Internal Revenue Bulletin 2011-51 (PDF rendition): IRS Announcements

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Bulletin No. 201
1-51
December 19, 201
1
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9556, page 862.
Final regulations under section 6011 of the Code provide rules
requiring the disclosure of listed transactions and transactions
of interest with respect to the generation-skipping transfer tax
and make conforming amendments under sections 6111 and
6112. The regulations provide guidance under section 6112
regarding the length of time a material advisor has to prepare
the list that must be maintained after the list maintenance re-
quirement first arises with respect to the reportable transaction
and clarify the provisions regarding designation agreements.
T.D. 9557, page 855.
Final regulations under section 108 of the Code provide guid-
ance in determining the discharge of indebtedness income of a
partnership that transfers a partnership interest to a creditor in
satisfaction of the partnership’s indebtedness, provide that sec-
tion 721 generally applies to a contribution of a partnership’s
indebtedness by a creditor to the partnership in exchange for
an interest in the partnership, and provide guidance for how a
partnership’s discharge of indebtedness income is allowed as
a minimum gain chargeback under section 704.
T.D. 9558, page 859.
REG–101273–10, page 873.
Temporary regulations under section 358 of the Code clarify
that, in certain reorganizations where no stock or securities of
the issuing corporation is issued and distributed in the transac-
tion, the ability to designate the share of stock of the issuing
corporation to which the basis, if any, of the stock or securities
surrendered will attach applies only to a shareholder that owns
actual shares in the issuing corporation.
Announcement 2011–77, page 874.
This announcement informs bankruptcy trustees (or debtors-in-
possession) of a change of address for the Centralized Insol-
vency Operation that should be used for the submission of re-
quests for tax refunds under section 505(a) of the Bankruptcy
Code or requests for prompt determinations of any unpaid tax
liability of the estate incurred during the bankruptcy case under
section 505(b) of the Bankruptcy Code. Rev. Procs. 2010–27
and 2006–24 modified.
Announcement 2011–80, page 903.
This announcement describes a correction to final and tempo-
rary regulations (T.D. 9554, 2011–50 I.R.B. 843) extending
the exceptions from taxes under the Federal Insurance Con-
tributions Act (“FICA”) and the Federal Unemployment Tax Act
(“FUTA”) under sections 3121(b)(3) (concerning individuals who
work for certain family members), 3127 (concerning members
of religious faiths), and 3306(c)(5) (concerning persons em-
ployed by children and spouses and children under 21 em-
ployed by their parents) of the Code to entities that are disre-
garded as separate from their owners for Federal tax purposes.
The temporary regulations alsoclarifytheexistingrulethatthe
owners of disregarded entities, except for qualified subchapter
S subsidiaries, are responsible for backup withholding and re-
lated information reporting requirements under section 3406.
(Continued on the next page)
Finding Lists begin on page ii.

EMPLOYEE PLANS
Announcement 2011–78, page 874.
This announcement describes rules that the Treasury Depart-
ment and the IRS are considering proposing relating to the de-
termination of whether a plan is a governmental plan within the
meaning of section 414(d) of the Code and contains an ap-
pendix that includes a draft notice of proposed rulemaking on
which Treasury Department and IRS invite comments.
Announcement 2011–79, page 892.
This announcement describes rules that the Treasury Depart-
ment and the IRS are considering proposing relating to the de-
terminationofwhetheraplanofanIndiantribalgovernmentis
a governmental plan within the meaning of section 414(d) of
the Code and contains an appendix that includes a draft notice
of proposed rulemaking on which Treasury Department and IRS
invite comments.
ESTATE TAX
T.D. 9556, page 862.
Final regulations under section 6011 of the Code provide rules
requiring the disclosure of listed transactions and transactions
of interest with respect to the generation-skipping transfer tax
and make conforming amendments under sections 6111 and
6112. The regulations provide guidance under section 6112
regarding the length of time a material advisor has to prepare
the list that must be maintained after the list maintenance re-
quirement first arises with respect to the reportable transaction
and clarify the provisions regarding designation agreements.
REG–112196–07, page 865.
Proposed regulations will amend regulations section
20.2032-1 to provide guidance that clarifies for the executor
of an estate that elects to use the alternate valuation method
under section 2032 of the Code what constitutes a distribu-
tion, sale, exchange, or other disposition and what post-death
occurrences the executor may consider when valuing property
includible in the gross estate on the alternate valuation date.
A public hearing is scheduled for March 9, 2012.
Announcement 2011–77, page 874.
This announcement informs bankruptcy trustees (or debtors-in-
possession) of a change of address for the Centralized Insol-
vency Operation that should be used for the submission of re-
quests for tax refunds under section 505(a) of the Bankruptcy
Code or requests for prompt determinations of any unpaid tax
liability of the estate incurred during the bankruptcy case under
section 505(b) of the Bankruptcy Code. Rev. Procs. 2010–27
and 2006–24 modified.
EMPLOYMENT TAX
Announcement 2011–77, page 874.
This announcement informs bankruptcy trustees (or debtors-in-
possession) of a change of address for the Centralized Insol-
vency Operation that should be used for the submission of re-
quests for tax refunds under section 505(a) of the Bankruptcy
Code or requests for prompt determinations of any unpaid tax
liability of the estate incurred during the bankruptcy case under
section 505(b) of the Bankruptcy Code. Rev. Procs. 2010–27
and 2006–24 modified.
ADMINISTRATIVE
T.D. 9556, page 862.
Final regulations under section 6011 of the Code provide rules
requiring the disclosure of listed transactions and transactions
of interest with respect to the generation-skipping transfer tax
and make conforming amendments under sections 6111 and
6112. The regulations provide guidance under section 6112
regarding the length of time a material advisor has to prepare
the list that must be maintained after the list maintenance re-
quirement first arises with respect to the reportable transaction
and clarify the provisions regarding designation agreements.
Announcement 2011–77, page 874.
This announcement informs bankruptcy trustees (or debtors-in-
possession) of a change of address for the Centralized Insol-
vency Operation that should be used for the submission of re-
quests for tax refunds under section 505(a) of the Bankruptcy
Code or requests for prompt determinations of any unpaid tax
liability of the estate incurred during the bankruptcy case under
section 505(b) of the Bankruptcy Code. Rev. Procs. 2010–27
and 2006–24 modified.
December 19, 20112011–51 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents 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 of
the 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 internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al 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 these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
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The c
ontents 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.
2011–51 I.R.B.December 19, 2011

December 19, 20112011–51 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 108.—Income From
Discharge of Indebtedness
26 CFR 1.108–8: Indebtedness satisfied by partner-
ship interest.
T.D. 9557
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Application of Section
108(e)(8) to Indebtedness
Satisfied by a Partnership
Interest
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACT
ION: Final regulations.
SUMMARY: This document contains fi-
nal regulations relating to the application
of section 108(e)(8) of the Internal Rev-
enue Code (Code) to partnerships and their
partners. These regulations provide guid-
ance regarding the determination of dis-
charge of indebtedness income of a part-
nership that transfers a partnership inter-
est to a creditor in satisfaction of the part-
nership’s indebtedness. The final regula-
tions also address the application of sec-
tion 721 to a contribution of a partner-
ship’s recourse or nonrecourse indebted-
ness by a creditor to the partnership in ex-
change for a capital or profits interest in
the partnership. Moreover, the final reg-
ulations address how a partnership’s dis-
charge of indebtedness income is allocated
as a minimum gain chargeback under sec-
tion 704. The regulations affect partner-
ships and their partners.
DATES:Effective Date:These regulations
are effective on November 17, 2011.
Applicability Date:For dates
of applicability, see §§1.108–8(d),
1.704–2(l)(1)(v), and 1.721–1(d)(4).
FOR FURTHER INFORMATION
CONTACT: Joseph R. Worst or
Megan A. Stoner, Office of Associate
Chief Counsel (Passthroughs and Special
Industries), (202) 622–3070 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
26 CFR part 1 under sections 108, 704, and
721 of the Code relating to the application
of section 108(e)(8) to partnerships.
Section 108(e)(8) was amended by
section 896 of the American Jobs Cre-
ation Act of 2004, Public Law 108–357
(118 Stat. 1648), to include discharges
of partnership indebtedness occurring
on or after October 22, 2004. Prior
to the amendment, section 108(e)(8)
only applied to discharges of corporate
indebtedness. Section 108(e)(8), as
amended, provides that, for purposes of
determining income of a debtor from
discharge of indebtedness (COD income),
if a debtor corporation transfers stock or
a debtor partnership transfers a capital
or profits interest in such partnership to
a creditor in satisfaction of its recourse
or nonrecourse indebtedness, such
corporation or partnership shall be treated
as having satisfied the indebtedness with
an amount of money equal to the fair
market value of the stock or interest. In
the case of a partnership, any COD income
recognized under section 108(e)(8) shall
be included in the distributive shares of the
partners in the partnership immediately
before such discharge.
A notice of proposed rulemak-
ing and a notice of public hearing
(REG–164370–05, 2008–46 I.R.B. 1157)
were published in theFederal Regis-
ter(73 FR 64903) on October 31, 2008,
proposing amendments to the regula-
tions regarding the application of section
108(e)(8) to partnerships and their part-
ners, including the determination of COD
income of a partnership that transfers a
partnership interest to a creditor in satis-
faction of the partnership’s indebtedness
(debt-for-equity exchange). The proposed
regulations also provide that section 721
generally applies to a contribution of a
partnership’s recourse or nonrecourse in-
debtedness by a creditor to the partnership
in exchange for a capitalor profits interest
in the partnership. A public hearing on the
proposed regulations was scheduled for
February 19, 2009, but was cancelled be-
cause no one requested to speak. However,
comments responding to the proposed
regulations were received. After consid-
eration of these comments, the proposed
regulations are adopted as revised by this
Treasury decision. These final regulations
generally retain the provisions of the pro-
posed regulations with the modifications
discussed in the preamble.
Summary of Comments and
Explanation of Provisions
1.Valuation of Partnership Interest
TransferredinSatisfactionofPartnership
Indebtedness
Section 108(e)(8) provides that, for pur-
poses of determining COD income of a
debtor partnership, the partnership shall be
treated as having satisfied the indebted-
ness with an amount of money equal to the
fair market value of the interest transferred
to the creditor. Generally, the amount by
which the indebtedness exceeds the fair
market value of the partnership interest
transferred is the amount of COD income
required to be included in the distributive
shares of the partners that were partners in
the debtor partnershipimmediately before
the discharge.
The proposed regulations provide that,
for purposes of determining the amount
of COD income, the fair market value
of the partnership interest transferred to
the creditor in a debt-for-equity exchange
(debt-for-equity interest) is the liquidation
value of the partnership interest if four re-
quirements are satisfied (liquidation value
safe harbor). For this purpose, liquidation
value equals the amount of cash that the
creditor would receive with respect to the
debt-for-equity interest if, immediately
after the transfer, the partnership sold all
of its assets (including goodwill, going
concern value, and any other intangibles)
for cash equal to the fair market value of
those assets, and then liquidated.
The four conditions of the liquidation
value safe harbor in the proposed regu-
lations are that (i) the debtor partnership
determines and maintains capital accounts
2011–51 I.R.B.855December 19, 2011

of its partners in accordance with the capi-
tal accounting rules of §1.704–1(b)(2)(iv)
(capital account maintenance require-
ment); (ii) the creditor, debtor partnership,
and its partners treat the fair market value
of the indebtedness as being equal to
the liquidation value of the debt-for-eq-
uity interest for purposes of determining
the tax consequences of the debt-for-eq-
uity exchange (consistency requirement);
(iii) the debt-for-equity exchange is an
arm’s-length transaction (arm’s-length
requirement); and (iv) subsequent to the
debt-for-equity exchange, neither the part-
nership redeems nor any person related to
the partnership purchases the debt-for-eq-
uity interest as part of a plan at the time of
the debt-for-equity exchange which has as
a principal purpose the avoidance of COD
income by the partnership (anti-abuse
provision). If these requirements are not
satisfied, all of the facts and circumstances
are considered in determining the fair
market value of the debt-for-equity in-
terest for purposes of applying section
108(e)(8). Each of the four requirements
of the proposed regulations is discussed in
the preamble.
The first requirement is the capital
account maintenance requirement. Com-
menters requested that the final regula-
tions clarify that this requirement does
not necessitate compliance with all as-
pects of the substantial economic effect
safe harbor under §1.704–1(b)(2), notably
the requirement that the partnership liq-
uidate in accordance with the positive
capital account balances of its partners.
To eliminate confusion over the capital
account maintenance requirement in the
liquidation value safe harbor, the IRS and
the Treasury Department have decided to
remove the capital account maintenance
requirement from the liquidation value
safe harbor because the maintenance of
capital accounts is not necessary to the
determination of the liquidation value of
the partner’s interest.
The second requirement of the liqui-
dation value safe harbor in the proposed
regulations is the consistency requirement.
This requirement is intended to ensure
consistent reporting by the creditor, debtor
partnership, and its partners. One com-
menter suggested narrowing the scope of
this requirement in the final regulations so
that the failure of a partner to consistently
treat the fair market value of the indebt-
edness as being equal to the liquidation
value of the debt-for-equity interest does
not invalidate the partnership’s use of the
liquidation value safe harbor, provided
the creditor and the partnership otherwise
consistently determine and report COD
income based on such valuation. The IRS
and the Treasury Department considered
the issue and decided to not modify this
requirement in the final regulations. The
amount of COD income computed under
the liquidation value safe harbor may dif-
fer from the amount computed using the
fair market value of the partnership inter-
est. Thus, in order for the partnership to
use the liquidation value safe harbor, the
IRS and the Treasury Department believe
that the partnership and all of its partners
must report consistently.
One commenter suggested that taxpay-
ers should not be able to selectively exploit
to their benefit the discrepancy between
liquidation value and fair market value and
suggested that the final regulations require
that a partnership apply a consistent val-
uation methodology to all equity issued in
any debt-for-equity exchange that is part of
the same overall transaction. The IRS and
the Treasury Department agree, and there-
fore the final regulations add this as a con-
dition to the liquidation value safe harbor.
The third requirement of the liquida-
tion value safe harbor in the proposed reg-
ulations is the arm’s-length requirement.
Commenters requested that the final reg-
ulations clarify whether this requirement
can be satisfied where the exchange is be-
tween the partnership and an existing part-
ner. The IRS and the Treasury Department
believe that the liquidation value safe har-
bor should be available where the trans-
action involves related parties and have
clarified this requirement in the final reg-
ulations to provide that, as long as the
debt-for-equity exchange has terms that
are comparable to terms that would be
agreed to by unrelated parties negotiating
with adverse interests, the third require-
ment is satisfied even if the transaction is
between related parties.
The fourth requirement of the liqui-
dation value safe harbor in the proposed
regulations is an anti-abuse provision.
The final regulations follow the anti-abuse
provision of the proposed regulations by
adding a restriction on subsequent pur-
chases of the debt-for-equity interest by a
person related to any partner (in addition
to purchases by a person related to the
partnership) as part of a tax-avoidance
plan. Thus, under the final regulations,
the partnership cannot redeem and no per-
son related to the partnership or to any
partner can purchase the debt-for-equity
interest as part of a plan at the time of
the debt-for-equityexchange that has as a
principal purpose the avoidance of COD
income by the partnership. Commenters
requested that the final regulations clarify
the meaning of “related” in this context.
The IRS and the Treasury Department
agree that clarification is warranted and
therefore the final regulations refer to sec-
tions 267(b) and 707(b) for the meaning
of “related” in the anti-abuse provision.
The final regulations also address the
application of the liquidation value safe
harbor rule to a partnership (upper-tier
partnership) that directly or indirectly
owns an interest in one or more partner-
ships (lower-tier partnership(s)). The final
regulations provide that, with respect to
interests held in one or more lower-tier
partnerships, the liquidation value of an
interest in an upper-tier partnership is
determined by taking into account the
liquidation value of such lower-tier part-
nership interest.
The final regulations provide that if the
fair market value of the debt-for-equity in-
terest does not equal the fair market value
of the indebtedness exchanged, then gen-
eral tax law principles shall apply to ac-
count for the difference. Moreover, sec-
tion 707(a)(2)(A), as it relates to the treat-
ment of payments to partners for transfers
of property, will be considered, if appro-
priate.
2.Application of Section 721 to
Debt-for-Equity Exchanges
The proposed regulations generally
provide that the nonrecognition rule of
section 721 applies to the debt-for-equity
exchange. Under the proposed regula-
tions, the creditor does not recognize a loss
or a bad debt deduction in the debt-for-eq-
uity exchange. The creditor’s basis in the
debt-for-equity interest is increased under
section 722 by the adjusted basis of the
indebtedness. The preamble to the pro-
posed regulations requested comments on
alternative approaches.
A number of commenters agreed with
the general application of section 721 to
December 19, 20118562011–51 I.R.B.

the debt-for-equity exchange, but recom-
mended that the rule be modified in the
final regulations. The commenters ar-
gued that the application of section 721 to
the debt-for-equity exchange may result
in asymmetry in the timing of the part-
nership’s COD income inclusion and the
creditor’s loss, character conversion for
the creditor from ordinary loss to capital
loss, and disparities between the partners’
aggregate bases in their partnership in-
terests and the partnership’s basis in its
assets. Some commenters suggested that
these results could be alleviated if the final
regulations bifurcate the debt-for-equity
exchange into two transactions, namely
the cancellation of a portion of the in-
debtedness, and the contribution of the
balance in exchange for an interest in the
partnership in a transaction to which sec-
tion 721 applies (bifurcation approach).
Another commenter, however, stated that
a bifurcation approach is not consistent
with section 721 or case law.
The IRS and the Treasury Department
agree with the latter comment and believe
that the bifurcation approach would be in-
consistent with the treatment of analogous
corporate debt-for-equity transactions in-
volving corporate indebtedness evidenced
by a security in which section 351 would
apply, for example. Further, comments
in favor of the bifurcation approach as-
sume a creditor has not validly taken a bad
debt deduction under section 166 prior to
the debt-for-equity exchange in a transac-
tion independent of and separate from the
debt-for-equity exchange. After consider-
ation of the issue, the IRS and the Treasury
Department have determined that the final
regulations will not adopt the bifurcation
approach.
3.Obligations for Unpaid Rent, Royalties,
and Interest
The proposed regulations provide that
section 721 does not apply to the trans-
fer of a partnership interest to a creditor in
satisfaction of a partnership’s recourse or
nonrecourse indebtedness for unpaid rent,
royalties, or interest on indebtedness (in-
cluding accrued original issue discount).
These items generally give rise to ordinary
income to the creditor and a deduction to
the partnership. Most commenters agreed
that the general nonrecognition rule under
section 721 should not apply to the trans-
fer of a partnership interest in satisfaction
of these items. The IRS and the Treasury
Department believe that the exception to
section 721 for these items is necessary to
prevent the conversion of ordinary income
into capital gain.
The final regulations retain the ex-
ception for these ordinary income items,
but, in response to a comment, limit the
scope of the exception. The commenter
suggested that the exception be limited to
items that accrued on or after the begin-
ning of the creditor’s holding period for
the indebtedness. The IRS and the Trea-
sury Department agree with the comment,
and therefore, the final regulations pro-
vide that section 721 does not apply to a
debt-for-equity exchange to the extent the
partnership interest is exchanged for the
partnership’s indebtedness for unpaid rent,
royalties, or interest on the partnership’s
indebtedness (including accrued original
issue discount) that accrued on or after the
beginning of the creditor’s holding period
for the indebtedness.
The preamble to the proposed regu-
lations states the general rule that when
property is transferred as payment on in-
debtedness (or in satisfaction thereof),
gain or loss on the property is recognized.
Under that approach, in a debt-for-equity
exchange, if the partnership is treated as
satisfying its indebtedness for unpaid rent,
royalties, or interest on indebtedness (in-
cluding accrued original issue discount)
with a fractional interest in each asset of
the partnership, the partnership could rec-
ognize gain or loss equal to the difference
between the fair market value of each par-
tial asset deemed transferred to the creditor
and the adjusted basis in that partial asset.
The IRS and the Treasury Department
believe that in a debt-for-equity exchange
where the partnership has not disposed of
any of its assets, the partnership should not
be required to recognize gain or loss on the
transfer of a partnership interest in satis-
faction of its indebtedness for unpaid rent,
royalties, or interest. Therefore, under the
final regulations, a debtor partnership will
not recognize gain or loss upon the trans-
fer of a partnership interest to a creditor
in a debt-for-equity exchange for unpaid
rent, royalties, or interest that accrued on
or after the beginning of the creditor’s
holding period for the indebtedness.
4.COD Income as First-tier Item for
Minimum Gain Chargeback Rules
The preamble to the proposed regula-
tions requested comments regarding the
manner in which COD income arising
from a debt-for-equity exchange should be
treated for purposes of the minimum gain
chargeback rules under §1.704–2(f)(6).
Section 1.704–2(f)(6) provides that any
minimum gain chargeback required for
a partnership taxable year consists first
of certain gains recognized from the dis-
position of partnership property subject
to one or more partnership nonrecourse
liabilities and then, if necessary, of apro
rataportion of the partnership’s other
items of income and gain for that year.
A similar rule applies to chargebacks of
partner nonrecourse debt minimum gain.
See §1.704–2(i)(4).
Commenters recommended that, where
a minimum gain chargeback results from
the discharge of partnership or partner
nonrecourse debt, the first-tier of the min-
imum gain chargeback should include
COD income relating to such debt. The
IRS and the Treasury Department agree
with this comment, and therefore the fi-
nal regulations provide that COD income
arising from a discharge of a partner-
ship or partner nonrecourse indebtedness
is treated as a first-tier item for mini-
mum gain chargeback purposes under
§§1.704–2(f)(6), 1.704–2(j)(2)(i)(A), and
1.704–2(j)(2)(ii)(A).
5.Disposition of Installment Obligations
Section 453B provides rules regarding
dispositions of installment obligations.
Generally, if an installment obligation of a
taxpayer is satisfied at other than its face
value or the taxpayer distributes, trans-
mits, sells, or otherwise disposes of an
installment obligation, the taxpayer recog-
nizes any deferred gain or loss. However,
§1.453–9(c)(2) provides that the contri-
bution of an installment obligation to a
partnership under section 721, for exam-
ple, does not constitute a disposition. The
IRS and the Treasury Department believe
that this exception does not apply to a
creditor who disposes of an installment
obligation of a partnership by contributing
it to the debtor partnership, even if the
transaction qualifies under section 721.
In that case, the creditor must recognize
2011–51 I.R.B.857December 19, 2011

gain or loss under section 453B. This
treatment is consistent with the corporate
rules that require a creditor to recognize
gain or loss under section 453B on the
disposition of an installment obligation of
a corporation to the debtor corporation in
a transaction that qualifies under section
351. Rev. Rul. 73–423, 1973–2 C.B. 161,
(see §601.601(d)(2)(ii)(b)). Accordingly,
the IRS and the Treasury Department are
proposing regulations under section 453B
to clarify this issue.
6.Additional Issues
The preamble to the proposed regula-
tions requested comments on whether any
special allocation rules of COD income
should apply where partnership indebt-
edness owed to a preexisting partner is
satisfied with the transfer of a partner-
ship interest. The proposed regulations
did not address this issue. Commenters
recommended that the final regulations
not impose any special allocation rules
regarding COD income realized under
section 108(e)(8) from the cancellation of
a partnership indebtedness owed to a pre-
existing partner. Commenters suggested
that Rev. Rul. 92–97, 1992–2 C.B. 124,
and Rev. Rul. 99–43, 1999–2 C.B. 506,
(see §601.601(d)(2)(ii)(b)), provide an
appropriate framework for determining
how COD income should be allocated,
whether or not the creditor is a partner in
the partnership. The IRS and the Treasury
Department agree that existing guidance
provides a framework for allocating COD
income and, thus, the final regulations do
not adopt any additional guidance regard-
ing the allocation of COD income among
partners in a debt-for-equity exchange.
Effective/Applicability Date
These final regulations apply to debt-
for-equity exchanges occurring on or af-
ter the date these final regulations are pub-
lished in theFederal Register.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because
these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to section
7805(f) of the Code, the notice of proposed
rulemaking that preceded these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
Drafting Information
The principal authors of these reg-
ulations are Joseph R. Worst and
Megan A. Stoner of the Office of the
Associate Chief Counsel (Passthroughs
and Special Industries).However,
other personnel from the IRS and the
Treasury Department participated in their
development.
*****
Adoption of Amendment to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.108–8 is added to read
as follows:
§1.108–8 Indebtedness satisfied by
partnership interest.
(a)In general. For purposes of deter-
mining income of a debtor from discharge
of indebtedness (COD income), if a debtor
partnership transfers a capital or profits in-
terest in the partnership to a creditor in sat-
isfaction of its recourse or nonrecourse in-
debtedness (a debt-for-equity exchange),
the partnership is treated as having satis-
fied the indebtedness with an amount of
money equal to the fair market value of the
partnership interest.
(b)Determination of fair market
value—(1)In general. All the facts and
circumstances are considered in determin-
ing the fair market value of a partnership
interest transferred by a debtor partnership
to a creditor in satisfaction of the debtor
partnership’s indebtedness (debt-for-eq-
uity interest) for purposes of paragraph (a)
of this section. If the fair market value of
the debt-for-equity interest does not equal
the fair market value of the indebtedness
exchanged, then general tax law principles
shall apply to accountfor the difference.
(2)Safe harbor—(i)General rule.For
purposes of paragraph (a) of this section,
the fair market valueof a debt-for-equity
interest is deemed to be equal to the liqui-
dation value of the debt-for-equity interest,
as defined in paragraph (b)(2)(iii) of this
section, if the following requirements are
satisfied—
(A) The creditor, debtor partnership,
and its partners treat the fair market value
of the indebtedness as being equal to the
liquidation value of the debt-for-equity
interest for purposes of determining the
tax consequences of the debt-for-equity
exchange;
(B) If, as part of the same overall trans-
action, the debtor partnership transfers
more than one debt-for-equity interest to
one or more creditors, then each creditor,
debtor partnership, and its partners treat
the fair market value of each debt-for-eq-
uity interest transferred by the debtor
partnership to such creditors as equal to its
liquidation value;
(C) The debt-for-equity exchange is a
transaction that has terms that are compa-
rable to terms that would be agreed to by
unrelated parties negotiating with adverse
interests; and
(D) Subsequent to the debt-for-equity
exchange, the debtor partnership does not
redeem the debt-for-equity interest, and no
person bearing a relationship to the debtor
partnership or its partners that is specified
in section 267(b) or section 707(b) pur-
chases the debt-for-equity interest, as part
of a plan at the time of the debt-for-eq-
uity exchange that has as a principal pur-
pose the avoidance of COD income by the
debtor partnership.
(ii)Tiered-partnership rule. For pur-
poses of this paragraph (b)(2), the liquida-
tion value of a debt-for-equity interest in
a partnership (upper-tier partnership) that
directly or indirectly owns an interest in
one or more partnerships (lower-tier part-
nership(s)) is determined by taking into ac-
count the liquidation value of such lower-
tier partnership interests.
December 19, 20118582011–51 I.R.B.

(iii)Definition of liquidation value.For
purposes of this paragraph (b)(2), the liq-
uidation value of a debt-for-equity interest
equals the amount of cash that the credi-
tor would receive with respect to the debt-
for-equity interest if, immediately after the
debt-for-equity exchange, the partnership
sold all of its assets (including goodwill,
going concern value, and any other intan-
gibles) for cash equal to the fair market
value of those assets and then liquidated.
(c)Example. The following example
illustrates the provisions of this section:
Example. (i) AB partnership has $1,000 of out-
standing indebtedness owed to C. C agrees to trans-
fer to AB partnership the $1,000 indebtedness in a
debt-for-equity exchange for a debt-for-equity inter-
est in AB partnership. The liquidation value of C’s
debt-for-equity interest is $700, which is the amount
of cash that C would receive with respect to that in-
terest if, immediately after the debt-for-equity ex-
change, AB partnership sold all of its assets for cash
equal to the fair market value of those assets and then
liquidated. Each of the requirements of the liquida-
tion value safe harbor described in paragraph (b)(2)
of this section is satisfied.
(ii) Because the requirements in paragraph (b)(2)
of this section are satisfied, the fair market value of
C’s debt-for-equity interest in AB partnership for pur-
poses of determining AB partnership’s COD income
is the liquidation value of C’s debt-for-equity inter-
est, or $700. Accordingly, AB partnership is treated
as satisfying the $1,000 indebtedness for $700 under
section 108(e)(8).
(d)Effective/applicability date.
This section applies to debt-for-eq-
uity exchanges occurring on or after
November 17, 2011.
Par. 3. Section 1.704–2 is amended as
follows:
1. In paragraph (f)(6), the first sen-
tence is revised and in the last sentence, the
language “(j)(2)(i) and (iii)” is removed
and the language “(j)(2)(i) and (j)(2)(iii)”
is added in its place.
2.Paragraphs (j)(2)(i)(A) and
(j)(2)(ii)(A) are revised.
3. In paragraph (l), revise the paragraph
heading and add a new paragraph (l)(1)(v).
The revisions and additions read as fol-
lows:
§1.704–2 Allocations attributable to
nonrecourse liabilities.
*****
(f) * * *
(6) * * * Any minimum gain charge-
back required for a partnership taxable
year consists first of apro rataportion of
certain gains recognized from the dispo-
sition of partnership property subject to
one or more partnership nonrecourse lia-
bilities and income from the discharge of
indebtedness relating to one or more part-
nership nonrecourse liabilities to which
partnership property is subject, and then,
if necessary, consists of apro rataportion
of the partnership’s other items of income
and gain for that year.* * *
*****
(j) * * *
(2) * * *
(i) * * *
(A) First, apro rataportion of gain
from the disposition of property subject
to partnership nonrecourse liabilities and
discharge of indebtedness income relat-
ingtopartnershipnonrecourse liabilities to
which property is subject;
*****
(ii) * * *
(A) First, apro rataportion of gain from
the disposition of property subject to part-
ner nonrecourse debt and discharge of in-
debtedness income relating to partner non-
recourse debt to which property is subject.
*****
(l)Effective/applicability dates.***
(1) * * *
(v) The first sentence of paragraph
(f)(6) of this section and paragraphs
(j)(2)(i)(A) and (j)(2)(ii)(A) of this section
apply on and after November 17, 2011.
*****
Par. 4. Section 1.721–1 is amended
by adding new paragraph (d) to read as
follows:
§1.721–1 Nonrecognition of gain or loss
on contribution.
*****
(d)Debt-for-equity exchange—(1)In
general. Except as otherwise provided
in section 721 and the regulations under
section 721, section 721 applies to a con-
tribution of a partnership’s indebtedness
by a creditor to the debtor partnership
in exchange for a capital or profits in-
terest in the partnership (debt-for-equity
exchange). See §1.108–8(a) for rules in
determining the debtor partnership’s dis-
charge of indebtedness income.
(2)Exception. Section 721 does not ap-
ply to a debt-for-equity exchange to the
extent the transfer of the partnership in-
terest to the creditor is in exchange for
the partnership’s indebtedness for unpaid
rent, royalties, or interest (including ac-
crued original issue discount) that accrued
on or after the beginning of the creditor’s
holding period for the indebtedness. The
debtor partnership will not recognize gain
or loss upon the transfer of a partnership
interest to a creditor in a debt-for-equity
exchange for unpaid rent, royalties, or in-
terest (including accrued original issue dis-
count).
(3)Cross reference.Forrulesinde-
termining whether a partnership interest
transferred to a creditor in a debt-for-eq-
uity exchange is treated as payment of in-
terest or accrued original issue discount,
see §§1.446–2 and 1.1275–2, respectively.
(4)Effective/applicability date.This
paragraph (d) applies to debt-for-eq-
uity exchanges occurring on or after
November 17, 2011.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved November 8, 2011.
Emily S. McMahon,
Acting Assistant
Secretary of the Treasury.
(Filed by the Office of the Federal Register on November 15,
2011, 11:15 a.m., and published in the issue of the Federal
Register for November 17, 2011, 76 F.R. 71255)
Section 358.—Basis to
Distributees
26 CFR 1.358–2: Allocation of basis among nonrecg-
nition property.
T.D. 9558
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Corporate Reorganizations;
Allocation of Basis in “All Cash
D” Reorganizations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
2011–51 I.R.B.859December 19, 2011

SUMMARY: This document contains tem-
porary regulations regarding the determi-
nation of the basis of stock or securities in
a reorganization where no stock or securi-
ties of the issuing corporation is issued and
distributed in the transaction. These tem-
porary regulations clarify that, in certain
reorganizations where no stock or securi-
ties of the issuing corporation is issued and
distributed in the transaction, the ability to
designate the share of stock of the issu-
ing corporation to which the basis, if any,
of the stock or securities surrendered will
attach applies only to a shareholder that
owns actual shares in the issuing corpora-
tion. These temporary regulations affect
corporations engaging in such transactions
and their shareholders. The text of the tem-
porary regulations also serves as the text
of the proposed regulations set forth in the
notice of proposed rulemaking on this sub-
ject in this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective on November 21, 2011.
Applicability Date:For dates of appli-
cability, see §1.358–2T(d).
FOR FURTHER INFORMATION
CONTACT: Lisa A. Fuller at (202)
622–7550 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 19, 2006, the IRS and the
Treasury Department published a notice of
proposed rulemaking (REG–125632–06,
2007–5 I.R.B. 415) in theFederal Reg-
ister(71 FR 75898) that included regu-
lations under section 368 (the Temporary
Regulations). These regulations pro-
vided guidance regarding whether the
distribution requirement under sections
368(a)(1)(D) and 354(b)(1)(B) is satis-
fied if there is no actual distribution of
stock or securities. On December 18,
2009, the IRS and the Treasury Depart-
ment published final regulations (T.D.
9475, 2010–4 I.R.B. 304) in theFed-
eral Register(71 FR 75879) that, in
addition to providing guidance regarding
the qualification of certain transactions
as reorganizations described in section
368(a)(1)(D), amended the regulations
under §1.358–2(a)(2)(iii) to provide
that in the case of a reorganization in
which the property received consists
solely of non-qualifying property equal
to the value of the assets transferred (as
well as a nominal share described in
the final regulations), the shareholder
or security holder may designate the
share of stock of the issuing corporation
to which the basis, if any, of the stock
or securities surrendered will attach.
The IRS and the Treasury Department
issued these regulations in response to
comments that, in a transaction where the
consideration received consists solely of
cash and a nominal share, the mechanics of
preserving basis, if any, in the shares of the
stock or securities surrendered in the basis
of the stock of the issuing corporation
were unclear under current law.
The IRS and the Treasury Department
have become aware that some maintain
these rules, as written, could be interpreted
to allow an inappropriate allocation of ba-
sis by persons that do not own actual shares
of stock in the issuing corporation. This in-
terpretation would most likely be asserted
in the context of a lower-tier reorganiza-
tion transaction involving corporations in
two different ownership chains that have
the same ultimate indirect shareholder(s).
Specifically, the argument is that the rules
could be interpretedto allow persons who
do not own actual shares of stock of the is-
suing corporation to allocate the adjusted
basis of the nominal share to an actual
share of stock of the issuing corporation
directly owned by someone else before
the nominal share is deemed to be further
transferred through the chains of owner-
ship to reflect the actual ownership of the
target and issuing corporations. Under this
interpretation of the rules, the actual share
to which the basis was allocated could then
be sold to recognize a loss, and taxpayers
would avoid losing the nominal share’s ba-
sis, which would otherwise be zero follow-
ing its deemed transfer through the chains
of ownership to the actual shareholder of
the issuing corporation.
For example, assume that J owns all the
stock of corporations X and Y, and X owns
all of the stock of corporation T. X has a
$150 basis in the T stock. The corpora-
tions do not join in the filing of a consol-
idated return. T sells all of its assets to Y
for $100 cash, their fair market value, and
liquidates. Pursuant to §1.368–2(l), Y will
be deemed to issue a nominal share of Y
stock to T in addition to the $100 actually
exchanged for the T assets, and T will be
deemed to distribute the nominal share of
Y stock to X. X will have a basis of $50 in
the nominal share of Ystock under section
358(a). Pursuant to §1.368–2(l), the nom-
inal share of Y stock is deemed to be fur-
ther transferred to J in order to reflect the
actual ownership of Y. J’s basis in the nom-
inal share of Y stock would be zero under
section 301(d). However, some argue that
the rule, as currently written, could be in-
terpreted as allowing X to allocate the $50
of basis in the nominal share to an actual
share of Y stock owned by J prior to the
nominal share of Y stock being deemed to
be further distributed to J.
The IRS and the Treasury Department
did not intend for the final regulations to
allow such an inappropriate allocation of
basis and do not believe the current reg-
ulations support such an allocation. Ac-
cordingly, the IRS and the Treasury De-
partment are proposing rules in this issue
of the Bulletin, to clarify that, in certain
reorganizations where no stock or securi-
ties of the issuing corporation is issued and
distributed in the transaction, the ability to
designate the share of stock of the issu-
ing corporation to which the basis, if any,
of the stock or securities surrendered will
attach applies only to a shareholder that
owns actual shares in the issuing corpora-
tion.
Explanation of Provisions
The preamble to the final regulation
noted that the IRS and the Treasury De-
partment believe the ability to designate
any remaining basis is consistent with
current law regarding basis determina-
tion, as a similar result would occur under
§1.358–2 if an amount of issuing corpo-
ration stock was actually issued in the
transaction (74 FR 67053; 74 FR 67056;
T.D. 9475). To complete the analogy,
however, in the case where stock is actu-
ally issued in a lower-tier transfer, such
stock would then be transferred through
chains of ownership, and in the process, if
basis in the stock exceeded value, the basis
in the shares would be reduced to the fair
market value of the shares in the hands of
the distributee, under section 301(d). Ac-
cordingly, in such a case, basis in excess of
the value of the issuing corporation shares
would generally be preserved only where
the shareholder of the transferor corpora-
tion does not further distribute the stock of
December 19, 20118602011–51 I.R.B.

the issuing corporation in a transaction to
which section 301 applies.
Consistent with this view, these tem-
porary regulations clarify and amend
the final regulations (T.D. 9475) under
§1.358–2(a)(2)(iii) by providing that if
an actual shareholder of the issuing cor-
poration is deemed to receive a nominal
share of stock of the issuing corporation
described in §1.368–2(l), such shareholder
must, after allocating and adjusting the
basis of the nominal share in accordance
with the rules of this section and §1.358–1,
and after adjusting the basis in the nom-
inal share for any transfers described in
§1.358–1, designate the share of stock of
the issuing corporation to which the basis,
if any, of the nominal share will attach.
The IRS and the Treasury Department
also are clarifying the effective date for a
2009 amendment to the regulations under
§1.358–2(a)(iii).
Special An
alyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. For
the applicability of the Regulatory Flexi-
bility Act, please refer to the cross-refer-
ence notice of proposed rulemaking pub-
lished elsewhere in this Bulletin. Pursuant
to section 7805(f) of the Internal Revenue
Code, these regulations were submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
Drafting Information
The principal author of these regula-
tions is Lisa A. Fuller of the Office of
the Associate Chief Counsel (Corporate).
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805* * *
Section 1.358–2 also issued under
26 U.S.C. 358(b)(1).
Par. 2. Section 1.358–2 is amended by:
1. Revising paragraph (a)(2)(iii).
2. Revising paragraph (d).
The revisions read as follows:
§1.358–2 Allocation of basis among
nonrecognition property.
(a) * * *
(2) * * *
(iii) [Reserved]. For further guidance,
see §1.358–2T(a)(2)(iii).
*****
(d)Effective/applicability date.This
section generally applies to exchanges
and distributions of stock and securi-
ties occurring on or after January 23,
2006. However, paragraph (a)(2)(iii)
of this section applies to exchanges and
distributions of stock and securities oc-
curring on or after November 21, 2011.
See §1.358–2(a)(2)(iii), as contained in
26 CFR part 1 revised as of April 1,
2010, for exchanges and distributions
of stock and securities occurring on
or after January 23, 2006, and before
November 21, 2011.
Par. 3. Section 1.358–2T is added to
read as follows:
§1.358–2T Allocation of basis among
nonrecognition property (temporary).
(a)(1) through (a)(2)(ii) [Reserved].
For further guidance, see §1.358–2(a)(1)
through (a)(2)(ii).
(iii) For purposes of this section, if a
shareholder or securityholder surrenders a
share of stock or a security in a transaction
under the terms of section 354 (or so much
of section 356 as relates to section 354) in
which such shareholder or security holder
receives no property or property (including
property permitted by section 354 to be
received without the recognition of gain
or “other property” or money) with a fair
market value less than that of the stock or
securities surrendered in the transaction,
such shareholder or security holder shall
be treated as follows.
(A) First, the shareholder or secu-
rity holder shall be treated as receiving
the stock, securities, other property, and
money actually received by the share-
holder or security holder in the transaction
and an amount of stock of the issuing cor-
poration (as defined in §1.368–1(b)) that
has a value equal to the excess of the value
of the stock or securities the shareholder or
security holder surrendered in the transac-
tion over the value of the stock, securities,
other property, and money the shareholder
or security holder actually received in
the transaction. If the shareholder owns
only one class of stock of the issuing cor-
poration the receipt of which would be
consistent with the economic rights associ-
ated with each class of stock of the issuing
corporation, the stock deemed received by
the shareholder pursuant to the previous
sentence shall be stock of such class. If
the shareholder owns multiple classes of
stock of the issuing corporation the receipt
of which would be consistent with the
economic rights associated with each class
of stock of the issuing corporation, the
stock deemed received by the shareholder
shall be stock of each such class owned
by the shareholder immediately prior to
the transaction, in proportion to the value
of the stock of each such class owned by
the shareholder immediately prior to the
transaction. The basis of each share of
stock or security deemed received and ac-
tually received shall be determined under
the rules of this section.
(B) Second, the shareholder or security
holder shall then be treated as surrender-
ing all of its shares of stock and securities
in the issuing corporation, including those
shares of stock or securities held immedi-
ately prior to the transaction, those shares
of stock or securities actually received in
the transaction, and those shares of stock
deemed received pursuant to the previous
sentence, in a reorganization under section
368(a)(1)(E) in exchange for the shares
of stock and securities of the issuing cor-
poration that the shareholder or security
holder actually holds immediately after the
transaction. The basis of each share of
stock and security deemed received in the
reorganization under section 368(a)(1)(E)
shall be determined under the rules of this
section.
(C) If an actual shareholder of the is-
suing corporation is deemed to receive
a nominal share of stock of the issuing
corporation described in §1.368–2(l), such
shareholder must, after allocating and ad-
justing the basis of the nominal share in
accordance with the rules of this section
and §1.358–1, and after adjusting the ba-
2011–51 I.R.B.861December 19, 2011

sis in the nominal share for any transfers
described in §1.368–2(l), designate the
share of stock of the issuing corporation
to which the basis, if any, of the nominal
share will attach.
(a)(2)(iv) through (c),Example 14
[Reserved]. For further guidance, see
§1.358–2(a)(2)(iv) through (c),Example
14.
Example 15.(i)Facts. Each of Corporation X and
Corporation Y has a single class of stock outstanding,
all of which is owned by J, an individual. J acquired
100 shares of Corporation X stock on Date 1 for $1.50
each. On Date 2, Corporation Y acquires the assets
of Corporation X for $100 of cash, their fair mar-
ket value, in a transaction described in §1.368–2(l).
Pursuant to the terms of the exchange, Corporation
X does not receive any Corporation Y stock. Cor-
poration X distributes the $100 of cash to J in liqui-
dation. Pursuant to §1.368–2(l), Corporation Y will
be deemed to issue a nominal share of Corporation Y
stock to Corporation X in addition to the $100 of cash
actually exchanged for the Corporation X assets, and
Corporation X will be deemed to distribute all of the
consideration to J. J will have a basis of $50 in the
nominal share of Corporation Y stock under section
358(a).
(ii)Analysis. Under paragraph (a)(2)(iii) of this
section, J is the actual shareholder of Corporation
Y, the issuing corporation, deemed to receive the
nominal share of Corporation Y stock described in
§1.368–2(l). Therefore, J must designate any share
of Corporation Y stock to which the basis of $50 in
the nominal share of Corporation Y stock will attach.
Example 16.(i)Facts. Each of Corporation X and
Corporation Y has a single class of stock outstand-
ing, all of which is owned by Corporation P. Corpo-
ration T has a single class of stock outstanding, all
of which is owned by Corporation X. The corpora-
tions do not join in the filing of a consolidated return.
Corporation X acquired 100 shares of Corporation T
stock on Date 1 for $1.50 each. On Date 2, Corpora-
tion Y acquires the assets of Corporation T for $100
of cash, their fair market value, in a transaction de-
scribed in §1.368–2(l). Pursuant to the terms of the
exchange, Corporation T does not receive any Cor-
poration Y stock. Corporation T distributes the $100
of cash to Corporation X in liquidation. Pursuant to
§1.368–2(l), Corporation Y will be deemed to issue a
nominal share of Corporation Y stock to Corporation
T in addition to the $100 of cash actually exchanged
for the Corporation T assets, and Corporation T will
be deemed to distribute all of the consideration to
Corporation X. Corporation X will have a basis of
$50 in the nominal share of Corporation Y stock un-
der section 358(a). Corporation X will be deemed to
distribute the nominal share of Corporation Y stock to
Corporation P. Corporation X does not recognize the
loss on the deemed distribution of the nominal share
to Corporation P under section 311(a). Corporation
P’s basis in the nominal share is zero, its fair market
value, under section 301(d).
(ii)Analysis. Corporation X is deemed to re-
ceive the nominal share of Corporation Y stock de-
scribed in §1.368–2(l). However, under paragraph
(a)(2)(iii) of this section, Corporation X is not an ac-
tual shareholder of Corporation Y, the issuing corpo-
ration. Therefore, Corporation X cannot designate
any share of Corporation Y stock to which the basis,
if any, of the nominal share of Corporation Y stock
will attach. Furthermore, Corporation P cannot des-
ignate a share of Corporation Y stock to which basis
will attach because Corporation P receives the nomi-
nal share with a basis of zero.
(d)Effective/applicability date.This
section applies to exchanges and distribu-
tions of stock and securities occurring on
or after November 21, 2011.
(e)Expiration date. This section ex-
pires on or before November 18, 2014.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved November 1, 2011.
Emily S. McMahon,
Acting Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on November 18,
2011, 8:45 a.m., and published in th
e issue of the Federal
Register for November 21, 2011, 76 F.R. 71878)
Section 6011.—General
Requirement of Return,
Statement, or List
26 CFR 26.6011–4: Requirement of statement dis-
closing participation in certain transactions by tax-
payers.
T.D. 9556
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 26 and 301
Generation-Skipping
Transfers (GST) Section
6011 Regulations and
Amendments to the Section
6112 Regulations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations that provide rules relating
to the disclosure of listed transactions and
transactions of interest with respect to
the generation-skipping transfer tax under
section 6011 of the Internal Revenue Code
(Code), conforming amendments under
sections 6111 and 6112, and rules relat-
ing to the preparation and maintenance
of lists with respect to reportable transac-
tions under section 6112. The regulations
affect taxpayers participating in listed
transactions and transactions of interest
and material advisors to such transactions.
The final regulations also contain rules
under section 6112 that affect material
advisors to reportable transactions. These
regulations provide guidance regarding
the length of time a material advisor has
to prepare the list that must be maintained
after the list maintenance requirement
first arises with respect to a reportable
transaction. These regulations also clarify
guidance regarding designation agree-
ments.
DATE: These regulations are effective
November 14, 2011.
FOR FURTHER INFORMATION
CONTACT: Charles D. Wien, (202)
622–3070 (not a toll-free number).
Background
This document contains final regulations
that amend 26 CFR part 26 to provide
rules for purposes of the generation-skip-
ping transfer tax that require the disclosure
of listed transactions and transactions of
interest by certain taxpayers on their Fed-
eral tax returns under section 6011. This
document also contains final regulations
that modify and clarify some of the rules
under26CFRpart301relatingtothe
disclosure obligations of material advisors
under section 6111 and the list mainte-
nance requirements of material advisors
with respect to reportable transactions un-
der section 6112.
On July 31, 2007, the IRS and Trea-
sury Department issued final regulations
under section 6011 (T.D. 9350, 72 FR
43146) 6111 (T.D. 9351, 72 FR 43157)
and 6112 (T.D. 9352, 72 FR 43154) (the
July 2007 regulations) that were published
in theFederal Registeron August 3,
2007. In the July 2007 regulations, the
IRS and Treasury Department amended
26 CFR parts 20, 25, 31, 53, 54, and 56
to provide that certain taxpayers would
be required to disclose transactions of
interest, in addition to listed transactions,
December 19, 20118622011–51 I.R.B.

on their Federal tax returns under section
6011. On September 10, 2009, the IRS and
Treasury Department issued a notice of
proposed rulemaking under sections 6011,
6111, and 6112 (REG–136563–07) (the
September 2009 proposed regulations).
The September 2009 proposed regulations
were published in theFederal Register
(74 FR 46705) on September 11, 2009.
In response to the September 2009 pro-
posed regulations, the IRS and Treasury
Department received two written public
comments. A public hearing was not re-
quested. After consideration of the com-
ments received, the IRS and Treasury De-
partment are adopting the proposed regu-
lations without change.
Explanation of Comments
Two commentators expressed concern
that if the IRS and Treasury Department
designate a transaction involving gift, es-
tate, or generation-skipping transfer taxes
as a listed transaction or transaction of in-
terest, that a corporate fiduciary, merely
by acting as an executor or trustee with
respect to an estate or trust that is inci-
dental to the transaction, would be treated
as a material advisor under section 6112
and the regulations thereunder. One of the
commentators proposed that the Septem-
ber 2009 proposed regulations and exist-
ing final regulations under sections 6011,
6111, and 6112 be amended to require pub-
lic comment before a transaction involving
Chapters 11, 12, and 13 of the Code can be
designated as a listed transaction or trans-
action of interest.
The IRS and Treasury Department be-
lieve that in the situation described by the
commentators the existing regulations un-
der sections 6111 and 6112 properly ad-
dress which parties are material advisors,
and transactions involving gift, estate, or
generation-skipping transfer taxes should
not be treated differently than other trans-
actions. A fiduciary will not be treated as a
material advisor merely by acting as an ex-
ecutor or trustee with respect to an estate or
trust that is incidental to a transaction. A
fiduciary will be treated as a material ad-
visor only if the fiduciary provides mate-
rial aid, assistance or advice as described in
§301.6111–3(b)(2), the fiduciary directly
or indirectly derives gross income in ex-
cess of the threshold amount as described
in §301.6111–3(b)(3), and the transaction
isenteredintobythetaxpayer.
In addition, the regulations are not
amended to require advance notice before
designating a transaction as a transaction
of interest or as a listed transaction as sug-
gested by a commentator. In appropriate
circumstances, the IRS and Treasury De-
partment may choose to publish advance
notice of a transaction of interest and re-
quest comments in certain circumstances.
The IRS and Treasury Department will de-
termine whether to provide advance notice
and a request for comments on a trans-
action by transaction basis. Accordingly,
the proposed regulations will be adopted
without change.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations. It is hereby
certified that the collection of information
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certification
is based on the fact that most of the mate-
rial advisors affected by these regulations
are not small entities and for those mate-
rial advisors that are small entities most
of the information is already required un-
der the current regulations. Any additional
recordkeeping burdens on material advi-
sors that result from this regulation are in-
substantial. Also, the collection of infor-
mation referenced in these regulations has
been approved under OMB control num-
ber 1545–1686. The clarification and new
information required by these final regula-
tions add little or no new burden to those
existing requirements. Therefore, a Regu-
latory Flexibility Analysis under the Reg-
ulatory Flexibility Act (5 U.S.C. chapter 6)
is not required. Pursuant to section 7805(f)
of the Code, the notice of proposed rule-
making preceding these regulations was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Drafting Information
The principal author of these regula-
tions is Charles D. Wien, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries).However,
other personnel from the IRS and
Treasury Department participated in their
development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 26 and 301
are amended as follows:
PART 26—GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT OF
1986
Paragraph 1. The authority citation for
part 26 is amended to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Section 26.6011–4 also issued under
26U.S.C.6011***
Par. 2. Section 26.6011–4 is added to
read as follows:
§26.6011–4 Requirement of statement
disclosing participation in certain
transactions by taxpayers.
(a)In general. If a transaction is iden-
tified as alisted transactionor atransac-
tion of interestas defined in §1.6011–4 of
this chapter by the Commissioner in pub-
lished guidance, and thelisted transaction
or transaction of interest involves a tax on
generation-skipping transfers under chap-
ter 13 of subtitle B of the Internal Revenue
Code, the transaction must be disclosed in
the manner stated in such published guid-
ance.
(b)Effective/applicability date.This
section applies to listed transactions and
transactions of interest entered into on or
after November 14, 2011.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 3. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. Section 301.6111–3 is amended
as follows:
2011–51 I.R.B.863December 19, 2011

1.Paragraphs (b)(2)(i)(A) and
(b)(3)(i)(B) are amended by adding the
language “26.6011–4,” after each occur-
rence of “25.6011–4,”.
2. Paragraphs (c)(2) and (c)(13)
are amended by adding the language
“26.6011–4,” after “25.6011–4,”.
3. Paragraph (i)(1) is revised.
The revision reads as follows:
§301.6111–3 Disclosure of reportable
transactions.
*****
(i)Effective/applicability date—(1)In
general. This section applies to trans-
actions with respect to which a material
advisor makes a tax statement on or after
August 3, 2007. However, this section
applies to transactions of interest en-
tered into on or after November 2, 2006,
with respect to which a material advisor
makes a tax statement under this section
on or after November 2, 2006. Para-
graphs (b)(2)(i)(A), (b)(3)(i)(B), (c)(2),
and (c)(13) of this section apply to trans-
actions with respect to which a material
advisor makes a tax statement under this
section after November 14, 2011. Para-
graph (h) of this section applies to ruling
requests received on or after November 2,
2006. Otherwise, the rules that apply
on or before November 14, 2011 are
contained in this section in effect prior to
November 14, 2011, (see 26 CFR part 301
revised as of April 1, 2011).
*****
Par. 5. Section 301.6112–1 is amended
as follows:
1. Paragraph (b)(1) is revised.
2. Paragraphs (c)(3) and (c)(12)
are amended by adding the language
“26.6011–4,” after “25.6011–4,”.
3. Paragraphs (f) and (g) are revised.
The revisions read as follows:
§301.6112–1 Material advisors of
reportable transactions must keep lists of
advisees, etc.
*****
(b) * * * (1)In general. A separate list
must be prepared and maintained for each
reportable transaction. However, one list
must be maintained for substantially sim-
ilar transactions. A material advisor will
have 30 calendar days from the date the
list maintenance requirement first arises
(see §301.6111–3(b)(4) and paragraph (a)
of this section) with respect to a reportable
transaction to prepare the list that must be
maintained under this section with respect
to that transaction. The Commissioner in
his discretion also may provide in pub-
lished guidance designating a transaction
as a reportable transaction a list prepara-
tion time period greater than 30 calendar
days. If a list is requested under this sec-
tion during the list preparation time period,
the request for the list will be treated as
having been made on the day after the list
preparation time period ends. A list must
be maintained in a form that enables the
IRS to determine without undue delay or
difficulty the information required in para-
graph (b)(3) of this section. The Com-
missioner in his discretion may provide in
published guidance a form or method for
maintaining or furnishing the list.
*****
(f)Designation agreements.Ifmore
than one material advisor is required to
maintain a list of persons for a reportable
transaction, in accordance with paragraph
(b) of this section, the material advisors
may designate by written agreement a sin-
gle material advisor (the designated mate-
rial advisor) to maintain the list or a por-
tion of the list. A designation agreement
does not relieve material advisors from
their obligation to maintain a list in accor-
dance with paragraph (b) of this section or
to furnish their list to the IRS in accordance
with paragraph (e)(1) of this section, but a
designation agreement may allow one ma-
terial advisor to maintain a list on behalf
of the other material advisors who are a
party to the designation agreement. A ma-
terial advisor is not relieved from the re-
quirement of this section because a mate-
rial advisor is unable to obtain the list from
any designated material advisor, any des-
ignated material advisor did not maintain
a list, or the list maintained by any des-
ignated material advisor is not complete.
The existence of a designation agreement
does not affect the ability of the IRS to re-
quest a list from any party to the designa-
tion agreement. The IRS may request a list
from any party to the designation agree-
ment, and the party receiving the request
must furnish their list to the IRS in accor-
dance with paragraph (e)(1) of this sec-
tion, regardless of whether their list was
maintained by another party pursuant to
the terms of a designation agreement.
(g)Effective/applicability date.Ingen-
eral, this section applies to transactions
with respect to which a material advisor
makes a tax statement under §301.6111–3
on or after August 3, 2007. However, this
section applies to transactions of interest
enteredintoonorafterNovember2,2006,
with respect to which a material advisor
makes a tax statement under §301.6111–3
on or after November 2, 2006. Para-
graphs (b)(1), (c)(3), (c)(12), and (f) of
this section apply to transactions with re-
spect to which a material advisor makes
a tax statement under §301.6111–3 after
November 14, 2011.
Otherwise, the rules that apply on or be-
fore November 14, 2011, are contained in
this section in effect prior to November 14,
2011, (see 26 CFR part 301 revised as of
April 1, 2011).
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved November 4, 2011.
Emily S. McMahon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on November 10,
2011, 8:45 a.m., and published in the issue of the Federal
Register for November 14, 2011, 76 F.R. 70340)
December 19, 20118642011–51 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking an
dNoticeof
Public Hearin
g
Gross Estate;
Election to Value
on Alternate
Valuation Date
REG–112196–
07
AGENCY: Inte
rnal Revenue Service
(IRS), Treas
ury.
ACTION: Noti
ce of proposed rulemaking
and notice o
f public hearing.
SUMMARY: Th
is document contains pro-
posed regul
ations that provide guidance
respecting
the election to use the alternate
valuation m
ethod under section 2032 of
the Interna
l Revenue Code (Code). The
proposed r
egulations will affect estates
that file F
orm 706,United States Estate
(and Gener
ation-Skipping Transfer) Tax
Returnand
elect to use the alternate valua-
tion meth
od. This document also provides
notice of
a public hearing on these pro-
posed reg
ulations.
DATES: Wr
itten or electronic comments
must be re
ceived by February 16, 2012.
Outlines
of topics to be discussed at the
public h
earing scheduled for March 9,
2012, at
10:00 a.m. must be received by
Februar
y 17, 2012.
ADDRESS
ES: Send submissions to:
CC:PA:L
PD:PR (REG–112196–07), In-
ternal R
evenue Service, Room 5203, PO
Box 760
4, Ben Franklin Station, Wash-
ington
, DC 20044. Submissions may be
hand de
livered Monday through Friday
betwee
n the hours of 8 a.m. and 4 p.m.
to CC:P
A:LPD:PR (REG–112196–07),
Couri
er’s Desk, Internal Revenue Ser-
vice,
1111 Constitution Avenue NW,
Washi
ngton, DC 20224; or sent elec-
troni
cally via the Federal eRulemak-
ing Po
rtal athttp://www.regulations.gov
(IRS
-REG–112196–07). The public hear-
ing w
ill be held in the Auditorium, begin-
ning
at 10 a.m., at the Internal Revenue
Buil
ding, 1111 Constitution Avenue NW,
Wash
ington, DC.
FOR F
URTHER INFORMATION
CONT
ACT: Concerning the proposed
regulations,
Theresa M. Melchiorre,
(202) 622–309
0; concerning submis-
sions of comme
nts, the hearing, and/or
to be placed on
the building access list
to attend the h
earing, Richard Hurst at
Richard.A.H
urst@irscounsel.treas.govor
at (202) 622–
7180 (not toll-free numbers).
SUPPLEMENTA
RY INFORMATION:
Background
Section 2001 i
mposes a tax on the trans-
ferofthetaxa
ble estate of every dece-
dent who is a ci
tizen or resident of the
United State
s. Section 2033 provides that
the value of t
he gross estate includes the
value of all p
roperty to the extent of the
interest of t
he decedent at the time of his
death. Secti
on 2031(a) provides that the
value of the
decedent’s gross estate in-
cludes the v
alue at the time of the dece-
dent’s deat
h of all property, real or per-
sonal, tang
ible or intangible, wherever sit-
uated. Sect
ion 2032(a) provides that the
value of th
e gross estate may be deter-
mined, if t
he executor so elects, by valuing
all the pro
perty includible in the gross es-
tate as fol
lows. Property distributed, sold,
exchange
d, or otherwise disposed of dur-
ing the 6-
month period immediately af-
ter the da
te of death (alternate valuation
period) i
s valued as of the date of dis-
tributio
n, sale, exchange, or other dispo-
sition (
transaction date). I.R.C. section
2032(a)
(1). Property not distributed, sold,
exchang
ed, or otherwise disposed of dur-
ing the a
lternate valuation period is valued
as of the
date that is 6 months after the
decede
nt’s death (6-month date). I.R.C.
sectio
n 2032(a)(2). Any interest or estate
that is
affected by the mere lapse of time
is incl
udible at its value as of the date of
death (
instead of any later date), with ad-
justm
ent for any difference in its value as
of the
later date that is not due to the mere
lapse
of time. I.R.C. section 2032(a)(3).
Secti
on 2031(c) was enacted by the
Taxpa
yer Relief Act of 1997, 105 Pub-
lic La
w 34 section 508(a), 111 Stat. 788
(Augu
st 5, 1997). Pursuant to this section,
adec
edent’s estate may elect to exclude
from
the gross estate a portion of the fair
mark
et value of property includible in
the d
ecedent’s gross estate by granting a
qual
ified conservation easement on that
property afte
r the date of the decedent’s
death but on or
before the due date (in-
cluding exten
sions) for filing the Form
706,
United St
ates Estate (and Genera-
tion-Skippin
g Transfer) Tax Return.
On April 25, 20
08, a notice of proposed
rulemaking (R
EG–112196–07, 2008–21
I.R.B. 1021)
relating to amendments to the
Estate Tax Re
gulations (26 CFR part 20)
under sectio
n 2032 of the Code was
published in
theFederal Register
(73 FR 22300
). Those regulations (73 FR
22300) prop
osed to clarify that the
election to
use the alternate valuation
method unde
r section 2032 is available
to estates
that experience a reduction in
the value o
f the gross estate during the
alternate
valuation period, but only to
the extent
that the reduction in value is
due to mark
et conditions and not to other
post-dea
th events (events occurring during
the alter
nate valuation period). The term
“market c
onditions” was defined as events
outside o
f the control of the decedent (or
the dece
dent’s executor or trustee) or other
person w
hose property is being valued that
affect t
he fair market value of the property
includi
ble in the decedent’s gross estate.
Changes
in value due to mere lapse of
time or
to other post-death events would
be igno
red in determining the value of the
decede
nt’s gross estate under the alternate
valuat
ion method.
No hear
ing was held because no per-
son or o
rganization requested to speak
at a hea
ring. However, written com-
ments
were received. Some commenta-
tors e
xpressed concern that the proposed
regul
ations (73 FR 22300) would cre-
ate ad
ministrative problems because an
estat
e would be required to trace prop-
erty
and to obtain appraisals based on
hypo
thetical property. Some commen-
tato
rs stated that the current and the
prop
osed regulations (73 FR 22300) did
not a
dequately address the application of
sec
tion 2032 to certain types of property,
suc
h as property the title to which passes at
dea
th due to contract, and to transactions
car
ried out during the alternate valuation
per
iod between an estate and partnerships,
cor
porations, or other entities. For
ex
ample, §20.2032–1(c)(1) does not
ad
dress the consequences of the estate
2011–51 I.R.B.865December 19, 2011

contributing property to a partnership
during the alternate valuation period.
In addition, commentators requested
guidance on the effect of a section 2032
election in calculating the portion of a
trust includible in the decedent’s gross es-
tate under section 2036. This would arise
in the situation where the decedent had
retained the right to an annuity, unitrust,
or other payment from the trust for life,
for any period not ascertainable without
reference to the grantor’s death, or for a
period that does not in fact end before the
grantor’s death. Further, some commenta-
tors requested guidance on the treatment
of the grant, during the alternate valuation
period, of a qualified conservation ease-
ment under section 2031(c).
Many commentators acknowledged
that estates may enter into a transaction
during the alternate valuation period that
could result in the abuse of the section
2032 election. They suggested that the IRS
and Treasury Department would better
serve taxpayers and address any potential
abuse by ensuring that the regulations ad-
dress the issues described in this preamble
rather than finalizing the approach taken
in the proposed regulations.
In view of the comments, the Treasury
Department and the IRS are withdrawing
the proposed regulations (73 FR 22300) by
the publication of these proposed regula-
tions in theFederal Register. Neverthe-
less, see the background section of those
proposed regulations (73 FR 22300) for a
summary of the legislative history of sec-
tion 2032 and the purpose for issuing these
proposed regulations.
This document contains revised pro-
posed amendments to the regulations
promulgated under section 2032. These
proposed regulations make irrelevant,
for purposes of determining the value of
property as of the transaction date or the
6-month date, whichever is applicable (al-
ternate valuation date), the percentage of
ownership or control in an entity includi-
ble in the gross estate and the extent of
participation by the estate (or other holder
of property includible in the gross estate)
in the relevant post-death events.
Certain provisions in the current regu-
lations that have been in effect since 1954
are restated in the proposed regulations for
purposes of clarity. The effective date of
those provisions is not changed.
Explanation of Provisions
These regulations propose to amend
several sections of §20.2032–1. Generally,
paragraph (c)(1)(i) identifies transactions
that constitute distributions, sales, ex-
changes, or dispositions of property. If
an estate’s (or other holder’s) property is
subject to such a transaction during the
alternate valuation period, the estate must
value that property on the transaction date.
The value included in the gross estate is
the fair market value of that property on
the date of and immediately prior to the
transaction. The term “property” refers to
the property includible in the decedent’s
gross estate under section 2033.
Sections 20.2032–1(c)(1)(ii) and
(c)(1)(iii)(A) identify two exceptions to
the rule in §20.2032–1(c)(1)(i). If ei-
ther exception applies, the estate may
use the 6-month date and value the prop-
erty held on that date. The exception
in §20.2032–1(c)(1)(ii) applies only to
transactions in which an interest in a
corporation, partnership, or other entity
(entity) includible in the decedent’s gross
estate is exchanged for one or more dif-
ferent interests (for example, a different
class of stock) in the same entity or in
an acquiring or resulting entity or enti-
ties during the alternate valuation period.
Such transactions may include, without
limitation, reorganizations, recapitaliza-
tions, mergers, or similar transactions.
This exception substitutes a fair market
value test for the corporate provisions in
the current regulations. Specifically, this
paragraph proposes that, if, during the
alternate valuation period, the interest in
an entity includible in the gross estate is
exchanged for a different interest in the
same entity, or in an acquiring or resulting
entity or entities, and if the fair market
value of the interest on the date of the
exchange equals the fair market value of
the property for which it was exchanged,
then the transaction will not be treated
as an exchange for purposes of section
2032(a)(1). As a result, the estate may use
the 6-month date to value the interest in the
same entity or in the acquiring or resulting
entity or entities received in the exchange.
For this purpose, the fair market values
of the surrendered property and received
interest are deemed to be equal if the dif-
ference between the fair market values of
the surrendered property and the received
interest does not exceed 5 percent of the
fair market value of the surrendered prop-
erty as of the transaction date. This section
has no effect on any other provision of the
Code that is applicable to the transaction.
For example, the provisions of chapter 14
may apply even if the transaction does not
result in a deemed exchange for section
2032 purposes as a result of satisfying the
provisions of §20.2032–1(c)(1)(ii).
Section 20.2032–1(c)(1)(iii)(A) pro-
poses that, if, during the alternate valuation
period, an estate (or other holder) receives
a distribution from a business entity, bank
account, or retirement trust (entity) and
an interest in that entity is includible in
the decedent’s gross estate, the estate may
use the 6-month date to value the property
held in the estate if the following require-
ment is satisfied. The fair market value
of the interest in the entity includible in
the gross estate immediately before the
distribution must equal the sum of the fair
market value of the distributed property
on the date of the distribution and the fair
market value of the interest in the entity
includible in the gross estate immediately
after the distribution. If this requirement
is not satisfied, the estate must use the fair
market value as of the distribution date
and immediately prior to the distribution
of the entire interest in the entity includi-
ble in the gross estate. For purposes of
this section, any distribution is deemed to
consist first of excluded property (as de-
fined in §20.2032–1(d)), if any, and then
of included property.
Section 20.2032–1(c)(1)(iv) proposes
an aggregation rule to use in calculating
the fair market value of each portion of
property that is, or is deemed to be dis-
tributed, sold, exchanged, or otherwise
disposed of during the alternate valuation
period, and that remains in the gross estate
on the 6-month date.
Section 20.2032–1(c)(iii)(B) provides a
special rule to use in determining the por-
tion of a trust includible, by reason of a
retained interest, in the decedent’s gross
estate under section 2036 as of the alter-
nate valuation date. An example is added
to §20.2032–1(e) to illustrate this special
rule and the effect of the provisions of
§20.2032–1(d) and §20.2032–1(f)(2)(i) on
this calculation.
Section 20.2032–1(c)(2) is amended to
clarify when property, the title to which
passes by contract or by operation of law, is
December 19, 20118662011–51 I.R.B.

deemed to be distributed, sold, exchanged,
or otherwise disposed of for section 2032
purposes. Section 20.2032–1(c)(3) is
amended to clarify the person or entity that
will be treated as having sold, exchanged,
or otherwise disposed of the property for
section 2032 purposes.
Section 20.2032–1(c)(4) is added to
provide that if Congress, by statute, has
deemed that a post-death event has oc-
curred on the decedent’s date of death, the
post-death event will not result in a distri-
bution, sale, exchange, or other disposition
of the property for section 2032 purposes.
To date, the only post-death event that
satisfies this exception is the grant, dur-
ing the alternate valuation period, of a
conservation easement in accordance with
section 2031(c). With respect to such a
grant, for section 2032 purposes, the estate
must determine the fair market value of
the property as of the date of death and as
of the alternate valuation date, taking into
account the effect of the easement on each
of those valuation dates.
Section 20.2032–1(c)(5) provides ex-
amples, not intended to be exclusive, illus-
trating the provisions of §20.2032–1(c).
Section 20.2032–1(f) is revised to clar-
ify the types of factors that impact the fair
market value of property and the effect
of which will be recognized under section
2032. This paragraphalso explains and il-
lustrates these rules.
Proposed Effective/Applicability Date
Section 20.2032–1(c)(2) except
the second sentence of the intro-
ductory text, §20.2032–1(c)(3) ex-
cept §20.2032–1(c)(3)(i)(C), the chart
inExample 1of §20.2032–1(e),
§20.2032–1(f)(2) except the last sen-
tence, and the first and third sentences
in §20.2032–1(f)(2)(ii) are applicable
to decedents dying after August 16,
1954. Sections 20.2032–1(a) introductory
text, 20.2032–1(a)(1), 20.2032–1(a)(2),
20.2032–1(c)(1)(i), (c)(1)(ii), (c)(1)(iii),
(c)(1)(iv), (c)(3)(i)(C), (c)(4), (c)(5),
(f)(1), (f)(2)(i), and (f)(3), the sec-
ond sentence in §20.2032–1(c)(2) in-
troductory text, §20.2032–1(e) except
the chart inExample 1,thelastsen-
tence in §20.2032–1(f)(2) introduc-
tory text, and the second sentence in
§20.2032–1(f)(2)(ii) are applicable to es-
tates of decedents dying on or after the
date of publication of the Treasury deci-
sion adopting these rules as final in the
Federal Register.
Special Analyses
It has been determined that this pro-
posed regulation is not a significant regu-
latory action as defined in Executive Or-
der 12866, as supplemented by Executive
Order 13563. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations
and, because these regulations do not im-
pose on small entities a collection of infor-
mation requirement, the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) does not
apply. Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
this regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and Treasury Department also re-
quest comments on the clarity of the pro-
posed rules and how they can be made eas-
ier to understand. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled for
March 9, 2012 at 10:00 a.m. in Audito-
rium, Internal Revenue Building. Due to
building security procedures, visitors must
use the main building entrance 1111 Con-
stitution Avenue NW, Washington, DC. In
addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate en-
trance area more than 30 minutes before
the hearing starts. For more information
about having your name placed on the list
to attend the hearing, see the “FOR FUR-
THER INFORMATION CONTACT” sec-
tion of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written (a signed original and eight
(8) copies) or electronic comments by Feb-
ruary 16, 2012 and an outline of the topics
to be discussed and the time to be devoted
to each topic by February 17, 2012. A pe-
riod of 10 minutes will be allotted to each
person for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for re-
ceiving outlines has passed. Copies of the
agenda will be available free of charge at
the hearing.
Drafting Information
The principal author of these proposed
regulations is Theresa M. Melchiorre,
Office of Associate Chief Counsel
(Passthroughs and Special Industries).
*****
Withdrawal of Notice of Proposed
Rulemaking
Under the authority of 26 U.S.C.
7805, the notice of proposed rulemaking
(REG–112196–07) that was published in
theFederal Registeron April 25, 2008
(73 FR 22300) is withdrawn.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 20 is pro-
posed to be amended as follows:
PART 20—ESTATE TAX; ESTATES
OF DECEDENTS DYING AFTER
AUGUST 16, 1954
Paragraph 1. The authority citation for
part 20 continues to read in part as follows:
Authority: 26 U. S. C. 7805 * * *
§20.2032–1[AMENDED]
Par. 2. For each entry in the table, each
paragraph in the “Old Paragraph” column
is redesignated as indicated in the “New
Paragraph” column:
2011–51 I.R.B.867December 19, 2011

Old Paragraph
New Paragraph
20.2032–1(c)(1)20.2032–1(c)(1)(i)
20.2032–1(c)(3)20.2032–1(c)(3)(i)
20.2032–1(c)(3)(i)20.2032–1(c)(3)(i)(A)
20.2032–1(c)(3)(ii)20.2032–1(c)(3)(i)(B)
20.2032–1(c)(3)(iii)20.2032–1(c)(3)(i)(C)
20.2032–1(c)(3)(iv)20.2032–1(c)(3)(i)(D)
20.2032–1(c)(3)(v)20.2032–1(c)(3)(i)(E)
20.2032–1(f)20.2032–1(f)(2)
20.2032–1(f)(1)20.2032–1(f)(2)(i)
20.2032–1(f)(2)20.2032–1(f)(2)(ii)
Par. 3. Section 20.2032–1 is amended
by:
1. Revising paragraph (a) introductory
text.
2. Revising paragraphs (a)(1) and
(a)(2).
3. Revising newly-designated para-
graph (c)(1)(i), newly-designated para-
graph (c)(3)(i)(C), paragraph (e) intro-
ductory text, the introductory text of
paragraph (e)Example 1preceding the
table, the last sentence in newly-desig-
nated paragraph (f)(2) introductory text,
newly-designated paragraph (f)(2)(i), and
the second sentence in newly-designated
paragraph (f)(2)(ii).
4. Adding new paragraphs (c)(1)(ii),
(c)(1)(iii), (c)(1)(iv), (c)(4), (c)(5), (f)(1),
and (f)(3).
5. Adding a paragraph heading and a
new second sentence in paragraph (c)(2)
introductory text.
6. Adding a paragraph heading to para-
graph (c)(3).
7. Designating the undesignated lan-
guage following newly-designated para-
graph (c)(3)(i)(E) as paragraph (c)(3)(ii)
and adding a paragraph heading to this
paragraph.
8. Designating the table in paragraph
(e) asExample 1and adding paragraph (e)
Example 2following the table.
9. Revising the paragraph heading and
adding two sentences at the end of para-
graph (h).
The additions and revisions read as fol-
lows.
§20.2032–1 Alternate valuation.
(a)In general. — In general, section
2032 provides for thevaluation of a dece-
dent’s gross estate at a date (alternate
valuation date) other than the date of the
decedent’s death. More specifically, if
an executor elects the alternate valuation
method under section 2032, the property
includible in the decedent’s gross estate
on the date of death (decedent’s interest)
is valued as of whichever of the following
datesisapplicable:
(1) Any property distributed, sold, ex-
changed, or otherwise disposed of within 6
months (1 year, if the decedent died on or
before December 31, 1970) after the dece-
dent’s death (alternate valuation period) is
valued as of the date on which it is first
distributed, sold, exchanged, or otherwise
disposed of (transaction date).
(2) Any property not distributed, sold,
exchanged, or otherwise disposed of dur-
ing the alternate valuation period is val-
ued as of the date 6 months (1 year, if the
decedent died on or before December 31,
1970) after the date of the decedent’s death
(6-month date).
*****
(c)Meaning of “distributed, sold, ex-
changed, or otherwise disposed of”—(1)
In general.
(i)Transactions included.Thephrase
“distributed, sold, exchanged, or otherwise
disposed of” comprehends all possible
ways by which property ceases to form
a part of the gross estate. This phrase
includes, but is not limited to:
(A) The use of money on hand at the
date of the decedent’s death to pay funeral
or other expenses of the decedent’s estate;
(B) The use of money on hand at the
date of the decedent’s death to invest in
other property;
(C) The exercise of employee stock op-
tions;
(D)Thesurrenderofstockforcorporate
assets in partial or complete liquidation of
a corporation, and similar transactions in-
volving partnerships or other entities;
(E) The distribution by the estate (or
other holder) of included property as de-
fined in paragraph (d) of this section;
(F) The transfer or exchange of property
for other property, whether or not gain or
loss is currently recognized for income tax
purposes;
(G) The contribution of cash or other
property to a corporation, partnership, or
other entity, whether or not gain or loss is
currently recognized for income tax pur-
poses;
(H) The exchange of interests in a cor-
poration, partnership, or other entity (en-
tity) for one or more different interests (for
example, a different class of stock) in the
same entity or in an acquiring or resulting
entity or entities (see, however, paragraph
(c)(1)(ii) of this section); and
(I) Any other change in the ownership
structure or interests in, or in the assets
of, a corporation, partnership, or other en-
tity, an interest in which is includible in the
gross estate, such that the included prop-
erty after the change does not reasonably
represent the included property at the dece-
dent’s date of death (see, however, para-
graph (c)(1)(iii)(A) of this section). Such a
change in the ownership structure or inter-
December 19, 20118682011–51 I.R.B.

ests in or in the assets of an entity includes,
without limitation—
(1) The dilution of the decedent’s own-
ership interest in the entity due to the is-
suance of additional ownership interests in
that entity;
(2) An increase in the decedent’s own-
ership interest in the entity due to the en-
tity’s redemption of the interest of a differ-
ent owner;
(3) A reinvestment of the entity’s assets;
and
(4) A distribution or disbursement of
property (other than excluded property as
defined in paragraph (d) of this section)
by the entity (other than expenses, such
as rents and salaries, paid in the ordinary
course of the entity’s business), with the
effect that the fair market value of the en-
tity before the occurrence does not equal
the fair market value of the entity immedi-
ately thereafter.
(ii)Exchange of an interest in an ex-
isting corporation, partnership, or other
entity includible in the gross estate.If
an interest in a corporation, partnership,
or other entity (entity) is includible in
the gross estate at death and that interest
is exchanged as described in paragraph
(c)(1)(i)(H) of this section for one or more
different interests in the same entity or
in an acquiring or resulting entity or en-
tities, the transaction does not result in
an exchange or disposition under section
2032(a)(1) and paragraph (c)(1)(i)(H) of
this section if, on the date of the exchange,
the fair market value of the interest in
the entity equals the fair market value of
the interest(s) in the same entity or the
acquiring or resulting entity or entities.
Such transactions may include, without
limitation, reorganizations, recapitaliza-
tions, mergers, or similar transactions. In
determining whether the exchanged prop-
erties have the same fair market value, a
difference in value equal to or less than
5 percent of the fair market value, as of
the transaction date, of the property in-
terest includible in the gross estate on the
decedent’s date of death is ignored. If the
transaction satisfies the requirements of
this paragraph, the property to be valued
on the 6-month date (or on the transaction
date, if any, subsequent to this transaction)
is the property received in the exchange,
rather than the property includible in the
decedent’s gross estate at the date of death.
This paragraph has noeffect on any other
provision of the Internal Revenue Code
that is applicable to the transaction. For
example, even if the transaction does not
result in a deemed exchange as a result of
satisfying the requirements of this para-
graph, the provisions of chapter 14 may be
applicable to determine fair market value
for Federal estate tax purposes.
(iii)Distributions from an account or
entity in which the decedent held an inter-
est at death.
(A)In general. If during the alternate
valuation period, an estate (or other holder
of the decedent’s interest) receives a dis-
tribution or disbursement (to the extent
the distribution or disbursement consists
of included property, as defined in para-
graph (d) of this section) (payment) from
a partnership, corporation, trust (including
an IRA, Roth IRA, 403(b), 401(k), Thrift
Savings Plan, etc.), bank account or sim-
ilar asset, or other entity (entity), and an
interest in that entity is includible in the
gross estate, the payment does not result in
a distribution under paragraph (c)(1)(i)(I)
of this section. However, this rule applies
only if, on the date of the payment, the fair
market value of the decedent’s interest in
the entity before the payment equals the
sum of the fair market value of the pay-
ment made to the estate (or other holder of
the decedent’s interest in the entity) and the
fair market value of the decedent’s interest
in the entity, not including any excluded
property, after the payment. In this case,
the alternate valuation date of the payment
is the date of the payment, and the alternate
valuation date of the decedent’s remaining
interest in the entity, if any, is the 6-month
date (or the transaction date, if any, sub-
sequent to this payment). If this require-
ment is not met, the payment is a distribu-
tion under paragraph (c)(1)(i) of this sec-
tion, and the alternate valuation date of the
decedent’s entire interest in the entity is the
date of the payment. For purposes of this
section, a distribution or disbursement is
deemed to consist first of excluded prop-
erty, if any, and then of included property,
as those terms are defined in paragraph (d)
of this section.
(B)Special rule.If the decedent’s in-
terest in an entity that is includible in the
gross estate consists of the amount needed
to produce an annuity, unitrust, remain-
der, or other such payment valued under
section 2036, then assuming the distribu-
tion satisfies the general rule set forth in
paragraph (c)(1)(iii)(A) of this section, the
value of each distribution (to the extent it
is deemed to consist of included property)
payable (whether or not actually paid) dur-
ing the alternate valuation period shall be
addedtothevalueoftheentityontheal-
ternate valuation date. The sum of the fair
market value of these distributions when
made and the fair market value of the en-
tity on the alternate valuation date shall be
used as the fair market value of the entity in
computing the amount, valued as of the al-
ternate valuation date, to be included in the
decedent’s gross estate under section 2036.
SeeExample 2of paragraph (e) of this sec-
tion.
(iv)Aggregation. For purposes of this
section, a special aggregation rule applies
in two situations to determine the value to
be included in the gross estate pursuant to
an alternate valuation election. Those two
situations arise when, during the alternate
valuation period, less than all of the inter-
est includible in the decedent’s gross es-
tate in a particular property is the subject
of a transaction described in paragraphs
(c)(1)(i), (c)(1)(ii), (c)(1)(iii), or (c)(2) of
this section. In one situation, one or more
portions of the includible interest are sub-
ject to such a transaction and a portion
isstillheldonthe6-monthdate. Inthe
other situation, the entire interest includi-
ble in the gross estate is disposed of in two
or more such transactions during the alter-
nate valuation period, so that no part of
that interest remains on the 6-month date.
In both of these situations, the fair mar-
ket value of each portion of the interest in-
cludible in the gross estate is to be deter-
mined as follows. The fair market value
of each portion subject to such a transac-
tion, and the portion remaining, if any, on
the 6-month date, is the fair market value,
as of the transaction date, or the 6-month
date for any remaining portion, of the en-
tire interest includible in the gross estate
on the decedent’s date of death, multiplied
by a fraction. The numerator of that frac-
tion is the portion of the interest subject to
that transaction, or the portion remaining
on the 6-month date, and the denominator
is the entire interest includible in the gross
estate at the decedent’s date of death.
(2)Property distributed.***Property
is not considered “distributed” merely be-
cause property passes directly at death as a
result of a beneficiary designation or other
2011–51 I.R.B.869December 19, 2011

contractual arrangement or by operation of
law. ***
(3)Person able to sell, exchange, or
otherwise dispose of property includible in
the gross estate.(i)***
(A) * * *
(B)***
(C) An heir, devisee, or other person to
whom title to property passes directly on
death by reason of a beneficiary designa-
tion or other contractual arrangement or by
operation of law;
(D) * * *
(E) * * *
(ii)Binding contracts.***
(4)Certain post-death events.Ifthe
effect of any other provision of the In-
ternal Revenue Code is that a post-death
event is deemed to have occurred on the
date of death, the post-death event will
not be considered a transaction described
in paragraph (c)(1)(i) of this section. For
example, the grant, during the alternate
valuation period, of a qualified conserva-
tion easement in accordance with section
2031(c) is not a transaction described in
paragraph (c)(1)(i) of this section. Pur-
suant to section 2031(c), the post-death
grant of the easement is effective for Fed-
eral estate tax purposes as of the date of the
decedent’s death. As a result, for purposes
of determining both the estate’s eligibil-
itytomakeanelectionunderthissection
and the value of the property on the alter-
nate valuation date,the fair market value
of the property as of the date of death must
be compared to the fair market value of
that property as of the alternate valuation
date, in each case as that value is adjusted
by reason of the existence of the section
2031(c) qualified easement.
(5)Examples. The application of para-
graph (c) of this section is illustrated in
the following examples. In each example,
decedent’s (D’s) estate elects to value D’s
gross estate under the alternate valuation
method, so that the alternate valuation date
of the property includible in the gross es-
tate on D’s date of death is either the trans-
action date or the 6-month date. In each
example, assume that the only factors af-
fecting value during the alternate valuation
period, and the only occurrences described
in paragraphs (c)(1)(i) and (c)(2) of this
section, are those described in the exam-
ple.
Example 1. At D’s death, D owned property
with a fair market value of $100X. Two months after
D’s death (Date 1), D’s executor and D’s family
members formed a limited partnership. D’s executor
contributed all of the property to the partnership and
received an interest in the partnership in exchange.
The investment of the property in the partnership is a
transaction described in paragraph (c)(1)(i)(F) and/or
(G) of this section. As a result, the alternate valuation
date of the property is the date of its contribution and
the value to be included in D’s gross estate is the fair
market value of the property immediately prior to
its contribution to the partnership. The result would
be the same if D’s estate instead had contributed
property to a limited partnership formed prior to D’s
death by D and/or other parties, related or unrelated
to D. Further, the result would be the same if D’s
estate had contributed the property to a corporation,
publicly traded or otherwise, or other entity after D’s
death and prior to the 6-month date.
Example 2. At D’s death, D held incentive stock
options that were qualified under section 422. D’s
executor exercised all of the stock options prior to
the 6-month date. The exercise of the stock options
is a transaction described in paragraph (c)(1)(i)(C) of
this section. Thus, the alternate valuation date of the
stock options is the date of their exercise and the value
to be included in D’s gross estate is the fair market
value of the stock options immediately prior to their
exercise. The result would be the same if the stock
options were not qualified under section 422 and were
taxable under section 83 upon exercise.
Example 3.D’s gross estate includes a control-
ling interest in Y, a corporation. During the alternate
valuation period, Y issued additional shares of stock
and awarded them to certain key employees. D’s in-
terest in Y was diluted to a non-controlling interest
by Y’s issuance of the additional stock. Y’s issuance
of the stock is a transaction described in paragraph
(c)(1)(i)(I) of this section. The value to be included in
D’s gross estate is the fair market value of D’s stock
immediately prior to Y’s issuance of the additional
stock. The result would be the same if D’s estate in-
cluded a minority interest in Y on the date of death
and that interest became a controlling interest during
the alternate valuation period as the result of Y’s re-
demption of the shares of another shareholder.
Example 4. At D’s death, D owned stock in Y,
a corporation. During the alternate valuation period,
the Board of Directors of Y contributed all of Y’s as-
sets to a partnership in exchange for interests therein.
The contribution is a transaction described in para-
graph (c)(1)(i)(I)(3) of this section. Therefore, the al-
ternate valuation date of D’s stock in Y is the date of
the reinvestment of Y’s assets and the value to be in-
cluded in D’s gross estate is the fair market value of
D’s stock in Y immediately prior to the reinvestment.
The result would be the same even if the Board of Di-
rectors had contributed only a portion of Y’s assets to
the partnership during the alternate valuation period.
Example 5. (i) At D’s death, D owned common
stock in Y, a corporation. Two months after D’s death
(Date 1), there was a reorganization of Y. In the reor-
ganization, D’s estate exchanged all of its stock for a
new class of stock in X. On the date of the reorgani-
zation, the difference between the fair market value
of the stock D’s estate received and the fair market
value on that date of the stock includible in D’s gross
estate at death was greater than 5% of the fair market
value, as of the date of the reorganization, of the stock
D held at death. The reorganization is a transaction
described in paragraph (c)(1)(i)(H) of this section and
does not satisfy the exception described in paragraph
(c)(1)(ii) of this section. Thus, the alternate valuation
date is the date of the reorganization and the value to
be included in D’s gross estate is the fair market value
of the stock immediately prior to the reorganization.
This result is not affected by whether or not the re-
organization is a tax-free reorganization for Federal
income tax purposes. The result would be the same if
the stock had been held, for example, in an IRA with
designated beneficiaries. See paragraph (c)(3)(i)(C)
of this section.
(ii) If, instead, the difference between the two
fair market values as of the date of the reorganiza-
tion was equal to or less than 5% of the fair market
value, as of the date of the reorganization, of the stock
D held at death, the reorganization would satisfy the
exception provided in paragraph (c)(1)(ii) of this sec-
tion. Thus, the alternate valuation date would be the
6-month date. The value to be included in D’s gross
estate would be the fair market value, determined as
of the 6-month date, of the new class of stock in Y
that D’s estate received in the reorganization.
Example 6. (i) At D’s death, D owned an inter-
est in Partnership X that is includible in D’s gross es-
tate. During the alternate valuation period, X made a
cash distribution to each of the partners. The distribu-
tion consists entirely of included property as defined
in paragraph (d) of this section. The distribution is
a transaction described in paragraph (c)(1)(i)(I)(4)of
this section. On the date of the distribution, the fair
market value of D’s interest in X before the distribu-
tion equaled the sum of the distribution paid to D’s
estate and the fair market value of D’s interest in X
immediately after the distribution. Thus, pursuant to
paragraph (c)(1)(iii)(A) of this section, the alternate
valuation date of the property distributed is the date
of the distribution, and the alternate valuation date of
D’s interest in X is the 6-month date.
(ii) If, instead, the fair market value of D’s inter-
est in X before the distribution did not equal the sum
of the distribution paid to D’s estate and the fair mar-
ket value of D’s interest in X (not including any ex-
cluded property) immediately after the distribution,
then pursuant to paragraph (c)(1)(i)(I)(4)ofthissec-
tion, the alternate valuation date of D’s entire interest
in X would be the date of the distribution.
Example 7. D died owning 100% of Blackacre.
D’s will directs that an undivided 70% interest in
Blackacre is to pass to Trust A for the benefit of D’s
surviving spouse, and an undivided 30% interest is to
pass to Trust B for the benefit of D’s surviving child.
Three months after D’s death (Date 1), the executor
of D’s estate distributed a 70% interest in Blackacre
to Trust A. Four months after D’s death (Date 2), the
executor of D’s estate distributed a 30% interest in
Blackacre to Trust B. The following values are in-
cludible in D’s gross estate pursuant to paragraphs
(c)(1)(i)(E) and (c)(1)(iv): the fair market value of
the 70% interest in Blackacre, determined by calcu-
lating 70% of the fair market value of all (100%) of
Blackacre as of Date 1; and the fair market value of
the 30% interest in Blackacre, determined by calcu-
lating 30% of the fair market value of all (100%) of
Blackacre as of Date 2.
Example 8. At D’s death, D owned 100% of
the units of a limited liability company (LLC). Two
months after D’s death (Date 1), D’s executor sold
20% of the LLC units to an unrelated third party.
December 19, 20118702011–51 I.R.B.

Three months after D’s death (Date 2), D’s execu-
tor sold 40% of the LLC units to D’s child. On the
6-month date, the estate held the remaining 40% of
the units in the LLC. The alternate valuation date of
the units sold is their sale date (Date 1 and Date 2, re-
spectively) pursuant to paragraph (a) of this section.
The alternate valuation date of the units remaining
in the estate is the 6-month date, as these units have
not been distributed, sold, exchanged, or otherwise
disposed of in a transaction described in paragraphs
(c)(1)(i) or (c)(2) of this section prior to this date. Pur-
suant to paragraph (c)(1)(iv) of this section, the value
of the units disposed of on Date 1 and Date 2 is the
fair market value of the 20% and 40% interests, de-
termined by calculating 20% and 40% of the fair mar-
ket value as of Date 1 and Date 2, respectively, of all
the units (100%) includible in the gross estate at D’s
death. Similarly, the value of the units held on the
6-month date to be included in D’s gross estate is the
fair market value of those units, determined by taking
40% of the fair market value on the 6-month date of
all of the units (100%) includible in the gross estate at
D’s death. As a result, the fact that the partial sales re-
sulted in the creation of three minority interests is not
taken into account in valuing under section 2032 any
portion of the LLC interests held by D at D’s death.
Example 9. Husband died owning an interest in
a brokerage account titled in the names of Husband
and Wife with rights of survivorship. On Husband’s
death, the account held marketable securities, corpo-
rate bonds, municipal bonds, certificates of deposit,
and cash. During the alternate valuation period,
Wife’s stockbroker advised her that the account
could not be held under the social security number of
a deceased individual. Accordingly, approximately
one month after Husband’s death, Wife directed the
stockbroker to transfer the account into an account
titled in Wife’s sole name. Because title to the joint
account passes to Wife at the moment of Husband’s
death by operation of law, the transfer of the joint
account into an account in Wife’s sole name is not
a transaction described in paragraph (c)(1)(i) of this
section. Accordingly, the value of the assets held in
Wife’s solely owned account will be includible in
Husband’s gross estate attheir fair market value on
the 6-month date. The result would be the same if
the brokerage firm automatically transferred title to
the account into Wife’s name, or if Wife changed
the beneficiary designation for the account. Finally,
the result would be the same if, instead of an ac-
count with a brokerage firm, the assets were held in
Husband’s retirement account (IRA or similar trust
such as a Roth IRA, 403(b) plan, or 401(k) plan) or
Wife’s ownership of the account was the result of a
contract (a beneficiary designation form) rather than
operation of law.
Example 10. Assume the same facts as inExam-
ple 9except that, during the alternate valuation pe-
riod, Wife directed the stockbroker to sell a bond in
the account. The sale is a transaction described in
paragraph (c)(1)(i)(I)(4) of this section. Wife is an
individual described in paragraph (c)(3)(i)(D) of this
section. Thus, the alternate valuation date of the bond
is the date of its sale. The values to be included in
D’s gross estate are the fair market value of the bond
on date of its sale, and the fair market value of the
balance of the account on the 6-month date. The re-
sult would be the same if the bond had matured and
was retired during the alternate valuation period. The
result also would be the same if the bond was held
within a retirement account (IRA or similar trust such
as a Roth IRA, 403(b) plan, or 401(k) plan).
Example 11. Assume the same facts as inExam-
ple 9except that, during the alternate valuation pe-
riod, Wife withdrew cash from the account or oth-
erwise received income or other disbursements from
the account. Each such withdrawal or disbursement
from the account (to the extent it consists of included
property as defined in paragraph (d) of this section)
is a distribution described in paragraph (c)(1)(i)(I)(4)
of this section. Provided that, on the date of each
distribution, the fair market value of the account be-
fore the distribution (not including excluded prop-
erty) equals the sum of the included property dis-
tributed and the fair market value of the included
property in the account immediately after the distri-
bution in accordance with paragraph (c)(1)(iii)(A) of
this section, the alternate valuation date for each dis-
tribution is the date of the distribution and the alter-
nate valuation date for the account is the 6-month
date. The value to be included in the gross estate
is the fair market value of each distribution of in-
cluded property (determined as of the date of distri-
bution) and the fair market value of the account on
the 6-month date. The result would be the same if the
assets were held in an IRA or similar trust, such as a
Roth IRA, 403(b) plan, or 401(k) plan.
Example 12. Husband died with a retirement ac-
count, having named his three children, in specified
shares totaling 100%, as the designated beneficiaries
of that account. During the alternate valuation period,
the account was divided into three separate retirement
accounts, each in the name of a different child and
funded with that child’s designated share. The divi-
sion of the retirement account is not a transaction de-
scribedinparagraph(c)(1)(i)ofthissectionbyrea-
son of paragraph (c)(2) of this section, so the alter-
nate valuation date for each of the new accounts is
the 6-month date.
Example 13. (i) D’s gross estate includes real
property. During the alternate valuation period, D’s
executor grants a conservation easement that restricts
the property’s use under local law but does not sat-
isfy the requirements of section 2031(c). The ease-
ment reduces the fair market value of the property.
The executor’s grant of the conservation easement is a
transaction described in paragraph (c)(1)(i)(E) of this
section and does not satisfy the exception described
in paragraph (c)(4) of this section. Therefore, the al-
ternate valuation date for the property is the date the
easement was granted, and the value to be included in
D’s gross estate is the fair market value of the prop-
erty immediately prior to the grant.
(ii) Assume, instead, that the easement satisfied
the requirements of section 2031(c) and, thus, satis-
fied the exception described in paragraph (c)(4) of
this section. Pursuant to paragraph (c)(4), for pur-
poses of determining both the estate’s eligibility to
make an election under section 2032 and the value of
the property on the 6-month date, the section 2031(c)
qualified easement is taken into account in determin-
ing both the fair market value of the property on D’s
date of death and the fair market value of the property
on the 6-month date.
*****
(e)Examples.— The application of
paragraph (d) of this section regarding “in-
cluded property” and “excluded property”
is illustrated by the following examples.
Example 1. Assume that the decedent (D) died on
January 1, 1955: * * *
Example 2. (i) At death, D held a qualified in-
terest described in section 2702(b) in the form of an
annuity in a grantor retained annuity trust (GRAT)
D had created and funded with $150,000. The trust
agreement provides for an annual annuity payment of
$12,000 per year to D or D’s estate for a term of 10
years. At the expiration of the 10-year term, the re-
mainder is to be distributed to D’s child. D dies prior
to the expiration of the 10-year term. On D’s date
of death, the fair market value of the property in the
GRAT is $325,000.
(ii)TheonlyassetsintheGRATareanapart-
ment building and a bank account. Three months af-
ter D’s date of death, an annuity payment of $12,000
is paid in cash to D’s estate. The monthly rents from
the apartment building total $500. After the date of
death and prior to the payment date, the GRAT re-
ceived $1,500 in excluded property in the form of
rent. Pursuant to paragraph (c)(1)(iii)(A) of this sec-
tion, $1,500 of the $12,000 distributed is deemed to
be excluded property for purposes of section 2032.
The distribution is a transaction described in para-
graph (c)(1)(i)(I)(4) of this section. On the date of
the distribution, the fair market value of D’s interest
in the GRAT before the distribution equals the sum
of the distribution paid to D’s estate and the fair mar-
ket value of D’s interest in the GRAT immediately
after the distribution. Thus, pursuant to paragraph
(c)(1)(iii)(A) of this section, the alternate valuation
date for the $10,500 cash distribution, which is in-
cluded property, is the date of its distribution, and the
alternate valuation date of the GRAT is the 6-month
date.
(iii) The calculation of the value of D’s interest in
the GRAT includible in D’s gross estate at D’s death
pursuant to section 2036 must be computed under
the special rule of paragraph (c)(1)(iii)(B) of this
section as a result of the estate’s election to use the
alternate valuation method under section 2032. On
the 6-month date, the section 7520 interest rate is 6%
and the fair market value of the property in the GRAT
is $289,500. Pursuant to paragraph (c)(1)(iii)(B)
of this section, the fair market value of the GRAT
property deemed to be included property is $300,000
($289,500 plus $10,500). Accordingly, for purposes
of determining the fair market value of thecorpusin-
cludible in D’s gross estate under section 2036(a)(1)
as of the 6-month date, see §20.2036–1(c)(2), using
aGRATcorpusof $300,000 and, pursuant to para-
graph (f)(2)(i) of this section, a section 7520 rate of
6%.
(f)Post-death factors and occur-
rences.—(1)In general. The election to
use the alternate valuation method under
section 2032 permits property includible
in the gross estate on the decedent’s date
of death to be valued on the 6-month date,
rather than on the date of death. Thus,
the election permits a valuation for Fed-
eral estate tax purposes that reflects the
impact of factors such as economic or
market conditions, occurrences described
2011–51 I.R.B.871December 19, 2011

in section 2054 (to the extent not compen-
sated by insurance or otherwise, and not
deducted under that section), and other
factors or occurrencesduring the alternate
valuation period, as set forth in guidance
issued by the Secretary. Those factors and
occurrences do not include the mere lapse
of time described in paragraph (f)(2) of
this section, or transactions described in
paragraph (c)(1)(i) or (c)(2) of this section
that are not excluded under paragraphs
(c)(1)(ii), (c)(1)(iii)(A), and (c)(4) of this
section. Generally, management decisions
made in the ordinary course of operat-
ing a business, such as a corporation, a
partnership, or other business entity, are
taken into account under this section as
occurrences related to economic or market
conditions. To the extent, however, that
these decisions change the ownership or
control structure of the business entity,
or otherwise are included in paragraph
(c)(1)(i) or (c)(2) of this section and are
not excluded by paragraphs (c)(1)(ii),
(c)(1)(iii)(A), or (c)(4) of this section, they
will be treated as described in paragraph
(c)(1)(i) of this section.
(2)Mere lapse of time. ***Theap-
plication of this paragraph is illustrated in
paragraphs (f)(2)(i) and (f)(2)(ii) of this
section:
(i)Life estates, remainders, and similar
interests. (A) The fair market value of
a life estate, remainder, term interest or
similar interest as of the alternate valu-
ation date is determined by applying the
methodology prescribed in §20.2031–7,
subject to the following two sentences.
The age of each person whose life ex-
pectancy may affect the fair market value
of the interest shall be determined as of
the date of the decedent’s death. The fair
market value of the property and the appli-
cable interest rate under section 7520 shall
be determined using values applicable on
the alternate valuation date.
(B)Examples. The application of para-
graph (f)(2)(i)(A) of this section is illus-
trated in the following examples.
Example 1. Assume that the decedent (D) or D’s
estate was entitled to receive certain property upon
the death of A, who was entitled to the income from
the property for life. At the time of D’s death after
April 30, 2009, the fair market value of the prop-
erty was $50,000, and A was 47 years and 5 months
old. In the month in which D died, the section 7520
rate was 6.2%, but rose to 7.4% on the 6-month date.
The fair market value of D’s remainder interest as of
D’s date of death was $9,336.00 ($50,000 x 0.18672,
the single life remainder factor from Table S for a 47
year old at a 6.2% interest rate), as illustrated inEx-
ample 1of §20.2031–7T(d)(5). If, because of eco-
nomic conditions, the property declined in value dur-
ing the alternate valuation period and was worth only
$40,000 on the 6-month date, the fair market value
of the remainder interest would be $5,827 ($40,000
X 0.14568, the Table S value for a 47 year old at a
7.4% interest rate), even though A would have been
48 years old on the 6-month date.
Example 2. D created anintervivoscharitable re-
mainder annuity trust (CRAT) described in section
664(d)(1). The trust instrument directs the trustee to
hold, invest, and reinvest thecorpusof the trust and
topaytoDforD’slife,andthentoD’schild(C)for
C’s life, an amount each year equal to 6% of the ini-
tial fair market value of the trust. At the termination
of the trust, thecorpus, together with the accumu-
lated income, is to be distributed to N, a charitable or-
ganization described in sections 170(c), 2055(a), and
2522(a). D died, survived by C. D’s estate is entitled
to a charitable deduction under section 2055 for the
present value of N’s remainder interest in the CRAT.
Pursuant to §1.664–2(c) and §20.7520–2, in deter-
mining the fair market value of the remainder interest
as of the alternate valuation date, D’s executor may
elect to use the section 7520 rate in effect for either
of the two months immediately preceding the month
in which the alternate valuation date occurs. Regard-
less of the section 7520 rate selected, however, the
factor to be used to value the remainder interest is the
appropriate factor for C’s age on the date of D’s death.
(2)(ii)Patents. * * * Six months after
the date of the decedent’s death, the patent
was sold for its then fair market value that
had decreased to $60,000 because of the
lapse of time. * * *
(3)Examples. The following examples
illustrate the application of this paragraph
(f). In each example, decedent’s (D’s) es-
tate elects to value D’s gross estate under
the alternate valuation method, so that the
alternate valuation date of the property in-
cludible in the gross estate on D’s date of
death is either the transaction date or the
6-month date. In each example, assume
that the only factors affecting value, and
the only occurrences described in para-
graph (c)(1)(i) or (c)(2) of this section, tak-
ing place during the alternate valuation pe-
riod are those described in the example.
Example 1. At D’s death, D’s gross estate in-
cludes a residence. During the alternate valuation pe-
riod, the fair market value of the residence (as well
as the residential market in the area generally) de-
clines due to a reduction in the availability of credit
throughout the United States and, consequently, a de-
cline in the availability of mortgages. The decline in
the availability of mortgages is an economic or mar-
ket condition. Therefore, in valuing the residence on
the 6-month date, the effect of this decline on the fair
market value of the residence is to be taken into ac-
count.
Example 2. (i) At D’s death, D is the sole share-
holder of corporation Y, a manufacturing company.
Four months after D’s death, Y’s physical plant is
destroyed as a result of a natural disaster. The dis-
aster affects a large geographic area and, as a result,
the economy of that area is negatively affected. Five
months after D’s death, Y’s Board of Directors votes
to liquidate and dissolve Y. The liquidation and disso-
lution proceeding is not completed as of the 6-month
date. The natural disaster is a factor that affects eco-
nomic and market conditions. Therefore, the disaster,
to the extent not compensated by insurance or other-
wise, is taken into account in valuing the Y stock on
the 6-month date.
(ii) Assume instead that Y’s plant is severely dam-
aged due to flooding from the failure of pipes in the
facility. The damage is an occurrence described in
section 2054. Therefore, the damage, to the extent
not compensated by insurance or otherwise, is taken
into account in valuing the property on the 6-month
date.
Example 3. At D’s death, D has an interest in an S
corporation, W. During the alternate valuation period,
it is discovered that an employee of W has embezzled
significant assets from W. W does not reasonably ex-
pect to recover the funds or any damages from the
employee, and insurance proceeds are not sufficient
to cover the loss. The theft is an occurrence described
in section 2054. Therefore, the theft, to the extent not
compensated by insurance or otherwise, is taken into
account in valuing D’s interest in W on the 6-month
date.
(h)Effective/applicability date.***
All of paragraph (c)(2) of this section ex-
cept the second sentence of the introduc-
tory text, all of paragraph (c)(3) of this sec-
tion except paragraph (c)(3)(i)(C) of this
section, the chart inExample 1of para-
graph (e) of this section, all of paragraph
(f)(2) of this section except the last sen-
tence, and the first and third sentences in
paragraph (f)(2)(ii) of this section are ap-
plicable to decedents dying after August
16, 1954. All of paragraphs (a) introduc-
tory text, (a)(1), (a)(2), (c)(1)(i), (c)(1)(ii),
(c)(1)(iii), (c)(1)(iv), (c)(3)(i)(C), (c)(4),
(c)(5), (f)(1), (f)(2)(i), and (f)(3) of this
section, the second sentence of the intro-
ductory text in paragraph (c)(2) of this sec-
tion, all of paragraph (e) of this section ex-
cept the chart inExample 1,thelastsen-
tence in the introductory text of paragraph
(f)(2) of this section, and the second sen-
tence in paragraph (f)(2)(ii) of this section
are applicable to estates of decedents dy-
ing on or after the date of publication of
the Treasury decision adopting these rules
as final in theFederal Register.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
December 19, 20118722011–51 I.R.B.

(Filed by the Office of the Federal Register on November 17,
2011, 8:45 a.m., and published in the issue of the Federal
Register for November 18, 2011, 76 F.R. 71491)
Notice of Proposed
Rulemaking by Cross
Reference to Temporary
Regulation
Corporate Reorganizations;
Allocation of Basis in “All Cash
D” Reorganizations
REG–101273–10
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rule mak-
ing by cross-reference to temporary regu-
lations.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9558) that provide guidance regard-
ing the determination of the basis of stock
or securities in a reorganization where no
stock or securities of the issuing corpora-
tion is issued and distributed in the trans-
action. These regulations clarify that, in
certain reorganizations where no stock or
securities of the issuing corporation is is-
sued and distributed in the transaction, the
ability to designate the share of stock of the
issuing corporation to which the basis, if
any, of the stock or securities surrendered
will attach applies only to a shareholder
that owns actual shares in the issuing cor-
poration. These regulations affect corpo-
rations engaging in such transactions and
their shareholders. The text of those tem-
porary regulations published in this issue
of the Bulletin also serves as the text of
these proposed regulations.
DATE: Written or electronic comments
and requests for a public hearing must be
received by February 21, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–101273–10), In-
ternal Revenue Service, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered or
sent electronically, via the Federal eRule-
making Portal atwww.regulations.gov
(IRS REG–101273–10).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, Lisa A. Fuller, (202) 622–7550;
concerning submission of comments,
Oluwafunmilayo Taylor, (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in this issue of
the Bulletin amend 26 CFR part 1. The
temporary regulations provide guidance
regarding the determination of the basis
of stock or securities in a reorganization
where no stock or securities of the issuing
corporation is issued and distributed in the
transaction. The text of those regulations
also serves as the text of these proposed
regulations. The preamble to the tempo-
rary regulations explains the amendments.
Explanation of Provisions
These temporary regulations clarify
that, in certain reorganizations where no
stock or securities of the issuing corpo-
rationisissuedanddistributedinthe
transaction, the ability to designate the
share of stock of the issuing corporation
to which the basis, if any, of the stock or
securities surrendered will attach applies
only to a shareholder that owns actual
shares in the issuing corporation.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866, as defined in Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It also has been deter-
mined that section 553(b) of the Adminis-
trative Procedure Act(5 U.S.C. chapter 5)
does not apply to these regulations, and be-
cause the regulation does not impose a col-
lection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking has been
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies)orelectroniccom-
ments that are submitted timely to the IRS.
The IRS and the Treasury Department re-
quest comments on the clarity of the pro-
posed rules and how they can be made eas-
ier to understand. All comments will be
available for public inspection and copy-
ing. A public hearing will be scheduled
ifrequestedinwritingbyanypersonthat
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in the Bulletin.
Drafting Information
The principal author of these regula-
tions is Lisa A. Fuller, Office of Associate
Chief Counsel (Corporate). However,
other personnel from the IRS and the
Treasury Department participated in their
development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.358–2 also issued under
26 U.S.C. 358(b)(1).
Par. 2. Section 1.358–2 is amended by:
1. Revising paragraph (a)(2)(iii).
2. Adding a newExample 15andEx-
ample 16to paragraph (c).
3. Revising paragraph (d).
The revision and addition reads as fol-
lows:
§1.358–2 Allocation of basis among
nonrecognition property.
(a) * * *
(2) * * *
(iii) [The text of this proposed amend-
ments to §1.358–2(a)(2)(iii) is the same as
2011–51 I.R.B.873December 19, 2011

the text of §1.358–2T(a)(2)(iii) published
elsewhere in this issue of the Bulletin]
*****
(c)Examples***
[The text of this proposed amendments
to §1.358–2,Examples 15and16are the
same as the text ofExamples 15and16
in §1.358–2T published elsewhere in this
issue of the Bulletin].
*****
(d) [The text of this proposed amend-
ment to §1.358–2(d) is the same as the
text of §1.358–2T(d) published elsewhere
in this issue of the Bulletin].
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on November 18,
2011, 8:45 a.m., and published in the issu
e of the Federal
Register for November 21, 2011, 76 F.R. 71919)
Change of Address for
the Centralized Insolvency
Operation and Further
Information Concerning
Additional Requirements for
the Filing of Requests for
a Prompt Determination of
Unpaid Tax Liability
Announcement 2011–77
This announcement informs bank-
ruptcy trustees (or debtors-in-possession)
of a change of address for the Central-
ized Insolvency Operation that should be
used for the submission of requests for
tax refunds under section 505(a) of the
Bankruptcy Code or requests for prompt
determinations of any unpaid tax liability
of the estate incurred during the bank-
ruptcy case under section 505(b) of the
Bankruptcy Code. This announcement
also describes where further information
concerning additional requirements for
filing those requests may be found.
Rev. Proc. 2010–27, 2010–31 I.R.B.
183, informs bankruptcy trustees (or
debtors-in-possession) of the application
proceduretobefollowedtoproperlyre-
quest a tax refund from the Service under
section 505(a) of the Bankruptcy Code.
Rev. Proc. 2006–24, 2006–1 C.B. 943,
establishes the procedure by which bank-
ruptcy trustees (or debtors-in-possession)
may request from the Service a prompt de-
termination of any unpaid tax liability of
the estate incurred during the bankruptcy
case under section 505(b) of the Bank-
ruptcy Code. Both Rev. Proc. 2010–27
and Rev. Proc. 2006–24 provide that re-
quests must be filed with the Centralized
Insolvency Operation. The new address,
effective immediately, is: Centralized
Insolvency Operation, P.O. Box 7346,
Philadelphia, PA 19101–7346.
Further information concerning addi-
tional requirements, including updated
address information for service of re-
quests, may be found on a webpage on the
IRS’s website,www.IRS.gov.To access
this webpage, typehttp://www.irs.gov/
into the address box on your internet
browser. Once the webpage opens, type
“IRS Tips for Bankruptcy Trustees” into
the search field in the top right hand cor-
ner of the webpage. Then click on the
result with that heading. Or you may type
http://www.irs.gov/businesses/small/arti-
cle/0,,id=240599,00.htmlinto the address
box on your internet browser.
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2010–27, 2010–31 I.R.B.
183, and Rev. Proc. 2006–24, 2006–1
C.B. 943, are modified.
The principal author of this announce-
ment is Tammie A. Geier of the Office
of Associate Chief Counsel (Procedure
and Administration). For further informa-
tion regarding this announcement, contact
Tammie A. Geier at (202) 622–3620 (not
a toll-free call).
Determination of
Governmental Plan Status
Announcement 2011–78
AGENCY: Internal Revenue Service
(IRS), Department of the Treasury.
ACTION: Advance notice of proposed
rulemaking.
SUMMARY: The Treasury Department
and IRS anticipate issuing regulations un-
der section 414(d) of the Internal Revenue
Code (Code) to define the term “govern-
mental plan.” This document describes the
rules that the Treasury Department and
IRS are considering proposing relating to
the determination of whether a plan is a
governmental plan within the meaning of
section 414(d) and contains an appendix
that includes a draft notice of proposed
rulemaking on which the Treasury Depart-
ment and IRS invite comments from the
public. This document applies to spon-
sors of, and participants and beneficiaries
in, employee benefit plans that are deter-
mined to be governmental plans.
DATE: Written or electronic comments
must be received by February 6, 2012.
ADDRESSES: Send submissions re-
lating to the section 414(d) draft gen-
eral regulations to: CC:PA:LPD:PR
(REG–157714–06), room 5203, Inter-
nal Revenue Service, PO Box 7604, Ben
Franklin Station, Washington DC, 20044.
Submissions may be hand delivered Mon-
day through Friday, between the hours
of 8 a.m. and 4 p.m. to CC:PA:LPD:PR
(REG–157714–06), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC.
Alternately, taxpayers may sub-
mit comments relating to the sec-
tion 414(d) draft general regulations
electronically via the Federal eRule-
making Portal atwww.regulations.gov
(IRS-REG–157714–06).
FOR FURTHER INFORMATION
CONTACT: Concerning the AN-
PRM, Pamela R. Kinard, at (202)
622–6060;concerning submission
of comments, Richard A. Hurst, at
Richard.A.Hurst@irscounsel.treas.govor
at (202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document describes rules that the
Treasury Department and IRS are consid-
ering proposing and contains a draft notice
of proposed rulemaking (in the Appendix
to this ANPRM) under section 414(d) of
the Internal Revenue Code (Code). Under
the draft notice of proposed rulemaking (in
the Appendix to this ANPRM), the rules
would provide general guidance relating to
the determination of whether a retirement
plan is a governmental plan within the
meaning of section 414(d) (section 414(d)
December 19, 20118742011–51 I.R.B.

draft general regulations). The principles
described in this ANPRM could also ap-
ply for purposes of certain parallel terms
in sections 403(b) and 457 of the Code.
Section 414(d) of the Code provides
that the term “governmental plan” gener-
ally means a plan established and main-
tained for its employees by the Govern-
ment of the United States, by the gov-
ernment of any State or political subdivi-
sion thereof, or by any agency or instru-
mentality of any of the foregoing. See
sections 3(32) and 4021(b)(2) of the Em-
ployee Retirement Income Security Act
of 1974 (ERISA) for definitions of the
term “governmental plan,” which govern
respectively for purposes of title I and title
IV of ERISA
1
.
The term “governmental plan” also in-
cludes any plan to which the Railroad Re-
tirement Act of 1935 or 1937 (49 Stat.
967, as amended by 50 Stat. 307) ap-
plies and which is financed by contribu-
tions required under that Act and any plan
of an international organization which is
exempt from taxation by reason of the In-
ternational Organizations Immunities Act
(59 Stat. 669). See section 414(d)(2) of
the Code.
Section 414(d) was amended by the
Pension Protection Act of 2006, Public
Law 109–280 (120 Stat. 780) (PPA ’06)
to include certain plans of Indian tribal
governments and related entities.
2
Section
906(a)(1) of PPA ’06 provides that the
term “governmental plan” includes a plan
which is established and maintained by
an Indian tribal government (as defined in
section 7701(a)(40)), a subdivision of an
Indian tribal government (determined in
accordance with section 7871(d)), or an
agency or instrumentality of either (ITG),
and all the participants of which are em-
ployees of such entity substantially all of
whose services as such an employee are in
the performance of essential governmental
functions but not in the performance of
commercial activities (whether or not an
essential governmental function).
Neither section 414(d) of the Code,
section 3(32) of ERISA, nor section
4021(b)(2) of ERISA define key terms
relating to governmental plans, including
the terms “established and maintained,”
“political subdivision,” “agency,” and
“instrumentality.” Currently, there are no
regulations interpreting section 414(d).
Revenue Ruling 89–49, 1989–1 C.B. 117,
see §601.601(d)(2), sets forth a facts and
circumstances analysis for determining
whether a retirement plan is a govern-
mental plan within the meaning of section
414(d).
3
This analysis is used by the IRS
in issuing letter rulings.
Governmental plans are subject to dif-
ferent rules than retirement plans of non-
governmental employers. Governmental
plans are excluded from the provisions of
titles I and IV of ERISA. In addition, gov-
ernmental plans receive special treatment
under the Code. These plans are exempt
from certain qualification requirements
and they are deemed to satisfy certain other
qualification requirements under certain
conditions. As a result, the principal qual-
ification requirements for a tax-qualified
governmental plan
4
are that the plan—
•Be established and maintained by the
employer for the exclusive benefit of
the employer’s employees or their ben-
eficiaries;
•Provide definitely determinable bene-
fits;
•Be operated pursuant to its terms;
•Satisfy the direct rollover rules of sec-
tion 401(a)(31);
•Satisfy the section 401(a)(17) limita-
tion on compensation;
•Comply with the statutory minimum
required distribution rules under sec-
tion 401(a)(9);
•Satisfy the pre-ERISA vesting require-
ments under section 411(e)(2);
5
•Satisfy the section 415 limitations on
benefits, as applicable to governmental
plans; and
•Satisfy the prohibited transaction rules
in section 503.
State and local governments, political
subdivisions thereof, and agencies or in-
strumentalities thereof are generally not
permitted to offer cash or deferred arrange-
ments under section 401(k). However, an
ITG is permitted to offer a cash or deferred
arrangement under section 401(k).
For further background, see the “Back-
ground” section of the preamble in the sec-
tion 414(d) draft general regulations in the
Appendix to this ANPRM under the head-
ings, “Exclusion of Governmental Plans
from ERISA,” “Exemption of Govern-
mental Plans from Certain Qualified Plan
Rules,” and “Exemption of Governmental
Plans from Other Employee Benefit Rules
Relating to Retirement Plans.”
Over the past several years, the IRS has
been coordinating with the Department of
Labor (DOL) and Pension Benefit Guar-
anty Corporation (PBGC) (the “Agen-
cies”) on governmental plan determina-
tions. Although the anticipated proposed
regulations would only be applicable for
purposes of section 414(d), the DOL and
PBGC were consulted when drafting this
proposal. DOL and PBGC agreed that it
would be advantageous for the Agencies
and the regulated community for there to
be coordinated criteria for determining
whether a plan is a governmental plan
within the meaning of section 414(d) of
the Code, section 3(32) of ERISA, and
section 4021(b)(2) of ERISA. See the
“Background” section of the preamble in
the section 414(d) draft general regulations
in the Appendix to this ANPRM under the
heading, “Interagency Coordination on
Governmental Plan Determinations.”
The Treasury Department and the IRS
have determined to seek public comment
on the draft proposed regulations in the
1
The three definitions of the term “governmental plan” are essentially the same. The only difference is that, in defining the term “governmental plan,” section 3(32) of ERISA uses the phrase
“established or maintained,” whereas section 414(d) of the Code and section 4021(b) of ERISA use the term “established and maintained.”
2
Section 906(a) of PPA ’06 made similar amendments to sections 3(32) and 4021(b)(2) of ERISA.
3
See also Rev. Rul. 57–128, 1957–1 C.B. 311, see § 601.601(d)(2), which provides guidance on determining when an entity is a governmental instrumentality for purposes of the exemption
from employment taxes under section 3121(b)(7) and 3306(c)(7).
4
A special rule applies to contributory plans of certain governmental entities. Section 414(h)(2) provides that, for a qualified plan established bya State government or political subdivision
thereof, or by any agency or instrumentality of the foregoing, where the contributions of the governmental employer are designated as employee contributions under section 414(h)(1) but the
governmental employer picks up the contributions, the contributions picked up will be treated as employer contributions.
5
Section 411(e)(2) states that a plan described in section 411(e)(1) is treated as meeting the requirements of section 411 if the plan meets the vestingrequirements resulting from the application
of section 401(a)(4) and (a)(7) as in effect on September 1, 1974.
2011–51 I.R.B.875December 19, 2011

Appendix to this ANPRM in advance of is-
suing a notice of proposed rulemaking. In
light of the interaction of the governmental
plan definitions in the Code and ERISA, a
copy of the comments will be forwarded to
DOL and PBGC.
Explanation of Provisions
Attached to the Appendix to this
ANPRM is a draft notice of proposed
rulemaking. The draft regulations include
proposed rules, a preamble, and a request
for comments. The Treasury Department
and IRS invite the public to comment on
the rules that the Treasury Department
and IRS are considering proposing,
which would generally define the term
“governmental plan” within the meaning
of section 414(d), as well as other key
related terms, including “State,” “political
subdivision of a State,” and “agency or
instrumentality of a State or political
subdivision of a State.”
In determining whether an entity is an
agency or instrumentality of the United
States or an agency or instrumentality of a
State or political subdivision of a State, the
anticipated guidancewould provide a facts
and circumstances analysis. The factors
used in these analyses are drawn from the
factors historicallyused in governmental
plan determinations, including Rev. Ruls.
57–128 and 89–49. The anticipated guid-
ance would provide several examples il-
lustrating the application of the facts and
circumstances tests. See the “Explanation
of Provisions” section in the section 414(d)
draft general regulations in the Appendix
to this ANPRM under the headings, “Def-
initions of the United States and agency or
instrumentality of the United States” and
“Definition of agency or instrumentality
of a State or a political subdivision of a
State.” See §601.601(d)(2).
The anticipated proposed regulations
would include numerous factors for de-
termining whether an entity is an agency
or instrumentality of a State or a political
subdivision of a State. The section 414(d)
draft proposed regulations in the Appendix
to this ANPRM would categorize these
factors into major factors and other factors.
The section 414(d) draft general regula-
tions would also request comments from
the public on whether the final regulations
should eliminate the distinction between
main and other factors. In addition, the
section 414(d) draft general regulations
would request comments on the ordering
and application of main and other factors;
for example, whether, as an alternative
to the ranking of major factors and other
factors, the regulations could provide a
safe harbor standard focusing on control
and fiscal responsibility under which the
entity would be treated as an agency or
instrumentality of a State or a political
subdivision of a State. For further expla-
nation of the safe harbor standard, see the
“Comments and Public Hearing” section
in the preamble of the section 414(d) draft
general regulations, which is located in
the Appendix to this ANPRM.
The anticipated proposed regulations
do not address the special rules that apply
in determining whether a plan of an In-
dian tribal government is a governmental
plan within the meaning of section 414(d).
That topic would be reserved in the pro-
posedregulationsandisaddressedinan
ANPRM (REG–133223–08) that is being
published elsewhere in this issue of the
Bulletin.
The anticipated proposed regulations
would provide rules for determining
whether a governmental entity has estab-
lished and maintained a plan for purposes
of section 414(d). The anticipated pro-
posed regulations might provide that a
plan is established and maintained for
the employees of a governmental entity
if: (1) the plan is established and main-
tained by an employer within the meaning
of §1.401–1(a)(2), (2) the employer is
a governmental entity, and (3) the only
participants covered by the plan are em-
ployees of that governmental entity. The
anticipated proposed regulations might
also provide rules covering circumstances
involving a change in status of an entity
(that is, when a private entity becomes a
governmental entity or when a govern-
mental entity becomes a private entity) due
to an acquisition or asset transfer. See the
“Explanation of Provisions” section in the
section 414(d) draft general regulations in
the Appendix to this ANPRM under the
heading, “Requirements for establishing
and maintaining a section 414(d) govern-
mental plan.”
Recognizing that the guidance might af-
fect numerous governmental plan partic-
ipants and their beneficiaries, the antici-
pated proposed regulations request com-
ments on transition rules, including tran-
sitional relief for governmental plans that
permitted participation of a small number
of former employees in their plans. See
the “Comments and Public Hearing” sec-
tion in the preamble of the section 414(d)
draft general regulations that is located in
the Appendix to this ANPRM.
Request for Comments
Before the notice of proposed rulemak-
ing is issued, consideration will be given
to any written comments that are submit-
ted timely (preferably a signed original and
eight (8) copies) to the IRS. All comments
will be available for public inspection and
copying. Copies of the comments will be
provided to the DOL and PBGC.
The IRS and Department of Treasury
plan to schedule a public hearing on the
ANPRM. That hearing will be scheduled
and announced at a later date. In ad-
dition to a public hearing, the Treasury
Department and IRS anticipate sched-
uling “Town Hall” meetings in order to
obtain comments from the public on the
section 414(d) draft general regulations.
It is expected that these “Town Hall”
meetings will take place in different lo-
cations across the country. Participants
will be encouraged to pre-register for
the meetings. Information relating to
these “Town Hall” meetings, including
dates, times, locations, registration, and
the procedures for submitting written and
oral comments, will be available on the
IRS website relating to governmental
plans athttp://www.irs.gov/retirement/ar-
ticle/0,,id=181779,00.html.
Drafting Information
The principal author of this advance no-
tice of proposed rulemaking is Pamela R.
Kinard, Office of the Chief Counsel (Tax-
exempt and Government Entities), how-
ever, other personnel from the IRS and
Treasury Department participated in its de-
velopment.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
APPENDIX
The following is draft language for a
notice of proposed rulemaking that would
set forth rules relating to the determination
December 19, 20118762011–51 I.R.B.

of whether a plan is a governmental plan
within the meaning of section 414(d). The
IRS and Treasury release this draft lan-
guage in order to solicit comments from
the governmental plans community:
Background
This document contains proposed regu-
lations under section 414(d) of the Internal
Revenue Code (Code). These regulations,
when finalized, would provide guidance
relating to the determination of whether
a retirement plan is a governmental plan
within the meaning of section 414(d). The
definition of a governmental plan under
section 414(d) applies for purposes of Part
I of Subchapter D of Chapter 1 of Subtitle
A (Income Taxes) of the Code (sections
401 through 420) and certain other Code
provisions that refer to section 414(d)
(such as sections 72(t)(10), 501(c)(25)(C),
4975(g)(2), 4980B(d)(2), 9831(a)(1), and
9832(d)(1)). It is expected that the prin-
ciples set forth in these regulations would
generally also apply for purposes of sec-
tions 403(b) and 457.
Statutory Definition of Governmental
Plan
Both the Code and the Employee Re-
tirement Income Security Act of 1974
(ERISA) define the term “governmen-
tal plan.” Section 414(d) of the Code
provides that the term “governmental
plan” generally means a plan established
and maintained for its employees by the
Government of the United States, by the
government of any State or political sub-
division thereof, or by any agency or in-
strumentality of any of the foregoing. See
sections 3(32) and 4021(b)(2) of ERISA
for parallel definitions of the termgovern-
mental plan, discussed under the heading,
“Exclusion of Governmental Plans from
ERISA.”
The term “governmental plan” also in-
cludes any plan to which the Railroad Re-
tirement Act of 1935 or 1937 (49 Stat.
967, as amended by 50 Stat. 307) ap-
plies and which is financed by contribu-
tions required under that Act and any plan
of an international organization which is
exempt from taxation by reason of the In-
ternational Organizations Immunities Act,
Public Law 79–291 (59 Stat. 669). Section
414(d) was amended by the Pension Pro-
tection Act of 2006, Public Law 109–280
(120 Stat. 780) (PPA ’06) to include cer-
tain plans of Indian tribal governments.
6
See Notice 2006–89, 2006–2 C.B. 772,
see §601.601(d)(2), for guidance relating
to plans established and maintained by In-
dian tribal governments.
7
These proposed
regulations do not provide any guidance
concerning the special provisions in sec-
tion 414(d) relating to the Railroad Retire-
ment Act of 1935 or 1937, the International
Organizations Immunities Act, or Indian
tribal governments.
Application of Section 414(d)
These proposed regulations are only ap-
plicable for purposes of section 414(d),
and not for any other purpose under the
Code.
8
However, the section 414(d) defi-
nition of “governmental plan” applies for
other sections of the Code, including:
•Section 72(t)(10)(A) (exception to the
early withdrawal tax for certain distri-
butions from a defined benefit govern-
mental plan);
•Section 457(e)(17) (special rules for:
(1) direct trustee-to-trustee transfers
from a section 457 deferred compen-
sation plan to a section 414(d) gov-
ernmental plan in order to purchase
permissive service credit under section
414(n)(3)(A) or (2) the repayments of
cashouts under governmental plans);
•Section 501(c)(25)(C)(ii) (exempting
section 414(d) governmental plans
from taxation);
•Section 503(a)(1) (applying the pro-
hibited transaction rules in section 503
to governmental plans as defined in
section 4975(g)(2));
•Section 818(a)(6)(A) (defining the
term “pension plan contract”);
•Section 1400Q(d)(2)(A)(ii) (special
timing rule for section 414(d) govern-
mental plans to make certain conform-
ing amendments);
•Section 4972(d)(1)(B) (exempting sec-
tion 414(d) governmental plans from
the excise tax on nondeductible contri-
butions to a qualified employer plan);
•Section 4975(g)(2) (exempting section
414(d) governmental plans from the
prohibited transaction rules of section
4975);
•Section 4980(c)(1)(B) (exempting sec-
tion 414(d) governmental plans from
the tax on the reversion of qualified
plan assets to an employer under sec-
tion 4980);
•Section 4980B(d)(2) (exempting sec-
tion 414(d) governmental plans from
the COBRA requirements under sec-
tion 4980B);
•Section 4980F(f)(2) (exempting sec-
tion 414(d) governmental plans from
the requirement to provide a no-
tice required under section 204(h) of
ERISA);
•Section 6057(c)(2) (providing rules re-
lating to the voluntary submission of
annual registration statements by sec-
tion 414(d) governmental plans); and,
•Sections 9831(a)(1) and 9832(d)(2)
(exempting section 414(d) govern-
mental plans from the group health
plan requirements).
The definitions and rules also apply for
purposes of section 101(h)(1)(A) (special
rule exempting governmental plan sur-
vivor benefits attributable to service of a
public safety officer killed in the line of
duty).
Currently, there are no regulations in-
terpreting section 414(d). Neither section
414(d) of the Code nor ERISA defines key
terms relating to governmental plans, in-
cluding the terms “established and main-
tained,” “political subdivision,” “agency,”
and “instrumentality.”
Executive Order 13132
Executive Order 13132 requires that
Federal departments and agencies engage
in consultation procedures in certain cir-
6
Section 906(a)(1) of PPA ’06 provides that the term “governmental plan” includes a plan which is established and maintained by an Indian tribal government (as defined in section 7701(a)(40)),
a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), or an agency or instrumentality of either, and all the participants of which are employees of such
entity substantially all of whose services as such anemployee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not
an essential government function). Section 906(a) of PPA ’06 made similar amendments to sections 3(32) and 4021(b) of ERISA.
7
See also Notice 2007–67, 2007–2 C.B. 467), see §601.601(d)(2) (extending transitional relief for plans of Indian tribal governments to comply with the requirements of section 906 of PPA
’06).
8
However, as indicated earlier, it is expected that the principles set forthin these regulations would also be taken into account for purposes of sections 403(b) and 457.
2011–51 I.R.B.877December 19, 2011

cumstances where regulations are issued
which have a substantial direct effect on
States. While these regulations when is-
sued as final regulations would not have
such a substantial direct effect, the IRS
and Treasury Department have followed
similar procedures, including issuance not
only of these proposed regulations, but
also an advance notice of these regulations
which was published (date to be provided)
in theFederal Register.
Judicial Determinations of Governmental
Entity Status
Historically, courts have used the test
inNLRB v. Natural Gas Utility District
of Hawkins County, Tennessee, 402 U.S.
600 (1971), in determining whether an
entity is an agency or instrumentality of a
State or a political subdivision of a State.
InHawkins County, the Supreme Court
interpreted the term “political subdivi-
sion” for purposes of 29 U.S.C. 152(2)
(section 2(2) of the National Labor Re-
lations Act (NLRA), as amended by the
Labor-Management Relations Act).
9
Al-
though the Supreme Court inHawkins
Countyanalyzed whether the employer at
issue was a political subdivision for pur-
poses of the NLRA, courts use the same
analysis for determining whether an entity
is an agency or instrumentality of a State
or a political subdivision of a State for
purposes of ERISA.
10
The two-prong test
inHawkins Countyanalyzes whether the
entity has been “(1) created directly by
the state, so as to constitute departments
or administrative arms of the government,
or (2) administered by individuals who
are responsible to public officials or to
the general electorate.”Hawkins County,
402 U.S. at 604–05. In addition to this
two-prong test, the Supreme Court also
analyzed other factors, including: whether
the utility had broad powers to accomplish
its public purpose; whether the utility’s
property and revenue were exempt from
state and local taxes (as well as whether
its bonds were tax-exempt); whether the
utility had the power of eminent domain;
whether the utility was required to main-
tain public records; whether the utility’s
commissioners were appointed by an
elected county judge; and whether the
commissioners could be removed by the
State of Tennessee pursuant to State pro-
cedures for removal ofpublic officials.
Many of these factors are similar to the
factors used in determining whether an
entity is an agency or instrumentality of a
State or a political subdivision of a State
under these proposed regulations.
In determining whether an entity is an
agency or instrumentality of the United
States, courts either apply a facts and cir-
cumstances analysisor look to the rela-
tionship between the entity and its employ-
ees. InAlley v. Resolution Trust Corpo-
ration, 984 F.2d 1201 (D.C.Cir. 1993),
in analyzing whether the Federal Asset
Disposition Association (FADA), a sav-
ings and loan association established by
the Federal Home Loan Bank Board, was
a Federal instrumentality for governmen-
tal plan purposes, the court focused on
the employment relationship between the
entity and its employees.
11
In looking at
the employer-employee relationship, the
Alleycourt concluded that FADA func-
tioned more like a private enterprise than
a governmental agency in the area of its
employment relations. “Measured by the
terms and conditions of their employment,
FADA personnel far more closely resem-
bled private sector employees than they
did government workers. Like employees
of ’ordinary’ Federally chartered S&Ls,
FADA’s employees were outside the civil
service system, and were not subject to the
personnel rules or restrictions on salaries
and benefits imposed generally on Federal
employees.”
12
However, inBerini v. Federal Reserve
Bank of St. Louis, Eighth District,420
F.Supp.2d 1021 (E.D. Mo. 2005), the
court reviewed administrative and judi-
cial authority in determining whether an
entity is a Federal agency or instrumen-
tality and applied a multi-factor test in
determining whether the employee benefit
plans maintained by the Federal Reserve
System are governmental plans within the
meaning of section 3(32) of ERISA. The
Berinitest was based on the six factors
in Rev. Rul. 57–128, 1957–1 C.B. 311,
see §601.601(d)(2), which was also the
test applied by the court inRose v. Long
Island Railroad Pension Plan,828F.2d
910, 918 (2
nd
Cir. 1987),cert. denied,
485 U.S. 936 (1988). Factors weighed by
theBerinicourt included that the Federal
reserve banks were established directly
by Congressional legislation to perform
an important governmental function (to
increase control of the nation’s currency
and banking system), the banks exist only
by an enabling statute, they possess only
the powers granted by the legislation, the
private interests involved do not have the
typical interests of an owner, and the banks
are controlled by the Federal Reserve
Board of Governors, which is a govern-
mental agency.
13
Agency Guidance Regarding
Governmental Entity Status
Revenue Ruling 57–128 provides guid-
ance on when an entity is a governmental
instrumentality for purposes of the ex-
emption from employment taxes under
sections 3121(b)(7) and 3306(c)(7). The
revenue ruling lists the following factors
to be considered in determining whether
an organization is an instrumentality of
one or more States or political subdivi-
sions thereof: (1) whether the organization
is used for a governmental purpose and
performs a governmental function; (2)
9
29 U.S.C. 152(2) provides that the term “employer” includes any person acting as an agent of an employer, directly or indirectly, but shall not includethe United States or any wholly owned
Government corporation, or any Federal Reserve Bank, or any State or political subdivision thereof, or any person subject to the Railway Labor Act, asamended from time to time, or any
labor organization (other than when acting as an employer), or anyoneacting in the capacity of officer or agent of such labor organization.
10
“The NLRB guidelines are a useful aid in interpreting ERISA’s governmental exemption, because ERISA, like the National Labor Relations Act, ‘represent[s] an effort to strike an ap-
propriate balance between the interests of employers and labor organizations.’”Rose v. Long Island Railroad Pension Plan,828 F.2d 910, 916 (2nd Cir. 1987),cert. denied, 485 U.S. 936
(1988) (quoting H.R. Rep. No. 533, reprinted in 1974 USCCAN at 4647).See also, Shannon v. Shannon, 965 F.2d 542, 547 (7th Cir. 1992),cert. denied, 506 U.S. 1028 (1992) (stating that
the proper test for determining whether an entityis an agency or instrumentality of a State or political subdivision for purposes of ERISA is theHawkinstest),Koval v. Washington County
Redevelopment Authority, 574 F.3d 238, 242 (3rd Cir. 2009) (stating that theHawkinstest is the most fitting analysis for determining whether an entity is a political subdivision), andBrooks
v. Chicago Housing Authority, No. 89–C–9304, 1990 WL 103572 at 1, 1990 U.S. Dist. LEXIS 8233 at 3 (N.D. Ill. July 5, 1990) (applying theHawkinstest).
11
“Wefocusourattention...onwhatshouldbethecoreconcernforERISApurposes—thenatureofanentity’srelationshiptoandgovernanceofitsemployees.”Alley v. Resolution Trust
Corporation, 984 F.2d at 1206, n. 11.
12
Alley v. Resolution Trust Corporation, 984 F.2d at 1206.
13
Berini v. Federal Reserve Bank of St. Louis, 420 F.Supp.2d at 1026–29.
December 19, 20118782011–51 I.R.B.

whether performance of its function is on
behalf of one or more States or political
subdivisions; (3) whether there are any
private interests involved, or whether the
States or political subdivisions involved
have the powers and interests of an owner;
(4) whether control and supervision of the
organization is vested in public authority
or authorities; (5) whether express or im-
plied statutory authority or other authority
is necessary for the creation and/or use of
such an instrumentality, and whether such
authority exists; and (6) the degree of the
organization’s financial autonomy and the
source of its operating expenses.
Revenue Ruling 89–49, 1989–1 C.B.
117, see §601.601(d)(2), provides guid-
ance for determining whether a retirement
plan maintained by an organization is a
governmental plan within the meaning of
section 414(d). The revenue ruling lists
several factors for determining whether
a sponsoring organization is an agency
or instrumentality of the United States or
any State or political subdivision thereof.
While the factors in Rev. Rul. 89–49 are
similar to the factors listed in Rev. Rul.
57–128, Rev. Rul. 89–49 focuses more on
thedegreeofcontrolthat the Federal or
State government has over the organiza-
tion’s everyday operations. Other factors
considered include: whether there is spe-
cific legislation creating the organization;
the source of funds for the organization;
the manner in which the organization’s
trustees or operating board are selected;
and whether the applicable government
unit considers the employees of the organ-
ization to be employees of the applicable
government unit. Rev. Rul. 89–49 pro-
vides that satisfaction of one or all of the
factors is not necessarily determinative of
whether an organization is a governmental
entity. See §601.601(d)(2)(ii)(b).
In Rev. Rul. 89–49, citizens of a mu-
nicipality organizeda volunteer fire com-
pany. The company was incorporated un-
der its State laws as a nonprofit corpora-
tion, and the company was managed under
the exclusive control of a board of trustees
elected by the volunteer firefighters. Area
municipalities, including the municipality
that created the company, entered into con-
tracts with the company to receive fire pro-
tection services. Under the contracts, it
was agreed that the operations of the vol-
unteer fire company would be under the
exclusive control of the board of trustees.
While the municipalities made payments
for fire protection services to the volun-
teer fire company pursuant to these con-
tracts, the municipalities did not contribute
to the company’s retirement plan, and the
employees of the company were not con-
sidered employees of the State or any of
the participating municipalities. The rul-
ing concludes that the retirement plan es-
tablished and maintained by the volunteer
fire company is not a governmental plan
within the meaning of section 414(d) be-
cause the degree of control that the partici-
pating municipalities exert over the volun-
teer fire company is minimal.
Exclusion of Governmental Plans from
ERISA
Section 4(b)(1) of ERISA provides that
title I of ERISA does not apply to an em-
ployee benefit plan that is a governmental
plan as defined in section 3(32) of ERISA.
Section 3(32) of ERISA generally pro-
vides that the term “governmental plan”
means a plan established or maintained for
its employees by the Government of the
United States, by the government of any
State or political subdivision thereof, or
by any agency or instrumentality of any of
the foregoing.
14
The ERISA section 3(32)
definition of a governmental plan also
includes any plan to which the Railroad
Retirement Act of 1935 or 1937 applies,
and which is financed by contributions
required under that Act and any plan of an
international organization which is exempt
from taxation under the provisions of the
International Organizations Immunities
Act. Section 906 of PPA ’06 amended
section 3(32) of ERISA to include in the
definition of governmental plan a plan
which is established and maintained by
an Indian tribal government (as defined in
section 7701(a)(40)), a subdivision of an
Indian tribal government (determined in
accordance with section 7871(d)), or an
agency or instrumentality of either. Under
this definition, all of the participants of
which are employees of such entity sub-
stantially all of whose services as such an
employee are in the performance of es-
sential governmental functions but not in
the performance of commercial activities
(whether or not an essential government
function).
Section 4021(b)(2) of ERISA provides
that title IV of ERISA does not apply to
any plan established and maintained for
its employees by the Government of the
United States, by the government of any
State or political subdivision thereof, or
by any agency or instrumentality of any
of the foregoing, or to which the Railroad
Retirement Act of 1935 or 1937 applies
and which is financed by contributions re-
quired under that Act. Similar to section
3(32) of ERISA, section 4021(b) of ERISA
was amended by section 906 of PPA ’06 to
include certain plans of Indian tribal gov-
ernments in the definition of governmen-
tal plan for purposes of section 4021(b) of
ERISA.
Neither the DOL nor the PBGC has
issued regulations interpreting the terms
of sections 3(32) and 4021(b) of ERISA.
Both agencies have, however, provided
guidance for specific entities in the form of
administrative determinations, and advi-
sory opinions or other opinion letters. The
IRS, the Department of Labor (DOL), and
the Pension Benefit Guaranty Corporation
(PBGC) have generally applied a facts and
circumstances approach in providing gov-
ernmental plan determinations.
15
For ex-
ample, the IRS issues private letter rulings
relating to governmental plan status using
a facts and circumstances analysis.
Exemption of Governmental Plans from
Certain Qualified Plan Rules
Governmental plans under Code sec-
tion 414(d) are exempt from certain qual-
ification requirements and are deemed
to satisfy certain other qualification re-
quirements under certain conditions. For
example, the nondiscrimination and min-
imum participation rules do not apply to
governmental plans. Section 1505 of the
14
In defining the term “governmental plan,” section 3(32) of ERISA uses the phrase “established or maintained,” whereas section 414(d) of the Code and section 4021(b) of ERISA use the
term “established and maintained.” For further discussion, see the Explanation of Provisions section of the preamble under the heading, “Requirements for establishing and maintaining a
section 414(d) governmental plan.”
15
The DOL issues advisory opinions. The PBGC issues administrative determinations and opinion letters. The IRS issues letter rulings relating to section 414(d) governmental plans. For
this purpose, a letter ruling is a written statement issued to a taxpayer by the IRS that interprets andapplies tax laws or any nontax laws applicable toemployee benefit plans to the taxpayer’s
specific set of facts. See section 3.02 of Rev. Proc. 2011–4, 2011–1 I.R.B. 123, 127), see §601.601(d)(2).
2011–51 I.R.B.879December 19, 2011

Taxpayer Relief Act of 1997, Public Law
105–34 (111 Stat. 788, 1063) (TRA ’97),
amended sections 401(a)(5)(G) and
401(a)(26)(G) of the Code to provide that
the minimum participation standards and
nondiscrimination requirements of section
410 and the additional participation
requirements under section 401(a)(26)(G)
do not apply to State or local governmental
plans.
16
Section1505ofTRA’97also
amended section 401(k)(3)(G) of the Code
to provide that certain State and local
governmental plans are treated as meeting
the requirements of the average deferral
percentage test of section 401(k)(3) and
the average contribution percentage test of
section 401(m)(2).
17
Section 861 of PPA ’06 exempts all
governmental plans (as defined in section
414(d)) from the nondiscrimination and
minimum participation requirements of
sections 401(a)(5)(G) and 401(a)(26)(G)
of the Code, as well as the nondiscrim-
ination and participation requirements
applicable to qualified cash or deferred
arrangements under section 401(k)(3)(G)
of the Code.
In addition to the nondiscrimination re-
quirements, the Code provides other ex-
emptions for governmental plans:
•Section 401(a)(10)(B)(iii), which pro-
vides that the top heavy requirements
of section 416 do not apply to a gov-
ernmental plan.
•Section 410(c)(1)(A), which provides
that the minimum participation provi-
sions of section 410 do not apply to a
governmental plan.
•Section 411(e), which provides that a
governmental plan is treated as satis-
fying the requirements of section 411
if the plan meets the pre-ERISA vest-
ing requirements.
•Section 412(e)(2)(C), which provides
that the minimum funding standards of
section 412 do not apply to a govern-
mental plan.
•Section 417, which provides rules re-
lating to qualified joint and survivor
annuities and qualified preretirement
survivor annuities.
Section 415 also provides a number of
special rules for governmental plans. The
special rules include section 415(b)(11)
(the 100 percent of a participant’s average
high 3 compensation limitation does not
apply), section 415(b)(2)(C) (the reduced
limitation to the annual benefit payable
beginning before age 62 and the reduction
in the dollar limitation to the annual bene-
fit payable for participation or services of
less than 10 years do not apply to disability
or survivor benefits received from a gov-
ernmental plan), section 415(m) (benefits
provided under a qualified governmental
excess benefit arrangement are not taken
into account in determining the section
415 benefit limitations under a section
414(d) governmental plan), and section
415(n) (permissive service credit).
18
As a result, the principal qualification
requirements for a tax-qualified govern-
mental plan
19
are the requirements that the
plan —
•Be established and maintained by the
employer for the exclusive benefit of
the employer’s employees or their ben-
eficiaries,
•Provide definitely determinable bene-
fits,
•Satisfy the direct rollover rules of sec-
tions 401(a)(31) and 402(f),
•Be operated pursuant to its terms,
•Satisfy the section 401(a)(17) limita-
tion on compensation,
•Comply with the statutory minimum
required distribution rules under sec-
tion 401(a)(9),
•Satisfy the pre-ERISA vesting require-
ments under section 411(e)(2),
•Satisfy the section 415 limitations on
benefits, as applicable to governmental
plans, and
•Satisfy the prohibited transaction rules
in section 503.
State and local governments, political
subdivisions thereof, and agencies or in-
strumentalities thereof are generally not
permitted to offer cash or deferred arrange-
ments under section 401(k). Instead, they
can offer a somewhat similar elective con-
tribution program through an eligible gov-
ernmental section 457(b) plan to which
section 457(g) applies. In addition, sec-
tion 403(b) includes special rules for plans
covering public schoolteachers, including
rules under which, in conjunction with an
eligible governmental section 457(b) plan,
the maximum dollar amount of the elective
contribution for a public school teacher is
in effect double the maximum for other
public or private employees.
Exemption of Governmental Plans from
Other Employee Benefit Rules Relating to
Retirement Plans
The Code and regulations also provide
that plans of governmental entities are
treated differently than plans of non-gov-
ernmental entities with respect to certain
requirements for section 403(b) plans and
eligible section 457(b) plans, including:
•Section 403(b)(1)(A)(ii), which pro-
vides that the exclusion allowance un-
der section 403(b)(1) applies to em-
ployees who perform services for a
public school of a State, a political sub-
division of a State, or an agency or in-
strumentality of any one or more of the
foregoing.
•Section 403(b)(12)(C), which provides
that the nondiscrimination require-
ments of section 403(b)(12) (other
than the compensation limitations of
section 401(a)(17)) do not apply to
a State or local governmental plan
within the meaning of section 414(d).
•Section 457(f)(2)(E), under which
section 457(f) (relating to nonquali-
fied deferred compensation) does not
16
In addition, section 1505(a)(3) of TRA ’97 amendedsection 410(c)(2) to provide that all governmental plans within the meaning of section 414(d) are treated as satisfying the nondiscrim-
ination requirements of section 410.
17
A State or local government, political subdivision, or agency or instrumentalitythereof,isnotpermittedtoestablishandmaintainasection401(k) plan. See section 401(k)(4)(B)(ii). There
is an exception for a grandfathered section 401(k) plan, which is generally a plan established by a governmental unit (a State or local government or political subdivision thereof) before
May 7, 1986. See §1.401(k)–1(e)(4).
18
See also Notice 89–23, 1989–1 C.B. 654, and Notice 96–64, 1996–2 C.B. 229, see § 601.601(d)(2), for guidance relating to the nondiscrimination rules that apply to qualified plans
maintained by governments.
19
A special rule applies to contributory plans of certain governmental entities. Section 414(h)(2) provides that, for a qualified plan established bya State government or political subdivision
thereof, or by any agency or instrumentality of the foregoing, where the contributions of the governmental employer are designated as employee contributions under section 414(h)(1) but the
governmental employer picks up the contributions, the contributions picked up will be treated as employer contributions.
December 19, 20118802011–51 I.R.B.

apply to a qualified governmental ex-
cess benefit arrangement under section
415(m).
•Section 457(e)(1)(B), which includes
as an eligible employer a State, polit-
ical subdivision, or agency or instru-
mentality thereof and any tax-exempt
organization other than a governmen-
tal unit.
•Section 457(g), which provides that
a deferred compensation plan main-
tained by a State, political subdivision
of a State, or any agency or instrumen-
tality thereof is not treated as an eligi-
ble section 457(b) plan unless the as-
sets and income of the plan are held in
trust for the exclusive benefit of plan
participants and beneficiaries.
•Section 402(c)(8)(B)(v), which pro-
vides that an eligible section 457(b)
governmental plan is an eligible retire-
ment plan for purposes of the rollover
rules under section 402(c), so that pay-
ments from an eligible section 457(b)
governmental plan can be rolled over
to another eligible retirement plan,
suchasaqualifiedplanoranIRA,and
payments from an eligible retirement
plan can be rolled over into an eligible
section 457(b) governmental plan.
20
An eligible section 457(b) plan of a
nongovernmental tax-exempt entity is
not eligible for this rollover treatment.
Legislative History of ERISA
The legislative history of ERISA and
its predecessor bills indicate that there
were two reasons for the governmental
plan exemption: (1) federalism concerns;
and (2) the taxing power of State and
local governments was thought to offer
sufficient protection for participants in
public plans.
21
In a summary of ERISA’s
predecessor bill, Senator Lloyd Bentsen
commented that “State and local govern-
ments must be allowed to make their own
determination of the best method to pro-
tect the pension rights of municipal and
state employees. These are questions of
state and local sovereignty and the Federal
Government should not interfere.”
22
While Congress was concerned about
pension protection for public as well as pri-
vate employees, governmental plans have
been excluded from many of the qualifi-
cation requirements because, in addition
to federalism concerns, Congress believed
that “the ability of governmental bodies
to fulfill their obligations to employees
through their taxing powers is an adequate
substitute for termination insurance.”
23
As
a result, ERISA includes exclusions for
governmental plans under titles I and IV
of ERISA and an exemption for govern-
mental plans from most of the qualifica-
tion requirements under the Code that were
added under title II of ERISA (as described
in this preamble under the heading, “Ex-
emption of Governmental Plans from Cer-
tain Qualified Plan Rules”).
Interagency Coordination on
Governmental Plan Determinations
Historically, the IRS, DOL, and PBGC
(the Agencies) have informally conferred
prior to making determinations on gov-
ernmental plan status in individual cases.
In Notice 2005–58, 2005–2 C.B. 295, see
§601.601(d)(2), the Treasury Department
and the IRS stated their intention of pub-
lishing guidance regarding governmental
plans under section 414(d). The Agencies
have become increasingly concerned with
the growing number of requests for gov-
ernmental plan determinations from plan
sponsors whose relationships to States or
political subdivisions thereof are increas-
ingly remote and whose arguments for
concluding that their plans are govern-
mental plans raise novel issues. The use
of differing approaches by the courts and
the Agencies has resulted in uncertainty
as entities with organizational, regulatory,
and contractual connections with States or
political subdivisions of States try to as-
certain which statutory and regulatory re-
quirements apply to their retirement plans.
These proposed regulations are intended
to address this issue by establishing coor-
dinated criteria for determining whether
a plan is a governmental plan within the
meaning of section 414(d) of the Code.
Although these proposed regulations are
only applicable for purposes of section
414(d), the DOL and the PBGC were con-
sulted in developing this proposal. The
DOL and the PBGC agreed that it would
be advantageous for the Agencies and
other affected parties to have coordinated
criteria for determining whether a plan is a
governmental plan within the meaning of
section 414(d) of the Code, section 3(32)
of title I of ERISA, and section 4021(b)
of title IV of ERISA. In that regard, com-
ments are requested on any issues arising
from these proposed regulations in light of
the interaction of the governmental plan
definition in the Code with the govern-
mental plan definitions in section 3(32) of
title I of ERISA and section 4021(b) of ti-
tle IV of ERISA. Copies of the comments
on these regulations will be forwarded to
the DOL and the PBGC.
Explanation of Provisions
I. Overview
A. In general.
These proposed regulations would gen-
erally define the term “governmental plan”
within the meaning of section 414(d) of the
Code. These proposed regulations would
also define other key terms relating to the
general definition of “governmental plan,”
including the definitions of “State,” “polit-
ical subdivision of a State,” and “agency or
instrumentality of a State or political sub-
division of a State.” While these terms are
commonly used in other Code sections, the
definitions in these proposed regulations
are only applicable for purposes of section
414(d), and not for any other purpose un-
der the Code. For example, the definition
of the term “instrumentality” under these
proposed regulations may be different for
other purposes under the Code.
As stated, the regulations under section
414(d) would only define the term “agency
20
Section 402(c)(8)(B) defines an eligible retirementplan as an individual retirement account under section 408(a), an individual retirement annuity under section 408(b), a qualified plan, a
section 403(a) annuity, a section 403(b) plan, and an eligible section 457(b) governmental plan.
21
ERISA included a directive for the Committee on Education and Labor and the Committee on Ways and Means of the House of Representatives and the Committees on Finance and on
Labor and Public Welfare of the Senate to study pension retirement plans sponsored by Federal, State, and local governments and analyze: (1) the adequacy of existing levels of participation,
vesting and financing arrangements; (2) existing fiduciary standards; and (3) the necessity for Federal legislation and standards with respect to such plans. See Staff of House Comm. On
Education and Labor, 95
th
Cong., 2d Sess.,Pension Task Force Report on Public Employee Retirement Systems(Comm. Print 1978).
22
Staff of the Senate Comm. on Labor and Public Welfare, 94
th
Cong., Legislative History of the Employee Retirement Income Security Act of 1974, Vol. I 220 (Comm. Print 1976).
23
S. Rep. No. 93–383, at 81 (1973). See also H.R. Rep. No. 93–807, at 164–5 (1974).
2011–51 I.R.B.881December 19, 2011

or instrumentality of the United States”
and “agency or instrumentality of a State
or political subdivision of a State” for pur-
poses of determining whether a plan is a
governmental plan under section 414(d).
Thus, the rules in these proposed regu-
lations would not apply for purposes of
defining the term “instrumentality,” under
any other provisions of the Code.
In addition, these regulations do not ad-
dress certain issues relating to governmen-
tal entities, including when an entity is so
closely related to a State that it constitutes
an “integral part” of a State.
24
The criteria
fortreatinganentityasan“integralpart”
of a State will be the subject of a separate
guidance project. Such guidance defining
“integral part” may include stricter crite-
ria than would apply under these proposed
regulations for determining whether an en-
tity is an agency or instrumentality of a
State.
B. Definition of governmental plan.
These proposed regulations reflect the
statutory definition of the term “gov-
ernmental plan” as a plan established
and maintained for its employees by the
Government of the United States, by the
government of any State or political sub-
division thereof, or by any agency or
instrumentality of the foregoing. Within
this definition, there are several key terms
relating to governmental plans, the def-
initions of which are set forth in these
proposed regulations. As mentioned in
the “Background” section of this pream-
ble, section 414(d) also includes special
rules relating to the Railroad Retirement
Act of 1935 or 1937, the International
Organizations Immunities Act, and plans
of Indian tribal governments. These pro-
posed regulations do not address the term
“governmental plan” as it relates to the
special provisions in section 414(d) re-
lating to the Railroad Retirement Act of
1935 or 1937, or the International Organi-
zations Immunities Act. The special rules
for Indian tribal governments are reserved
in these proposed regulations and are in a
separate notice of proposed rulemaking,
which is being published elsewhere in this
issue of the Bulletin.
C. Definitions of the United States and
agency or instrumentality of the United
States.
These proposed regulations would de-
fine the term “United States,” for purposes
of the governmental plan definition un-
der section 414(d), as having the same
meaningsetforthinsection 7701(a)(9).
Section 7701(a)(9) provides that the term
“UnitedStates,”whenusedinageograph-
ical sense, includes only the States and the
District of Columbia.
Whether an entity is an “agency or in-
strumentality of the United States” is de-
termined based on the specific purpose for
which the designation is sought and is de-
cided by determining if Congress intended
the entity to be treated as a Federal entity
for the specific purpose.
25
The proposed
regulations would define the term “agency
or instrumentality of the United States” as
an entity that satisfies the facts and circum-
stances test as set forth in these regulations.
The facts and circumstances test, similar to
the factors weighed by theBerinicourt, fo-
cuses on the “degree to which the entity is
connected with the . . . federal govern-
ment.”
26
The factors in this test are a com-
pilation of various different tests used for
governmental plan determinations, includ-
ingfactorsintheBeriniandRosecases,
as well as Rev. Ruls. 57–128 and 89–49.
The facts and circumstances test is simi-
lar to that proposed for agencies and in-
strumentalities of a State or political subdi-
vision thereof, (which is described in this
preamble under the heading, “Definition of
agency or instrumentality of a State or po-
litical subdivision of a State”) but modi-
fied to reflect that thisdefinition does not
implicate the federalism concerns present
in making determinations relating to agen-
cies and instrumentalities of a State or po-
litical subdivision thereof.
The proposed regulations provide that,
in making a determination of whether an
entity is an “agency or instrumentality of
the United States,” the factors to be con-
sidered include whether:
•The entity performs or assists in the
performance of a governmental func-
tion.
•There are no private interests involved,
or the Government of the United States
has all of the powers and interests of an
owner. In determining whether an en-
tity that holds stock has a private in-
terest, stock will not be considered a
private interest if the stock of the cor-
poration is not acquired for investment
purposes or for purposes of control.
27
•The control and supervision of the en-
tity is vested in the Government of the
United States. Control must be more
than the government’s extensive Fed-
eral regulation of an industry.
•The entity is exempt from Federal,
State, and local tax by an Act of Con-
gress.
•The entity is created by the United
States Government pursuant to a spe-
cific enabling statute that prescribes
the purposes, powers, and manner in
which the entity is to be established
and operated.
•The entity receives financial assistance
from the Government of the United
States. However, an entity is not a gov-
ernmental entity merely because it re-
ceives funds from the Government of
the United States under a contract to
provide a governmental service.
•Theentityisdeterminedtobean
agency or instrumentality of the United
States by a Federal court.
•Other governmental entities recognize
and rely on the entity as an arm of the
Government of the United States.
•The entity’s employees are treated in
the same manner as Federal employees
for purposes other than providing em-
ployee benefits (for example, the en-
tity’s employees are granted civil ser-
vice protection).
24
Over the years, the IRS has extended the income tax exemption it provides to states and political subdivisions to entities it regards as their “integral parts.” See Rev. Rul. 87–2, 1987–1
C.B. 18;see alsoTreas. Reg. § 301.7701–1(a)(3).
25
SeeBerini v. Federal Reserve Bank of St. Louis, 420 F.Supp.2d at 1025.
26
Id.
27
The Department of Treasury and the IRS recognize that an entity may hold stock for purposes other than investment and control. For example, the federalreserve banks are required to
hold stock in the Federal Reserve Bank of its district because ownership is acondition of being a member in the Federal Reserve System. Unlike stock in aprivate corporation, this stock is
not acquired for investment purposes or for purposes of control.See Berini v. Federal Reserve Bank of St. Louis, 420 F. Supp. 2d at 1024, citingLee Const. Co., Inc. v. Federal Reserve Bank
of Richmond, 558 F.Supp. 165, 177 n.17 (D.Mich. 1982), citing 4 F. Solomon, W. Schlicting, T. Rice & J. Cooper,Banking Law, § 77.02, at 77–6 to 77–7 (1982).
December 19, 20118822011–51 I.R.B.

These proposed regulations also pro-
vide an example, illustrating the applica-
tion of the facts and circumstances test to a
particular entity — a Federal credit union.
As announced in previous guidance, one
purpose of these regulations is to address
whether a Federal credit union is a gov-
ernmental entity for purposes of determin-
ing whether the Federal credit union can
maintain an eligible nonqualified deferred
compensation plan. Notice 2005–58 ad-
dresses certain income tax issues with re-
spect to nonqualified deferred compensa-
tion plans maintained by Federal credit
unions, including whether a Federal credit
union can maintain an eligible nonquali-
fied deferred compensation plan described
in section 457(b). Under Notice 2005–58,
a plan in effect on August 15, 2005, that
is maintained by a Federal credit union
and that is intended to be an eligible non-
qualified deferred compensation plan of
a non-governmental tax-exempt employer
would not fail to be an eligible plan un-
der section 457(b) solely because the em-
ployer is a Federal credit union, provided
that certain conditions are satisfied (in-
cluding the condition that the plan of the
Federal credit union not have claimed to be
a governmental plan for purposes of sec-
tion 414(d) of the Code and section 3(32)
of ERISA). The rule in Notice 2005–58
only applies pending the issuance of future
guidance regarding section 414(d). See
§601.601(d)(2)(ii)(b). Accordingly, upon
adoption of these regulations as final reg-
ulations, the special treatment provided in
Notice 2005–58 for Federal credit unions
will no longer apply. However, after is-
suance of these regulations as final regu-
lations, a Federal credit union can be an
eligible employer within the meaning of
section 457(e)(1)(B) on the basis that Fed-
eral credit unions are non-governmental
tax-exempt organizations.
D. Definitions of State and political
subdivision of a State.
The proposed regulations define the
term “State” as any State of the United
States and the District of Columbia. This
definition, which is based on the definition
of “State” in section 7701(a)(10), is dif-
ferent from the definition of “State” under
section 3(10) of ERISA, which defines,
in relevant part, the term “State” as any
State of the United States, the District of
Columbia, Puerto Rico, the Virgin Islands,
America Samoa, Guam, and Wake Island.
The term “political subdivision of a
State” is defined in these proposed regu-
lations as a regional,territorial, or local
authority, such as a county or municipality
(including a municipal corporation), that
is created or recognized by State statute
to exercise sovereign powers.
28
Examples
of sovereign powers include the power of
taxation, the power of eminent domain,
and the police power. The definition of
“political subdivision of a State” also pro-
vides that the governing officers of the
authority must be appointed by State offi-
cials or publicly elected.
The term “political subdivision of a
State” has been used for purposes other
than section 414(d), including the NLRA
and section 103.
29
The definition in these
proposed regulations of the term “political
subdivision of a State” applies only for
purposes of section 414(d), and not for
any other purposes under the Code or any
other statute, including whether an entity
is treated as a political subdivision for
purposes of the NLRA or section 103 of
the Code.
E. Definition of agency or instrumentality
of a State or a political subdivision of a
State.
These proposed regulations would pro-
vide guidance on determining whether an
entity is an “agency or instrumentality of a
State or a political subdivision of a State.”
These regulations would provide that the
determination is based on a facts and cir-
cumstances test. The proposed regulations
provide that numerous factors have been
applied by the IRS in determining whether
an entity is an agency or instrumentality of
a State or a political subdivision of a State.
Satisfaction of one or more of the factors
is not necessarily determinative of whether
an organization is a governmental entity.
One factor that is not weighed by the IRS
is the way the entity refers to itself. For ex-
ample, the mere fact that an entity is called
the “Educational Service Agency of City
A” would not be a factor in determining
whether the entity is an agency or instru-
mentality of City A.
Major factors for determining whether
an entity is an agency or instrumentality of
a State or political subdivision of a State
are whether:
•The entity’s governing board or body is
controlled by a State or political subdi-
vision.
•The members of the governing board
or body are publicly nominated and
elected.
•The entity’s employees are treated in
the same manner as employees of the
State (or political subdivision thereof)
for purposes other than providing em-
ployee benefits (for example, the en-
tity’s employees are granted civil ser-
vice protection).
•A State (or political subdivision
thereof) has fiscal responsibility for
the general debts and other liabilities
of the entity (including funding re-
sponsibility for the employee benefits
under the entity’s plans).
•In the case of an entity that is not a
political subdivision, the entity is dele-
gated, pursuant to a statute of a State or
political subdivision, the authority to
exercise sovereign powers of the State
or political subdivision (such as, the
power of taxation, the power of emi-
nent domain, and the police power).
It is expected that, in applying the fac-
tor relating to whether the entity’s govern-
ing board or body is controlled by a State
or political subdivision, the control can-
not be a mere legal possibility. Examples
of situations in which the control factor
might be a mere legal possibility are cases
in which there are a number of tiers of in-
tervening corporations between the entity
and the State, and cases in which the legal
power to control is shared among so many
28
For certain purposes, the effect of an entity being determined to be a political subdivision of a State may be similar to the entity being determined to be an agency or instrumentality of
a State or political subdivision and for other purposes the effects may be different. Examples in which it is relevant whether an entity is a political subdivision in contrast to an agency or
instrumentality of a State or political subdivision include the exclusionprovided under section 402(l), the excise tax under section 4965, and the exception to the 10 percent additional tax
under section 72(t)(10).
29
Two court cases that have analyzed whether an entity is a “political subdivision of a State” for purposes of section 103 of the Code areCommissioner of Internal Revenue v. Shamberg’s
Estate, 144 F.2d 998 (2
nd
Cir. 1944),cert. denied, 323 U.S. 792 (1945), andCommissioner of Internal Revenue v. White’s Estate, 144 F.2d 1019 (2
nd
Cir. 1944),cert. denied, 323 U.S. 792
(1945).
2011–51 I.R.B.883December 19, 2011

governing entities that none of them can be
said to be responsible in the event of a fail-
ure to exercise control. In addition, since
these two factors are interrelated, an entity
that would satisfy the control factor would
not be expected to satisfy the factor relat-
ing to whether members of the governing
board or body are publicly elected or nom-
inated. Alternatively, an entity that would
satisfy the factor relating to whether mem-
bers of the governing board or body are
publicly elected or nominated would not
be expected to satisfy the control factor.
Other factors for determining whether
an entity is an agency or instrumentality of
a State or political subdivision of a State
are whether:
•The entity is created by a State govern-
ment or political subdivision pursuant
to a specific enabling statute that pre-
scribes the purposes and powers of the
entity, and the manner in which the en-
tity is to be established and operated.
•The entity is directly funded through
tax revenues or other public sources.
•The entity is treated as a governmen-
tal entity for Federal employment tax
or income tax purposes (for example,
whether the entity has the authority to
issue tax-exempt bonds under section
103(a) of the Code) or under other Fed-
eral laws.
•The entity’s operations are controlled
by a State or political subdivision.
•Theentityisdeterminedtobean
agency or instrumentality of a State or
political subdivision thereof for pur-
poses of State law. For example, the
entity is subject to open meetings laws
or the requirement to maintain public
records that apply only to govern-
mental entities, or the State attorney
general represents the entity in court
under a State statute that only permits
representation of State entities.
•Theentityisdeterminedtobean
agency or instrumentality of a State or
political subdivision thereof by a State
or Federal court for purposes other
than section 414(d).
There are two additional factors to be
considered. First, if a party other than a
State (or political subdivision, agency, or
instrumentality thereof) has an ownership
interest, or other similar interests, in the
entity, this factor would indicate that the
entity is not an agencyor instrumentality
of a State or political subdivision thereof
(however, an entity would not necessarily
be considered an agency or instrumentality
of a State or political subdivision thereof
merely because there is no private owner-
ship in the entity or the entity serves a gov-
ernmental purpose). Second, if an entity
does not serve a governmental purpose,
this factor would indicate that it is not an
agency or instrumentality of a State (or po-
litical subdivision thereof).
The proposed regulations include a
variety of examples to illustrate whether
an entity is an agency or instrumentality
of a State or political subdivision thereof.
Many of these examples are drawn from
prior judicial opinions, as well as the
Agencies’ determinations.
30
Within the
description of particular factors, there are
some examples that illustrate whether a
particular factor is satisfied. However,
the mere satisfaction of a particular factor
is not conclusive in determining whether
an entity is an agency or instrumentality
within the meaning of these regulations.
F. Requirements for establishing
and maintaining a section 414(d)
governmental plan.
The proposed regulations would pro-
vide that a plan is established and main-
tained for the employees of a governmen-
tal entity if the following requirements
are satisfied: (1) the plan is established
andmaintainedbyanemployerwithinthe
meaning of §1.401–1(a)(2) of the Income
Tax Regulations;
31
(2) the employer is
a governmental entity; and (3) the only
participants covered by the plan are em-
ployees of the governmental entity. For
purposes of determining whether employ-
ees covered by a plan are employees of
a governmental entity, employee repre-
sentatives described in section 413(b)(8)
(including individuals who are employed
by the plan) would be treated as employ-
ees of the plan sponsor.
32
The proposed regulations would pro-
vide rules for changes in status of an en-
tity from a private entity to a governmen-
tal entity and from a governmental en-
tity to a private entity. As mentioned in
the “Background” section of this pream-
ble, the qualification requirements for a
private qualified plan differ substantially
from those of a governmental qualified
plan. The issue of whether a plan of a pri-
vate employer that later becomes a gov-
ernmental entity can be a governmental
plan raises a question regarding the in-
teraction among the three definitions of
the term “governmental plan” in ERISA.
Section 414(d) of the Code defines the
term “governmental plan” as “a plan es-
tablished and maintained by the Govern-
ment of the United States, by the govern-
ment of any State or political subdivision
thereof, or by any agency or instrumental-
ity of the foregoing.” In title IV of ERISA,
section 4021(b)(2) provides that any plan
“established and maintained for its em-
ployees by the Government of the United
States, by the government of any State
or political subdivision thereof, or by any
agency or instrumentality of the forego-
ing” is exempt from coverage by ERISA.
In title I of ERISA, section 3(32) defines a
governmental plan as “a plan established
or maintained by the Government of the
United States, by the government of any
State or political subdivision thereof, or
by any agency or instrumentality of the
foregoing.” While the definitions in title II
of ERISA (Code) and title IV of ERISA
(PBGC provisions) use the language “es-
tablishedandmaintained” by a govern-
mental employer, the title I definition uses
the language “establishedormaintained.”
This difference in statutory language
was addressed inRose v. Long Island Rail-
road Pension Plan, 828 F.2d 910 (2
nd
Cir.
1987),cert. denied, 485 U.S. 936 (1988).
InRose, the State of New York, through
the Metropolitan Transportation Authority
(MTA), acquired the Long Island Railroad
Company in 1966 (LIRR). The LIRR had
originally been chartered as a private stock
corporation. As part of the acquisition,
the State also assumed sponsorship of the
Long Island Railroad Pension Plan (LIRR
30
See, for example, Brock v. Chicago Zoological Society, 820 F.2d 909 (7
th
Cir. 1987) andNLRB v. Parents & Friends of the Specialized Living Center, 879 F.2d 1442 (7
th
Cir. 1989).
31
Section 1.401–1(a)(2) generally provides that a qualified pension, profit-sharing, or stock bonus plan is a definite written program and arrangement which is communicated to the employees
and which is established and maintained by an employer.
32
See §1.413–1(i)(1) for rules for when an employee is an employee representative.
December 19, 20118842011–51 I.R.B.

Pension Plan). After ERISA was enacted
in 1974, the widow of a participant who
died in 1976 in the LIRR Pension Plan
sued the plan under title I of ERISA after
being denied survivorship benefits. The
Rosecourt concluded that the LIRR Pen-
sion Plan was a governmental plan within
the meaning of section 3(32) of ERISA
because the LIRR was an agency or in-
strumentality of a political subdivision, the
MTA.
TheRosecourt took the position that
ifaprivateentityisacquiredbyagov-
ernmental entity which becomes the plan
sponsor, the plan can be established by
the governmental entity and, thus, be a
governmental plan. The court interpreted
the “established or maintained” language
in section 3(32) literally, but also noted the
discrepancy between the “establishedor
maintained” language in ERISA section
3(32) and the “establishedandmain-
tained” language in Code section 414(d)
and ERISA section 4021(b)(2) (emphasis
added). Despite this difference in the three
statutory definitions, Congress intended
all three definitions to be interpreted in a
similar manner. TheRosecourt reasoned
that:
“If a plan is required to have been both
established and maintained by a gov-
ernmental entity in order to qualify
for exemption, then a plan which was
established by a private entity but sub-
sequently taken over by a governmental
body would continue to be subject to
ERISA. This outcome conflicts with
the federalism-based concerns which
led Congress to exempt governmental
plans in the first place.”Rose v. Long
Island Railroad Pension Plan,828F.2d
at 920.
TheRosecourt stated that courts have
interpreted the word “and” as meaning
“or” if such interpretation would reflect
the legislative intent of the statute.
33
The
Rosecourt noted that its conclusion was
consistent with the approach taken by the
PBGC in a similar matter involving an
entity’s change to governmental status
prior to the enactment of ERISA where
the PBGC stated that it would not impose
the “established” requirement when doing
so would frustrate the congressional intent
of section 4021(b)(2) of ERISA.
34
TheRosecourt also noted that the LIRR
Pension Plan had been rewritten and sub-
stantially funded by the State since its ac-
quisition of the LIRR in 1966, and stated
that it would have reached the same con-
clusion regarding the plan’s governmental
status even if the definition under section
3(32) of ERISA used the phrase “estab-
lished and maintained.”
“In any event, even if we agreed with
Rose that the correct interpretation of
[section 3(32) of ERISA] was estab-
lished and maintained, we would still
not conclude that the LIRR Plan was
covered by ERISA, because the Plan
was in fact established and maintained
by the LIRR.”
Rose v. Long Island Railroad Pension
Plan, 828 F.2d at 920.See also Roy v.
Teachers Insurance and Annuity Associa-
tion, 878 F.2d 47 (2
nd
Cir. 1989).
The court concluded that a broad read-
ing of the term “established”—whereby
a plan not previously established under
ERISA may become a plan established
under ERISA without the preexisting one
having been formally “terminated”—is
more consistent with the legislative intent
behind the governmental plan exemp-
tion.
35
For reasons similar to those presented
by theRosecourt, but consistent with the
“established and maintained” language in
section 414(d), the proposed regulations
would set forth rules for employers chang-
ing status from private to governmental
that are consistent with the legislative
intent of the exemption of governmental
plans. The proposed regulations would
provide that if an employer becomes a
governmental entity or a governmental
entity becomes the employer under the
plan (for example, in connection with an
asset transfer), the plan will be treated
as a governmental plan established by a
governmental employer on the date of the
change (including all of the plan’s assets
and liabilities attributable to service before
and after the date of the change). Thus,
in such a case, under the proposed regula-
tions, the plan would have to comply with
all the requirements for a private plan up
to the date of the change and then comply
with the requirements for a governmental
plan after the date of the change. These
same rules would also apply if a portion
of a private plan was spun off to a plan
maintained by a governmental employer:
that portion of the plan would cease to
be subject to Code rules applicable to
nongovernmental employers, and instead
would become part of a governmental
plan, while the remaining portion of the
private plan that was not spun off would
continue to be subject to the protection
and other rules applicable to private plans.
These rules would provide standards for
determining when the Code protections
and other rules for a private plan cease to
apply(andwhenthesubstantiallydiffer-
ent rules for a governmental plan begin to
apply).
In the case of a change in status from
a private plan to a governmental plan,
comments are requested on whether, and
if so how, these regulations should address
rights and obligations that accrued prior
to the conversion to a governmental plan,
including the responsibility of the former
private plan sponsor (or former private
plan) for benefits that accrued prior to
the conversion. Any comments that ad-
dress the potential impact of the proposed
regulation’s approach on rights and re-
sponsibilities under title I and title IV of
ERISA will be forwarded to the DOL and
the PBGC.
Similarly, the regulations would pro-
vide that if a governmental employer
ceases to be a governmental entity, the
plan will be treated as being established
by a private employer thereafter (includ-
ing all of the plan’s assets and liabilities
attributable to service before and after the
date of the change). Such a change would
33
SeeRose v. Long Island Railroad Pension Plan, 828 F.2d at 919.
34
TheRosecourt said that: “We find the PBGC’s approach to be a sensible one; the statusof the entity which currently maintains a particular pension plan bears more relation to Congress’
goals in enacting ERISA and its various exemptions, than does the status of the entity which established the plan.”Rose v. Long Island Railroad Pension Plan, 828 F.2d at 920. See PBGC
Opinion Letter 75–44 (December 9, 1975).
35
But see Hightower v. Texas Hospital Association,65F.3d443,448(5
th
Cir. 1995), in which the Fifth Circuit held that if the plan was “established or maintained” for its employees by a
governmental employer, the plan was exempt from coverage under title I of ERISA, even if it was not exempt from coverage under the title IV “establishedand maintained” test. The Court
of Appeals held that the difference in statutory language between “established or maintained” and“established and maintained” had to be given some meaning, and held that for a plan to be
a governmental plan under ERISA section 4021(b)(2), the plan had to be both establishedandmaintained by the government.Id.at 450–51. The court did not discuss what, if any, actions
would be sufficient for an employer assuming sponsorship of an existing plan to be treated as having “established” the plan.
2011–51 I.R.B.885December 19, 2011

occureitherwheretheemployerentity
ceases to be a governmental entity (such
as a spin-off of a corporation) or where
the employees become employees of a
different entity (such as in an asset trans-
fer). Thus, for example, the entity in either
case would no longer satisfy the require-
ment that the employer be a governmental
entity. If such a change occurs, the plan
must comply with the requirements for a
governmental plan up to the change and
then comply with all the requirements for
a private plan for periods after the date of
the change. (See also the related discus-
sion under the heading, “Comments and
Public Hearing.”)
In the case of a formerly governmental
plan becoming a private plan, the plan and
plan sponsor may secure certain advan-
tages, such as PBGC coverage or ERISA
preemption, not available to governmental
plans and governmental sponsors. How-
ever, nothing in these proposed income tax
regulations should be construed to mean
that, with respect to a transaction such as
an asset sale, in which assets and liabilities
of a governmental plan are transferred to a
private plan, the assumption of benefit lia-
bilities accrued priorto the transfer to the
private plan relieves the former govern-
mental employer (or former governmental
plan) from responsibility for those bene-
fits.
As previously stated, the proposed
regulations would provide that if a gov-
ernmental employer ceases to be a gov-
ernmental entity, the plan will be treated
as being established by a private em-
ployer on the date of the change. The
proposed regulations would provide an
exception to this general rule when there
is a change in status from a governmen-
tal entity to a private entity under certain
circumstances. Specifically, if a govern-
mental plan ceases to be maintained by a
governmental employer, the plan will nev-
ertheless be treated as continuing to be a
governmental plan if the benefits held un-
der the governmental plan are frozen and
a governmental entity assumes responsi-
bility for the plan. While the frozen plan
would continue to be treated as a govern-
mental plan, the plan would be permitted
(but not required) to provide participating
employees with credit for service with the
new employer for purposes of vesting,
final pay adjustments, entitlements to ben-
efits such as early retirement benefits, and
similar service credit other than benefit
accrual credit.
Further, certain types of plans are lim-
ited under the Code to specific types of
employers, including limitations that ap-
ply differently depending on whether or
not the employer is or is not a governmen-
tal entity. These limitations on employer
eligibility raise special problems for cases
in which an entity becomes or ceases to
be a governmental employer. For exam-
ple, because a qualified cash or deferred
arrangement under section 401(k) gener-
ally cannot be maintained by a State or
local government or political subdivision,
or any agency or instrumentality thereof,
such a plan maintained by a private em-
ployer cannot be continued if the employer
later becomes part of a State. Other spe-
cial problems arise if a governmental em-
ployer that is not a tax-exempt organiza-
tion under section 501(c)(3) and that is not
apublicschoolattemptstobecomeaspon-
soring employer of a section 403(b) plan
of a tax-exempt organization under section
501(c)(3). Likewise, a State entity cannot
maintain an unfunded section 457(b) plan
of a tax-exempt organization described in
section 457(e)(1)(B). These proposed reg-
ulations would not alter rules relating to
the eligibility of an employer to estab-
lish or maintain a particular type of retire-
ment plan. An employer that is consider-
ing a change in its status should evaluate
whether it is eligible to sponsor any plan
that it assumes, taking into account the em-
ployer eligibility rules. Therefore, spon-
sors should not assume from these pro-
posed regulations that a change of sponsor-
ship from a private to governmental em-
ployer, orvice versa, will not result in any
adverse tax consequences. As emphasized
elsewhere in this preamble, the proposed
regulations would provide that the estab-
lished and maintainedrulesapplyonlyfor
purposes of section 414(d).
Proposed Effective Date
It is expected that these proposed reg-
ulations would not be applicable earlier
than for plan years beginning after the date
of the publication of the Treasury deci-
sion adopting these rules as final regula-
tions in theFederal Register. Generally,
amendment of a State or local retirement
plan requires enactment of State legisla-
tion. The Department of Treasury and
IRS intends to take into consideration the
time required to complete the State legisla-
tive process when determining an effective
date for these regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. In addition, because no collection
of information is imposed on small enti-
ties, the provisions of the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not ap-
ply, and therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Code, this notice of pro-
posed rulemaking will be submitted to the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The Treasury Depart-
ment and the IRS specifically request com-
ments on the clarity of the proposed rules
and how they can be made easier to under-
stand. All comments will be available for
public inspection and copying.
These proposed regulations would pro-
vide that a determination of whether an en-
tity is an agency or instrumentality of a
State or a political subdivision thereof is
based on a facts and circumstances anal-
ysis. Under the proposed regulations, the
factors to be applied would be ranked into
main factors and other factors.
36
Com-
ments are requested on whether the final
regulations should eliminate the distinc-
tion between main and other factors. Com-
ments are also requested on the ordering
36
For a list of the factors, seediscussion under the headingDefinition of Agency or Instrumentality of a State or a Political Subdivision of a Statein the Explanation of Provisions of this
preamble.
December 19, 20118862011–51 I.R.B.

and the application of the main and other
factors; for example, whether the final reg-
ulations should provide a list of factors
with a safe harbor standard under which,
if an entity satisfies identified factors, the
entity will be treated as an agency or in-
strumentality of a State or political sub-
division thereof, for purposes of section
414(d). Comments are also requested on
whether the distinction between main and
other factors should be retained, in addi-
tion to providing a safe harbor standard.
The factors identified in this bright line
test might be whether: (1) a majority of
the entity’s governing board or body are ei-
ther controlled by a State or political subdi-
vision thereof or elected through periodic,
publicly held elections (with the nominees
elected by the voters); and (2) a State or po-
litical subdivision thereof has the fiscal re-
sponsibility for the general debts and other
liabilities of the entity, including the en-
tity’s employee benefit plans. This stan-
dard might be available only if the entity
was created by a State government or polit-
ical subdivision pursuant to a specific en-
abling statute that prescribes the purposes,
powers, and manner in which the entity is
to be established and operated.
Apart from the special rules relating
to plan coverage for employees of a la-
bor union or plan under section 413(b)(8),
these proposed regulations do not include
special rules addressing existing practices
under which a small number of private em-
ployees participate in a plan that would
otherwise constitute a governmental plan
under section 414(d). Comments are re-
quested on whether an exception should
be provided in such cases. Parameters
that could be taken into account for such
a special rule include the following: (1)
whether the private employees were previ-
ously employees of the sponsoring govern-
mental entity; (2) whether the private em-
ployees were previously participants in the
governmental plan; (3) whether the num-
ber or percentage of such former employ-
ees who participate in the governmental
plan isde minimis(and, if so, what consti-
tutes ade minimisnumber or percentage);
(4) whether the coverage is pursuant to
pre-existing plan provisions; (5) whether
the private employer performs a govern-
mental function and has been officially
designated as a State entity for plan partic-
ipation purposes; and (6) whether the em-
ployer is ineligible to sponsor the partic-
ular type of governmental plan (for exam-
ple, whether a private employer is a tax-ex-
empt organization under section 501(c)(3)
that can sponsor a section 403(b) plan,
and whether the private employer spon-
sors or has sponsored plans that cannot
be sponsored by a State governmental en-
tity, such as a cash or deferred arrangement
under section 401(k) or an unfunded sec-
tion 457(b) plan of a tax-exempt entity (de-
scribed in section 457(e)(1)(B)).
If any special rule for such circum-
stances were to be included in the final
regulation, there would be a number of
related issues. These issues would include
how to address the status of such a plan as
a governmental multiple employer plan.
Other issues might include how section
414(h) governmental pick-up plans should
be treated, differences resulting from the
application of federal employment taxes
to a private employer participating in a
governmental multiple employer plan,
the application of the minimum funding
rules with respect to a private employer
participating in a governmental multi-
ple employer plan, how the prohibited
transaction rules of section 4975 would
apply with respect to a private employer
participating in a governmental multiple
employer plan, how the special benefit
limitation rules of section 415 would apply
to private plan participants in the govern-
mental plan, and what treatment should
apply where the plan was previously a
funded section 457(b) plan of a State or
local government.
If the final regulations do not provide
any special rule for cases in which a gov-
ernmental plan continues to cover private
employees who were formerly govern-
mental employees, it is expected that a
reasonable transition period following
publication of the final regulations will
be provided. Comments are requested
on what transitional relief should be pro-
vided to a governmental plan that covers
private employees who were formerly
governmental employees and continue to
participate in the plan that would other-
wise constitute a governmental plan under
section 414(d) (such as the governmental
plan spinning off a portion of the assets
and liabilities of the plan with respect
to the former employees as a separate
non-governmental plan). Comments are
also requested on whether this method of
correction might also be appropriate in
situations such as described inExample 5
in paragraph (k)(4) of the proposed regu-
lations.
The final regulations may also provide
transitional relief for entities that previ-
ously operated as if they were governmen-
tal entities eligible to participate or spon-
sor governmental plans but later were de-
termined to be private entities under the
regulations. Comments are requested on
what transitional relief should be provided
to an entity that is later determined to be
a private entity. The Treasury Department
and the IRS anticipate that there will be a
reasonable transition period following the
final regulations for a plan to revise its ar-
rangements in order to avoid the adverse
taxconsequencesoffailingtocomplywith
all the requirements of a private retirement
plan.
A public hearing has been scheduled
for (date to be provided when proposed
regulations are published), beginning at
10 a.m. in the Auditorium, Internal Rev-
enue Building, 1111 Constitution Avenue,
NW, Washington DC. Due to building se-
curity procedures, visitors must enter at
the main entrance located at 1111 Constitu-
tion Avenue, NW. In addition, all visitors
must present photo identification to enter
the building. Because of access restric-
tions, visitors will not be admitted beyond
the immediate entrance area more than 30
minutes before the hearing starts. For in-
formation about having your name placed
on the building access list to attend the
hearing, see the “FOR FURTHER INFOR-
MATION CONTACT” portion of this pre-
amble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments must submit writ-
ten or electronic comments and an outline
of the topics to be discussed and time to
be devoted to each topic (signed original
and eight (8) copies) by (date to be pro-
vided when proposed regulations are pub-
lished). A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the schedul-
ing of the speakers will be prepared after
the deadline for receiving comments has
passed. Copies of the agenda will be avail-
able free of charge at the hearing.
2011–51 I.R.B.887December 19, 2011

Drafting Information
The principal author of these proposed
regulations is Pamela R. Kinard, Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties), Internal Revenue Service. However,
personnel from other offices of the IRS
and Treasury participated in their develop-
ment.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par.2. Section 1.414(d)–1 is added to
read as follows:
§1.414(d)–1 Definition of governmental
plan.
(a)Definition of governmental
plan—(1)In general. In accordance with
section 414(d), for purposes of part I of
subchapter D of chapter 1 of the Internal
Revenue Code and the regulations, the
termgovernmental planmeans a plan es-
tablished and maintained for its employees
by the Government of the United States,
by the government of any State or political
subdivision thereof, or by any agency or
instrumentality of the foregoing, as deter-
mined pursuant to the requirements of this
section. The definitions set forth in this
section only apply for purposes of section
414(d) and this section.
(2)Definition for plans subject to cer-
tain statutes. For purposes of part I of
subchapter D of chapter 1 of the Inter-
nal Revenue Code and the regulations, the
term “governmental plan” also includes
any plan to which the Railroad Retirement
Act of 1935 or 1937 applies and which is
financed by contributions required under
thatActandanyplanofaninternational
organization which is exempt from taxa-
tion by reason of the International Organi-
zations Immunities Act (59 Stat. 669).
(3)Definition for certain plans of In-
dian tribal governments. For purposes of
part I of subchapter D of chapter 1 of the
Internal Revenue Code and the regula-
tions, the term “governmental plan” also
includes a plan which is established and
maintained by an Indian tribal government
(as defined in section 7701(a)(40)), a sub-
division of an Indian tribal government
(determined in accordance with section
7871(d)), or an agency or instrumentality
of either, and all of the participants of
which are employees of such entity sub-
stantially all of whose services as such an
employee are in the performance of es-
sential governmental functions but not in
the performance of commercial activities
(whether or not an essential governmental
function).
(b)Definition of United States.The
termUnited Stateshas the meaning set
forth in section 7701(a)(9).
(c)Definition of agency or instrumen-
tality of the United States—(1)Agency or
instrumentality of the United States.For
purposes of the definition of “governmen-
tal plan” in paragraph (a)(3) of this section,
the termagency or instrumentality of the
United Statesmeans an entity that satisfies
the facts and circumstances test in para-
graph (c)(2) of this section.
(2)Facts and circumstances test.
Whether an entity is an agency or instru-
mentality of the United States is based on
facts and circumstances. In making this
determination, the facts to be considered
include the following:
(i) The entity performs or assists in the
performance of a governmental function.
(ii) There are no private interests in-
volved, or the Government of the United
States has all of the powers and interests of
an owner. In determining whether an en-
tity that holds stock has a private interest,
stock will not be considered a private inter-
est if the stock of the corporation is not ac-
quired for investment purposes or for pur-
poses of control.
(iii) The control and supervision of the
entity is vested in the Government of the
United States. Control must be more than
the government’s extensive Federal regu-
lation of an industry.
(iv) The entity is exempt from Federal,
State, and Local tax by an Act of Congress.
(v) The entity is created by the United
States Government pursuant to a specific
enabling statute that prescribes the pur-
poses, powers, and manner in which the
entity is to be established and operated.
(vi) The entity receives financial assis-
tance from the Government of the United
States. However, an entity is not a govern-
mental entity merely because it receives
funds from the Government of the United
States under a contract to provide a gov-
ernmental service.
(vii) The entity is determined to be an
agency or instrumentality of the United
States by a Federal court.
(viii) Other governmental entities rec-
ognize and rely on the entity as an arm of
the Government of the United States.
(ix) The entity’s employees are treated
in the same manner as Federal employ-
ees for purposes other than providing em-
ployee benefits (for example, the entity’s
employees are granted civil service protec-
tion).
(3)Example. The following example
illustrates the application of this paragraph
(c):
Example.(i)Facts. Entity A is a Federal credit
union, which is created pursuant to the Federal Credit
Union Act, and is a tax-exempt organization under
section 501(c)(1)(A)(i).Membership in the Federal
credit union is not open to the general public but to
individuals who share a common bond, current or for-
mer employees of specified employers. Entity A is
member-owned and is controlled by a board of di-
rectors that is elected by its membership. Entity A,
along with other Federal credit unions, is subject to
regulation by the National Credit Union Administra-
tion (NCUA), which is a Federal agency that charters
and regulates Federal credit unions.
(ii)Conclusion. Based on the facts and circum-
stances and the factors in paragraph (c)(2) of this sec-
tion, Entity A is not an agency or instrumentality of
the United States because its board of directors is
elected by its own members and the directors are not
responsible to the United States, except to the limited
extent set forth in the Federal Credit Union Act and
regulated by the NCUA. Thus, Entity A is not a gov-
ernmental entity within the meaning of paragraph (c)
of this section.
(d)Definition of State.ThetermState
means any State of the United States and
the District of Columbia.
(e)Definition of political subdivision of
aState.Thetermpolitical subdivision of
aStatemeans—
(1) A regional, territorial, or local au-
thority, such as a county or municipality
(such as, a municipal corporation), that
is created or recognized by State statute
to exercise sovereign powers (which gen-
erally means the power of taxation, the
power of eminent domain, and the police
power); and
December 19, 20118882011–51 I.R.B.

(2) The governing officers either are
appointed by State officials or publicly
elected.
(f)Definition of agency or instrumen-
tality of a State or political subdivision
of a State—(1)Agency or instrumental-
ity of a State or political subdivision of a
State.Thetermagency or instrumental-
ity of a State or political subdivision of a
Statemeans an entity that satisfies the facts
and circumstances test in paragraph (f)(2)
of this section.
(2)Facts and circumstances test—(i)
Factors to be considered. Inmakingthe
determination of whether an entity is an
agency or instrumentality of a State or po-
litical subdivision of a State, the main fac-
tors to be considered are—
(A) The entity’s governing board or
body is controlled by a State (or political
subdivision thereof). For example, an
entity’s governing board or body is con-
trolled by a State (or political subdivision
thereof) if the public officials of the State
(or political subdivision thereof) have the
power to appoint, and to remove and re-
place, a majority of the entity’s governing
board or body. This factor is not satisfied
if the power to control is materially re-
stricted (for example, if any board member
of the entity can be replaced only with an
individual chosen from a list of designees
selected by the other members of the gov-
erning board or body);
(B) The members of the governing
board or body are publicly nominated and
elected;
(C) A State (or political subdivision
thereof) has fiscal responsibility for the
general debts and other liabilities of the
entity, including responsibility for the
funding of benefitsunder the entity’s em-
ployee benefit plans;
(D) The entity’s employees are treated
in the same manner as employees of the
State (or political subdivision thereof) for
purposes other than providing employee
benefits (for example, the entity’s employ-
ees are granted civil service protection);
and
(E) In the case of an entity that is not
a political subdivision, the entity is dele-
gated the authority to exercise sovereign
powers (which generally means the power
of taxation, the power of eminent domain,
and police powers) of the State (or political
subdivision thereof) and the delegation of
authority is pursuant to a statute of a State
(or political subdivision thereof).
(ii)Other factors to be considered.In
making the determination of whether an
entity is an agency or instrumentality of a
State or a political subdivision of a State,
other factors include—
(A) The entity’s operations are con-
trolled by a State (or political subdivision
thereof);
(B) The entity is directly funded
through tax revenues or other public
sources. However, this factor is not sat-
isfied if an entity that is not otherwise
an agency or instrumentality is paid from
public funds under a contract to provide a
governmental service or is funded through
grants by the State or Federal government;
(C) The entity is created by a State gov-
ernment or political subdivision of a State
pursuant to a specific enabling statute that
prescribes the purposes, powers, and man-
ners in which the entity is to be established
and operated. However, a nonprofit corpo-
ration that is incorporated under a State’s
general corporation laws is not created un-
der a specific enabling statute;
(D) The entity is treated as a govern-
mental entity for Federal employment tax
or income tax purposes (such as, the au-
thority to issue tax-exempt bonds under
section 103(a)) or under other Federal
laws;
(E) The entity is determined to be an
agency or instrumentality of a State (or po-
litical subdivision thereof) for purposes of
State laws. For example, the entity is sub-
ject to open meetings laws or the require-
ment to maintain public records that ap-
ply only to governmental entities, or the
State attorney generalrepresents the entity
in court under a State statute that only per-
mits representation of State entities;
(F) The entity is determined to be an
agency or instrumentality of a State (or
political subdivision thereof) by a State or
Federal court;
(G) A State (or political subdivision
thereof) has the ownership interest in the
entity and no private interests are involved;
and
(H) The entity serves a governmental
purpose.
(3)Examples. The following examples
illustrate the application of this paragraph
(f). In each of these examples, unless oth-
erwise stated, only facts that are relevant
to the examples are included and it is as-
sumed that no party other than a State or
political subdivision thereof has an owner-
ship interest in the entity and that the en-
tity serves a governmental purpose. The
examples are as follows:
Example 1.(i)Facts. Entity C is a utility com-
pany located in County B of State A. Entity C is cre-
ated pursuant to a State A statute by a petition of 25
private citizens who are landowners, and approved by
an order of a judge in County B. Entity C is adminis-
tered by a board of commissioners named in the origi-
nal petition, with vacanciesto be filled by the incum-
bents, but with State A having the right to remove
a board member for malfeasance. Entity C has the
power of eminent domain. In addition, the records of
Entity C are public records.
(ii)Conclusion. Based on the facts and circum-
stances, Entity C is not an agency or instrumentality
of County B within the meaning of paragraph (f) of
this section because it does not satisfy the control fac-
tors described in paragraphs (f)(2)(i)(A) and (ii)(A)
of this section because Entity C is under the control
of a self-perpetuating board of directors and because
State A or its officials do not exercise control over the
directors.
Example 2.(i)Facts. The facts are the same as
inExample 1, except that Entity C is administered by
a board of commissioners which is appointed by the
Governor of State A and is subject to removal pro-
ceedings by the Governor of State A, the County B
prosecutor, or the general public in County B. Vacan-
cies on Entity C’s district board are filled by popular
election or by appointment of the Governor of State
A. Entity C has the power of eminent domain. In ad-
dition, the records of Entity C are public records.
(ii)Conclusion. Based on the facts and circum-
stances, Entity C is an agency or instrumentality of
County B within the meaning of paragraph (f) of this
section.
Example 3.(i)Facts. Entity K is a non-profit cor-
poration that operates a zoo in County J. Entity K is
organized under the laws of State L. Although En-
tity K was not created by State law, the legislature of
State L authorized the State’s forest districts to con-
tract with zoological societies for the creation, opera-
tion, and maintenance of zoological parks. County J
entered into a contract with Entity K, giving Entity K
exclusive control and management authority over the
zoo in County J. Entity K, through government con-
tracts, receives over half of its revenues from taxes
raised by County J. The remaining revenues are from
admission and parking fees, concessions, souvenirs,
and private donations. County J maintains a signifi-
cant amount of control over the budget of Entity K,
including overseeing the expenditures of nontax rev-
enues generated by Entity K. The zoo is located on
land owned by County J, and vehicles used at the zoo
are owned by County J and licensed as municipal ve-
hicles. Entity K is managed by a 35-member board
of trustees. Only one member of the board of trustees
is a public official. Of the 240 members of Entity K
who elect the board of trustees, only 4 members are
County J public officials. In addition, County J has no
direct role in Entity K’s operation and maintenance of
the zoo. Employees of Entity K are not treated in the
same manner as public employees and, thus, are not
covered under the civil service rules, pension plan, or
workers’ compensation funds of County J or State L.
2011–51 I.R.B.889December 19, 2011

(ii)Conclusion. Based on the facts and circum-
stances, Entity K is not an agency or instrumentality
of County J or State L within the meaning of para-
graph (f) of this section. Although Entity K is partly
funded by County J, it receives those funds under a
contract to provide governmental service and very
few members of both the board of trustees and the
governing members of Entity K are public officials.
Example 4.(i)Facts. Entity P is a non-profit
corporation that operates a 24-hour intermediate care
facility for mentally challenged adults located in
State O. Entity P is licensed and regulated by State
O. While not created by statute, Entity P’s facility
was built pursuant to statutory directives. Entity P is
managed by a 9-member board of directors, which
consists of parents of the patients at the facility and
other volunteers. The directors are elected by Entity
P’s corporate members. State O has no authority to
appoint or remove directors. The facility is managed
by an executive director who is hired by the board
without State approval. Pursuant to regulations,
State O mandates certain personnel requirements,
including staffing levels and minimum qualification
requirements for staff members at the facility. How-
ever, Entity P is responsible for hiring, firing, and
other disciplinary decisions. State O prescribes an
hourly mean wage for the employees of Entity P,
which limits the total amount that Entity P can pay
its employees. In addition, State O imposes a ceiling
on fringe benefits available to employees of Entity P,
but Entity P is responsible for allocating the funds to
pay for the fringe benefits.
(ii)Conclusion. Based on the facts and circum-
stances, Entity P is not an agency or instrumentality
of State O within the meaning of paragraph (f) of this
section. Although Entity P is directly funded by State
O, it receives those funds under a contract to provide
services to State O. Entity P does not satisfy the con-
trol factors described in paragraphs (f)(2)(i)(A) and
(ii)(A) of this section because Entity P is controlled
by directors who are chosen by Entity P’s corporate
members. While State O has some oversight control
over Entity P’s employees, through certification re-
quirements and the imposition of limitations on pay
and fringe benefits, Entity P has control over most
employment decisions, as well as setting policies for
holidays, vacations, insurance, and retirement bene-
fits.
Example 5.(i)Facts relating to University U.
University U was created by the legislature of State
A and is an agency or instrumentality of State A un-
der this paragraph (f). The board of trustees of Uni-
versity U appoints the president of University U. The
president of University U appoints the chancellor of
the medical school of University U. The chancellor of
the medical school is also a vice-president of Univer-
sity U. The chancellor of the medical school appoints
the various chairs of the clinical departments of the
medical school.
(ii)Facts relating to the corporate structure of
Employer M. The chairs of the clinical departments of
the medical school have incorporated a separate en-
tity, Employer M, under State A’s not-for-profit law.
Employer M is an integrated group practice for man-
aging the clinical practice activities of the medical
school faculty and was established in order to ad-
vance the purposes of the medical educational pro-
gram and related activities of the medical school of
University U. Under the by-laws of Employer M, any
physician employee of Employer M must be a fac-
ulty member of the medical school (and if any physi-
cian employee of Employer M leaves the faculty of
the medical school, his or her employment with Em-
ployer M terminates automatically).
(iii)Facts relating to the control of Employer
M. Employer M is governed by a board of trustees
consisting of the chancellor of the medical school,
the clinical department chairs, and full-time faculty
members appointed by two-thirds of the clinical
department chairs. Performance of services as an
employee of Employer M is a condition of employ-
ment for all full-time faculty members of the medical
school. The faculty members are employees of Uni-
versity U and, in the capacity of their employment
at University U, participate in the State A public
employees’ pension plan. Employer M also employs
administrative and non-faculty employees who are
not treated in the same manner as employees of State
A (or University U). Employer M charges patients
for the services provided by Employer M, and a
portion of the fees collected are paid to University U.
The compensation levels for employees of Employer
M are set by faculty members who serve on the board
of trustees of Employer M. The compensation paid
to faculty members by Employer M is a substantial
portion of the total compensation paid to them by
University U and Employer M. Audited financial
records of Employer M are submitted annually to the
president of University U.
(iv)Conclusion. Employer M does not satisfy any
of the factors listed in paragraphs (f)(2)(i)(B) through
(E) of this section (that is, its trustees are not publicly
nominated and elected, State A has no fiscal respon-
sibility for Employer M, administrative and non-fac-
ulty employees of EmployerM are not treated in the
same manner as employees of State A, and Employer
M has no sovereign powers). Employer M also does
not satisfy any of the additional factors listed in para-
graphs (f)(2)(ii)(B) through (G) of this section, but
does satisfy the governmental purpose factor in para-
graph (f)(2)(ii)(H) of this section. With respect to the
control factors in paragraphs (f)(2)(i)(A) and (ii)(A)
of this section, while all of Employer M’s trustees
are employees of University U, the majority of the
board of trustees is not controlled by University U
but by clinical department chairs and full-time fac-
ulty members of University U. Their service on the
board of trustees of Employer M is in their capacity
as representatives of Employer M, not as representa-
tives of University U or State A. Accordingly, based
on the facts and circumstances, including the lack of
involvement of University U in overseeing the con-
duct of the board of trustees and the operations of
Employer M beyond review of its audited financials,
Employer M is not an agency or instrumentality of
State A within the meaning of paragraph (f) of this
section.
Example 6.(i)Facts. Entity W, a private foun-
dation, provides public assistance to the indigent el-
derly in a residence hall built on land privately do-
nated to Entity W, located in City V. City V contracts
with Entity W to provide elder care to residents of
City V. Over the years, City V has regularly budgeted
for services provided by Entity W to its residents, in-
cluding maintenance and upkeep of its facilities, and
salaries of employees. In 1970, Entity W and City V
together incorporated a non-profit organization, En-
tity X, called “City V Eldercare Residence,” through
which Entity W would provide its services to the res-
idents of City V. Under Entity X’s bylaws, Entity X
is governed by a board of directors, six of whom are
appointed by the Mayor of City V, and six of whom
are appointed by Entity W. Entity X’s employees are
considered employees of Entity X and are not treated
in the same manner as municipal employees of City
V.
(ii)Conclusion. Although City V is a political
subdivision of a State within the meaning of para-
graph (e)(1) of this section, Entity X is not an agency
or instrumentality of City V within the meaning of
paragraph (f) of this section. While Entity X sat-
isfies the governmental purpose factor described in
paragraph (f)(2)(ii)(H) of this section, it does not sat-
isfy any other factor, including the control factors de-
scribed in paragraphs (f)(2)(i)(A) and (ii)(A) of this
section or the employee factor described in paragraph
(f)(2)(i)(D) of this section (because a majority of the
board is not appointed by City V and Entity X’s em-
ployees are not treated in the same manner as employ-
ees of City V).
Example 7.(i)Facts. Five States created Com-
mission D as a body corporate of each compacting
State and territory. Commission D was created to
provide services to the States on issues relating to
higher education. Each governor of the five States ap-
points three persons to the governing board of Com-
mission D, which is subject to the joint control of
the five States. Commission D submits yearly re-
ports and budgets to the governors of each of the five
States. Commission D’s operating costs are appor-
tioned equally among the States. The IRS determined
in a ruling that Commission D was exempt from gross
income under section 115. The IRS also determined
that Commission D was an instrumentality of each of
the five States for employment tax purposes.
(ii)Conclusion. Based on the facts and circum-
stances, Commission D is an agency or instrumental-
ity of each of the five States within the meaning of
paragraph (f) of this section.
Example 8.(i)Facts. Entity S, incorporated un-
der the laws of State T as a non-profit corporation, op-
erates a hospital in City R. City R leases the hospital
and its entire operation to Entity S. The lease between
City R and Entity S requires Entity S to transfer its as-
sets and liabilities back to the City upon expiration of
the lease. City R created the first board of directors
for the hospital, but it does not have the power to re-
move or replace any board member. Only one of the
13 board members of Entity S is a public official, an
ex officiovoting member. In addition, the board of di-
rectors is not elected by the general public of City R.
To fund a subsequent expansion of the hospital facil-
ity, City R issued tax-exempt bonds. Entity S does not
have the authority to issue tax-exempt bonds. Entity
S does not exercise any sovereign powers. Employ-
ees of Entity S are not treated in the same manner as
employees of City R. For example, Entity S and City
R maintain separate payrolls, health insurance plans,
and pension plans.
(ii)Conclusion. Based on the facts and circum-
stances, Entity S is not an agency or instrumentality
of City R within the meaning of paragraph (f) of this
section. Although City R had the power of the initial
appointment of the board members, it cannot subse-
quently appoint or remove any directors of Entity S,
therefore, Entity S does not satisfy the control factor
described in paragraph (f)(2)(i)(A) of this section.
December 19, 20118902011–51 I.R.B.

(g)Special rules for plans of Indian
tribal governments.[Reserved].
(h)Special rules for plans subject to the
Railroad Retirement Act of 1935 or 1937.
[Reserved].
(i) [Reserved].
(j)Special rules for plans subject to
the International Organizations Immuni-
ties Act. [Reserved].
(k)Established and maintained—(1)In
general. For purposes of applying this sec-
tion (and not for any other purpose) with
respect to a governmental entity (which is
an entity defined in paragraph (b), (c), (d),
(e), or (f) of this section), a plan is estab-
lished and maintained for the employees of
a governmental entity if—
(i) The plan is established and main-
tained for employees by an employer,
within the meaning of §1.401–1(a)(2);
(ii) The employer is a governmental en-
tity; and
(iii) The participants covered by the
plan are employees ofthat governmental
entity.
(2)Changes in status—(i)Ceasing to
be a private entity. Ifanemployerbe-
comes a governmental entity (for exam-
ple, as a result of a stock acquisition) or
a governmental entity becomes the em-
ployer under the plan (for example, in con-
nection with an asset transfer), the plan (in-
cluding all of the plan’s assets and liabili-
ties attributable to service before and after
the date of the change) will be treated, for
purposes of paragraph (k)(1)(i) of this sec-
tion, as being established by that govern-
mental entity on the date of that change.
(ii)Ceasing to be a governmental en-
tity—(A)General rule. Except as pro-
vided in paragraph (k)(2)(ii)(B) of this sec-
tion, if an employer that is a governmen-
tal entity ceases to be a governmental en-
tity (for example, as a result of a stock ac-
quisition) or a private entity becomes the
employer under the plan (for example, in
connection with an asset transfer), the plan
(including all of the plan’s assets and li-
abilities attributable to service before and
after the date of the change) is treated, for
purposes of paragraph (k)(1)(ii) of this sec-
tion, as being established by the non-gov-
ernmental employer on the date of that
change.
(B)Exception. If a plan is established
and maintained for the employees of a gov-
ernmental entity in accordance with para-
graph (k)(1) of this section (without regard
to this paragraph (k)(2)(ii)) and, at a sub-
sequent date, the employer ceases to be a
governmental entity (for example, as a re-
sult of an assets transfer), the plan is treated
as continuing to be a governmental plan
if—
(1) A governmental entity continues to
be the plan sponsor after the change (for
example, a governmental entity assumes
the plan on or before the date on which the
private entity becomes the employer (in-
cluding becoming responsible for the em-
ployer obligations with respect to the pay-
ment of benefits under the plan)); and
(2) Benefits under the plan are frozen
(with, if provided under the plan, partici-
pating employees to receive credit for ser-
vice with the new employer for purposes of
vesting, final pay adjustments, entitlement
to benefits such as early retirement bene-
fits, and similar service credit other than
benefit accrual credit).
(C)Governmental liability for spun-off
benefits. In the case of a transaction such
as an asset sale in which assets and lia-
bilities of a governmental plan are trans-
ferred to a private plan, the private em-
ployer would be responsible for satisfy-
ing the minimum funding standards of sec-
tion 412 (including with respect to bene-
fits attributable to service performed be-
fore the date of the change). However,
nothing in this paragraph (k)(2)(ii) should
be construed to mean that, with respect to
such a transaction, the assumption of ben-
efit liabilities accrued prior to the trans-
fer to the private plan would relieve the
former governmental employer (or former
governmental plan) from responsibilities
for those benefits.
(3)Plan coverage for employees of a la-
bor union or plan. For purposes of para-
graph (k)(1)(iii) of this section, employees
of employee representatives described in
section 413(b)(8) (including employees of
a plan) are treated as employees of the plan
sponsor. See §1.413–1(i).
(4)Examples. The following examples
illustrate the application of this paragraph
(k):
Example 1.(i)Facts. Employer C, a non-profit
corporation whose principal place of business is lo-
cated in City F, is not a governmental entity. Plan B,
a retirement plan, is established and maintained by
Employer C. In a stock acquisition, City F acquires
all the shares of stock of Employer C and, as a result,
Employer C becomes a governmental entity.
(ii)Conclusion. After the acquisition, Plan B is
established and maintained by a governmental entity.
In addition, the employees covered by Plan B are em-
ployees of a governmental entity. Thus, Plan B, in-
cluding the assets and liabilities attributable to bene-
fits accrued in Plan B prior to the date of the acqui-
sition, is a governmental plan within the meaning of
section 414(d) and this section.
Example 2.(i)Facts. Employer G is a hospital
that is an agency or instrumentality of State A. Plan
J, a retirement plan, is established and maintained by
Employer G. Plan J satisfies the requirements of this
paragraph (k) and is a governmental plan within the
meaning of section 414(d). The assets of Employer G
are transferred to a non-profit corporation, Employer
M, which is not a governmental entity. All employees
of Employer G become employees of Employer M.
As part of the transaction, Employer M assumes Plan
J, with respect to benefits accrued for service both
before and after the transaction.
(ii)Conclusion. Plan J is no longer maintained
by a governmental entity. In addition, the employees
covered by Plan J are no longer employees of a gov-
ernmental entity. Therefore, Plan J no longer consti-
tutes a governmental plan within the meaning of sec-
tion 414(d) and this section. In order for Plan J to
continue to be a qualified plan, Plan J must satisfy
the qualification requirements relating to non-gov-
ernmental plans, including with respect to the assets
and liabilities attributable to benefits accrued in Plan
J prior to the date of the sale. The same conclusion
would apply if the transfer were a stock transaction.
Example 3.(i)Facts. Same facts as inExample
2, except that, on the date of the sale, Employer G
freezes Plan J, so that participants in Plan J are no
longer accruing benefitsunder the plan and all ac-
crued benefits are limited to service before the sale.
In addition, on the date of the acquisition, State A
assumes Plan J, including responsibility for the pay-
ment of benefits previously accrued to participants in
Plan J.
(ii)Conclusion. In accordance with paragraph
(k)(2)(ii)(B) of this section, Plan J continues to be
a governmental plan within the meaning of section
414(d) and this section.
Example 4.(i)Facts. Pursuant to a State statute,
State L permits local towns and villages to establish
recreational facility authorities to build and promote
recreational activities. Under Statute K, unincorpo-
rated Townships M, N, and O (which are political sub-
divisions of State L, within the meaning of paragraph
(d) of this section) jointly establish a recreational fa-
cility authority, Authority R. Financing for Authority
F is through local taxes and fees. Authority R oper-
ates under a three-person board of directors, one each
appointed by townships M, N, and O. Authority R
built and operates a skating rink, Facility S, which is
located in Township O, but is open to the residents of
Townships M, N, and O. Facility S is wholly owned
and controlled by Townships M, N, and O. Township
O maintains Pension Plan P for its seven employees,
which is a governmental plan under section 414(d).
Township O amends its plan to permit the three em-
ployees of Facility S to participate. The employees of
Facility S are not employees of Township O and are
not employees of a labor union described in section
413(b)(8).
(ii)Conclusion. The governmental plan status of
Pension Plan P is not affected by the participation of
Facility S’s employees because Facility S is a govern-
2011–51 I.R.B.891December 19, 2011

mental entity within the meaning of section 414(d)
and this section.
Example 5.(i)Facts. Same facts asExample
4, except that Township O amends Plan P to permit
participation by 10 employees of candy and soft drink
Vendor T, a supplier for Facility S. Vendor T is not a
governmental entity.
(ii)Conclusion. Plan P is no longer a governmen-
tal plan within the meaning of section 414(d) because
it provides benefits to employees of a non-govern-
mental employer, Vendor T.
(l)Employee. For purposes of this sec-
tion, the termemployeemeans a common
law employee of the employer (and the
rules in section 401(c) do not apply).
Indian Tribal Governmental
Plans
Announcement 2011–79
AGENCY: Internal Revenue Service
(IRS), Department of the Treasury.
ACTION: Advance notice of proposed
rulemaking.
SUMMARY: The Treasury Department
and IRS anticipate issuing regulations un-
der section 414(d) of the Internal Revenue
Code (Code) to define the term “govern-
mental plan.” This document describes the
rules the Treasury Department and IRS are
considering proposing relating to the de-
termination of whether a plan of an Indian
tribal government is a governmental plan
within the meaning of section 414(d) and
contains an appendix that includes a draft
notice of proposed rulemaking on which
the Treasury Department and IRS invite
comments from the public. This document
applies to sponsors of, and participants and
beneficiaries in, employee benefit plans of
Indian tribal governments.
DATE: Written or electronic comments
must be received by February 6, 2012.
ADDRESSES: Send submissions relating
to the section 414(d) draft ITG regulations
to: CC:PA:LPD:PR (REG–133223–08),
room 5203, Internal Revenue Service, PO
Box 7604, Ben Franklin Station, Wash-
ington DC, 20044. Submissions may be
hand delivered Monday through Friday,
betweenthehoursof8a.m. and4p.m.
to CC:PA:LPD:PR (REG–133223–08),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC.
Alternately, taxpayers may sub-
mit comments relating to the sec-
tion 414(d) draft ITG regulations lo-
cated in the Appendix to this ANPRM
electronically via the Federal eRule-
making Portal atwww.regulations.gov
(IRS-REG–133223–08).
FOR FURTHER I
NFORMATION
CONTACT: Con
cerning the ANPRM,
Pamela R. Kin
ard, at (202) 622–6060;
concerning s
ubmission of comments,
Richard Hur
st, at (202) 622–7180 (not
toll-free n
umbers).
SUPPLEMENTARY INFORMATION:
Background
This document describes rules that the
Treasury Department and IRS are consid-
ering proposing and contains a draft notice
of proposed rulemaking (in the Appendix
to this ANPRM) under section 414(d) of
the Internal Revenue Code (Code). Under
the draft notice of proposed rulemaking (in
the Appendix to this ANPRM), the rules
would provide guidance relating to the de-
termination of whether a plan of an Indian
tribal government, a subdivision of an In-
dian tribal government, or an agency or in-
strumentality of either (ITG) is a govern-
mental plan within the meaning of section
414(d) of the Code (section 414(d) draft
ITG regulations).
Section 414(d) of the Code provides
that the term “governmental plan” gener-
ally means a plan established and main-
tained for its employees by the Govern-
ment of the United States, by the gov-
ernment of any State or political subdivi-
sion thereof, or by any agency or instru-
mentality of any of the foregoing. See
sections 3(32) and 4021(b)(2) of the Em-
ployee Retirement Income Security Act
of 1974 (ERISA) for definitions of the
term “governmental plan,” which govern
respectively for purposes of title I and title
IV of ERISA
1
.
The term “governmental plan” also in-
cludes any plan to which the Railroad Re-
tirement Act of 1935 or 1937 (49 Stat.
967, as amended by 50 Stat. 307) ap-
plies and which is financed by contribu-
tions required under that Act and any plan
of an international organization which is
exempt from taxation by reason of the In-
ternational Organizations Immunities Act
(59 Stat. 669). See section 414(d)(2) of
the Code.
Section 414(d) was amended by the
Pension Protection Act of 2006, Public
Law 109–280 (120 Stat. 780) (PPA ’06)
to include certain plans of Indian tribal
governments and related entities.
2
Section
906(a)(1) of PPA ’06 provides that the
term “governmental plan” includes a plan
which is established and maintained by
an Indian tribal government (as defined in
section 7701(a)(40)), a subdivision of an
Indian tribal government (determined in
accordance with section 7871(d)), or an
agency or instrumentality of either (ITG),
and all the participants of which are em-
ployees of such entity substantially all of
whose services as such an employee are in
the performance of essential governmental
functions but not in the performance of
commercial activities (whether or not an
essential governmental function).
Neither section 414(d) of the Code,
section 3(32) of ERISA, nor section
4021(b)(2) of ERISA define key terms
relating to governmental plans, including
the terms “established and maintained,”
“political subdivision,” “agency,” and
“instrumentality.” Currently, there are no
regulations interpreting section 414(d).
Revenue Ruling 89–49, 1989–1 C.B. 117,
see §601.601(d)(2), sets forth a facts and
circumstances analysis for determining
whether a retirement plan is a govern-
mental plan within the meaning of section
414(d).
3
This analysis is used by the IRS
in issuing letter rulings. In connection
with this advanced notice of proposed
rulemaking, an advance notice of pro-
posed rulemaking is also being issued
with respect to the general definition of a
1
The three definitions of the term “governmental plan” are essentially the same. The only difference is that, in defining the term “governmental plan,” section 3(32) of ERISA uses the phrase
“established or maintained,” whereas section 414(d) of the Code and section 4021(b) of ERISA use the term “established and maintained.”
2
Section 906(a) of PPA ’06 made similar amendments to sections 3(32) and 4021(b)(2) of ERISA.
3
See also Rev. Rul. 57–128, 1957–1 C.B. 311, see § 601.601(d)(2), which provides guidance on determining when an entity is a governmental instrumentality for purposes of the exemption
from employment taxes under section 3121(b)(7) and 3306(c)(7).
December 19, 20118922011–51 I.R.B.

governmental plan (REG–157714–06 that
is being published elsewhere in this issue
of the Bulletin).
Governmental plans are subject to dif-
ferent rules than retirement plans of non-
governmental employers. Governmental
plans are excluded from the provisions of
titles I and IV of ERISA. In addition, gov-
ernmental plans receive special treatment
under the Code. These plans are exempt
from certain qualification requirements
and they are deemed to satisfy certain other
qualification requirements under certain
conditions. As a result, the principal qual-
ification requirements for a tax-qualified
governmental plan
4
are that the plan—
•Be established and maintained by the
employer for the exclusive benefit of
the employer’s employees or their ben-
eficiaries;
•Provide definitely determinable bene-
fits;
•Be operated pursuant to its terms;
•Satisfy the direct rollover rules of sec-
tion 401(a)(31);
•Satisfy the section 401(a)(17) limita-
tion on compensation;
•Comply with the statutory minimum
required distribution rules under sec-
tion 401(a)(9);
•Satisfy the pre-ERISA vesting require-
ments under section 411(e)(2);
5
•Satisfy the section 415 limitations on
benefits, as applicable to governmental
plans; and
•Satisfy the prohibited transaction rules
in section 503.
State and local governments, political
subdivisions thereof, and agencies or in-
strumentalities thereof are generally not
permitted to offer cash or deferred arrange-
ments under section 401(k). However, an
ITG is permitted to offer a cash or deferred
arrangement under section 401(k).
Notice 2006–89, 2006–2 C.B. 772, and
Notice 2007–67, 2007–2 C.B. 467, see
§601.601(d)(2), summarize the changes
made by section 906(a)(1) of PPA ’06 and
provide transitional relief to ITGs under
a reasonable and good faith standard to
comply with such changes. The notices
provide that until such guidance is issued,
a plan established and maintained by an
ITG for its employees is treated as satisfy-
ing the requirements of section 906(a)(1)
of PPA ’06 to be a governmental plan
under section 414(d) of the Code if it com-
plies with those requirements based on a
reasonable and good faith interpretation of
section 414(d). For further background,
see the “Background” section of the pre-
amble of the section 414(d) draft ITG
regulations in the Appendix to this AN-
PRM under the headings, “Notices Issued
by the IRS Relating to ITG Retirement
Plans under PPA ’06.”
The Treasury Department and the IRS
participated in a series of telephone listen-
ing meetings with the ITG community fol-
lowing the passage of PPA ’06. The at-
tached draft notice of proposed rulemak-
ing in the Appendix to this ANPRM takes
into account comments provided through
a number of informative and cooperative
comments received in response to Notices
2006–89 and 2007–67 and open and direct
consultations with the Indian tribal com-
munity. Those comments received from
Notices 2006–89 and 2007–67 and during
the consultations were considered in draft-
ing the proposed rulemaking.
The Treasury Department and the IRS
have determined to seek public comment
and consult with ITGs on the draft pro-
posed regulations in advance of issuing a
notice of proposed rulemaking. In light
of the interaction of the governmental plan
definitionsintheCodeandERISA,acopy
of the comments will be forwarded to DOL
and PBGC.
Explanation of Provisions
Attached to the Appendix to this
ANPRM is a draft notice of proposed
rulemaking. These draft regulations
include proposed rules, a preamble, and
a request for comments. The Treasury
Department and IRS invite the public to
comment on the rules that the Treasury
Department and IRS are considering
proposing, which would set forth special
rules relating to retirement plans of ITGs.
Section 414(d) Draft ITG regulations
A plan established and maintained by
an ITG is a governmental plan under sec-
tion 414(d), as amended by section 906
of PPA ’06, only if all of its participants
are employees substantially all of whose
services are in the performance of essen-
tial governmental functions (but not in
the performance of commercial activities
whether or not an essential governmental
function). Therefore, the rules under the
section 414(d) draft general regulations
(in the Appendix to the ANPRM that is
being published elsewhere in this issue of
the Bulletin) would apply to ITG govern-
mental plans, as well as the special rules
under the attached section 414(d) draft
ITG regulations. The anticipated pro-
posed regulations would use the broader
concepts of governmental activity and
commercial activity, instead of the terms
essential governmental function and com-
mercial activity. See the “Explanation of
Provisions” section in the section 414(d)
draft ITG regulations in the Appendix to
this ANPRM under the heading, “Determi-
nation of Governmental and Commercial
Activities.”
Under the section 414(d) draft ITG reg-
ulations (in the Appendix to this ANPRM),
whether a plan of an ITG is a governmental
plan or a nongovernmental plan within the
meaning of section 414(d) would be based,
in part, on: (1) a determination of which
activities are commercial activities and (2)
a determination of whether employees of
the ITG covered by the plan are employees
who perform substantial services in com-
mercial activities of the ITG (and are thus
commercial employees).
The anticipated proposed regulations
would provide that certain specific ac-
tivities are deemed to be governmental
or commercial for purposes of section
414(d). Under the anticipated proposed
regulations, commercial activities would
be operations involving a hotel, casino,
service station, convenience store, or ma-
rina. These activities are examples that
were identified as commercial activities
in Notices 2006–89 and 2007–67, as well
as in the Joint Committee on Taxation
4
A special rule applies to contributory plans of certain governmental entities. Section 414(h)(2) provides that, for a qualified plan established bya State government or political subdivision
thereof, or by any agency or instrumentality of the foregoing, where the contributions of the governmental employer are designated as employee contributions under section 414(h)(1) but the
governmental employer picks up the contributions, the contributions picked up will be treated as employer contributions.
5
Section 411(e)(2) states that a plan described in section 411(e)(1) is treated as meeting the requirements of section 411 if the plan meets the vestingrequirements resulting from the application
of section 401(a)(4) and (a)(7) as in effect on September 1, 1974.
2011–51 I.R.B.893December 19, 2011

Technical Explanation to section 906 of
PPA ’06. The section 414(d) draft ITG
regulations in the Appendix to this AN-
PRM would provide that governmental
activities include activities related to the
building and maintenance of public roads,
sidewalks, and buildings, activities related
to public works projects (such as schools
and government buildings), and activities
that are subject to a treaty or special rules
that pertain to trust land ownership and
use. See §601.601(d)(2).
In addition to listing certain specified
activities, the anticipated proposed regu-
lations would provide a facts and circum-
stances test for determining whether an
activity is a governmental or commercial
activity. See the “Explanation of Provi-
sions” section in the section 414(d) draft
ITG regulations in the Appendix to this
ANPRM under the heading, “Governmen-
tal and Commercial Activities.” The an-
ticipated proposed regulations would also
provide examples illustrating the applica-
tion of the facts and circumstances tests to
particular activities.
The anticipated proposed regulations
would also provide rules for determin-
ing whether employees covered by an
ITG plan are employees who perform
substantial services in activities that are
governmental. For this purpose, the de-
termination of whether an employee’s
services are for governmental or commer-
cial activities would generally be based
on the employee’s assigned duties and
responsibilities. See the “Explanation of
Provisions” section in the section 414(d)
draft ITG regulations in the Appendix to
this ANPRM under the headings, “Deter-
mination of Governmental ITG Employ-
ees” and “Determination of Commercial
ITG Employees.”
The anticipated proposed regulations
do not address the broader issue of whether
a retirement plan is a governmental plan
within the meaning of section 414(d). That
topic is addressed in the advance notice of
proposed rulemaking relating generally to
the definition of governmental plan that is
being published elsewhere in this issue of
the Bulletin.
Request for Comments
Before a notice of proposed rulemaking
is issued, consideration will be given to
any written comments that are submitted
timely (preferably a signed original and
eight (8) copies) to the IRS. All comments
will be available for public inspection and
copying. Copies of the comments will be
provided to the DOL and PBGC.
Comments are also requested on
whether, as an alternative to issuing pro-
posed regulations, the Department of
Treasury and IRS should publish a notice
that reflects some or all of the rules in
the draft proposed regulations and that
also modifies the rule in Notice 2007–67
concerning when a mixed ITG is required
to be amended to be two different plans,
one for governmental employees and an-
other for commercial employees. If so, the
notice would include a significant transi-
tional period for compliance similar to the
transition period that would be expected
to apply for regulations (such as not being
effective until plan years that begin at least
18 months after publication of the notice).
The Department of Treasury and IRS in-
vite comments on whether this method
of guidance would be preferable to the
issuance of regulations.
The IRS and Department of Treasury
plan to schedule a public hearing on the
ANPRM. That hearing will be scheduled
and announced at a later date. In ad-
dition to a public hearing, the Treasury
Department and IRS anticipate schedul-
ing consultation listening meetings in or-
der to obtain comments from tribal gov-
ernments on the section 414(d) draft ITG
regulations. It is expected that these meet-
ings will take place in different locations
across the country. Participants will be
encouraged to pre-register for the meet-
ings. Information relating to these meet-
ings, including dates, times, locations, reg-
istration, and the procedures for submitting
written and oral comments, will be avail-
able on the IRS website relating to govern-
mental plans athttp://www.irs.gov/retire-
ment/article/0,,id=181779,00.html.
EO 13175, Consultation and
Coordination with Indian Tribal
Governments
In the Appendix to this ANPRM is
a draft notice of proposed rulemaking.
These draft regulations include proposed
rules, a preamble, and a request for com-
ments. The Treasury Department and the
IRS invite the public to comment on the
rules under consideration, which would
set forth special rules relating to retirement
plans of ITGs. This solicitation of com-
ments is in furtherance of the objective
of Executive Order 13175 under which
Treasury consults with tribal officials in
the development of Federal policies that
may have tribal implications. The IRS and
Treasury Department will consult with
Indian tribes through the normal comment
process in theFederal Register, issuing
this advance notice of public rulemaking,
and reaching out to Indian tribes through a
series of consultation listening meetings.
Drafting Information
The principal author of this ad-
vance notice of proposed rulemaking is
Pamela R. Kinard, Office of the Chief
Counsel (Tax-exempt and Government
Entities), however, other personnel
from the IRS and Treasury Department
participated in its development.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on November 7,
2011, 8:45 a.m., and published in the issue of the Federal
Register for November 8, 2011, 76 F.R. 69188)
APPENDIX
The following is draft language for a
notice of proposed rulemaking that would
set forth rules relating to the determination
of whether a plan of an Indian tribal gov-
ernment is a governmental plan within the
meaning of section 414(d). The IRS and
Treasury release this draft language in or-
der to solicit comments from the govern-
mental plans community:
Background
This document contains proposed regu-
lations under section 414(d) of the Internal
Revenue Code (Code). These regulations,
when finalized, would provide guidance
relating to the determination of whether
a plan of an Indian tribal government or
other entities related to an Indian tribal
government is a governmental plan within
the meaning of section 414(d). The defini-
tion of a governmental plan under section
414(d) applies for purposes of Part I of
Subchapter D of Chapter 1 of Subtitle
A (Income Taxes) of the Code (sections
401 through 420) and certain other Code
December 19, 20118942011–51 I.R.B.

provisions that refer to section 414(d)
(such as sections 72(t)(10), 501(c)(25)(C),
4975(g)(2), 4980B(d)(2), 9831(a)(1), and
9832(d)(1) of the Code).
Statutory Definition of Governmental
Plan
Both the Code and the Employee Re-
tirement Income Security Act of 1974
(ERISA) define the term “governmen-
tal plan.” Prior to the Pension Protection
Act of 2006, Public Law 109–280 (120
Stat. 780) (PPA ’06), section 414(d) of
the Code provides that the term “govern-
mental plan” means a plan established
and maintained for its employees by the
Government of the United States, by the
government of any State or political sub-
division thereof, or by any agency or
instrumentality of any of the foregoing.
Sections 3(32) and 4021(b)(2) of ERISA
have parallel definitions of the term “gov-
ernmental plan.” The term “governmental
plan” also includes any plan to which the
Railroad Retirement Act of 1935 or 1937
(49 Stat. 967, as amended by 50 Stat. 307)
applies and which is financed by contribu-
tions required under that Act and any plan
of an international organization which is
exempt from taxation by reason of the In-
ternational Organizations Immunities Act
Public Law 79–291 (59 Stat. 669).
Section 906 of PPA ’06
Section 906(a) of PPA ’06 amended
section 414(d) of the Code (and the par-
allel provisions in sections 3(32) and
4021(b)(2) of ERISA) to include in the
definition of “governmental plan” cer-
tain plans of an Indian tribal government,
a subdivision of an Indian tribal gov-
ernment, or an agency or instrumental-
ity thereof. Specifically, under section
906(a)(1) of PPA ’06, the term “govern-
mental plan” includes a plan which is
established and maintained for its em-
ployees by an Indian tribal government
(as defined in section 7701(a)(40)), a sub-
division of an Indian tribal government
(determined in accordance with section
7871(d)), or an agency or instrumentality
of either (ITG), and all of the participants
of which are employees of such entity
substantially all of whose services as
such an employee are in the performance
of essential governmental functions but
not in the performance of commercial
activities (whether or not an essential gov-
ernmental function). Section 906(c) of
PPA ’06 provides that the amendments
made by section 906 of PPA ’06 apply to
any year beginning on or after the date of
enactment, which is August 17, 2006.
In its Technical Explanation
6
to sec-
tion 906 of PPA ’06, the Joint Commit-
tee on Taxation refers to an employee sub-
stantially all of whose services for an ITG
are in the performance of essential govern-
mental services and not in the performance
of commercial activities (whether or not
such activities are an essential governmen-
tal function) as a qualified employee who
is eligible to participate in a governmental
plan as described in section 414(d). The
Technical Explanation states, for example,
that a governmental plan includes a plan
of an ITG, all of the participants of which
are teachers in tribal schools. However,
the Technical Explanation also states that
a governmental plan does not include a
plan covering tribal employees who are
employed by a hotel, casino, service sta-
tion, convenience store, or marina oper-
ated by a tribal government.
Exemption of Governmental ITG Plans
from Certain Qualified Plan Rules
Governmental plans under Code sec-
tion 414(d), including governmental ITG
plans, receive special treatment with re-
spect to certain qualification rules. Such
plans are exempt from certain qualification
requirements and are deemed to satisfy
certain other qualification requirements
under certain conditions. For example, the
nondiscrimination and minimum partici-
pation rules do not apply to governmental
plans.
7
In addition, the Code provides
other exemptions for section 414(d) gov-
ernmental plans:
•Section 401(a)(10)(B)(iii), which pro-
vides that the top-heavy requirements
of section 416 do not apply to a gov-
ernmental plan.
•Section 410(c)(1)(A), which provides
that the minimum participation provi-
sions of section 410 do not apply to a
governmental plan.
•Section 411(e), which provides that a
governmental plan is treated as satis-
fying the requirements of section 411
if the plan meets the pre-ERISA vest-
ing requirements.
•Section 412(e)(2)(C), which provides
that the minimum funding standards of
section 412 do not apply to a govern-
mental plan.
•Section 417, which provides rules re-
lating to qualified joint and survivor
annuities and qualified preretirement
survivor annuities.
Section 415 also provides a number of
special rules for governmental plans. The
special rules include section 415(b)(11)
(under which governmental pensions are
not limited to 100% of a participant’s
average high 3 compensation), section
415(b)(2)(I) (the reduced limitation to the
annual benefit payable beginning before
age 62 and the reduction in the dollar lim-
itation to the annual benefit payable for
participation or services of less than 10
years do not apply to disability or survivor
benefits received from a governmental
plan), section 415(m) (benefits provided
under a qualified governmental excess
benefit arrangement are not taken into
account in determining the section 415
benefit limitations under a section 414(d)
governmental plan), and section 415(n)
(permissive service credit).
As a result, the principal qualification
requirements for a tax-qualified govern-
mental plan
8
are that the plan—
•Be established and maintained by the
employer for the exclusive benefit of
6
Joint Committee on Taxation, Technical Explanation of H.R. 4, the “Pension Protection Act of 2006” as passed by the House on July 28, 2006, and considered by the Senate on August 3,
2006 (JCX–38–06), August 3, 2006, 109th Cong., 2nd Sess. 244 (2006).
7
Section 861 of PPA ’06 amended sections 401(a)(5)(G) and 401(a)(26)(G) of the Code to provide that the minimum participation standards and nondiscrimination requirements of section
410 and the additional participation requirements under section 401(a)(26) do not apply to governmental plans within the meaning of section 414(d) of the Code. Section 861 of PPA ’06 also
exempts governmental plans from the nondiscrimination and participation requirements applicable to qualified cash or deferred arrangements under section 401(k)(3) of the Code.
8
A special rule applies to contributory plans of certain governmental entities. Section 414(h)(2) provides that, for a qualified plan established bya State government or political subdivision
thereof, or by any agency or instrumentality of the foregoing, where the contributions of the governmental employer are designated as employee contributions under section 414(h)(1) but the
governmental employer picks up the contributions, the contributions picked up will be treated as employer contributions.
2011–51 I.R.B.895December 19, 2011

the employer’s employees or their ben-
eficiaries;
•Provide definitely determinable bene-
fits;
•Be operated pursuant to its terms;
•Satisfy the direct rollover rules of sec-
tions 401(a)(31) and 402(f);
•Satisfy the section 401(a)(17) limita-
tion on compensation;
•Comply with the statutory minimum
required distribution rules under sec-
tion 401(a)(9);
•Satisfy the pre-ERISA vesting require-
ments under section 411(e)(2);
9
•Satisfy the section 415 limitations on
benefits, as applicable to governmental
plans; and
•Satisfy the prohibited transaction rules
in section 503.
State and local governments, political
subdivisions thereof, and agencies or in-
strumentalities thereof are generally not
permitted to offer cash or deferred arrange-
ments under section 401(k).
10
However,
Indian tribal governments and their related
entities are permitted to offer cash or de-
ferred arrangements as part of a plan main-
tained by an ITG.
11
Rules Treating Indian Tribal Governments
as States for Purposes of Issuing
Tax-Exempt Bonds
Section 7871 provides special rules
for Indian tribal governments. Section
7871(a)(4) providesthat an Indian tribal
government is to be treated as a State
for purposes of section 103, relating to
tax-exempt bonds.
12
Section 7871(c)(1)
generally provides that section 103(a) ap-
plies to an obligation issued by an Indian
tribal government only if such obligation
is part of an issue substantially all of the
proceeds of which are to be used in the
exercise of any essential governmental
function.
On August 9, 2006, an advance no-
tice of proposed rulemaking under section
7871 was published in theFederal Regis-
ter(71 FR 45474). The ANPRM describes
the rules that the Treasury Department and
the IRS anticipate proposing on the defini-
tion of essential governmental function un-
der section 7871(e). The rules would pro-
vide that an activity is considered an es-
sential governmental function that is cus-
tomarily performed by State and local gov-
ernments if: (1) there are numerous State
and local governments with general tax-
ing powers that have been conducting the
activity and financing it with tax-exempt
governmental bonds; (2) State and local
governments with general taxing powers
have been conducting the activity and fi-
nancing it with tax-exempt governmental
bonds for many years; and (3) the activity
is not a commercial orindustrial activity.
The ANPRM provides examples of activ-
ities customarily performed by State and
local governments, including public works
projects such as roads, schools, and gov-
ernment buildings.
Notices Issued by the IRS Relating to ITG
Retirement Plans under PPA ’06
Notice 2006–89, 2006–2 C.B. 772, and
Notice 2007–67, 2007–2 C.B. 467, see
§601.601(d)(2), summarize the changes
made by section 906(a)(1) of PPA ’06 and
provide transitional relief to ITGs under
a reasonable and good faith standard to
comply with such changes. The notices
provide that, until such guidance is is-
sued, a plan established and maintained
by an ITG for its employees is treated
as satisfying the requirements of section
906(a)(1) of PPA ’06 to be a governmental
plan under section 414(d) of the Code if
it complies with those requirements based
on a reasonable and good faith interpreta-
tion of section 414(d). The notices further
provide that it is not a reasonable and good
faith interpretation of section 414(d) for
an ITG plan to claim to be a governmental
plan within the meaning of section 414(d)
if employees participating in the plan per-
form services for a hotel, casino, service
station, convenience store, or marina op-
erated by an ITG.
In Notices 2006–89 and 2007–67, the
Treasury Department and IRS announced
that regulations would be proposed to pro-
vide guidance on section 414(d), including
changes made to section 414(d) by section
906 of PPA ’06, and to provide transitional
relief pending the issuance of these regula-
tions. Comments were requested on issues
relating to section 906 of PPA ’06, includ-
ing transitional issues not addressed in the
notice.
The transitional relief provided to
plans of ITGs under Notices 2006–89 and
2007–67 continues up to the date that is
six months after the date that guidance is
issued under section 414(d) of the Code,
as amended by section 906 of PPA ’06 (ex-
tended date). For ITG plans that provide
benefits both to employees substantially
all of whose work is in essential govern-
mental functions that are not commercial
activities (governmental ITG employ-
ees) and to employees who perform ser-
vices substantially in the performance of
commercial activities (commercial ITG
employees), the Notices provide that the
ITG plan will be treated as satisfying the
reasonable, good faith standard if certain
steps are taken, which include adopting a
separate plan covering commercial ITG
employees effective as of the beginning of
the first plan year beginning on or after Au-
gust 17, 2006, the enactment of PPA ’06.
The commercial ITG plan, beginning on
the same effective date, must comply with
the qualification requirements for plans
that are not governmental plans.
These proposed regulations would pro-
vide guidance relating to ITG plans under
section 414(d). The transitional relief pro-
vided under Notices 2006–89 and 2007–67
would end six months after the effective
date of the final regulations published in
theFederal Register.
The transitional relief in Notices
2006–89 and 2007–67 is conditioned on
the ITG plans involved not being amended,
for periods before the extended date, to
reduce benefits unless the reduction does
not distinguish between reductions for
9
Section 411(e)(2) states that a plan described in section 411(e)(1) is treated as meeting the requirements of section 411 if the plan meets the vestingrequirements resulting from the application
of section 401(a)(4) and (a)(7) as in effect on September 1, 1974.
10
Section 401(k)(4)(B)(ii) provides that a cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement if it is part ofa plan maintained by a State or local
government or political subdivision thereof, or any or agency or instrumentality thereof.
11
See section 401(k)(4)(B)(iii). For a general overview of the special rules relating to plans of ITGs, see the Joint Committee on Taxation,Overview of Federal Tax Provisions Relating to
Native American Tribes and Their Members(JCX 61–08), July 18, 2008.
12
An Indian tribal government is treated in the same manner as a State for certain specified purposes under the Code, but not for purposes of section 414(d) (or any provision in sections 401
through 424, other than sections 403(b)(1)(A)(ii)).
December 19, 20118962011–51 I.R.B.

commercial ITG employees and govern-
mental ITG employees or the reduction
for commercial ITG employees is the min-
imum amount necessary to satisfy any
requirement under the Code. If any re-
duction occurs that does not satisfy these
conditions, the transitional relief provided
under Notices 2006–89 and 2007–67 ends
on the date that the reduction goes into
effect.
Executive Order 13175
Executive Order 13175 requires that
Federal departments and agencies engage
in consultation procedures in certain cir-
cumstances where regulations are issued
which have substantial direct effects with
respect to the Federal government and In-
dian tribes. While these regulations when
issued as final regulations would not have
such substantial direct effects, the IRS
and Treasury Department have followed
similar procedures. Further, the Treasury
Department and the IRS participated in
a series of telephone listening meetings
with the ITG community following the
passage of PPA ’06 and these proposed
regulations also take into account the com-
ments that were provided in response to
Notices 2006–89 and 2007–67, including
the related open and direct consultations
with the Indian tribal community.
Judicial Determinations
The few court cases that discuss section
906 of PPA ’06 primarily relate to welfare
benefit plans. One reason for the legisla-
tive change to section 414(d) of the Code
and section 3(32) of ERISA is “to clar-
ify the legal ambiguity regarding the status
of employee benefit plans established and
maintained by tribal governments.”
13
In
Bolssen v. Unum Life Insurance Company
of America, 629 F.Supp. 2d 878 (E.D.
Wis. 2009), Mr. Bolssen sued the Unum
Life Insurance Company for failing to pro-
vide disability insurance benefits. He ar-
gued that the case should be remanded
to state court because the insurance plan
sponsored by his employer, an Indian tribal
casino, was a governmental plan within the
meaning of section 3(32) of ERISA. In an-
alyzing whether the welfare benefit plan
was a governmental plan, theBolssencourt
looked to another case involving an Indian
tribal casino,San Manuel Indian Bingo &
Casino v. NLRB, 475 F.3d 1306 (D.C. Cir.
2007). InSan Manuel Indian Bingo &
Casino, the court held that the National
Labor Relations Act applied to an Indian
tribal casino because the operation of the
casino was a commercial function. The
court reasoned that “it can be argued any
activity of a tribal government is by def-
inition ‘governmental,’ and even more so
an activity aimed at raising revenue that
will fund governmental functions. Here,
though, we use the term ’governmental’ in
a restrictive sense to distinguish between
the traditional acts governments perform
and collateral acts that, though perhaps in
some way related to the foregoing, lie out-
side their scope.”
14
The court, inSan Manuel Indian Bingo
&Casino, held that operating a casino is
not a traditional act of government, but
is commercial in nature.
15
The court in
Bolssenappliedthesamereasoningtocon-
clude that disability plan of the casino was
not a governmental plan within the mean-
ing of section 3(32) of ERISA.
Explanation of Provisions
These proposed regulations would
provide special rules for purposes of the
definition of a “governmental plan” under
section 414(d) of the Code, as it relates to
plans of ITGs. The Treasury Department
and IRS also expect to issue separate pro-
posed regulations under section 414(d) to
define a governmental plan for purposes
other than the special rules applicable to
ITGs. However, these proposed regu-
lations relating to ITGs would provide
Indian tribal governments with guidance
in determining whether an ITG plan is a
governmental ITG plan or a commercial
ITG plan. As discussed in the background
of this preamble, under the heading “Ex-
emption of Governmental ITG Plans from
Certain Qualified Plan Rules,” govern-
mental plans receive special treatment
with respect to certain qualification rules.
Thus, the determination of whether an
ITG plan is a governmental ITG plan is
essential in ensuring compliance with the
qualified plan rules because an ITG must
be able to ascertain which of its plans are
governmental plans under section 414(d)
and which of its plans must comply with
the requirements for a plan that is not
a governmental plan. These proposed
regulations take into account comments
received in response to Notices 2006–89
and 2007–67 and a number of open and
direct consultations with the Indian tribal
community. Those comments received
from Notices 2006–89 and 2007–67 and
during the consultations were considered
in drafting these proposed regulations.
Determination of Governmental and
Commercial Activities
As discussed earlier in the background
section of this preamble, a governmental
plan, as it relates to ITGs, may include
a plan established and maintained by an
ITG, but such a plan is a governmental
plan under section 414(d) only if all of
its participants are employees substantially
all of whose services are in the perfor-
mance of essential governmental functions
(but not in the performance of commercial
activities whether or not an essential gov-
ernmental function). Key to determining
whether a plan of an ITG is a governmental
plan within the meaning of section 414(d)
is the determination of the terms “essential
governmental function” and “commercial
activity.”
These proposed regulations would use
the concepts of “governmental activity”
and “commercial activity,” instead of the
terms “essential governmental function”
and “commercial activity.” The terms
“governmental activity” and “commercial
activity” would apply only for purposes of
the governmental plan rules under section
414(d) and not for any other purpose under
the Code, including section 7871. The use
of these terms is meant to provide guidance
on the requirements of section 414(d) with
respect to ITG plans, while maintaining
flexibility and withoutdirectly impacting
future guidance on section 7871.
These proposed regulations would de-
fine a governmental ITG plan as any plan
that is established and maintained by an In-
13
SeeDobbs v. Anthem Blue Cross & Blue Shield, 475 F.3d 1176, 1178 (10th Cir. 2007) (citing 150 Cong. Rec. S9526, 9533),rev’d in part600 F.3d 1275 (2010). See alsoBolssen v. Unum
Life Insurance Company of America, 629 F.Supp. 2d 878, 881 (E.D. Wis. 2009).
14
San Manuel Indian Bingo & Casino, 475 F.3d at 1313.
15
Id. at 1315.
2011–51 I.R.B.897December 19, 2011

dian tribal government, a subdivision of an
Indian tribal government, or an agency or
instrumentality of either, and all of its par-
ticipants are employees substantially all of
whose services are in the performance of
governmental activities. The regulations
would define a commercial ITG plan as
a plan covering any ITG employees who
perform substantial services in a commer-
cial activity, such as a hotel, casino, ser-
vice station, convenience store, or marina,
which are examples of commercial activi-
ties that are listed in the Joint Committee
on Taxation Technical Explanation to sec-
tion 906 of PPA ’06.
16
Aplanwouldalso
be a commercial plan if it covers any indi-
vidual who is not an employee of an ITG.
Governmental and Commercial Activities
Under the proposed regulations,
whether a plan of an ITG is a commercial
plan or a governmental plan within the
meaning of section 414(d) is based in part
on (1) a determination of which activities
are commercial activities and (2) a de-
termination of whether employees of the
Indian tribal government covered by the
plan are employees who perform substan-
tial services in commercial activities (and
are thus commercial employees).
Under the first step, the proposed regu-
lations would provide guidance for deter-
miningwhetheranactivityoperatedbyan
ITG is a governmental activity or a com-
mercial activity for purposes of section
414(d). This is achieved by listing certain
specific activities that are deemed to be
governmental or commercial for purposes
of section 414(d). Specific governmental
activities would include the following: (1)
activities that are related to public infra-
structure, such as the building and main-
taining of public roads and buildings; (2)
activities that involve providing criminal
protection services to the public (such as
police and fire departments) or providing
civil or public administrative service (such
as providing public housing and operat-
ing public schools and hospitals, as well
as managing the ITG’s civil service sys-
tem); and (3) activities subject to a treaty
or special rules that pertain to trust land
ownership and use. Under the regulations,
operations involving a hotel, casino, ser-
vice station, convenience store, and ma-
rina would be commercial activities. As
discussed above, these activities are exam-
ples that are identified as commercial ac-
tivities in Notices 2006–89 and 2007–67,
as well as in the Joint Committee on Taxa-
tion Technical Explanation to section 906
of PPA ’06.
In addition to listing certain specified
activities, the proposed regulations would
provide a facts and circumstances test for
determining whether an activity is a gov-
ernmental or commercial activity. The
proposed regulations provide that, in mak-
ing a determination of whether an activity
is a governmental activity, the factors to be
considered include whether—
•The activity provides a public benefit
to members of the Indian tribal gov-
ernment (not treating the generation of
profitsfromcommercialactsaspro-
viding a public benefit); and
•The absence of one or more of the rel-
evant factors listed for a commercial
activity as provided in these proposed
regulations.
The proposed regulations also provide
that, in making a determination of whether
an activity is a commercial activity, the
factors to be considered include whether—
•The activity is a type of activity that is
operated to earn a profit;
•The activity is a type of activity that
is typically performed by private busi-
nesses; and
•The activity is a type of activity where
the customers are substantially from
outside of the Indian tribal community,
including whether the activity is lo-
cated or conducted outside of Indian
tribal land.
These proposed regulations also pro-
vide examples illustrating the application
of the facts and circumstances tests to par-
ticular activities. Some examples of ac-
tivities of an Indian tribal government that
are commercial might include: (1) oper-
ating a bank for a profit, serving tribal
and non-tribal customers; (2) operating a
trucking business for a profit; and (3) op-
erating a factory producing goods for sale
primarily to non-tribal customers. Con-
versely, examples of activities of an Indian
tribal government that are governmental
could include: (1) a community swimming
pool on tribal land used primarily by tribal
members; and (2) the operation of a cul-
tural center and a museum on tribal land.
The proposed regulations would also
delegate to the Commissioner of Internal
Revenue the authority to publish guid-
ance under section 414(d) that the Com-
missioner determines to be necessary or
appropriate with respect to determining
whether a plan of an Indian tribal govern-
ment is a commercial ITG plan because
the tribe’s employees are performing ser-
vices in an activity that the Commissioner
determines to be a commercial activity.
Any such guidance would be published
in the form of revenue rulings, notices, or
other guidance published in the Internal
Revenue Bulletin (see §601.601(d)(2)).
Determination of Governmental ITG
Employees
These proposed regulations would also
provide rules for the second step, namely
determining whether employees covered
by an ITG plan are employees who per-
form substantially all of their services in
activities that are governmental. For this
purpose, the determination of whether an
employee’s services are for governmental
or commercial activities would generally
be based on the employee’s assigned du-
ties and responsibilities. In making this
determination, the rules in these regula-
tions would not require that a plan keep
track of the individual hours worked by
any employee or that the compensation of
any particular employee be traced through
the hours worked by that employee. The
proposed regulations would provide that
an employee whose assigned duties and
responsibilities are in the performance of
a governmental activity is treated as per-
forming substantially all of his or her ser-
vices in a governmental activity, and not
treated as performing services for a com-
mercial activity, even though the perfor-
mance of those services for the govern-
mental activity may temporarily involve
significant time working in the commer-
cial activity. For example, the chief fi-
nancial officer (CFO) for an ITG may be
expected to spend a substantial amount
of time working on the financing for any
16
Joint Committee on Taxation,Technical Explanation of H.R. 4, the “Pension Protection Act of 2006” as passed by the House on July 28, 2006, and considered by the Senate on August 3,
2006(JCX–38–06), August 3, 2006, 109
th
Cong., 2
nd
Sess. 244 (2006).
December 19, 20118982011–51 I.R.B.

casino, marina, or hotel to be built on the
ITG’s tribal lands, but, despite temporarily
working in a commercial activity, the pro-
posed regulations would provide that the
CFO is a governmental employee of the
ITG all of whose services are in that ca-
pacity.
Determination of Commercial ITG
Employees
The proposed regulations set forth rules
for determining an employee’s assigned
duties and responsibilities, and thus when
his or her services are substantially in the
performance of a governmental or com-
mercial activity. The analysis would start
with the location of the employee’s ser-
vices in relation to the activity. The reg-
ulations provide that if a commercial ac-
tivity has a specific location that is identi-
fiable and is not associated with a govern-
mental activity, any employee performing
services at the location of activity is a com-
mercial employee. One example is a secu-
rity guard whose work is providing secu-
rity services at a location which is an In-
dian tribal casino. In the case of an em-
ployee who works at a location other than
a location where a commercial activity is
being performed, the result would depend
on the employee’s assigned duties and re-
sponsibilities.
Another key part of the analysis is who
pays the employee. If an employee is on
the payroll of an ITG entity that is en-
gaged in a commercial activity, the em-
ployee’s assigned duties and responsibil-
ities are treated as being for a commer-
cial activity and, thus, the employee is a
commercial ITG employee. For example,
if a cashier is on the payroll of a conve-
nience store (which is a commercial activ-
ity) owned by an ITG, the cashier is a com-
mercial ITG employee. However, in the
case of an employee who is not on a payroll
of an ITG that engages in a commercial ac-
tivity, the result would depend on the em-
ployee’s assigned duties and responsibili-
ties.
Where an employee neither works at
a location where a commercial activity is
being performed nor is on the payroll of
a commercial entity, the result would de-
pend on the employee’s assigned duties
and responsibilities, taking into account
the facts and circumstances. Thus, for ex-
ample, a bookkeeper located in a govern-
mental building and paid through the gen-
eral payroll of the ITG would neverthe-
less be a commercial employee if the facts
and circumstances indicate that his or her
assigned duties and responsibilities are to
maintain the books and records for a hotel
owned and operated by an ITG.
The statutory language in section
414(d) makes it clear that a plan is not a
governmental ITG plan if it covers any
employee who is a commercial ITG em-
ployee. There is node minimisexception
relating to this rule under section 414(d).
In light of these circumstances, an ITG
maychoosetousecautionwhencovering
employees in a governmental plan. If,
after applying the rules, an ITG plan spon-
sor is not certain whether an employee is
a governmental ITG or commercial ITG
employee, the ITG may choose to provide
coverage for the employee in its commer-
cial ITG plan in order to ensure the preser-
vation of the status of the governmental
ITG plan. Coverage of a governmental
employee in a commercial plan would not
adversely affect the qualified status of the
commercial plan.
Reasonable, Good Faith Interpretation
The proposed regulations provide that,
in general, an ITG plan will not be treated
as failing to satisfy the assignment of em-
ployee rules if the plan complies with those
rules under a standard that constitutes a
reasonable, good faith interpretation of the
statute, taking intoaccount the final regu-
lations and any other published guidance
that relates to the application of section
414(d) to ITGs. The reasonable, good faith
interpretation standard for the assignment
of employees to governmental and com-
mercial plans would only apply if the ben-
efit levels between the separate govern-
mental and commercial plans are uniform.
Thus, this reasonable, good faith interpre-
tation standard would not apply if the ben-
efit level for employees under a plan pur-
porting to be a governmental plan is higher
than that of the benefit level under a sepa-
rate plan covering employees who include
commercial employees.
Assignment of Shared Employees
Under these rules, there may be cases
in which an employee is transferred from
one ITG employer to another. An em-
ployee may also perform substantially all
of his or her services in the performance of
a governmental activity and later the em-
ployee’s assigned duties and responsibili-
ties may change, so that the employee is
subsequently performing substantially all
of his or her duties in the performance of
a commercial activity. In addition, an em-
ployee may work two separate and distinct
jobs, one in a commercial activity of an
ITG and another in a governmental activ-
ity of an ITG (for example, an ITG em-
ployeewhoworksasafull-timepoliceof-
ficer and also works at the front desk in
the lobby of a hotel over the weekends).
For all of these scenarios, assuming the
ITG maintains separate plans for its gov-
ernmental and commercial employees, the
ITG should assign the employee to either
plan based on prorating service credits and
allocating compensation between the gov-
ernmental and commercial activities.
Application of the Controlled Group Rules
to ITG Plans
These proposed regulations do not
address the rules under which, for pur-
poses of sections 401, 408(k), 408(p),
410, 411, 415, and 416, all employees
of all corporations that are members of
a controlled group of corporations are
treated as employed by a single employer
for purposes of these controlled group
rules. Note that, under current guidance,
a reasonable, good faith interpretation
standard applies with respect to govern-
ments. See Notice 89–23, 1989–1 C.B.
654, and Notice 96–64, 1996–2 C.B. 229,
see §601.601(d)(2) of this chapter.
Proposed Effective Date
The proposed regulations would apply
to plan years beginning 6 months after
publication of these regulations as final
regulations. For plan years after the statu-
tory effective date of the PPA ’06 amend-
ment of section 414(d) and prior to the
effective date of these regulations as fi-
nal regulations, a plan of an ITG would
be treated as a governmental plan for pur-
poses of section 414(d), providing that a
reasonable, good faith effort is made to
ensure that the plan satisfy the conditions
for being a governmental plan under sec-
tion 414(d), taking into account relevant
guidance, including Notices 2006–89 and
2007–67. To the extent that a plan of an In-
dian tribal government complies with the
2011–51 I.R.B.899December 19, 2011

requirements under either the notices or
the proposed regulations, the plan will be
treated as making a reasonable, good faith
effort to satisfy the requirements of section
414(d).
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. In addition, because no collection
of information is imposed on small enti-
ties, the provisions of the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not ap-
ply, and therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Code, this notice of pro-
posed rulemaking will be submitted to the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are submitted
timely to the IRS. The Treasury Depart-
ment and the IRS specifically request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. Comments are specifically
requested on whether a correction mecha-
nism under the Employee Plans Compli-
ance Resolution System (EPCRS), as set
forth in Rev. Proc. 2008–50, 2008–35
I.R.B. 464, see §601.601(d)(2), might be
helpful for cases in which an employee
substantially all of whose services are
not in the performance of a governmen-
tal activity has nevertheless inadvertently
become a participant in a plan purporting
to be a governmental plan. For example,
assuming the various conditions for self
correction have been satisfied (see sec-
tion 4.09 of Rev. Proc. 2008–50, which
provides that the failure must be an oper-
ational failure which occurred by mistake
or oversight, even though the plan had
established practices and procedure to en-
sure qualification, and which is promptly
corrected), the plan’s assets and liabili-
ties with respect to the employee might
be transferred to a similar plan covering
commercial employees under which the
employee would accrue benefits up to the
level that would have applied if he or she
had participated in that commercial plan
during the period when he or she was
a commercial employee. All comments
will be available for public inspection and
copying.
A public hearing has been scheduled
for (date to be provided when proposed
regulations are published), beginning at
10 a.m. in the Auditorium, Internal Rev-
enue Building, 1111 Constitution Avenue,
NW, Washington DC. Due to building se-
curity procedures, visitors must enter at the
main entrance, located at 1111 Constitu-
tion Avenue, NW. In addition, all visitors
must present photo identification to enter
the building. Because of access restric-
tions, visitors will not be admitted beyond
the immediate entrance area more than 30
minutes before the hearing starts. For in-
formation about having your name placed
on the building access list to attend the
hearing, see the “FOR FURTHER INFOR-
MATION CONTACT” portion of this pre-
amble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments must submit writ-
ten or electronic comments and an outline
of the topics to be discussed and time to
be devoted to each topic (signed original
and eight (8) copies) by (date to be pro-
vided when proposed regulations are pub-
lished). A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the schedul-
ing of the speakers will be prepared after
the deadline for receiving comments has
passed. Copies of the agenda will be avail-
able free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Pamela R. Kinard, Office
of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities), Internal Revenue Service.
However, personnel from other offices
of the IRS and Treasury Department
participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.414(d)–1 is amended
by adding paragraph (g) to read as follows:
§1.414(d)–1 Definition of governmental
plan.
*****
(g)Special rules for plans of Indian
tribal governments—(1)Definition of gov-
ernmental plan as it relates to Indian tribal
governments. For purposes of applying
paragraph (a)(3) of this section, a govern-
mental plan as it relates to an Indian tribal
government is a plan that is established and
maintained for its employees by an Indian
tribal government, a subdivision of an In-
dian tribal government, or an agency or in-
strumentality of either (ITG), provided that
the employees covered under the plan pro-
vide substantially all of their services in the
performance of governmental activities as
determined in paragraph (g)(6) of this sec-
tion.
(2)Definition of commercial ITG plans.
For purposes of paragraph (g) of this sec-
tion, the termcommercial ITG planmeans
a plan of an ITG that covers any ITG em-
ployee who is not a governmental ITG em-
ployee under paragraph (g)(8) of this sec-
tion or that covers any individual who is
not an employee of an ITG.
(3)Definition of an Indian tribal gov-
ernment. For purposes of this paragraph
(g), the termIndian tribal government
has the meaning set forth in section
7701(a)(40).
(4)Definition of subdivision of an In-
dian tribal government. For purposes of
this paragraph (g), the termsubdivision of
an Indian tribal governmenthas the mean-
ing set forth in section 7871(d).
(5)Definition of agency or instrumen-
tality of an Indian tribal government or
subdivision of an Indian tribal govern-
ment. For purposes of this paragraph (g),
the termagency or instrumentality of an
Indian tribal government or subdivision
December 19, 20119002011–51 I.R.B.

of an Indian tribal governmentmeans an
entity that would be treated as an “agency
or instrumentality of a State or political
subdivision of a State” under paragraph (f)
of this section if the related Indian tribal
government or subdivision of an Indian
tribal government were treated as a State
or political subdivision of a State, respec-
tively.
(6)Definition of governmental activi-
ties—(i)In general. The following activ-
ities are governmental activities for pur-
poses of paragraph (g)(1) of this section:
(A) Activities that are related to the
building and maintaining of public roads;
public sidewalks, public buildings, and re-
lated areas, such as parking lots.
(B) Activities that are related to public
sewer and drainage facilities, and related
facilities such as a waste-water treatment
plant.
(C) Activities relating to public works
projects, such as schools and government
buildings.
(D) Activities relating to public utili-
ties, such as electricity and other power
sources, including the development of
newer and emerging technologies.
(E) Activities related to providing
criminal protection services, such as po-
lice and fire departments, providing civil
and public administrative services, such
as operating and managing public hous-
ing, libraries, judiciary buildings, and
administrative buildings, teaching in and
managing public schools, managing and
providing services at public hospitals and
health clinics, operating the government’s
civil service system, and other related
public services.
(F) Activities subject to a treaty or spe-
cial rules that pertain to trust land owner-
ship and use.
(ii)Facts and circumstances test.
Whether any other activity is a govern-
mental activity for purposes of section
414(d) is based on facts and circumstances.
In making this determination, the facts to
be considered include the following:
(A) Whether the activity provides a
public benefit to members of the Indian
tribal government; and
(B) Whether there is the absence of one
or more of the relevant factors listed for
a commercial activity as provided in para-
graph (g)(7) of this section.
(iii)Examples. The following examples
illustrate the application of this paragraph
(g)(6):
Example 1.(i)Facts. Indian tribal government
C owns and operates a community swimming pool
on tribal land. Indian tribal members of Indian tribal
government C may use the pool for free. Other local
community members pay a fee to use the pool. Due
to its location, this pool is used primarily by tribal
members of Indian tribal government C.
(ii)Conclusion. Based on the facts and circum-
stances and the factors in paragraph (g)(6)(ii) of this
section, the operation of the community swimming
pool is a governmental activity of Indian tribal gov-
ernment C because it is a type of activity that is op-
erated on a nonprofit basis and is similar to an activ-
ity that other non-tribal local governments operate for
their communities. In addition, the pool is located in-
side tribal land and provides recreational benefits to
tribal members.
Example 2.(i)Facts. Indian tribal government D
owns and operates a cultural center and a museum on
tribal land. The purpose of the cultural center and
museum is to preserve and showcase items related
to the culture of Indian tribal government D, includ-
ing crafts and artistry. The center contains an exhibit
area, a lobby and reception area, a small gift shop, a
theater and various activityrooms. A variety of civic
functions are held in the activity rooms. The other ar-
eas display and sell local handicraft items produced
locally by members of Indian tribal government D.
(ii)Conclusion. Based on the facts and circum-
stances and the factors in paragraph (g)(6)(ii) of this
section, the operation of the cultural center and mu-
seum is a governmental activity of Indian tribal gov-
ernment D even though the majority of its visitors are
individuals who are not members of the tribe. Its pur-
pose is to promote and display the culture of Indian
tribal government D, which is a type of activity that
is generally operated on a nonprofit basis (similar to
municipal museums operated by public authorities)
and not by private businesses. In addition, the center
and museum are located inside tribal land and provide
a public benefit by educating the public and preserv-
ing and highlighting the culture of the tribe.
(7)Definition of commercial activi-
ties—(i)In general. The following activi-
ties are commercial activities for purposes
of paragraph (g)(2) of this section:
(A) Activities relating to the operation
of a hotel.
(B) Activities relating to the operation
of a casino.
(C) Activities relating to the operation
of a service station.
(D) Activities relating to the operation
of a convenience store.
(E) Activities relating to the operation
of a marina.
(ii)Facts and circumstances test.
Whether any other activity is a commer-
cial activity for purposes of section 414(d)
is based on facts and circumstances. In
making this determination, the facts to be
considered include the following:
(A) Whether the activity is a type of
activity that is operated to earn a profit.
(B) Whether the activity is a type of ac-
tivity that is typically performed by private
businesses.
(C) Whether the activity is a type of
activity where the customers are substan-
tially from outside of the Indian tribal
community, including whether the activity
is located or conducted outside of Indian
tribal land.
(iii)Delegation of authority to the Com-
missioner. Any activity that the Commis-
sioner of the Internal Revenue Service de-
termines is a commercial activity under
section 414(d), in revenue rulings, notices,
or other guidance published in the Inter-
nal Revenue Bulletin (see §601.601(d)(2)
of this chapter).
(iv)Examples. The following examples
illustrate the application of this paragraph
(g)(7)(ii):
Example 1.(i)Facts. Indian tribal government
A owns and operates a recreational RV park and
campground facility, serving transient non-tribal
customers, primarily tourists. Other RV parks and
campgrounds in the area operated by non-tribal pri-
vate entities also attract the same type of customers.
Very few, if any, tribal members of Indian tribal
government A use this RV park and campground
facility. Indian tribal government A charges a fee to
customers to use the RV park and campground.
(ii)Conclusion. Based on the facts and circum-
stances and the factors in paragraph (g)(7)(ii) of this
section, the operation of the recreational RV park and
campground facility is a commercial activity of In-
dian tribal government A because it is the type of ac-
tivity that is operated to earn a profit and is the type of
activity that is performed by other private businesses.
In addition, the facility includes customers who are
substantially from outside of the Indian tribal com-
munity.
Example 2.(i)Facts. Indian tribal government
B owns and operates a bank. This bank serves both
tribal and non-tribal customers primarily living in the
local area (either on or off the tribal land). No distinc-
tion is made between the services and fees provided
to any customer based on whether or not he or she is
a tribal member of Indian tribal government B.
(ii)Conclusion. Based on the facts and circum-
stances and the factors in paragraph (g)(7)(ii) of this
section, the operation of a bank is a commercial ac-
tivity of Indian tribal government B because it is the
type of activity that is operated to earn a profit and is
the type of activity that is performed by other private
businesses.
Example 3.(i)Facts. Indian tribal government
E entered into a lease with Company X, which is in
the trucking business. The lease provides that In-
dian tribal government E will purchase tractors, trail-
ers and other equipment and lease such equipment to
Company X on a long-term basis.
(ii)Conclusion. Based on the facts and circum-
stances and the factors in paragraph (g)(7)(ii) of this
section, the leasing transactions relate to a commer-
2011–51 I.R.B.901December 19, 2011

cial activity of Indian tribal government E because it
is the type of activity that is operated to earn a profit
and is the type of activity that is performed by other
private businesses.
Example 4.(i)Facts. Indian tribal government G
operates a factory on tribal land that produces goods
for sale primarily to non-tribal customers, intended to
earn a profit.
(ii)Conclusion. Based on the facts and circum-
stances and the factors in paragraph (g)(7)(ii) of this
section, this is a commercial activity of Indian tribal
government G because the activity is operated to earn
a profit and is the type of activity that is performed
by private businesses. In addition, the customers are
substantially from outside of the Indian tribal com-
munity. The result could be different if the factory
produced goods to promote and display the culture
of Indian tribal government G, even if non-tribal cus-
tomers primarily purchase the goods. This could be a
governmental activity, depending on the factors.
(8)Determination of ITG employ-
ees—(i)Governmental and commercial
ITG employees. This paragraph (g)(8) ap-
plies to determine whether an employee is
an employee substantially all of whose ser-
vices are in the performance of a govern-
mental activity of an ITG (a governmental
ITG employee), or is instead an employee
who renders a significant portion of his
or her services in the performance of a
commercial activity of an ITG (a commer-
cial ITG employee), for purposes of this
paragraph (g). As provided in paragraph
(g)(8)(iv) of this section, this determina-
tion is based on the employee’s assigned
duties and responsibilities.
(ii)Location of the activity.Ifacom-
mercial activity (within the meaning of
paragraph (g)(7) of this section) of an ITG
has a specific location that is readily iden-
tifiable and is not associated with a gov-
ernmental activity, an employee perform-
ing substantial services at such a location
is treated as having assigned duties and
responsibilities for that commercial activ-
ity and, thus, the employee is a commer-
cial ITG employee within the meaning of
paragraph (g)(8) of this section. For ex-
ample, a guard who is assigned to provide
security services for an Indian tribal gov-
ernment at an Indian tribal casino (which
is a commercial activity under paragraph
(g)(7)(i)(B) of this section) is a commer-
cial ITG employee within the meaning of
paragraph (g)(8) of this section. However,
where an employee is not on a payroll of an
ITG that engages in a commercial activity,
the result would depend on the other rules
in this paragraph (g)(8).
(iii)Payroll records. If an employee
is on the payroll of an ITG entity that is
engaged in a commercial activity (within
the meaning of paragraph (g)(7) of this
section), the employee’s assigned duties
and responsibilities are being treated as
for the commercial activity and, thus,
the employee is a commercial ITG em-
ployee. For example, if a cashier is on
the payroll of a convenience store (which
is a commercial activity under paragraph
(g)(7)(i)(D) of this section) owned by an
ITG, the cashier is a commercial ITG em-
ployee within the meaning of paragraph
(g)(8) of this section.
(iv)Duties and responsibilities.Sub-
ject to the specific rules in paragraph
(g)(8)(ii) or (iii) of this section, whether
an employee is a governmental or com-
mercial ITG employee within the meaning
of this paragraph (g)(8) is based on the
employee’s assigned duties and respon-
sibilities, taking into account facts and
circumstances. Thus, whether an em-
ployee is a governmental or commercial
ITG employee depends on whether the
facts and circumstances indicate that the
employee’s assigned duties and respon-
sibilities are substantially in the perfor-
mance of a governmental or commercial
activity. Thus, for example, a bookkeeper
located in a governmental building and
on the payroll of the general ITG govern-
ment would nevertheless be a commercial
employee if the facts and circumstances
indicate that his or her assigned duties and
responsibilities are to maintain the books
and records for the hotel owned and op-
erated by an ITG. However, an employee
whose assigned duties and responsibilities
are in the performance of a governmental
activity, based on all the facts and circum-
stances, in accordance with the standards
set forth in this paragraph (g)(8), is not
treated as performing services for a com-
mercial activity, even if the performance
of services for the governmental activ-
ity may temporarily involve significant
time working in a commercial activity
in furtherance of the employee’s duties
and responsibilities for the governmen-
tal activity. For example, although, over
a six-month period, the chief financial
officer (CFO) for an ITG may spend a
substantial amount of time working on the
financing for a casino to be built on the
ITG’s tribal lands, the CFO would not be
a commercial employee within the mean-
ing of this paragraph (g)(8) because the
CFO’s duties and responsibilities are for a
governmental activity.
(v)Reasonable, good faith interpreta-
tion. Except as provided in paragraph
(g)(8)(ii) and (iii) of this section, an ITG
plan will not be treated as failing to satisfy
the rules in this paragraph (g)(8) if it com-
plies with those rules under a standard that
constitutes a reasonable, good faith inter-
pretation of the statute, taking into account
the rules in this paragraph (g) and any other
published guidance that relates to the ap-
plicationofsection414(d)toITGs.How-
ever, this paragraph (g)(8)(v) applies with
respect to the assignment of employees to
governmental and commercial plans only
if the benefit levels provided by the sep-
arate governmental and commercial plans
are uniform. Thus, this paragraph (g)(8)(v)
would not apply if the benefit level for em-
ployees under a plan purported to be a gov-
ernmental plan is higher than that provided
under a separate plan which covers com-
mercial ITG employees.
(vi)Examples. The following exam-
ples further illustrate the application of this
paragraph (g)(8):
Example 1.(i)Facts. Employee A, who is an
attorney, works at the Attorney General’s office of
Indian tribal government B. Employee A’s job loca-
tion is in a government office building on tribal lands.
The assigned duties and responsibilities of Employee
A are principally to review the operations of marina
boat operators to ensure that they comply with tribal
rules and regulations as applicable to marina boat op-
erators. Employee A provides some services for the
marina, such as speaking at conferences or meetings
with marina boat operators. Employee A’s area of ex-
pertise is contract law.
(ii)Conclusion. Based on the facts and circum-
stances and the factors in paragraph (g)(8)(ii) through
(iv) of this section, Employee A is a governmental
ITG employee within the meaning of this paragraph
(g)(8). Employee A primarily performs services for
Indian tribal government B at a government building
which is a governmental location and Employee A is
on the payroll of Indian tribal government B. In addi-
tion, Employee A’s assigned duties and responsibil-
ities are primarily to provide government oversight
services for Indian tribal government B.
Example 2.(i)Facts. Employee C is a police of-
ficer providing services for Indian tribal government
D. Employee C’s job location is the tribal police sta-
tion located in a government building on tribal lands.
The assigned duties and responsibilities of Employee
C indicate that Employee C is expected to maintain
public order, detect crime, and apprehend offenders
on tribal lands of Indian tribal government D. Occa-
sionally, while on patrol, Employee C must go to the
casino operated by Indian tribal government D to re-
store order relating to a disturbance. Employee C’s
area of expertise is in general law enforcement.
(ii)Conclusion. Based on the facts and circum-
stances and the factors in paragraph (g)(8)(ii) through
December 19, 20119022011–51 I.R.B.

(iv) of this section, Employee C is a governmental
ITG employee within the meaning of this paragraph
(g)(8). Employee C primarily performs services for
Indian tribal government D at either a government
building or while on patrol, even though Employee
C’s patrol duties include providing law enforcement
services at the casino, which is a commercial activity
under paragraph (g)(7)(i)(B) of this section. In addi-
tion, the assigned duties and responsibilities of Em-
ployee C, as well as Employee C’s area of expertise,
relate to general law enforcement and do not substan-
tially relate to a commercial activity.
Extending Religious and
Family Member FICA and FUTA
Exceptions to Disregarded
Entities; Correction
Announcement 2011–80
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correcting amendment.
SUMMARY: This document describes a
correction to final and temporary regu-
lations (T.D. 9554, 2011–50 I.R.B. 843)
extending the exceptions from taxes un-
der the Federal Insurance Contributions
Act (“FICA”) and the Federal Unemploy-
ment Tax Act (“FUTA”) under sections
3121(b)(3) (concerning individuals who
work for certain family members), 3127
(concerning members of religious faiths),
and 3306(c)(5) (concerning persons em-
ployed by children and spouses and chil-
dren under 21 employed by their parents)
of the Internal Revenue Code (“Code”)
to entities that are disregarded as separate
from their owners for Federal tax pur-
poses. The temporary regulations also
clarify the existing rule that the owners of
disregarded entities, except for qualified
subchapter S subsidiaries, are responsi-
ble for backup withholding and related
information reporting requirements under
section 3406. These regulations were pub-
lished in theFederal Registeron Tuesday,
November 1, 2011 (76 FR 67363).
DATES: This correction is effective on
December 6, 2011, and is applicable on
November 1, 2011.
FOR FURTHER INFORMATION
CONTACT: Joseph Perera, (202)
622–6040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final and temporary regulations
that are the subject of this document are
under section 7701 of the Internal Rev-
enue Code.
Need for Correction
As published, final and temporary reg-
ulations (T.D. 9554) contain an error that
may prove to be misleading and is in need
of clarification.
*****
Correction of Publication
Accordingly, 26 CFR 301 is cor-
rected by making the following correcting
amendment:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7701–2T is revised
to read as follows:
§301.7701–2T Business entities;
definitions (temporary).
(a) through (c)(2)(iv) [Reserved]. For
further guidance, see §301.7701–2(a)
through (c)(2)(iv).
(A)In general.Section
§301.7701–2(c)(2)(i) (relating to certain
wholly owned entities) does not apply
to taxes imposed under Subtitle C—Em-
ployment Taxes and Collection of Income
Tax (Chapters 21, 22, 23, 23A, 24 and
25 of the Internal Revenue Code). How-
ever, §301.7701–2(c)(2)(i) does apply
to withholding requirements imposed
under section 3406 (backup withholding).
The owner of a business entity that is
disregarded under §301.7701–2 is subject
to the withholding requirements imposed
under section 3406 (backup withholding).
Section 301.7701–2(c)(2)(i) also applies
to taxes imposed under Subtitle A, includ-
ingChapter2—TaxonSelfEmployment
Income. The owner of an entity that
is treated in the same manner as a sole
proprietorship under §301.7701–2(a) will
be subject to tax on self-employment
income.
(B) [Reserved]. For further guidance,
see §301.7701–2(c)(2)(iv)(B).
(C)Exceptions. For exceptions to the
rule in §301.7701–2(c)(2)(iv)(B), see sec-
tions 31.3121(b)(3)–1(d), 31.3127–1(c),
and 31.3306(c)(5)–1(d).
(D)through(e)(4)[Re-
served]. For further guidance, see
§301.7701–2(c)(2)(iv)(D) through (e)(4).
(5) Paragraphs (c)(2)(iv)(A) and
(c)(2)(iv)(C) of this section apply to wages
paid on or after December 6, 2011. For
rules that apply to paragraph (c)(2)(iv)(A)
of this section before December 6, 2011,
see 26 CFR part 301 revised as of April 1,
2009. However, taxpayers may apply
paragraphs (c)(2)(iv)(A) and (c)(2)(iv)(C)
of this section to wages paid on or after
January 1, 2009.
(e)(6) through (e)(7) [Reserved]. For
further guidance, see §301.7701–2(e)(6)
through (e)(7).
(8)Expiration Date. The applica-
bility of paragraphs (c)(2)(iv)(A) and
(c)(2)(iv)(C) of this section expires on or
before December 5, 2014.
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 December 5,
2011, 8:45 a.m., and published in the issue of the Federal
Register for December 6, 2011, 76 F.R. 76037)
2011–51 I.R.B.903December 19, 2011

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the 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 the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
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—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
December 19, 2011i2011–51 I.R.B.

Numerical Finding List
1
Bulletins 2011–27 through 2011–51
Announcements:
2011-37, 2011-27 I.R.B.37
2011-38, 2011-28 I.R.B.45
2011-39, 2011-28 I.R.B.46
2011-40, 2011-29 I.R.B.56
2011-41, 2011-28 I.R.B.47
2011-42, 2011-32 I.R.B.138
2011-43, 2011-35 I.R.B.198
2011-44, 2011-33 I.R.B.164
2011-45, 2011-34 I.R.B.178
2011-46, 2011-34 I.R.B.178
2011-47, 2011-34 I.R.B.178
2011-48, 2011-36 I.R.B.874
2011-49, 2011-36 I.R.B.228
2011-50, 2011-38 I.R.B.409
2011-51, 2011-38 I.R.B.409
2011-52, 2011-38 I.R.B.409
2011-53, 2011-38 I.R.B.409
2011-54, 2011-38 I.R.B.409
2011-55, 2011-38 I.R.B.409
2011-56, 2011-38 I.R.B.409
2011-57, 2011-38 I.R.B.409
2011-58, 2011-38 I.R.B.410
2011-59, 2011-37 I.R.B.335
2011-61, 2011-39 I.R.B.453
2011-62, 2011-40 I.R.B.483
2011-63, 2011-41 I.R.B.503
2011-64, 2011-41 I.R.B.503
2011-65, 2011-44 I.R.B.691
2011-66, 2011-44 I.R.B.691
2011-67, 2011-44 I.R.B.691
2011-68, 2011-44 I.R.B.691
2011-69, 2011-44 I.R.B.691
2011-70, 2011-45 I.R.B.715
2011-71, 2011-46 I.R.B.770
2011-72, 2011-47 I.R.B.796
2011-73, 2011-48 I.R.B.822
2011-74, 2011-47 I.R.B.796
2011-75, 2011-48 I.R.B.823
2011-76, 2011-50 I.R.B.854
2011-77, 2011-51 I.R.B.874
2011-78, 2011-51 I.R.B.874
2011-79, 2011-51 I.R.B.892
2011-80, 2011-51 I.R.B.903
Notices:
2011-47, 2011-27 I.R.B.34
2011-50, 2011-27 I.R.B.35
2011-51, 2011-27 I.R.B.36
2011-52, 2011-30 I.R.B.60
2011-53, 2011-32 I.R.B.124
2011-54, 2011-29 I.R.B.53
Notices— Continued:
2011-55, 2011-29 I.R.B.53
2011-56, 2011-29 I.R.B.54
2011-57, 2011-31 I.R.B.84
2011-58, 2011-31 I.R.B.85
2011-59, 2011-31 I.R.B.86
2011-60, 2011-31 I.R.B.90
2011-61, 2011-31 I.R.B.91
2011-62, 2011-32 I.R.B.126
2011-63, 2011-34 I.R.B.172
2011-64, 2011-37 I.R.B.231
2011-65, 2011-34 I.R.B.173
2011-66, 2011-35 I.R.B.184
2011-67, 2011-34 I.R.B.174
2011-68, 2011-36 I.R.B.205
2011-69, 2011-39 I.R.B.445
2011-70, 2011-32 I.R.B.135
2011-71, 2011-37 I.R.B.233
2011-72, 2011-38 I.R.B.407
2011-73, 2011-40 I.R.B.474
2011-74, 2011-41 I.R.B.496
2011-75, 2011-40 I.R.B.475
2011-76, 2011-40 I.R.B.479
2011-78, 2011-41 I.R.B.497
2011-79, 2011-41 I.R.B.498
2011-80, 2011-43 I.R.B.591
2011-81, 2011-42 I.R.B.513
2011-82, 2011-42 I.R.B.516
2011-83, 2011-43 I.R.B.593
2011-84, 2011-43 I.R.B.595
2011-85, 2011-44 I.R.B.605
2011-86, 2011-45 I.R.B.698
2011-87, 2011-45 I.R.B.699
2011-88, 2011-46 I.R.B.748
2011-89, 2011-46 I.R.B.748
2011-90, 2011-47 I.R.B.791
2011-91, 2011-47 I.R.B.792
2011-92, 2011-48 I.R.B.809
2011-93, 2011-48 I.R.B.810
2011-94, 2011-49 I.R.B.834
2011-99, 2011-50 I.R.B.847
Proposed Regulations:
REG-128224-06, 2011-42 I.R.B.533
REG-146537-06, 2011-48 I.R.B.813
REG-112196-07, 2011-51 I.R.B.865
REG-137128-08, 2011-28 I.R.B.43
REG-136565-09, 2011-50 I.R.B.851
REG-140280-09, 2011-45 I.R.B.709
REG-114749-09, 2011-48 I.R.B.819
REG-146297-09, 2011-47 I.R.B.795
REG-101273-10, 2011-51 I.R.B.873
REG-109564-10, 2011-50 I.R.B.852
REG-112805-10, 2011-40 I.R.B.482
REG-120391-10, 2011-39 I.R.B.451
REG-125592-10, 2011-32 I.R.B.137
Proposed Regulations— Continued:
REG-125949-10, 2011-45 I.R.B.712
REG-131491-10, 2011-36 I.R.B.208
REG-133002-10, 2011-46 I.R.B.766
REG-140038-10, 2011-42 I.R.B.537
REG-109006-11, 2011-37 I.R.B.334
REG-101352-11, 2011-30 I.R.B.75
REG-111283-11, 2011-42 I.R.B.573
REG-116284-11, 2011-43 I.R.B.598
REG-118809-11, 2011-33 I.R.B.162
REG-122813-11, 2011-35 I.R.B.197
REG-126519-11, 2011-39 I.R.B.452
Revenue Procedures:
2011-38, 2011-30 I.R.B.66
2011-39, 2011-30 I.R.B.68
2011-40, 2011-37 I.R.B.235
2011-41, 2011-35 I.R.B.188
2011-42, 2011-37 I.R.B.318
2011-43, 2011-37 I.R.B.326
2011-44, 2011-39 I.R.B.446
2011-45, 2011-39 I.R.B.449
2011-46, 2011-42 I.R.B.518
2011-47, 2011-42 I.R.B.520
2011-48, 2011-42 I.R.B.527
2011-49, 2011-44 I.R.B.608
2011-50, 2011-44 I.R.B.628
2011-51, 2011-44 I.R.B.669
2011-52, 2011-45 I.R.B.701
2011-53, 2011-46 I.R.B.749
2011-54, 2011-46 I.R.B.759
2011-55, 2011-47 I.R.B.793
2011-56, 2011-49 I.R.B.834
2011-57, 2011-49 I.R.B.836
2011-58, 2011-50 I.R.B.849
Revenue Rulings:
2011-14, 2011-27 I.R.B.31
2011-15, 2011-30 I.R.B.57
2011-16, 2011-32 I.R.B.93
2011-17, 2011-33 I.R.B.160
2011-18, 2011-39 I.R.B.428
2011-19, 2011-36 I.R.B.199
2011-20, 2011-36 I.R.B.202
2011-21, 2011-40 I.R.B.458
2011-22, 2011-41 I.R.B.489
2011-23, 2011-43 I.R.B.585
2011-24, 2011-41 I.R.B.485
2011-25, 2011-45 I.R.B.695
2011-26, 2011-48 I.R.B.803
2011-27, 2011-48 I.R.B.805
2011-28, 2011-49 I.R.B.830
2011-29, 2011-49 I.R.B.824
2011-30, 2011-49 I.R.B.826
2011-31, 2011-49 I.R.B.829
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin
2011–26, dated June 27, 2011.
2011–51 I.R.B.iiDecember 19, 2011

Treasury Decisions:
9527, 2011-27 I.R.B.1
9528, 2011-28 I.R.B.38
9529, 2011-30 I.R.B.57
9530, 2011-31 I.R.B.77
9531, 2011-31 I.R.B.79
9532, 2011-32 I.R.B.95
9533, 2011-33 I.R.B.139
9534, 2011-33 I.R.B.144
9535, 2011-39 I.R.B.415
9536, 2011-39 I.R.B.426
9537, 2011-35 I.R.B.181
9538, 2011-37 I.R.B.229
9539, 2011-35 I.R.B.179
9540, 2011-38 I.R.B.341
9541, 2011-39 I.R.B.438
9542, 2011-39 I.R.B.411
9543, 2011-40 I.R.B.470
9544, 2011-40 I.R.B.458
9545, 2011-41 I.R.B.490
9546, 2011-42 I.R.B.505
9547, 2011-43 I.R.B.580
9548, 2011-46 I.R.B.716
9549, 2011-46 I.R.B.718
9550, 2011-47 I.R.B.785
9551, 2011-47 I.R.B.774
9552, 2011-47 I.R.B.783
9553, 2011-48 I.R.B.806
9554, 2011-50 I.R.B.843
9555, 2011-50 I.R.B.838
9556, 2011-51 I.R.B.862
9557, 2011-51 I.R.B.855
9558, 2011-51 I.R.B.859
December 19, 2011iii2011–51 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2011–27 through 2011–51
Announcements:
2007-47
Updated and superseded by
Ann. 2011-59, 2011-37 I.R.B.335
Notices:
2002-1
Amplified by
Notice 2011-86, 2011-45 I.R.B.698
2006-101
Amplified and superseded by
Notice 2011-64, 2011-37 I.R.B.231
2007-93
Obsoleted by
T.D. 9545, 2011-41 I.R.B.490
2010-23
Modified and supplemented by
Notice 2011-54, 2011-29 I.R.B.53
2010-77
Modified by
Notice 2011-85, 2011-44 I.R.B.605
2010-81
Amended and supplemented by
Notice 2011-63, 2011-34 I.R.B.172
2010-88
Modified by
Ann. 2011-40, 2011-29 I.R.B.56
2010-90
Modified by
Notice 2011-85, 2011-44 I.R.B.605
Proposed Regulations:
REG-158677-05
Withdrawn by
Ann. 2011-75, 2011-48 I.R.B.823
REG-118761-09
Hearing scheduled by
Ann. 2011-38, 2011-28 I.R.B.45
REG-151687-10
Hearing scheduled by
Ann. 2011-48, 2011-48 I.R.B.874
Ann. 2011-48, 2011-36 I.R.B.874
Revenue Procedures:
72-36
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B.318
Revenue Procedures— Continued:
2003-14
Clarified, modified, and superseded by
Rev. Proc. 2011-56, 2011-49 I.R.B.834
2004-29
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B.318
2005-16
Modified and superseded by
Rev. Proc. 2011-49, 2011-44 I.R.B.608
2006-24
Modified by
Ann. 2011-77, 2011-51 I.R.B.874
2006-56
Modified and amplified by
Rev. Proc. 2011-46, 2011-42 I.R.B.518
2007-35
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B.318
2008-24
Modified and superseded by
Rev. Proc. 2011-38, 2011-30 I.R.B.66
2008-32
Superseded by
Rev. Proc. 2011-39, 2011-30 I.R.B.68
2009-20
Modified by
Rev. Proc. 2011-58, 2011-50 I.R.B.849
2010-27
Modified by
Ann. 2011-77, 2011-51 I.R.B.874
2010-33
Superseded by
Rev. Proc. 2011-50, 2011-44 I.R.B.628
2010-37
Superseded by
Rev. Proc. 2011-51, 2011-44 I.R.B.669
2010-39
Amplified, modified, and superseded by
Rev. Proc. 2011-47, 2011-42 I.R.B.520
2011-4
Modified by
Rev. Proc. 2011-44, 2011-39 I.R.B.446
2011-6
Modified by
Rev. Proc. 2011-49, 2011-44 I.R.B.608
2011-8
Modified by
Rev. Proc. 2011-49, 2011-44 I.R.B.608
Revenue Procedures— Continued:
2011-14
Modified by
Rev. Proc. 2011-43, 2011-37 I.R.B.326
2011-24
Obsoleted by
Notice 2011-92, 2011-48 I.R.B.809
2011-35
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B.318
Revenue Rulings:
58-225
Obsoleted by
Rev. Rul. 2011-15, 2011-30 I.R.B.57
76-345
Revoked by
Rev. Rul. 2011-29, 2011-49 I.R.B.824
92-19
Supplemented in part by
Rev. Rul. 2011-23, 2011-43 I.R.B.585
2007-28
Superseded by
Rev. Rul. 2011-26, 2011-48 I.R.B.803
2010-30
Supplemented and superseded by
Rev. Rul. 2011-27, 2011-48 I.R.B.805
Treasury Decisions:
9527
Corrected by
Ann. 2011-49, 2011-36 I.R.B.228
9554
Corrected by
Ann. 2011-80, 2011-51 I.R.B.903
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin 2011–26, dated June 27, 2011.
2011–51 I.R.B.ivDecember 19, 2011

December 19, 20112011–51 I.R.B.

INTERNAL REVENUE BULLETIN
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