate only one time and formof payment upon the occurrence of eachevent described in paragraph (a)(1), (2),(3), (5), or (6) of this section. * * *

* * * * *(i) * * *(1) * * *(ii) * * *(B) * * * A change in the limitation or a

change in the time and form of payment ofany payment that is not otherwise made atthe scheduled payment date due to applica-tion of the formula limitation is subject tothe requirements of §1.409A–2(b) (subse-quent deferral elections) and paragraph (j)of this section (accelerated payments).

* * * * *(3) * * *(ii) * * * However, the determination

of amounts reasonably necessary to sat-isfy the emergency need is not required to

September 17, 2007 665 2007–38 I.R.B.

take into account any additional compen-sation that is available from a qualified em-ployer plan as defined in §1.409A–1(a)(2)(including any amount available by obtain-ing a loan under the plan), or that due tothe unforeseeable emergency is availableunder another nonqualified deferred com-pensation plan (including a plan that wouldprovide for deferred compensation exceptdue to the application of the effective dateprovisions under §1.409A–6). * * *

* * * * *(j) * * *(4) * * *(vi) * * * However, the total payment

under this acceleration provision must notexceed the aggregate of the FICA or RRTAamount, and the income tax withholdingrelated to such FICA or RRTA amount.

* * * * *(ix) * * *(B) * * * Solely for purposes of this

paragraph (j)(4)(ix)(B), the applicable ser-vice recipient with the discretion to liqui-date and terminate the agreements, meth-ods, programs, and other arrangements isthe service recipient that is primarily liableimmediately after the transaction for thepayment of the deferred compensation.

* * * * *(5) * * * If a nonqualified deferred com-

pensation plan provides that the amountdeferred under the plan is the amountdetermined under the formula determin-ing benefits under a qualified employerplan (as defined in §1.409A–1(a)(2)), ora broad-based foreign retirement plan(as defined in §1.409A–1(a)(3)(v)) main-tained by the service recipient but appliedwithout regard to one or more limitationsapplicable to the qualified employer planunder the Internal Revenue Code or to thebroad-based foreign retirement plan underother applicable law, or that the amountdeferred under the nonqualified deferredcompensation plan is determined as anamount offset by some or all of the bene-fits provided under the qualified employerplan or broad-based foreign retirementplan, a decrease in amounts deferredunder the nonqualified deferred compen-sation plan that results directly from theoperation of the qualified employer planor broad-based foreign retirement plan(other than service provider actions de-scribed in paragraphs (j)(5)(iii) and (iv)

of this section) including changes in ben-efit limitations applicable to the qualifiedemployer plan or the broad-based foreignretirement plan under the Internal Rev-enue Code or other applicable law doesnot constitute an acceleration of a paymentunder the nonqualified deferred compen-sation plan, provided that such operationdoes not otherwise result in a change inthe time or form of a payment under thenonqualified deferred compensation plan,and provided further that the change in theamounts deferred under the nonqualifieddeferred compensation plan does not ex-ceed such change in the amounts deferredunder the qualified employer plan or thebroad-based foreign retirement plan, asapplicable. * * *

* * * * *(iv) A service provider’s action or in-

action under a qualified employer planwith respect to elective deferrals and otheremployee pre-tax contributions subject tothe contributions restrictions under section401(a)(30) or section 402(g), and after-taxcontributions by the service provider toa qualified employer plan that providesfor such contributions, that affects theamounts that are credited under one ormore nonqualified deferred compensationplans as matching amounts or other similaramounts contingent on such elective de-ferrals, pre-tax contributions, or after-taxcontributions, provided that the total ofsuch matching or contingent amounts, asapplicable, never exceeds 100 percent ofthe matching or contingent amounts thatwould be provided under the qualifiedemployer plan absent any plan-based re-strictions that reflect limits on qualifiedplan contributions under the Internal Rev-enue Code.

* * * * *


Par. 5. Section 1.409A–6 is amendedby revising paragraphs (a)(3)(i) and (ii)and (a)(4)(iv) to read as follows:

§1.409A–6 Application of section 409Aand effective dates.

* * * * *(a) * * *(3) * * *(i) * * * The amount of compensation

deferred before January 1, 2005, under a

nonqualified deferred compensation planthat is a nonaccount balance plan (as de-fined in §1.409A–1(c)(2)(i)(C)), equalsthe present value of the amount to whichthe service provider would have been enti-tled under the plan if the service providervoluntarily terminated services withoutcause on December 31, 2004, and re-ceived a payment of the benefits availablefrom the plan on the earliest possible dateallowed under the plan to receive a pay-ment of benefits following the terminationof services, and received the benefits inthe form with the maximum value. * * *

(ii) * * * The amount of compensationdeferred before January 1, 2005, under anonqualified deferred compensation planthat is an account balance plan (as definedin §1.409A–1(c)(2)(i)(A)), equals the por-tion of the service provider’s account bal-ance as of December 31, 2004, the right towhich was earned and vested (as defined inparagraph (a)(2) of this section) as of De-cember 31, 2004, plus any future contribu-tions to the account, the right to which wasearned and vested (as defined in paragraph(a)(2) of this section) as of December 31,2004, to the extent such contributions areactually made.

* * * * *(4) * * *(iv) * * * With respect to an ac-

count balance plan (as defined in§1.409A–1(c)(2)(i)(A)), it is not a ma-terial modification to change a notionalinvestment measure to, or to add to anexisting investment measure, an invest-ment measure that qualifies as a prede-termined actual investment within themeaning of §31.3121(v)(2)–1(d)(2) ofthis chapter or, for any given taxableyear, reflects a reasonable rate of in-terest (determined in accordance with§31.3121(v)(2)–1(d)(2)(i)(C) of this chap-ter). * * *

* * * * *

Guy R. Traynor,Federal Register Liaison,

Legal Processing Division,Publication & Regulations Branch,

Associate Chief Counsel(Procedure & Administration).

(Filed by the Office of the Federal Register on July 30, 2007,8:45 a.m., and published in the issue of the Federal Registerfor July 31, 2007, 72 F.R. 41620)

2007–38 I.R.B. 666 September 17, 2007

Built-in Gains and LossesUnder Section 382(h);Correction



ACTION: Correcting amendments.

SUMMARY: This document contains cor-rections to temporary regulations (T.D.9330, 2007–31 I.R.B. 239) that werepublished in the Federal Register onThursday, June 14, 2007 (72 FR 32792)applying to corporations that have un-dergone ownership changes within themeaning of section 382. These regulationsprovide guidance regarding the treatmentof prepaid income under the built-in gainprovisions of section 382(h).

DATES: These corrections are effectiveAugust 1, 2007.

FOR FURTHER INFORMATIONCONTACT: Keith Stanley at (202)622–7750 (not a toll-free number).


Background

The temporary regulations that are thesubject of this document are under section382 of the Internal Revenue Code.

Need for Correction

As published, temporary regulations(T.D. 9330) contain errors that may proveto be misleading and are in need of clarifi-cation.

* * * * *

Correction of Publication

Accordingly, 26 CFR part 1 is cor-rected by making the following correctingamendments:


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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.382–7T is amended

by revising paragraph (b)(2) to read as fol-lows:

§1.382–7T Built-in gains and losses(temporary).

* * * * *(b) * * *(2) The applicability of this section ex-

pires on June 14, 2010.Par. 3. The signature block is revised

by adding the language “Approved: June4, 2007.”





Grantor Retained InterestTrusts — Application ofSections 2036 and 2039;Hearing



ACTION: Change of location for publichearing.

SUMMARY: This document provides achange of location for a public hearing onproposed regulations (REG–119097–05,2007–28 I.R.B. 74) providing guidance onthe portion of a trust properly includiblein a grantor’s gross estate under InternalRevenue Code sections 2036 and 2039 ifthe grantor has retained the use of propertyin a trust or the right to annuity, unitrust,or other income payment from such trustfor life, for any period not ascertainablewithout reference to the grantor’s death,or for a period that does not in fact endbefore the grantor’s death.

DATES: The public hearing is being heldon Wednesday, September 26, 2007, at10 a.m.

ADDRESSES: The public hearing wasoriginally being held in the IRS Audito-rium, Internal Revenue Building, 1111Constitution Avenue, NW, Washington,DC. The hearing location has changed.The public hearing will be held in room2116, Internal Revenue Building, 1111Constitution Avenue, NW, Washington,DC.

FOR FURTHER INFORMATIONCONTACT: LaNita Van Dyke,(202) 622–3215 or Richard Hurst [email protected].


The subject of the public hearingis a notice of proposed rulemaking(REG–119097–05) that was publishedin the Federal Register on Thursday, June7, 2007 (72 FR 31487).

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons, who submitwritten comments and outlines by Septem-ber 5, 2007, may present oral comments atthe hearing.

A period of 10 minutes is allotted toeach person for presenting oral comments.The IRS will prepare an agenda contain-ing the schedule of speakers. Copies ofthe agenda will be made available, free ofcharge, at the hearing.





September 17, 2007 667 2007–38 I.R.B.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2007–38 I.R.B. i September 17, 2007

Numerical Finding List1

Bulletins 2007–27 through 2007–38

Announcements:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Notices:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Proposed Regulations:

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

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

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

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

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

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

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

Proposed Regulations— Continued:

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

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

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

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

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

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

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

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

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

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

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

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

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

Revenue Procedures:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Revenue Rulings:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Conventions:

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

Treasury Decisions:

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

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

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

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

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

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

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

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

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

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

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

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

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

9339, 2007-35 I.R.B. 437

9340, 2007-36 I.R.B. 487

9341, 2007-35 I.R.B. 449

9342, 2007-35 I.R.B. 451

9343, 2007-36 I.R.B. 533

9344, 2007-36 I.R.B. 535

9345, 2007-36 I.R.B. 523

9346, 2007-37 I.R.B. 570

9347, 2007-38 I.R.B. 624

9348, 2007-37 I.R.B. 563

9350, 2007-38 I.R.B. 607

9351, 2007-38 I.R.B. 616

9352, 2007-38 I.R.B. 621

9355, 2007-37 I.R.B. 577

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

September 17, 2007 ii 2007–38 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletins 2007–27 through 2007–38

Announcements:

84-26

Obsoleted by

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

84-37

Obsoleted by

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

Notices:

2003-81

Modified and supplemented by

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

2006-43

Modified by

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

2006-56

Clarified by

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

2006-89

Modified by

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

2007-3

Modified by

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

2007-26

Modified by

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

Proposed Regulations:

REG-157711-02

Corrected by

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

REG-119097-05

Hearing location change by

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

REG-109367-06

Hearing scheduled by

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

REG-143601-06

Corrected by

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

REG-103842-07

Corrected by

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

Revenue Procedures:

90-27

Superseded by

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

Revenue Procedures— Continued:

95-28

Superseded by

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

97-14

Modified and superseded by

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

2002-9

Modified and amplified by

Rev. Proc. 2007-48, 2007-29 I.R.B. 110Rev. Proc. 2007-53, 2007-30 I.R.B. 233

2004-42

Superseded by

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

2005-16

Modified by

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

2005-27

Superseded by

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

2005-66

Clarified, modified, and superseded by

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

2006-25

Superseded by

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

2006-27

Modified by

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

2006-33

Superseded by

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

2006-55

Superseded by

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

2007-4

Modified by

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

2007-15

Superseded by

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

Revenue Rulings:

54-378

Clarified by

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

67-93

Obsoleted by

T.D. 9347, 2007-38 I.R.B. 624

74-299

Amplified by

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

Revenue Rulings— Continued:

75-425

Obsoleted by

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

76-450

Obsoleted by

T.D. 9347, 2007-38 I.R.B. 624

78-257

Obsoleted by

T.D. 9347, 2007-38 I.R.B. 624

78-369

Revoked by

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

89-96

Amplified by

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

92-17

Modified by

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

94-62

Supplemented by

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

2001-48

Modified by

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

2007-59

Amplified by

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

Treasury Decisions:

9321

Corrected by

Ann. 2007-68, 2007-32 I.R.B. 348Ann. 2007-78, 2007-38 I.R.B. 663

9330

Corrected by

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

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2007–1 through 2007–26 is in Internal Revenue Bulletin 2007–26, dated June 25, 2007.

2007–38 I.R.B. iii September 17, 2007

September 17, 2007 2007–38 I.R.B.

2007–38 I.R.B. September 17, 2007

September 17, 2007 2007–38 I.R.B.

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