US Internal Revenue Service: irb07-46

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Bulletin No. 2007-46November 13, 200

HIGHLIGHTS

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

SPECIAL ANNOUNCEMENT

Announcement 2007106, page 1021 .The announcement for the 2008 IRS Individual e-file Partner-ship Program will solicit applications from potential partnersfor participation in the program. The partnership opportuni-ties are a result of RRA 98, which authorized the IRS Commis-sioner to promote the benefits of and encourage the use ofe-file products and services through partnerships with variousentities that offer low-cost tax preparation and electronic filingof individual income tax returns for qualified taxpayers. Thoseapplicants that are accepted into the program will have a link(s)and offer description(s) for their products and services postedto IRS.gov (Partners Page).

INCOME TAX

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

REG14020606, page 1006 .Proposed regulations under section 1441 of the Code provideguidance regarding the withholding and reporting obligationsof a withholding agent in the case of a self tender by a pub-licly traded corporation, when a determination is required un-der section 301 as to whether the distribution is treated as a

dividend or a distribution in part or full payment in exchangefor stock. A public hearing is scheduled for February 6, 2008.

REG11412507, page 1012 .Proposed regulations under section 861 of the Code conchanges to existing final regulations regarding the sourccompensation for labor or personal services.

Notice 200786, page 990 .This notice provides additional transition relief, under se

409A of the Code, that was scheduled to expire on Decem31, 2007. Generally, this notice extends relief to Decem31, 2008, except that reliance on the proposed regulations der section 409A is not permitted after December 31, 20Notice 200778 modified. Section 3 of Notice 200679 mified and superseded.

Notice 200788, page 993 .This notice requests public comment on a proposal to chathe process by which taxpayers obtain the consent of the Cmissioner of Internal Revenue to change a method of accing for federal income tax purposes.

EMPLOYEE PLANS

Notice 200786, page 990 .This notice provides additional transition relief, under se409A of the Code, that was scheduled to expire on Decem31, 2007. Generally, this notice extends relief to Decem31, 2008, except that reliance on the proposed regulations der section 409A is not permitted after December 31, 20Notice 200778 modified. Section 3 of Notice 200679 mified and superseded.

(Continued on the next page)

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


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The IRS MissionProvide Americas 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 considerand Service personnel and others concerned are cautioagainst reaching the same conclusions in other cases unlthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.19 86 Code.This part includes rulings and decisions based on provisionthe Internal Revenue Code of 1986.

Part II.Treaties and Tax Legislation.This part is divided into two subparts as follows: SubpTax Conventions and Other Related Items, and Subpart Bislation and Related Committee Reports.

Part III.Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesubjects are contained in the other Parts and Subparts. Aincluded in this part are Bank Secrecy Act Administrativings. Bank Secrecy Act Administrative Rulings are issuthe Department of the Treasurys Office of the Assistant

retary (Enforcement).

Part IV.Items of General Interest.This part includes notices of proposed rulemakings, disment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulativefor the matters published during the preceding months. Tmonthly indexes are cumulated on a semiannual basis, andpublished 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 a

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

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Place missing child here.

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

The Supreme Court holds that the Trust missed

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

Section 7426.Civil Actions by Persons OtherThan Taxpayers

Ct. D. 2083

SUPREME COURT OF THE

UNITED STATESNo. 051541 (2007)

EC TERM OF YEARSTRUST v. UNITED STATES

CERTIORARI TO THE UNITEDSTATES COURT

OF APPEALS FOR THE FIFTHCIRCUIT

April 30, 2007

Syllabus

Under 26 U.S.C. 7426(a)(1), if the In-ternal Revenue Service (IRS) levies upon athird partys property to collect taxes owedby another, the third party may bring awrongful levy action against the UnitedStates, so long as such action is broughtbefore the expiration of 9 months fromthe date of the levy, 6532(c)(1). In con-trast, the limitations period for a tax re-fund action under 28 U.S.C. 1346(a)(1)begins with an administrative claim that

may be filed within at least two years, andmay be brought to court within another twoyears after an administrative denial. TheIRS levied on a bank account in whichpetitioner (Trust) had deposited funds be-cause the IRS assumed that the Trusts cre-ators had transferred assets to the Trust toevade taxes. The bank responded with acheck to the Treasury. Almost a year later,the Trust and others brought a 7426(a)(1)action claiming wrongful levies, but the

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

Held : The Trust missed 7426(a)(1)sdeadline for challenging a levy, andmay not bring the challenge as a taxrefund claim under 1346(a)(1). Section7426(a)(1) provides the exclusive remedyfor third-party wrongful levy claims. [A]precisely drawn, detailed statute pre-emptsmore general remedies, Brown v. GSA ,425 U.S. 820, 834, and it braces the pre-emption claim when resort to a generalremedy would effectively extend the limi-tations period for the specific one, see id.at 833. If third parties could avail them-selves of 1346(a)(1)s general tax refund jurisdiction, they could effortlessly evade7426(a)(1)s much shorter limitationsperiod. The Trust argues that becauseUnited States v. Williams , 514 U.S. 527,construed 1346(a)(1)s general jurisdic-tional grant expansively enough to cover

third parties wrongful levy claims, treat-ing 7426(a)(1) as the exclusive avenuefor these claims would amount to a disfa-vored holding that 7426(a)(1) implicitlyrepealed 1346(a)(1)s pre-existing juris-dictional grant. But this reads Williamstoo broadly. Williams involved a lien andwas decided on the specific understand-ing that no other remedy was open to theplaintiff. Here, the Trust challenges alevy and could have made a timely claimunder 7426(a)(1). Even if the presump-tion against implied repeals applied here,

7426(a)(1)s 9-month limitations periodcannot be reconciled with the notion thatthe same challenge would be open under 1346(a)(1) for up to four years. Nor canthe two statutory schemes be harmonizedby construing 7426(a)(1)s filing dead-line to cover only those actions seekingpre-deprivation remedies unavailable un-der 1346(a)(1). On its face, 7426(a)(1)applies to pre-deprivation and post-depri-vation claims alike. Pp. 47.

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

a unanimous Court.

SUPREME COURT OF THEUNITED STATES

No. 051541 (2007)

EC TERM OF YEARSTRUST v. UNITED STATES

On WRIT OF CERTIORARI TO THEUNITED STATES COURT

OF APPEALS FOR THE FIFTHCIRCUIT

April 30, 2007

JUSTICE STEVENS delivered theopinion of the Court.

This is a challenge to the Internal Rev-enue Services levy upon the property of atrust, to collect taxes owed by another, anaction specifically authorized by 26 U.S.C.7426(a)(1), but subject to a statutory fil-ing deadline the trust missed. The questionis whether the trust may still challenge thelevy through an action for tax refund un-der 28 U.S.C. 1346(a)(1). We hold that it

may not.

I

The Internal Revenue Code providesthat [i]f any person liable to pay any taxneglects or refuses to pay the same afterdemand, the amount . . . shall be a lien infavor of the United States upon all prop-erty and rights to property, whether realor personal, belonging to such person. 26U.S.C. 6321. A federal tax lien, how-ever, is not self-executing, and the IRS

must take [a]ffirmative action . . . toenforce collection of the unpaid taxes.United States v. National Bank of Com-merce , 472 U.S. 713, 720 (1985). One oits principal tools, ibid. , is a levy, whichis a legally sanctioned seizure and saleof property, Blacks Law Dictionary 926(8th ed. 2004); see also 6331(b) (Theterm levy as used in this title includesthe power of distraint and seizure by anymeans).

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To protect against a wrongful im-position upon property which is not thetaxpayers, S. Rep. No. 1708, 89thCong., 2d Sess., 30 (1966), the FederalTax Lien Act of 1966 added 7426(a)(1),providing that [i]f a levy has been madeon property . . . any person (other than theperson against whom is assessed the taxout of which such levy arose) who claimsan interest in . . . such property and thatsuch property was wrongfully levied uponmay bring a civil action against the UnitedStates in a district court. 80 Stat. 1143.The action must, however, be broughtbefore the expiration of 9 months fromthe date of the levy. 1 6532(c)(1). Thisshort limitations period contrasts with itscounterpart in a tax refund action under 28 U.S.C. 1346(a)(1), which begins withan administrative claim that may be filedwithin at least two years, and may be

brought to court within another two after an administrative denial. 2 The demand for greater haste when a third party contests alevy is no accident; as the Government ex-plained in the hearings before passage of the Act, [s]ince after seizure of propertyfor nonpayment of taxes [an IRS] districtdirector is likely to suspend further col-lection activities against the taxpayer, it isessential that he be advised promptly if hehas seized property which does not belongto the taxpayer. Hearings on H.R. 11256and H.R. 11290 before the House Com-

mittee on Ways and Means, 89th Cong., 2dSess., 5758 (1966) (written statement of Stanley S. Surrey, Assistant Secretary of the Treasury); see also id. at 72 (statementof Laurens Williams, Chairman, SpecialCommittee on Federal Liens, AmericanBar Association) (A short (9-month)statute of limitations is provided, becauseit is important to get such controversiesdecided quickly so the Government maypursue the taxpayers own property if itmade a mistake the first time).

II

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

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

Almost a year after that, the Trust(joined by several other trusts created bythe Cullerses) brought a civil action under 26 U.S.C. 7426(a)(1) claiming wrongfullevies, but the District Court dismissed it

because the complaint was filed after the9-month limitations period had expired,see 6532(c)(1). The court also notedthat tax refund claims under 28 U.S.C.1346(a)(1) were not open to the plaintiff trusts because 7426 affords the exclu-sive remedy for an innocent third partywhose property is confiscated by the IRSto satisfy another persons tax liability. BSC Term of Years Trust v. United States ,20011 USTC 50,174, p. 87,237, n. 1,87 AFTR 2d 2001390, p. 2001547, n.1 (WD Tex., 2000) (quoting Texas Comm.

Bank Fort Worth, N.A. v. United States ,896 F.2d 152, 156 (CA5 1990); emphasisdeleted). At first the Trust sought reviewby the Court of Appeals for the FifthCircuit, but then voluntarily dismissedits appeal. BSC Term of Years Trust v.United States , 87 AFTR 2d 20011039,p. 20012532 (2001).

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

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

III

In a variety of contexts, the Courthas held that a precisely drawn, detailedstatute pre-empts more general remedies. Brown v. GSA, 425 U.S. 820, 834 (1976);see Block v. North Dakota ex rel. Board of Univ. and School Lands , 461 U.S.273, 284286 (1983) (adverse claimantsto real property of the United States maynot rely on officers suits or on other general remedies because the Quiet TitleAct of 1972 is their exclusive recourse);see also Stonite Products Co. v. Melvin Lloyd Co. , 315 U.S. 561 (1942) (venue inpatent infringement cases is governed bya statute dealing specifically with patents,not a general venue provision). It bracesthe preemption claim when resort to ageneral remedy would effectively extendthe limitations period for the specific one.See Brown v. GSA , supra , at 833 (rejectingan interpretation that would driv[e] outof currency a narrowly aimed provisionwith its rigorous . . . time limitationsby permitting access to the courts under other, less demanding statutes); see also Rancho Palos Verdes v. Abrams , 544 U.S.113, 122123 (2005) (concluding that 47U.S.C. 332(c) precludes resort to thegeneral cause of action under 42 U.S.C.1983, in part because 332 limits relief in ways that 1983 does not by requiring judicial review to be sought within 30days); 544 U.S. at 130, n. (STEVENS, J.,concurring in judgment) (same).

Resisting the force of the better-fit-ted statute requires a good countervailingreason, and none appears here. Con-

gress specifically tailored 7426(a)(1) tothird-party claims of wrongful levy, andif third parties could avail themselvesof the general tax refund jurisdiction of 1346(a)(1), they could effortlessly evade

1 This period can be extended for up to 12 months if the third party makes an administrative request for the return of the property wrongfully levied upon. See 26 U.S.C. 6532(c)(2).2 Title 28 U.S.C. 1346(a)(1) gives district courts jurisdiction, concurrent with the United States Court of Federal Claims, over [a]ny civil action against the United States for the recoveryof, among other things, any internal revenue tax alleged to have been erroneously or illegally assessed or collected. A taxpayer may bring such an action within two years after the IRSdisallows the taxpayers administrative refund claim. See 26 U.S.C. Secs. 6532(a)(1)(2); see also 7422(a) (requiring a taxpayer to file the administrative claim before seeking a refund incourt). An administrative refund claim must, in turn, be filed within two years from the date the tax was paid or three years from the time the tax return was filed, whichever is later. See6511(a).3 The District Court declined to dismiss the Trusts claim on res judicata grounds, and the Government does not argue claim or issue preclusion in this Court, see Brief for United States 5, n. 2.

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the levy statutes 9-month limitations pe-riod thought essential to the Governmentstax collection.

The Trust argues that in United Statesv. Williams , 514 U.S. 527 (1995), we con-strued the general jurisdictional grant of 1346(a)(1) expansively enough to cover third parties wrongful levy claims. So, ac-cording to the Trust, treating 7426(a)(1)as the exclusive avenue for these claimswould amount to a disfavored holding that7426(a)(1) implicitly repealed the pre-ex-isting jurisdictional grant of 1346(a)(1).See Radzanower v. Touche Ross & Co .,426 U.S. 148 (1976); Morton v. Mancari ,417 U.S. 535 (1974).

But the Trust reads Williams toobroadly. Although we decided that1346(a)(1) authorizes a tax-refund claimby a third party whose property was sub- jected to an allegedly wrongful tax lien,

we so held on the specific understanding

that no other remedy, not even a timelyclaim under 7426(a)(1), was open to theplaintiff in that case. See Williams , supra ,at 536538. Here, on the contrary, theTrust challenges a levy, not a lien, andcould have made a timely claim under 7426(a)(1) for the relief it now seeksunder 1346(a)(1). 4

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

the Trust proposes that the two statutory

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

* * *The Trust missed the deadline for chal-

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

It is so ordered.

4 It has been commonly understood that Williams did not extend 1346(a)(1) to parties in the Trusts position. See 434 F.3d 807, 810 (CA5 2006) (case below) (To construe Williams to allowan alternative remedy under 1346, with its longer statute of limitations period, would undermine the surety provided by the clear avenue to recovery under 7426 (citation omitted)); Dahnv. United States, 127 F.3d 1249, 1253 (CA10 1997) ([T]here were no tax levies involved in [Williams]. Thus, the Court was concerned solely with the reach of 1346 per se; the exclusivityof a concurrent 7426 claim was never in issue. Indeed, the Court specifically emphasized the inapplicability of 7426 (or any other meaningful remedy) to reinforce its broad reading of 1346); WWSM Investors v. United States, 64 F.3d 456, 459 (CA9 1995) (Brunetti, J., dissenting) (The Supreme Court recognized Williams as a refund, not a wrongful levy, case, and [didnot] even hint that 7426 was not the exclusive remedy for a claimed wrongful levy); Rev.Rul. 200549, 20052 Cum.Bull. 126 (The rationale in Williams is inapplicable to wrongful levysuits because, Congress created an exclusive remedy under section 7426 for third persons claiming an interest in property levied upon by the [IRS]); but see WWSM Investors, supra, at 459(majority opinion) ([S]eizing money from WWSMs bank account is functionally equivalent to what the IRS did in Williams placing a lien on property in escrow under circumstanceswhich compelled Mrs. Williams to pay the IRS and discharge the lien).

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

US-UK Agreement Definingthe Term First NotificationUnder Treaty Article 26(1)

Announcement 2007107

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

ment) entered into by the CompetentAuthorities of the United States and theUnited Kingdom regarding the definitionof first notification under paragraph 1 of Article 26 (Mutual Agreement Procedure)

of the Convention between the UnitedStates of America and the United King-dom of Great Britain and Northern Ireland

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

The text of the Agreement is as follows:

COMPETENT AUTHORITY AGREEMENT

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

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

Definition of First Notification under Article 26(1)

Paragraph 1 of Article 26 provides that

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

The competent authorities of the United States and the United Kingdom have agreed that paragraph 1 of Article 26 of theConvention shall be interpreted in the way most favourable to the taxpayer, consistent with the approach set out in the OECDcommentary on the Model Tax Convention on Income and on Capital. In order to provide certainty for taxpayers and to ensure

consistent application of the provision, the date of first notification of the action resulting in taxation not in accordance with theConvention shall be treated as the date when all domestic remedies have been exhausted.

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

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

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

Agreed to by the Undersigned competent authorities:

Date Date

Frank Y. NgU.S. Competent Authority

Diane HayU.K. Competent Authority

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

Notice 200786

SECTION 1. PURPOSE

This notice provides additional tran-sition relief regarding the application of section 409A of the Internal RevenueCode to nonqualified deferred compensa-tion plans. Generally, this notice extendsto December 31, 2008, the transition relief that was scheduled to expire on December 31, 2007, as provided in Notice 200679,200643 I.R.B. 763, and the preamble tothe final regulations under section 409A(72 Fed. Reg. 19234 (April 17, 2007))(the final regulations preamble). Thistransition relief revokes and supersedesthe transition relief provided in III of Notice 200778, 200741 I.R.B. 780, andmodifies the relief provided in IV of Notice 200778 related to employmentagreements, as described below. Thistransition relief does not affect the guid-ance provided in IV of Notice 200778related to predetermined cashout features,or the guidance provided in VI of Notice200778, related to the application of sec-tion 409A(b) (restrictions on certain trustsand other arrangements).

SECTION 2. BACKGROUND

Section 409A provides certain require-ments applicable to nonqualified deferredcompensation plans. If a plan does notmeet those requirements, participants inthe plan are required to immediately in-clude amounts deferred under the plan inincome and pay additional taxes on suchincome. Beginning with Notice 20051,

20051 C.B. 274 , the Treasury Depart-ment and the IRS have issued several no-tices and other guidance providing transi-tion relief intended to permit and promotecompliance with the requirements of sec-tion 409A. The Treasury Department andthe IRS also issued proposed regulationsunder section 409A (70 Fed. Reg. 57930(Oct. 4, 2005)) (the proposed regulations),and final regulations under section 409A inApril 2007 (the final regulations).

On September 10, 2007, the TreasuryDepartment and the IRS issued Notice200778, granting certain transition re-lief intended to facilitate compliance withthe written plan requirements set forth inthe final regulations. See 1.409A1(c).

Commentators stated that although the No-tice 200778 transition relief was helpful,the transition relief in that notice did notadequately address the need for additionaltime for service recipients and serviceproviders to analyze all of their plans andmake informed and reasoned decisionsregarding the changes that would be nec-essary to bring existing arrangements intocompliance with the final regulations.This notice addresses these concerns bygenerally extending the transition relief currently scheduled to expire on Decem-

ber 31, 2007 through December 31, 2008.Section III of Notice 200778 is revokedand superseded by this notice.

SECTION 3. EXTENSION OFTRANSITION RELIEF

.01 Extension of Transition Relief Provided in Notice 200679

Section 3 of Notice 200679 is mod-ified and superseded in accordance withparagraphs (A) and (B) of this 3.01.

(A) General rule . During 2008, tax-payers are not required to comply with therequirements of the final regulations. In-stead, they are required to operate a non-qualified deferred compensation plan incompliance with the plans terms, to theextent consistent with section 409A andthe applicable guidance (including Notice20051). Where a provision of Notice20051 is inconsistent with the final regu-lations, taxpayersmay rely upon either No-tice 20051 or the final regulations. To theextent an issue is not addressed in Notice

20051 or other applicable guidance, tax-payers must apply a reasonable, good faithinterpretation of the statute. Reliance uponthe final regulations is treated as applyinga reasonable, good faith interpretation of the statute.

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

proposed regulations (relating to the ap-plication of section 409A to partners andpartnerships) until further guidance is is-sued and sections XI.C (relatingto changesin payment elections or conditions) andXI.H (relating to substitutions of non-dis-

counted stock options and stock apprecia-tion rights fordiscounted stock options andstock appreciation rights) of the preambleto the proposed regulations continue to ap-ply to the extent provided in 3 of Notice200679, as modified and superseded byparagraph (B) of this 3.01.

(B) Section 3 of Notice 200679 modified and superseded.

(1) Paragraphs .01, .02, .03 and .04 of 3 of Notice 200679 are modified andsuperseded to reflect the general rule pro-vided in paragraph (A) and to read as fol

lows:.01. Amendment and operation of plans

adopted on or before December 31, 2008A plan adopted on or before December

31, 2008 will not be treated as violat-ing section 409A(a)(2), (3) or (4) on orbefore December 31, 2008 if the plan isoperated through December 31, 2008 incompliance with the provisions of section409A and applicable provisions of Notice20051 and any other generally applicableguidance published with an effective dateprior to January 1, 2008, and the plan isamended on or before December 31, 2008to conform to the provisions of section409A and the final regulations under sec-tion 409A (70 Fed. Reg. 19234 (April17, 2007)) with respect to amounts subjectto section 409A. For such periods, to theextent an issue is not addressed in an appli-cable provision of Notice 20051 or othergenerally applicable guidance publishedwith an effective date prior to January 12008, the plan must be operated consistentwith a good faith, reasonable interpreta-tion of section 409A, and, to the extent notinconsistent therewith, the plans terms.For purposes of this notice, generallyapplicable guidance published with an ef-fective date prior to January 1, 2008 doesnot include the final regulations.

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

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with the proposed regulations or the fi-nal regulations will constitute reasonable,good faith compliance with the statute.For periods after December 31, 2007 andbefore January 1, 2009, compliance withthe final regulations (but not the proposedregulations) will constitute reasonable,good faith compliance with the statute.To the extent that a provision of either the proposed regulations or the final reg-ulations is inconsistent with a provisionof Notice 20051, or a provision of theproposed regulations is inconsistent with aprovision of the final regulations, for peri-ods before January 1, 2008, the plan maycomply with the provision of the proposedregulations, the final regulations or Notice20051. To the extent that a provision of the final regulations is inconsistent with aprovision of Notice 20051, after Decem-ber 31, 2007 and before January 1, 2009,

the plan may comply with the provision of the final regulations or Notice 20051.A plan will not be operating in good

faith compliance if discretion provided un-der the terms of the plan is exercised in amanner that causes the plan to fail to meetthe requirements of section 409A. For ex-ample, if an employer retains the discretionunder the terms of the plan to delay or ex-tend payments under the plan in a manner that violates section 409A and exercisessuch discretion, the plan will not be con-sidered to be operated in good faith com-

pliance with section 409A with regard toany plan participant. However, an exerciseof a right under the terms of the plan by aparticipant solely with respect to that par-ticipants benefits under the plan, in a man-ner that causes the plan to fail to meet therequirements of section 409A, will not beconsidered to result in the plan failing tobe operated in good faith compliance withrespect to other participants. For example,the request for and receipt of an immediatepayment permitted under the terms of theplan if the participant forfeits 20 percent of the participants benefits (a haircut) will beconsidered a failure of the plan to meet therequirements of section 409A with respectto that participant, but not with respect toall other participants under the plan.

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

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

through December 31, 2008, with certainclarifications described below, and subjectto limitations for certain discounted stock rights also described below. Accordingly,with respect to amounts subject to section409A, a plan may provide, or be amendedto provide, for new payment elections onor before December 31, 2008, with respectto both the time and form of payment of such amounts and the election or amend-ment will not be treated as a change inthe time or form of payment under section409A(a)(4) or an acceleration of a pay-ment under section 409A(a)(3), providedthat the plan is so amended and electionsare made on or before December 31, 2008.With respect to an election or amendmentto change a time and form of paymentmade on or after January 1, 2006 and onor before December 31, 2006, the electionor amendment may apply only to amounts

that would not otherwise be payable in2006 and may not cause an amount tobe paid in 2006 that would not otherwisebe payable in 2006. With respect to anelection or amendment to change a timeand form of payment made on or after January 1, 2007 and on or before Decem-ber 31, 2007, the election or amendmentmay apply only to amounts that wouldnot otherwise be payable in 2007 andmay not cause an amount to be paid in2007 that would not otherwise be payablein 2007. With respect to an election or

amendment to change a time and form of payment made on or after January 1, 2008and on or before December 31, 2008, theelection or amendment may apply onlyto amounts that would not otherwise bepayable in 2008 and may not cause anamount to be paid in 2008 that would nototherwise be payable in 2008. So, for ex-ample, where an amount would otherwisebe payable upon an event, such as a sep-aration from service, an election in 2008cannot change the amount that would bepayable in 2008 if the service provider separated from service in 2008. In addi-tion, a deferral election may be made withrespect to an amount that is a short-termdeferral within the meaning of proposed1.409A1(b)(4), provided that the elec-tion is made before January 1, 2008 andbefore the year in which the amount wouldotherwise have been paid. Also, a deferralelection may be made with respect to anamount that is a short-term deferral withinthe meaning of final 1.409A1(b)(4),

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

This provision applies to elections or amendments by a service provider, a ser-vice recipient, or both a service provider and a service recipient. A service provider or service recipient may make more thanone change or amendmentunder this relief,provided that each such change or amend-ment is made in accordance with the dead-lines and conditions set forth in the ap-plicable transition relief. For example, aservice provider that in 2005 elected tochange the time and form of payment of deferred compensation to a lump sum pay-ment in 2010, may elect again in 2006,2007 or 2008 to change the time and formof payment in accordance with this para-graph. However, a service provider that in

2005 elected to be paid an amount in 2008(and that did not change such election in2006 or 2007) may not in 2008 change thetime and form of payment to be paid in alater year.

Similarly, except as provided belowwith respect to certain discounted stock rights, an outstanding stock right thatprovides for a deferral of compensationsubject to section 409A may be amendedto provide for fixed payment terms con-sistent with section 409A, or to permitholders of such rights to elect fixed pay-

ment terms consistent with section 409A,and such amendment or election will notbe treated as a change in the time and formof payment under section 409A(a)(4) or an acceleration of a payment under section409A(a)(3), provided that the option or right is so amended, and any elections aremade, on or before December 31, 2008.For this purpose, a stock right will not betreated as payable in a year solely becausethe stock right is exercisable during thatyear, if the stock right is also reasonablyexpected to be exercisable in a subsequentyear.

.03 Payments linked to qualified plansand certain other plans

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

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annuities, section 457(b) eligible plans,and certain foreign broad-based plans.Accordingly, (i) for periods ending on or before December 31, 2007, an electionas to the time and form of a paymentunder a nonqualified deferred compensa-tion plan that is controlled by a paymentelection made by the service provider or beneficiary of the service provider un-der a qualified employer plan describedin proposed or final 1.409A1(a)(2), aplan that includes a trust described in sec-tion 402(d), a plan described in section1022(i)(1) or (2) of the Employee Retire-ment Income Security Act, or a foreignbroad-based plan described in proposed or final 1.409A1(a)(3)(v), will not violatethe requirements of section 409A, pro-vided that the determination of the timeand form of the payment is made in accor-dance with the terms of the nonqualified

deferred compensation plan that governpayment elections, as in effect on October 3, 2004 and (ii) for periods ending after December 31, 2007 and before January1, 2009, the rules discussed in (i) will beapplied by reference to the provisions of the final regulations only. For example,where a nonqualified deferred compensa-tion plan provides as of October 3, 2004,that the time and form of payment to aservice provider or beneficiary will be thesame time and form of payment elected bythe service provider or beneficiary under

a qualified plan, it will not be a violationof section 409A for the plan administrator to make or commence payments under the nonqualified deferred compensationplan on or after January 1, 2005, and on or before December 31, 2008, pursuant to thepayment election under the qualified plan.Notwithstanding the foregoing, other pro-visions of the Internal Revenue Code andcommon law tax doctrines continue toapply to any election as to the time andform of a payment under a nonqualifieddeferred compensation plan.

.04 Substitutions of non-discounted stock options and stock appreciation rights for discounted stock options and stock appreciation rights

Notice 20051, Q&A18(d) providesthat it will not be a material modificationto replace a stock option or stock appre-ciation right otherwise providing for a de-ferral of compensation under section 409Awith a stock option or stock appreciationright that would not have constituted a de-

ferral of compensation under section 409Aif it had been granted upon the originaldate of grant of the replaced stock optionor stock appreciation right, provided thatthe cancellation and reissuance occurs onor before December 31, 2005. SectionXI.H of the preamble to the proposed reg-ulations extended the period during whichthe cancellation and reissuance may oc-cur until December 31, 2006, but only tothe extent a cancellation and reissuancein 2006 does not result in the cancella-tion of a deferral in exchange for cash or vested property in 2006. Except with re-spect to certain discounted stock rights de-scribed in 3.07 of Notice 200679, theperiod during which the cancellation andreissuance may occur is extended until De-cember 31, 2008, but only to the extentsuch cancellation and reissuance in 2007does not result in the cancellation of a de-

ferral in exchange for cash or vested prop-erty in 2007 and only to the extent suchcancellation and reissuance in 2008 doesnot result in the cancellation of a deferralin exchange for cash or vested property in2008. For example, a discounted optiongenerally may be replaced through De-cember 31, 2008 with an option that wouldnot have provided for a deferral of com-pensation, although the exercise of sucha discounted option after 2005 and beforethe cancellation and replacement generallywould result in a violation of section 409A

unless such exercise complied in operationwith the requirements of section 409A andthe applicable guidance.

Where replacement stock options or stock appreciation rights that would notconstitute deferred compensation subjectto section 409A are issued in accordancewith the conditions set forth in Notice20051, Q&A18(d), the preamble to theproposed regulations and this notice, suchreplacement stock options or stock appre-ciation rights will be treated for purposesof section 409A as if granted on the grantdate of the original stock option or stock appreciation right. For a discussion of cer-tain methods that commentators proposedto use to compensate option holders for the value of a lost discount, see sectionXI.H of the preamble to the proposed reg-ulations.

(2) Paragraph .06 of 3 of Notice200679 is modified and superseded toread as follows:

.06 Other transition issues

Notice 20051, Q&A21 provided re-lief with respect to certain initial deferralelections, generally providing that cer-tain requirements would not be applicableto elections made on or before March15, 2005. One of the conditions of therelief was that the plan be amended tocomply with the requirements of section409A in accordance with Notice 20051,Q&A19. Notice 20051, Q&A19 gen-erally required that plans be amendedby December 31, 2005. The March 15,2005 deadline for initial deferral electionswas not extended in the preamble to theproposed regulations; however, the planamendment requirement generally was ex-tended to December 31, 2006. Althoughthe initial deferral election relief containedin Notice 20051, Q&A21 only referredto the requirements of Notice 20051,Q&A19, the Treasury Department and

the IRS have become aware that manytaxpayers interpreted the extension ofthe plan amendment deadlines as flow-ing through to the requirements of Notice20051, Q&A21. To avoid unintentionalnoncompliance in this area, the deadlinefor a plan to be amended to reflect useof the relief provided in Notice 20051,Q&A21 is extended to December 31,2008. However, taxpayers retain the bur-den of demonstrating satisfaction of therequirement by showing that the defer-ral election was made by the March 15,

2005 deadline, in accordance with the planterms in effect on or before December 31,2005 (other than a requirement to make adeferral election on or before March 15,2005). See Notice 20051, Q&A21.

(3) Paragraphs .05 and .07 of 3 oNotice 200679 are not affected by thisnotice.

.02 Modification of Transition Relief Provided in the Final RegulationsPreamble

The relief provided in sections XII andXIII of the final regulations preamble ismodified to reflect the extension of the No-tice 200679 transition relief through De-cember 31, 2008, and the guidance pro-vided in section XIV of the final regula-tions preamble is modified with respect toperiods after December 31, 2007, as fol-lows:

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

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

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

(C) Section XII.D . With respect to pro-grams established before April 10, 2007where initial deferral elections have notbeen made by January 1, 2008, the tran-sition relief provided in the second para-

graph of section XII.D of the final regu-lations preamble remains unchanged (thatis, no further transition relief is providedby this notice).

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

SECTION 4. EFFECT ON OTHERDOCUMENTS

Nothing in this notice is intended tolimit the scope or applicability of the tran-sition reliefprovided in Notice20051, theproposed regulations or Notice 200679for periods before January 1, 2008. Thisnotice does not affect the guidance pro-vided in Notice 200633, 20061 C.B.754 (relating to the application of section409A(b)), Notice 200594, 20052 C.B.

1208 (relating to reporting and wage with-holding for 2005) and Notice 2006100,200651 I.R.B. 1109 (relating to reportingand wage withholding for 2006). Notwith-standing the section of the final regulationspreamble entitled Effect on Other Docu-ments, Notice 20051 is obsoleted onlyfor taxable years beginning on or after January 1, 2009, except for the followingsections of Notice 20051, which remaineffective after that date as modified by

any other applicable guidance: Q&A6(application to arrangements covered bysection 457); Q&A7 (application to ar-rangements between a partnership and apartner of the partnership); and Q&A24through Q&A38 (information reportingand withholding guidance).

Pursuant to this notice, Notice 20064,20063 C.B. 307 (relating to the applica-tion of section 409A to certain outstandingstock rights), is superseded by the finalregulations with respect to stock rightsissued in taxable years of the serviceprovider beginning after December 31,2008. Notice 200664, 200629 I.R.B. 88(relating to the acceleration of paymentsto comply with certain conflict of interestrules), is superseded by the final regu-lations effective for taxable years of theservice provider beginning after Decem-ber 31, 2008.

Section III of Notice 200778 is re-voked and superseded by this notice. Pur-suant to this notice, the penultimate para-graph and the first sentence of the finalparagraph of IV.A of Notice 200778 aremodified by substituting references to De-cember 31, 2008 for references to Decem-ber 31, 2007. The guidance otherwise pro-vided in IV of Notice 200778 is notaffected by this notice. Section 3 of No-tice 200679 is modified and supersededas provided in this notice. The guidanceand relief provided in the final regulations

preamble is modified as provided in thisnotice.

The Treasury Department and the IRSanticipate issuing guidance as soon as pos-sible with respect to the correction pro-gram and other matters discussed in Vof Notice 200778 and this notice does notaffect that section. In addition, this noticedoes not affect the guidance provided in VI of Notice 200778.

SECTION 5. DRAFTINGINFORMATION

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

at (202) 9279639 (not a toll-free num-ber).

Proposed Changes to theProcess for Obtaining theCommissioners Consentto Change a Method of AccountingNotice 200788

PURPOSE

This notice requests comments fromthe public regarding a proposal to changethe process by which taxpayers obtain theconsent of the Commissioner of InternalRevenue to change a method of account-ing for federal income tax purposes. Theproposal described in this notice is one

possible approach. The Internal RevenueService (IRS) is interested in consider-ing other possible approaches. Therefore,changes to the process, including any pilotprogram, will not become effective untilthe IRS considers public comments andsuggestions received in response to thisnotice and publishes guidance announcingchanges to the process.

BACKGROUND

A. The Existing Accounting Method

Change ProcessSection 446(e) of the Internal Revenue

Code requires taxpayers to obtain the con-sent of the Commissioner before changinga method of accounting for federal incometax purposes. A change in a method of ac-counting includes a change in the overallplan of accounting for gross income or de-ductions or a change in the treatment of any item that involves the proper time for the inclusion of the item in income or thetaking of the item as a deduction. Taxpay-

ers request the Commissioners consent tochange a method of accounting by filinga Form 3115, Application for Change in Accounting Method , that describes the cur-rent and new methods of accounting, iden-tifies items that will be treated differentlyunder the new method of accounting, andincludes a computation of any adjustmentrequired by section 481(a).

The Commissioner has issued admin-istrative procedures instructing taxpayers

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

The IRS believes that the proposal con-

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

PROPOSAL

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

A. Standard Consent Process

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

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

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

All changes in method of accountingthat are specifically identified in Rev.Proc. 20029 (or any successor), or other automatic consent guidance, would beeligible for consent under the standardconsent process. As is the case under the existing automatic consent process,taxpayers changing to one of these specif-ically identified methods of accountingwould ordinarily obtain audit protectionand ruling protection. The IRS antici-pates that Rev. Proc. 20029 (or anysuccessor), and other automatic consent

guidance, would be incorporated into theadministrative procedures that govern thestandard consent process. Consequently,the standard consent process would be theexclusive process available to taxpayerschanging to methods of accounting specif-ically identified in Rev. Proc. 20029(or any successor) and other automaticconsent guidance.

This proposal contemplates that thestandard consent process would be avail-able even for changes that are not identi-fied in Rev. Proc. 20029 (or any succes-

sor), or other automatic consent guidance.That is, except for changes required to bemade under the proposed specific con-sent process (described below), a taxpayer that timely files Form 3115 with its taxreturn and complies with the proceduresgoverning the standard consent processwould have the Commissioners consentto change to any permissible method of ac-counting for the requested year of change,including changes to methods of account-ing not specifically identified in Rev.Proc. 20029 (or any successor) or other automatic consent guidance. However,unlike the consent applicable to methodchanges specifically identified in Rev.Proc. 20029 (or any successor), or other automatic consent guidance, a taxpayerschange of its method of accounting to amethod other than a method specificallyidentified in Rev. Proc. 20029 (or anysuccessor), or other automatic consentguidance, would receive only audit pro-tection for years prior to the requested year

of change and would not receive rulingprotection.

Although the proposal contemplatesthat taxpayers would file Form 3115 withtheir returns for the requested year of change, the IRS is considering an alter-native approach under which taxpayerswould be required to file Form 3115for changes to methods of accountingnot specifically identified in Rev. Proc.20029 (or any successor) or other au-tomatic guidance, by the last day of theninth month of the requested taxable year of change. Requiring Form 3115 to befiled during the requested taxable year of change, rather than with the tax returnfor the requested taxable year of change,would provide the IRS with time to con-sider the request before the taxpayer filesits return for the requested taxable year of change. The IRS requests comments on

this alternative approach.The IRS expects that the standard con-sent process would give taxpayers whoseek consent under section 446(e) withoutruling protection the opportunity to obtainthis consent in a timely and efficient man-ner. The taxpayers filing of Form 3115would give the IRS adequate notice of thechange in accounting method. Further, thelack of ruling protection for changes thatare not specified in Rev. Proc. 20029 (or any successor), or other automatic consentguidance, puts the taxpayer in no worse a

position with regard to the new method of accounting as the taxpayer is in with re-gard to other items of income or deductionreported on the return. That is, the tax-payers use of the new method of account-ing is an issue that may be considered uponexamination.

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

screen accounting method change requestsfor completeness and for compliance withthe procedures governing the standardconsent process. Requests that are notsubstantially complete would be deniedconsent and the taxpayer would be notifiedthat consent is not granted. In contrast tothe procedures contained in section 10.02of Rev. Proc. 20029, under the pro-posal, the IRS does not intend to permittaxpayers to perfect requests that are notsubstantially complete prior to denyingconsent. As a consequence, a taxpayer who submits a form that is not substan-tially complete would not receive consent

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

In addition to screening accountingmethod change requests for complete-ness, the IRS would review Forms 3115filed under the standard consent processto determine whether the new accounting

method is permissible. In cases wherethe IRS agrees that the new method ispermissible, ordinarily no further actionwould be taken and the taxpayer wouldnot be advised that the review has takenplace. In cases where the IRS questionsthe propriety of the new method, the IRSmay correspond with the taxpayer to re-solve the matter. In some cases, resolutionmay require the taxpayer to provide addi-tional information about the change. If theIRS tentatively determines that the newmethod of accounting is impermissible,

the IRS would notify the taxpayer of thetentative adverse determination and willordinarily offer the taxpayer a conference.In cases where the IRS remains adverseafter the conference, it would notify thetaxpayer that consent to make the changein method of accounting is not granted.

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

B. Specific Consent Process

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

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

1. Changes identified in published guidance

Under the proposal, the IRS wouldpublish guidance in the Internal Rev-enue Bulletin that lists specific accountingmethod changes that must be made usingthe specific consent process. The spe-cific accounting method changes listed

in this published guidance would includethe types of changes that the IRS wantsto review in more depth and prior to thetaxpayer implementing the accountingmethod on its tax return. The IRS wouldupdate the proposed published list asnecessary to add or remove specific ac-counting method changes that are requiredto be made under the specific consentprocess. The IRS expects that, in gen-eral, the process for requesting specificconsent would be similar to the existingadvance consent process described in Rev.

Proc. 9727. That is, a taxpayer files aForm 3115 that is substantially complete(as discussed above in the description of the standard consent process) and awaitsa ruling from the IRS granting consentto the change. To give the IRS adequatetime to consider the request prior to thedue date of the taxpayers tax return for the requested taxable year of change, theIRS expects to require taxpayers to fileForm 3115 by the last day of the ninthmonth of the requested taxable year of change, without the possibility of relief for late requests under section 301.9100of the Regulations on Procedure and Ad-ministration. However, the IRS intendsto consider an otherwise qualified requestfiled after the last day of the ninth monthof a taxable year and before the beginningof the succeeding taxable year a timelyfiled request for the succeeding taxableyear.

If a taxpayers consent request isgranted, audit protection would apply

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

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

The specific consent process would alsoapply to any change that otherwise quali-fies for the standard consent process (in-cluding a change specifically identified inRev. Proc. 20029, or any successor, orother automatic consent guidance), but forthe fact that the taxpayer seeks a term andcondition different from those that applyto standard consent requests, or seeks awaiver of certain scope limitations that ap-ply to standard consent requests. For ex-ample, a taxpayer that filed a Form 3115under the standard consent process andseeks to make a subsequent change to the

same item within five years would be re-quired to request consent under this spe-cific consent process to make the subse-quent change. As provided in section 8.02of Rev. Proc. 9727, the IRS may de-termine that, based on the unique factsof a particular case and in the interest ofsound tax administration, terms and con-ditions that differ from those that ordinar-ily apply are more appropriate for a par-ticular accounting method change. It isnot intended that under this proposal theIRS would change its policy concerning

the circumstances in which it will approvea request for modified terms and condi-tions. Taxpayers should be aware that it isonly in rare situations that the IRS agreesto a taxpayers request for terms and con-ditions different from those prescribed inpublished guidance.

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

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

C. Letter Ruling Consent Process

TheIRS recognizes that some taxpayerswho seek to change an accounting methodmay want the certainty of a letter ruling is-sued by the IRS national office concern-ing the propriety of a requested methodof accounting. Under the proposal, a tax-payer that seeks a change in accountingmethod other than a change that is specif-ically identified in Rev. Proc. 20029 (or any successor), or other automatic consentguidance, may request a letter ruling un-der Rev. Proc. 20071, 20071 I.R.B. 1,(or its successor). The IRS would applyRev. Proc. 20071 (or its successor) andRev. Proc. 20073, 20071 I.R.B. 108,(or its successor) in determining whether to rule on a request filed under the letter ruling consent process.

The IRS is concerned that requests for accounting method changes made under the existing advance consent process of-ten are not as well developed as requestsfor letter rulings generally. Under this pro-posal, a taxpayer utilizing the letter rulingconsent process must submit a fully devel-oped request, and that request would besubject to the same standard of factual and

legal development as a request for a let-ter ruling generally. Under this proposal, aletter ruling request would include, amongother information, a complete statement of facts, copies of documents pertinent to thetransaction, statements of supporting andcontrary authorities, examples of the appli-cation of the new method to the taxpayers

transaction and a completed Form 3115 asan attachment to the letter ruling request.As provided in Rev. Proc. 20071, taxpay-ers must provide any additional informa-tion requested by the IRS and, if a taxpayer does not submit the information within 21calendar days from the date of the request,the letter ruling request would be closedand the taxpayer would be notified in writ-ing.

Requests made under this letter rulingconsent process would be subject to thegenerally applicable user fee imposed onletter ruling requests, and not the user feecurrently imposed in the existing advanceconsent process. Further, the IRS intendsto require taxpayers to submit letter rul-ing consent requests by the last day of theninth month of the requested taxable year of change, without the possibility of relief for late requests under section 301.9100

of the Regulations on Procedure and Ad-ministration. However, the IRS intends toconsider an otherwise qualified letter rul-ing request filed after the last day of theninth month of a taxable year and beforethe beginning of the succeeding taxableyear a timely filed letter ruling request for the succeeding taxable year.

If the IRS national office rules favor-ably on the letter ruling request, it alsowould grant the taxpayer consent under section 446(e) to change its method of ac-counting for the item that is the subject of

the letter ruling request. Audit protectionand ruling protection would apply.

D. Pilot Program

The IRS intends to implement anychanges to the accounting method changeprocess on a pilot basis before makingpermanent changes to the process. TheIRS expects to open the pilot programto all taxpayers making an accountingmethod change within a specified pilotperiod. During the pilot period, the IRS

will continue to evaluate the process. TheIRS emphasizes that this notice does notestablish a pilot program. The IRS willconsider public comments received in re-sponse to this notice before establishinga pilot program in separate guidance. Inthe meantime, taxpayers must continue tofollow the existing procedures ( e.g. , Rev.

Proc. 9727 and Rev. Proc. 20029) for obtaining consent to change an accountingmethod.

REQUEST FOR COMMENTS

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

Written submissions in response to

this notice should be submitted no later than January 18, 2008, to Internal Rev-enue Service, CC:PA:LPD:RU (Notice200788), room 5203, P.O. Box 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand delivered be-tween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:RU (Notice 200788),Couriers Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC 20224. Alternatively, submis-sions may be submitted via the Internet at [email protected]

in which case Notice 200788 shouldbe in the subject line. All submissionswill be available for public inspection andcopying in their entirety. Therefore, sub-missions received by the IRS should notinclude taxpayer-specific information of aconfidential nature. Submissions shouldinclude the name and telephone number of a person to contact.

DRAFTING INFORMATION

The principal authors of this notice areAndrew J. Keyso and Brenda D. Wilsonof the Office of Associate Chief Coun-sel (Income Tax & Accounting). For fur-ther information regarding this notice, con-tact Mr. Keyso or Ms. Wilson at (202)6224800 (not a toll-free call).

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Reporting and Wage Withholding Under InternalRevenue Code 409A

Notice 200789

I. PURPOSE

This notice provides guidance to em-ployers and payers on their reporting andwage withholding requirements for calen-dar year 2007 with respect to amounts in-cludible in gross income under 409Aof the Internal Revenue Code. This no-tice also provides guidance to employersand payers on their reporting requirementswith respect to all deferrals of compen-sation under 409A of the Internal Rev-enue Code for 2007. This notice doesnot affect the application of 3121(v)(2)or an employers reporting obligations un-der 31.3121(v)(2)1 of the EmploymentTax Regulations. In addition, this noticeprovides guidance to service providers ontheir income tax reporting and tax pay-ment requirements with respect to amountsincludible in gross income under 409Afor 2007. Generally, these requirementsfor 2007 reflect an extension to 2007 taxyears of the guidance provided in Notice2006100 applicable to 2005 and 2006 taxyears.

II. BACKGROUND

A. The American Jobs Creation Act of 2004

Section 885 of the American JobsCreation Act of 2004, Pub. Law No.108357, 118 Stat. 1418 (the Act), added 409A, which provides, inter alia , thatall amounts deferred under a nonquali-fied deferred compensation plan for alltaxable years are currently includible ingross income to the extent not subjectto a substantial risk of forfeiture and notpreviously included in gross income, un-less certain requirements are met. Section885(b) of the Act amended the Code toimpose the following reporting and wagewithholding requirements with respectto deferrals of compensation within themeaning of 409A.

The Act amended 6041 and 6051to require that an employer or payer report all deferrals for the year under a nonqualified deferred compensation

plan on a Form W2 (Wage and TaxStatement) or a Form 1099MISC( Miscellaneous Income ), regardless of whether such deferred compensationis includible in gross income under 409A(a).

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

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

B. Notice 20051

On December 20, 2004, the IRS issuedNotice 20051, 20051 C.B. 274, which

provides guidance with respect to the ap-plication of 409A. Additionally, in ac-cordance with the amendments made by 885(b) of the Act, Notice 20051 pro-vides the following with respect to report-ing and wage withholding requirementsfor deferred amounts:

An employer reports to an employeethe total amount of deferrals for theyear under a nonqualified deferredcompensation plan in box 12 of FormW2 using code Y. See Q&A29.

An employer reports amounts includi-ble in gross income under 409A andin wages under 3401(a) in box 1of Form W2 as wages paid to theemployee during the year and subjectto income tax withholding. An em-ployer also reports such amounts inbox 12 of Form W2 using code Z. SeeQ&A33.

A payer reports to a nonemployee thetotal amount of deferrals for the year

under a nonqualified deferred com-pensation plan in box 15a of Form1099MISC. See Q&A30.

A payer reports amounts includible ingross income under 409A and nottreated as wages under 3401(a) asnonemployee compensation in box 7of Form 1099MISC. A payer also re-ports such amounts in box 15b of Form1099MISC. See Q&A35.

C. Final Regulations

On April 10, 2007, the IRS issued fi-nal regulations (T.D. 9321, 200714 I.R.B.865) regarding the application of 409A,applicable for taxable years beginning onor after January 1, 2008. See 72 Fed. Reg.19234 (April 17, 2007). The regulationsgenerally incorporate and expand on theguidance provided in Notice 20051. Un-der Notice 200786, 200746 I.R.B. 990(November 13, 2007), taxpayers generallyare not required to comply with the fi-nal regulations until January 1, 2009, buttaxpayers may rely on the final regula-tions for periods before January 1, 2009.The final regulations generally supersedeNotice 20051 for periods beginning af-ter 2008. However, the regulations donot address reporting and withholding re-quirements, and accordingly do not su-persede Notice 20051, Q&A24 throughQ&A38, which address those issues. SeePreamble to the Final Regulations, Effecton Other Documents, 72 Fed. Reg. 19275.

D. Notice 2006100

On November 30, 2006, the IRS is-sued Notice 2006100, 200651 I.R.B.1109, which provided guidance to em-ployers and payers on their reporting andwithholding obligations with respect todeferrals of compensation and amountsincludible in gross income under 409Aduring calendar years 2005 and 2006. Thenotice permanently waived employersand payers reporting requirements under 6041 and 6051 for calendar years 2005and 2006 with respect to annual deferralsof compensation within the meaning of 409A (Form W2, Box 12, Code Y andForm 1099, Box 15a). The notice alsoprovided guidance regarding the calcu-lation of amounts includible in incomeunder 409A, and the application of theemployer and payer reporting and with-holding requirements for such amountsunder 409A (Form W2, Box 12, CodeZ and Form 1099, Box 15b).

III. INTERIM EMPLOYER ANDPAYER REPORTING AND WAGEWITHHOLDING PROVISIONS

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

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A. 2007 Annual Deferrals

1. Amounts Reportable on Form W2

For calendar year 2007, an employer is not required to report amounts deferredduring the year under a nonqualifieddeferred compensation plan subject to 409A in box 12 of Form W2 using codeY.

2. Amounts Reportable on Form1099MISC

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

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

Section 3401(a) provides that for in-come tax withholding purposes the termwages includes any amount includiblein gross income of an employee under 409A, and payment of such amount istreated as having been made in the taxableyear in which the amount is includiblein gross income. Thus, for calendar year 2007, an employer must treat amountsincludible in gross income under 409Aas wages for income tax withholding pur-poses. An employer is required to reportsuch amounts as wages paid on line 2of Form 941, Employers QUARTERLY Federal Tax Return, and in box 1 of FormW2. An employer must also report suchamounts as 409A income in box 12 of Form W2 using code Z. Amounts includi-ble in gross income under section 409Aare supplemental wages for purposes of determining the amount of income taxrequired to be deducted and withheld un-der 3402(a), regardless of whether the

employer has paid the employee any reg-ular wages during the calendar year of the payment. See Publication 15 for thewithholding rules with respect to supple-mental wages. The amount required tobe withheld is not increased on accountof the additional income taxes imposedunder 409A(a)(1)(B). Employees shouldthus be aware that estimated tax paymentsmay be required to avoid penalties under 6654.

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

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

Section 409A(a)(1)(A)(i) provides thatif at any time during a taxable year a non-qualified deferred compensation plan failsto meet the requirements of 409A(a)(2),(3) or (4), all compensation deferred un-der the plan for the taxable year and allpreceding taxable years shall be includiblein gross income for the taxable year to theextent not subject to a substantial risk of forfeiture and not previously included ingross income. Accordingly, for purposesof this notice, the amount includible ingross income under 409A(a) and re-quired to be reported by the employer or payer equals the portion of the totalamount deferred under the plan that, asof December 31, 2007, is not subject toa substantial risk of forfeiture as definedin Notice 20051, Q&A6, or the finalregulations, and has not been includedin income in a previous year, plus anyamounts of deferred compensation paidor made available to the service provider under the plan during the calendar year 2007. For purposes of this paragraph, anemployer or payer may treat an amountas previously included in income if prop-erly reported by the employer or payer on a 2005 or 2006 Form W2, Form1099MISC, or Form W2c or correctedForm 1099MISC. Thus, amounts prop-

erly reported on a 2005 or 2006 Form W2or Form 1099MISC, or Form W2c or corrected Form 1099MISC should notbe reported again on a 2007 Form W2or Form 1099MISC. For the definitionof a plan, including the plan aggregationrules, see Notice 20051, Q&A9, and 1.409A1(c).

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

ingly, for purposes of this section III.B.1.,references to amounts deferred under aplan, including references to account bal-ances, refer solely to amounts deferred thatare subject to 409A and not, for exam-ple, to amounts deferred that were earnedand vested prior to January 1, 2005 andthat are not otherwise subject to 409Adue to the application of the effective dateprovisions. For rules regarding the appli-cation of the effective date provisions of 409A to nonqualified deferred compen-sation plans, see 1.409A6.

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

regarding the submission of comments onthese topics, see section V. of this notice.

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

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

Amounts includible in gross incomeunder 409A(a) in 2007 that are neither actually nor constructively received (dis-regarding the application of 409A) bythe employee during the calendar year 2007, are treated as a payment of wageson December 31, 2007 for purposes of withholding, depositing, and reportingthe income tax at source on wages under 3401(a). If as of December 31, 2007

the employer does not withhold incometax from the employee on such wages,or withholds less than the amount of in-come taxes required to be withheld under 3402 from the employee, the employeewill receive credit under 31 for 2007 if the employer follows one of two possibleoptions. Under the first option, notwith-standing 31.62051(c)(4), the employer withholds or recovers from the employeethe amount of the undercollection after

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December 31, 2007 and before Febru-ary 1, 2008, and reports as wages for thequarter ending December 31, 2007 suchamounts that were neither actually nor constructively received but are includiblein income under 409A on Form 941for that quarter and in box 1 of the em-ployees Form W2 for 2007. Under thesecond option, the employer pays the in-come tax withholding liability on behalf of the employee (without deduction fromthe employees wages or other reimburse-ment by the employee), and reports thegross amount of wages and the income taxwithholding liability for the quarter end-ing December 31, 2007 as including suchamounts that were neither actually nor constructively received but are includiblein income under 409A, as well as theFederal Insurance Contributions Act, Fed-eral Unemployment Tax Act, and income

tax withholding wages resulting frompaying the income tax on the employeesbehalf, on Form 941 and Form 940, Em- ployers Annual Federal Unemployment (FUTA) Tax Return , and in box 1 of theemployees Form W2 for 2007. SeeRev. Rul. 58113, 19581 C.B. 362 andRev. Rul. 8614, 19861 C.B. 304, for methods of computing gross wages whenpaying employment taxes on behalf of anemployee. In addition, for purposes of the deposit requirements associated withsuch wages, if the income tax withholding

liability with respect to such wages is paidto the IRS by the due date of the Form 941for the quarter ending December 31, 2007on which the wages are reported, thenthe amount of income tax withholdingliability will be considered to have beendeposited in accordance with the rules of 31.63021(c). Thus, penalties for failureto deposit taxes under 6656 will not beimposed with respect to such amount.

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

The following sections provide guid-ance for calculating the total amountdeferred under the plan as of December 31, 2007 for purposes of determining theamount required to be included in grossincome under 409A(a) in accordancewith the rules described in section III.B.1.of this notice.

a. Account Balance Plans

For a plan that is an account balanceplan as defined in 1.409A1(c)(2)(i)(A)or (B), the amount deferred as of Decem-ber 31, 2007 equals the amount that wouldbe treated as an amount deferred under 31.3121(v)(2)1(c)(1) on December 31,2007 if the entire account balance under such plan (including all principal amounts,adjusted for income, gain or loss cred-ited to the service providers account) asof December 31, 2007 were treated as aprincipal amount credited to the serviceproviders account on December 31, 2007.These same calculation rules apply for pur-poses of determining the amount reportedon Form 1099MISC for calendar year 2007 with respect to a nonemployee par-ticipating in an account balance plan. For purposes of this section, a plan described in

1.409A1(c)(2)(i)(A) (elective accountbalance plan) is not aggregated with a plandescribed in 1.409A1(c)(2)(i)(B) (non-elective account balance plan).

b. Nonaccount Balance Plans Amounts that are ReasonablyAscertainable

For a plan that is a nonaccount balanceplan as defined in 1.409A1(c)(2)(i)(C),where the amount deferred is reason-ably ascertainable within the meaning of

31.3121(v)(2)1(e)(4), the amount de-ferred as of December