Internal Revenue Bulletin 2012-4 (PDF rendition): IRS Announcements

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Bulletin No. 201
2-4
January 23, 2012
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. 9560, page 299.
Final regulations under section 45D of the Code relate to how
an entity serving certain targeted populations can meet the
requirements to be a qualified active low-income community
business for the new markets tax credit.
REG–102988–11, page 326.
Proposed regulations under section 6045 of the Code modify
information reporting requirements for a broker, transfer re-
porting requirements under section 6045A, and issuer state-
ment requirements under section 6045B to cover debt instru-
ments and options. A public hearing is scheduled for March 16,
2012.
Notice 2012–7, page 308.
This notice provides for the suspension of certain requirements
under section 42 of the Code for low-income housing credit
projects in Iowa in order to provide emergency housing relief
needed as a result of the devastation in Iowa caused by flooding
during the period of May 25, 2011, to August 1, 2011.
Notice 2012–8, page 309.
This notice provides a proposed revenue procedure that will up-
date Rev. Proc. 2003–61, 2003–2 C.B. 296, which provides
guidance regarding equitable relief from joint and several liabil-
ity under section 6015(f) of the Code. Rev. Proc. 2003–61
superseded.
EMPLOYEE PLANS
Announcement 2012–3, page 335.
This announcement extends to April 2, 2012, the deadline to
submit on-cycle applications for opinion and advisory letters
for pre-approved defined contribution plans for the plans’
second six-year remedial amendment cycle. Under Rev.
Proc. 2007–44, 2007–2 C.B. 54, and Rev. Proc. 2011–49,
2011–44 I.R.B. 608, the submission period for these appli-
cations was scheduled to expire on January 31, 2012. Rev.
Procs. 2007–44 and 2011–49 modified.
EMPLOYMENT TAX
Notice 2012–9, page 315.
This notice restates and amends the interim guidance on in-
formational reporting to employees of the cost of their em-
ployer-sponsored group health plan coverage initially provided
in Notice 2011–28, 2011–16 I.R.B. 656. This informational
reporting is required under section 6051(a)(14) of the Code,
enacted as part of the Patient Protection and Affordable Care
Act of 2010 (the Affordable Care Act), Public Law, 111–148,
to provide useful and comparable consumer information to em-
ployees on the cost of their health care coverage. Notice
2011–28 superseded.
ADMINISTRATIVE
Notice 2012–8, page 309.
This notice provides a proposed revenue procedure that will up-
date Rev. Proc. 2003–61, 2003–2 C.B. 296, which provides
guidance regarding equitable relief from joint and several liabil-
ity under section 6015(f) of the Code. Rev. Proc. 2003–61
superseded.
Announcement 2012–4, page 335.
This document contains corrections to final regulations
(T.D. 9517, 2011–15 I.R.B. 610) relating to the enrollment of
actuaries.
Finding Lists begin on page ii.

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
published in the last Bulletin of each semiannual period.
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.
January 23, 20122012–4 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 45D.—
New Markets
Tax Credit
26 CFR 1.45D–1
: New markets tax credit.
T.D. 9560
DEPARTMENT OF
TREASURY
Internal Rev
enue Service
26 CFR Part 1
Targeted Pop
ulations Under
Section 45D
(e)(2)
AGENCY: Int
ernal Revenue Service
(IRS), Trea
sury.
ACTION: Fin
al Regulations.
SUMMARY: Th
is document contains final
regulatio
ns relating to how an entity serv-
ing certai
n targeted populations can meet
the requir
ements to be a qualified active
low-incom
e community business for the
new market
s tax credit. The regulations re-
flect cha
nges to the law made by the Amer-
ican Jobs
Creation Act of 2004. The regu-
lations w
ill affect certain taxpayers claim-
ing the ne
w markets tax credit.
DATES:Ef
fective Date:These regulations
are effec
tive on December 5, 2011.
Applicab
ility Dates:For dates of appli-
cability
, see §1.45D–1(h)(3).
FOR FURTH
ER INFORMATION
CONTACT
: Julie Hanlon Bolton, (202)
622–304
0 (not a toll-free number).
SUPPLEM
ENTARY INFORMATION:
Backgro
und
This doc
ument amends 26 CFR part 1
to provi
de rules relating to certain targeted
populat
ions under section 45D(e)(2). On
May 24, 2
005, the Community Develop-
ment Fi
nancial Institutions Fund published
an adva
nce notice of proposed rulemak-
ing (AN
PRM) (70 FR 29658) to seek
commen
ts from the public with respect to
how tar
geted populations may be treated
as eli
gible low-income communities un-
der se
ction 45D(e)(2). In response to the
ANPRM
, the IRS received various sug-
gesti
ons relating to the definition of the
termtargeted
populationsand proposing
amendments to
the requirements to be a
qualified act
ive low-income community
business und
er §1.45D–1. On June 30,
2006, the IRS
and Treasury Department
released Not
ice 2006–60, 2006–2 C.B. 82,
which announ
ced that §1.45D–1 would
be amended t
o provide rules relating to
how an entit
y meets the requirements to
be a qualifi
ed active low-income commu-
nity busine
ss when its activities involve
certain tar
geted populations under section
45D(e)(2)
. On September 24, 2008, a
notice of p
roposed rulemaking (NPRM)
(REG–1423
39–05, 2008–2 C.B. 1116)
was publis
hedintheFederal Register
(73 FR 549
90). Written and electronic
comments
responding to the proposed
regulati
ons were received and a public
hearing w
as held on January 22, 2009.
After con
sideration of all the comments,
the prop
osed regulations are adopted as
amended
by this Treasury decision.
General
Overview
Section
45D(a)(1) provides a new mar-
kets tax
credit on certain credit allowance
dates de
scribedinsection45D(a)(3)with
respect
to a qualified equity investment in
aquali
fied community development entity
(CDE) d
escribed in section 45D(c).
Sectio
n 45D(b)(1) provides that an eq-
uity in
vestment in a CDE is aqualified
equity
investmentif, among other require-
ments:
(A) the investment is acquired by
the tax
payer at its original issue (directly
or thr
ough an underwriter) solely in ex-
chang
e for cash; (B) substantially all of the
cash i
s used by the CDE to make qualified
low-i
ncome community investments; and
(C) th
e investment is designated for pur-
pose
s of section 45D by the CDE.
Under
section 45D(b)(2), the maxi-
mum a
mount of equity investments issued
by a C
DEthatmaybedesignatedbythe
CDE a
s qualified equity investments shall
not e
xceed the portion of the new markets
tax c
redit limitation set forth in section
45D
(f)(1) that is allocated to the CDE by
the
Secretary under section 45D(f)(2).
Sec
tion 45D(c)(1) provides that an en-
tit
y is a CDE if, among other requirements,
the entity is c
ertified by the Secretary as a
CDE.
Section 45D(d
)(1) provides that the
termqualifie
d low-income community in-
vestmentmean
s: (A) any capital or equity
investment i
n, or loan to, any qualified
active low-i
ncome community business
(as defined i
n section 45D(d)(2)); (B)
the purchase
from another CDE of any
loan made by
the entity that is a qualified
low-income
community investment; (C)
financial c
ounseling and other services
specified i
n regulations prescribed by the
Secretary
to businesses located in, and
residents
of, low-income communities;
and (D) any
equity investment in, or loan
to, any CDE
.
Under sect
ion 45D(d)(2)(A), a quali-
fied activ
e low-income community busi-
ness is an
y corporation (including a non-
profit co
rporation) or partnership if for
such year
, among other requirements, (i) at
least 50 p
ercent of the total gross income
of the ent
ity is derived from the active
conduct o
f a qualified business within any
low-inc
ome community, (ii) a substantial
portion
of the use of the tangible property
of the en
tity (whether owned or leased) is
within a
ny low-income community, and
(iii) a
substantial portion of the services
perfor
medfortheentitybyitsemployees
are per
formed in any low-income commu-
nity.
Under s
ection 45D(d)(3), with certain
except
ions, a qualified business is any
trade o
r business. The rental to others
of rea
l property is a qualified business
only i
f, among other requirements, the
real p
roperty is located in a low-income
commu
nity.
Secti
on 221(a) of the American Jobs
Creat
ion Act of 2004 (Act) (Public Law
108–3
57, 118 Stat. 1418) amended sec-
tion
45D(e)(2) to provide that the Sec-
reta
ry shall prescribe regulations under
whic
h one or more targeted populations
(wit
hin the meaning of section 103(20)
of th
e Riegle Community Development
and R
egulatory Improvement Act of 1994
(12
U.S.C. 4702(20))) may be treated as
low
-income communities. The regulations
sha
ll include procedures for determining
whi
ch entities are qualified active low-in-
com
e community businesses with respect
2012–4 I.R.B.299January 23, 2012

to those populations. Section 221(c)(1) of
the Act provides that the amendment made
by section 221(a) of the Act shall apply to
designations made by the Secretary of the
Treasury after October 22, 2004, the date
of enactment of the Act.
The termtargeted population,asde-
finedin12U.S.C.4702(20)and12CFR
1805.201, means individuals, or an iden-
tifiable group of individuals, including an
Indian tribe, who (A) are low-income per-
sons; or (B) otherwise lack adequate ac-
cess to loans or equity investments. Un-
der 12 U.S.C. 4702(17) as interpreted by
12 CFR 1805.104, the termlow-income
means having an income, adjusted for fam-
ily size, of not more than (A) for metropoli-
tan areas, 80 percent of the area median
family income; and (B) for non-metropoli-
tan areas, the greater of (i) 80 percent of the
area median family income; or (ii) 80 per-
cent of the statewide nonmetropolitan area
median family income.
Section 101(a) of the Gulf Oppor-
tunity Zone Act of 2005 (Public Law
109–135, 119 Stat. 2577) added new
sections 1400M and 1400N to the Code.
Section 1400M(1) provides that the Gulf
Opportunity Zone (GO Zone) is that por-
tion of the Hurricane Katrina disaster area
determined by the President to warrant
individual or individual and public assis-
tance from the Federal Government under
the Robert T. Stafford Disaster Relief and
Emergency Assistance Act (the Act) by
reason of Hurricane Katrina.
Section 1400M(2) provides that the
Hurricane Katrina disaster area is an area
with respect to which a major disaster
has been declared by the President before
September 14, 2005, under section 401 of
the Act by reason of Hurricane Katrina.
After determination by the President that a
disaster area warrantsassistance pursuant
to the Act, the Federal Emergency Man-
agement Agency (FEMA) makes damage
assessments. The categories for damage
assessment in the wake of a hurricane are:
flooded area, saturated area, limited dam-
age, moderate damage, extensive damage,
and catastrophic damage.
Under section 1400N(m)(1), a CDE
shall be eligible foran allocation under
section 45D(f)(2) of the increase in the
new markets tax credit limitation de-
scribed in section 1400N(m)(2) only if
a significant mission of the CDE is the
recovery and redevelopment of the GO
Zone. Section 1400N(m)(2) provides that
the new markets tax credit limitation oth-
erwise determined under section 45D(f)(1)
shall be increased by an amount equal
to $300,000,000 for 2005 and 2006 and
$400,000,000 for 2007, to be allocated
among CDEs to make qualified low-in-
come community investments within the
GO Zone.
Under section 45D(b)(1), a qualified
equity investment does not include any eq-
uity investment issued by a CDE more than
5 years after the date the entity receives
an allocation under section 45D(f). Under
section 45D(f)(3), if the new markets tax
credit limitation for any calendar year ex-
ceeds the aggregate amount allocated un-
der section 45D(f)(2) for the year, then the
limitation for the succeeding calendar year
is increased by the amount of the excess.
However, no amount may be carried to any
calendar year after 2016.
Summary of Comments and
Explanation of Provisions
Ownership Requirement and Non-Profit
Businesses
Generally, the proposed regulations
provide that an entity will not be treated
as a qualified active low-income com-
munity business for low-income targeted
populations unless (i) at least 50 percent
of the entity’s total gross income for any
taxable year is derived from sales, rentals,
services, or other transactions with indi-
viduals who are low-income persons for
purposes of section 45D(e)(2) (the 50-per-
cent gross-income requirement), (ii)at
least 40 percent of the entity’s employees
are individuals who are low-income per-
sons for purposes of section 45D(e)(2),
or (iii) at least 50 percent of the entity is
owned by individuals who are low-income
persons for purposes of section 45D(e)(2).
Commentators recommended that the
ownership requirement for being treated
as a qualified active low-income com-
munity business for low-income targeted
populations under the proposed regu-
lations be amended to accommodate
non-profit businesses that are not individ-
ually owned. Commentators suggested
that if a non-profit business can docu-
ment that at least 20 percent of its board,
with a minimum of two board mem-
bers, are low-income persons or represent
low-income targeted populations, then the
non-profit business should be treated as
satisfying the ownership requirement.
The final regulations do not adopt this
recommendation because, if a non-profit
business does not derive at least 50 per-
cent of its gross income from sales, rentals,
services, or other transactions with low-in-
come persons, or if at least 40 percent of
the non-profit business’ employees are not
low-income persons, then the non-profit
business is not adequately serving targeted
populations solely because 20 percent or
more of its board members are low-income
persons.
Start-up or Expanding Businesses
Commentators requested that, in or-
der to accommodate start-up entities, the
final regulations should provide a rule
allowing an entity to meet the require-
ments to be a qualified active low-income
community business for low-income tar-
geted populations if the CDE reasonably
expects that the entity will generate rev-
enues within three years after the date the
CDE makes the investment in, or loan to,
that entity. If an entity serving targeted
populations chooses to apply the 50-per-
cent gross-income requirement rather than
the employee requirement or the owner-
ship requirement, then the commentators’
suggestion could potentially allow an en-
tity to be a qualified active low-income
community business for three years with-
out having to meet any requirement. As
stated in the preamble of the proposed
regulations, this result is clearly inappro-
priate. Therefore, the final regulations
do not adopt the commentators’ sugges-
tion. In addition, the final regulations
clarify that the three-year active con-
duct of a trade or business safe harbor in
§1.45D–1(d)(4)(iv)(A) does not apply to
the 50-percent gross-income requirement.
Documenting Low-Income Persons
The IRS and Treasury Department
specifically requested comments on what
measure of income should be used to deter-
mine an individual’s income for purposes
of the definition of low-income persons
found in the proposed regulations. The
proposed regulations asked whether the
measure of income should be the same as
the measure of income used by the U.S.
Census Bureau, the measure of income on
January 23, 20123002012–4 I.R.B.

the Form 1040, or the measure of income
in 24 CFR Part 5, which is used for cer-
tain Department of Housing and Urban
Development (HUD) programs and other
Federal programs.
Two commentators recommended that
the IRS and Treasury Department accept
as a proxy for income documentation proof
of an individual’s participation in other
federal programs targeted specifically to
low-income individuals and families. The
final regulations do not adopt the com-
mentators’ recommendation because, as
stated in the proposed regulations, the
IRS and Treasury Department have not
analyzed other Federal programs to de-
termine whether they meet the statutory
requirements under section 45D(e), and
whether the programs currently meeting
the requirements will continue to do so in
the future.
Another commentator recommended
that the IRS and Treasury Department al-
low an entity to measure income using any
reasonable method including measures
of income by the U.S. Census Bureau,
Form 1040, or the HUD rules in 24 CFR
Part 5. If one measure must be used,
the commentator recommended using the
HUD rules because they are consistent
with low-income determinations used for
the Section 8 rental voucher program and
the low-income housing tax credit under
section 42. The final regulations adopt
this commentator’s recommendation that
an entity may use any of the three stated
methods. Specifically, the final regula-
tions allow an individual’s family income
to be determined using household income
as measured by the U.S. Census Bureau or
HUD, or using the individual’s total family
income as reported on Form(s) 1040. An
individual’s family income includes the
income of any member of the individual’s
family (as defined in section 267(c)(4))
if the family member resides with the in-
dividual regardless of whether the family
member files a separate return. Lastly, the
final regulations incorporate the preamble
language in the proposed regulations that
provides additional detail on what esti-
mates may be relied upon in determining
the applicable income limitation forarea
median family income.
Items Included in Gross Income
A commentator requested that the final
regulations conclude that the termderived
fromin the proposed regulations includes
gross income derived from payments
made directly by low-income persons to
an entity and amounts and contributions of
property or services provided to the entity
for the benefit of low-income persons.
Another commentator recommended that
only operating revenue should be included
for the purpose of meeting the 50-percent
gross-income requirement.
The final regulations adopt the first
commentator’s recommendation that the
termderived fromincludes gross income
derived from both payments made directly
by low-income persons to the entity and
money and the fair market value of con-
tributions of property or services provided
to the entity primarily for the benefit of
low-income persons. However, persons
providing the money and contributions
cannot receive a direct benefit from the
entity (notably, a contribution that benefits
the general public is not a direct bene-
fit). Accordingly, an entity’s total gross
income derived from transactions with
low-income persons for purposes of sec-
tion 45D(e)(2) can include Federal, state,
or local grants, charitable donations, or
in-kind contributions, as well as collected
fees, insurance reimbursements, and other
sources of income as long as these pay-
ments and contributions are provided for
the benefit of low-income persons on an
individual basis or as a class of individu-
als. If an entity receiving such payments
can document that those amounts are
legallyrequiredtobepaidonbehalfof
individuals that meet the definition of
low-income persons, the amounts may
be treated as derived from transactions
with low-income persons. The second
commentator’s suggestion to limit a gross
income consideration to operating revenue
is too restrictive because any money, prop-
erty, or services provided to the entity may
be provided to the entity for the benefit of
low-income persons.
Owners
The proposed regulations provide that
the determination of whether an owner
is a low-income person must be made at
the time the qualified low-income com-
munity investment is made. If an owner
is a low-income person at the time the
qualified low-income community invest-
ment is made, that owner is considered a
low-income person for purposes of sec-
tion 45D(e)(2) throughout the time the
ownership interest is held by that owner.
A commentator suggested that the rule
locking in an owner’s status as a low-in-
come person as of the time of investment
should be similarly applied to low-income
persons who acquire an ownership interest
after the time the qualified low-income
community investment is made. The fi-
nal regulations adopt this suggestion by
locking in the status of an owner as a
low-income person at the time the quali-
fied low-income community investment is
made or at the time the ownership interest
is acquired by the owner, whichever is
later.
Rental to Others of Real Property
Commentators requested clarification
on the 50-percent gross-income require-
ment under the proposed regulations for
an entity whose sole business is the rental
to others of real property. Because an
entity whose sole business is the rental to
others of real property will often not have
employees, the entity will have to satisfy
the 50-percent gross-income requirement
or the ownership requirement for low-in-
come targeted populations. To satisfy
the 50-percent gross-income requirement,
the proposed regulations require that the
entity must derive gross income solely
from low-income individuals. However,
in the case of an entity engaged solely in
the rental of property, the entity’s gross
income would only be derived from rents,
and in many instances, the tenants are not
individuals as required under the proposed
regulations. Thus, commentators recom-
mend that the 50-percent gross-income
requirement be deemed satisfied if at least
50 percent of gross rental income is de-
rived from tenants that are low-income
individuals and entities that are qualified
active low-income community businesses
for low-income targeted populations. The
final regulations adopt a rule similar to this
recommendation by providing a special
rule that generally treats an entity whose
sole business is the rental to others of
real property as satisfying the 50-percent
gross-income requirement if the entity is
2012–4 I.R.B.301January 23, 2012

treated as being located in a low-income
community.
Gross Income — Fair Market Value
of Sales, Rentals, Services, or Other
Transactions
The IRS and Treasury Department
specifically requested comments in the
proposed regulations on the question of
whether the 50-percent gross-income re-
quirement should be modified to include
the fair market value of goods and ser-
vices provided to low-income persons at
reduced fees. Commentators responded
by stating that a CDE should have the
option to include the fair market value of
goods and services provided to low-in-
come persons for purposes of the 50-per-
cent gross-income requirement. The final
regulations adopt the commentator’s sug-
gestion but limit the rule to an entity with
gross income that is derived from sales,
rentals, services, or other transactions
with both non low-income persons and
low-income persons. The entity may treat
the value of the sales, rentals, services,
or other transactions with low-income
persons at fair market value even if the
low-income persons do not pay fair market
value.
IndividualsorGroupsThatOtherwise
Lack Adequate Access to Loans or Equity
Investments
Commentators have asked that the IRS
and the Treasury Department consider
defining particular individuals or groups
of individuals as lacking adequate access
to loans or equity investments. Although
the IRS and the Treasury Department
cannot include new rules describing addi-
tional targeted populations in these final
regulations, taxpayers are hereby invited
to submit comments: (1) identifying indi-
viduals or groups that may be considered
to lack adequate access to loans or equity
investments, (2) describing the reasons
such individuals or group of individuals
qualify as lacking adequate access to loans
or equity investments, and (3) suggesting
ways for additional targeted populations
rules to appropriately limit the definition
of such individuals or group of individuals
to ensure that the purposes of the targeted
populations provision are not abused.
Send submissions to:
Submissions to the Service submitted
by U.S. mail:
Internal Revenue Service
Attn: Julie Hanlon Bolton
CC:PSI:5, Room 5111
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Submissions to the Service submitted
by a private delivery service:
Internal Revenue Service
Attn: Julie Hanlon Bolton
CC:PSI:5, Room 5111
1111 Constitution Ave., N.W.
Washington, DC 20224
EFFECT ON OTHER DOCUMENTS
Notice 2006–60, 2006–1 C.B. 82, is ob-
solete for taxable years ending on or after
December 5, 2011.
Special Analyses
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 has also 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. It is
hereby certified that these regulations will
not have a significant economic impact on
a substantial number of small entities. This
certification is based upon the fact that the
final regulations provide a benefit to small
entities in low-income communities from
the proceeds of a tax credit because, con-
sistent with legislative intent, the final reg-
ulations allow a tax credit to be claimed
in situations where it was previously un-
available without the Secretary providing
for such situations in final regulations. Ac-
cordingly, a Regulatory Flexibility Analy-
sis under the provisions of the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Code, the notice of proposed rulemak-
ingwassubmittedtotheChiefCounselfor
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
Drafting Information
The principal author of these regu-
lations is Julie Hanlon Bolton with the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries),
IRS. However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is 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 1.45D–1 also issued under
26 U.S.C. 45D(e)(2) and (i);* * *
Par. 2. Section 1.45D–0 is added to
read as follows :
§1.45D–0 Table of contents.
This section lists the paragraphs con-
tained in §1.45D–1.
(a) Current year credit.
(b) Allowance of credit.
(1) In general.
(2) Credit allowance date.
(3) Applicable percentage.
(4) Amount paid at original issue.
(c) Qualified equity investment.
(1) In general.
(2) Equity investment.
(3) Equity investments made prior to
allocation.
(i) In general.
(ii) Exceptions.
(A) Allocation applications submitted
by August 29, 2002.
(B) Other allocation applications.
(iii) Failure to receive allocation.
(iv) Initial investment date.
(4) Limitations.
(i) In general.
(ii) Allocation limitation.
(5) Substantially all.
(i) In general.
(ii) Direct-tracing calculation.
(iii) Safe harbor calculation.
(iv) Time limit for making investments.
January 23, 20123022012–4 I.R.B.

(v) Reduced substantially-all percent-
age.
(vi) Examples.
(6) Aggregation of equity investments.
(7) Subsequent purchasers.
(d) Qualified low-income community
investments.
(1) In general.
(i) Investment in a qualified active low-
income community business.
(ii) Purchase of certain loans from
CDEs.
(A) In general.
(B) Certain loans made before CDE cer-
tification.
(C) Intermediary CDEs.
(D) Examples.
(iii) Financial counseling and other ser-
vices.
(iv) Investments in other CDEs.
(A) In general.
(B) Examples.
(2) Payments of, or for, capital, equity
or principal.
(i) In general.
(ii) Subsequent reinvestments.
(iii) Special rule for loans.
(iv) Example.
(3) Special rule for reserves.
(4) Qualified active low-income com-
munity business.
(i) In general.
(A) Gross-income requirement.
(B) Use of tangible property.
(1) In general.
(2)Example.
(C) Services performed.
(D) Collectibles.
(E) Nonqualified financial property.
(1) In general.
(2) Construction of real property.
(ii) Proprietorships.
(iii) Portions of business.
(A) In general.
(B) Examples.
(iv) Active conduct of a trade or busi-
ness.
(A) Special rule.
(B) Example.
(5) Qualified business.
(i) In general.
(ii) Rental of real property.
(iii) Exclusions.
(A) Trades or businesses involving in-
tangibles.
(B) Certain other trades or businesses.
(C) Farming.
(6) Qualifications.
(i) In general.
(ii) Control.
(A) In general.
(B) Definition of control.
(C) Disregard of control.
(7) Financial counseling and other ser-
vices.
(8) Special rule for certain loans.
(i) In general.
(ii) Example.
(9) Targeted populations.
(i) Low-income persons.
(A) Definition.
(1) In general.
(2) Area median family income.
(3) Individual’s family income.
(B) Qualified active low-income com-
munity business requirements for low-in-
come targeted populations.
(1) In general.
(2) Employee.
(3)Owner.
(4) Derived from.
(5) Fair market value of sales, rentals,
services, or other transactions.
(C) 120-percent-income restriction.
(1) In general.
(2) Population census tract location.
(D) Rental of real property for low-in-
come targeted populations.
(1) In general.
(2) Special rule for entities whose sole
business is the rental to others of real prop-
erty.
(ii) Individuals who otherwise lack ad-
equate access to loans or equity invest-
ments.
(A) In general.
(B) GO Zone Targeted Population.
(C) Qualified active low-income com-
munity business requirements for the
GO Zone Targeted Population.
(1) In general.
(2) Location.
(i) In general.
(ii) Determination.
(D) 200-percent-income restriction.
(1) In general.
(2) Population census tract location.
(E) Rental of real property for the
GO Zone Targeted Population.
(e) Recapture.
(1) In general.
(2) Recapture event.
(3) Redemption.
(i) Equity investment in a C corpora-
tion.
(ii) Equity investment in an S corpora-
tion.
(iii) Capital interest in a partnership.
(4) Bankruptcy.
(5) Waiver of requirement or extension
of time.
(i) In general.
(ii) Manner for requesting a waiver or
extension.
(iii) Terms and conditions.
(6) Cure period.
(7) Example.
(f) Basis reduction.
(1) In general.
(2) Adjustment in basis of interest in
partnership or S corporation.
(g) Other rules.
(1) Anti-abuse.
(2) Reporting requirements.
(i) Notification by CDE to taxpayer.
(A) Allowance of new markets tax
credit.
(B) Recapture event.
(ii) CDE reporting requirements to Sec-
retary.
(iii) Manner of claiming new markets
tax credit.
(iv) Reporting recapture tax.
(3) Other Federal tax benefits.
(i) In general.
(ii) Low-income housing credit.
(4)BankruptcyofCDE.
(h) Effective/applicability dates.
(1) In general.
(2) Exception for certain provisions.
(3) Targeted populations.
Par. 3. Section 1.45D–1 is amended by:
1. Revising paragraph (a).
2. Revising the first sentence in para-
graph (b)(1).
3. Revising paragraph (d)(4)(i) intro-
ductory text.
4. Adding a new sentence to the end of
paragraph (d)(4)(i)(A).
5. Adding a new sentence to the end of
paragraph (d)(4)(i)(B)(1).
6. Adding a new sentence to the end of
paragraph (d)(4)(i)(C).
7. Adding a new sentence at the end of
paragraph (d)(4)(iv)(A).
8. Adding new paragraph (d)(9).
9. Revising the heading for paragraph
(h) and adding new paragraph (h)(3).
The additions and revisions read as fol-
lows:
2012–4 I.R.B.303January 23, 2012

§1.45D–1 New markets tax credit.
(a)Current year credit. The current
year general business credit under section
38(b)(13) includes the new markets tax
credit under section 45D(a).
(b) * * * (1) * * * A taxpayer holding
a qualified equity investment on a credit
allowance date which occurs during the
taxable year may claim the new markets
tax credit determined under section 45D(a)
and this section for such taxable year in an
amount equal to the applicable percentage
of the amount paid to a qualified commu-
nity development entity (CDE) for such in-
vestment at its original issue. * * *
*****
(d) * * *
(4) * * *
(i)In general.Thetermqualified active
low-income community businessmeans,
with respect to any taxable year, a corpo-
ration (including a nonprofit corporation)
or a partnership engaged in the active con-
duct of a qualified business (as defined
in paragraph (d)(5) of this section), if the
requirements of paragraphs (d)(4)(i)(A),
(B), (C), (D), and (E) of this section are
met (or in the case of an entity serving tar-
geted populations, if the requirements of
paragraphs (d)(4)(i)(D), (E), and (d)(9)(i)
or (ii) of this section are met). Solely for
purposes of this section, a nonprofit cor-
poration will be deemed to be engaged in
the active conduct of a trade or business if
it is engaged in an activity that furthers its
purpose as a nonprofit corporation.
(A) * * * See paragraph (d)(9) of this
section for rules relating to targeted popu-
lations.
(B)***
(1)***Seeparagraph(d)(9)ofthis
section for rules relating to targeted popu-
lations.
*****
(C) * * * See paragraph (d)(9) of this
section for rules relating to targeted popu-
lations.
*****
(iv)Active conduct of a trade or busi-
ness—(A)***Thisparagraph(d)(4)(iv)
applies only for purposes of determining
whether an entity is engaged in the active
conduct of a trade or business and does not
apply for purposes of determining whether
the gross-income requirement under para-
graph (d)(4)(i)(A), (d)(9)(i)(B)(1)(i), or
(d)(9)(ii)(C)(1)(i) of this section is satis-
fied.
*****
(9)Targeted populations. For purposes
of section 45D(e)(2), targeted populations
that will be treated as a low-income com-
munity are individuals, or an identifiable
group of individuals, including an Indian
tribe, who are low-income persons as de-
fined in paragraph (d)(9)(i) of this section
or who are individuals who otherwise lack
adequate access to loans or equity invest-
ments as defined in paragraph (d)(9)(ii) of
this section.
(i)Low-income persons—(A)Defini-
tion—(1)In general. For purposes of sec-
tion 45D(e)(2) and this paragraph (d)(9),
an individual shall be considered to be
low-income if the individual’s family in-
come, adjusted for family size, is not more
than—
(i) For metropolitan areas, 80 percent of
the area median family income; and
(ii) For non-metropolitan areas, the
greater of 80 percent of the area me-
dian family income, or 80 percent of the
statewide non-metropolitan area median
family income.
(2)Area median family income.For
purposes of paragraph (d)(9)(i)(A)(1)of
this section,area median family income
is determined in a manner consistent with
the determinations of median family in-
come under section 8 of the Housing Act
of 1937, as amended. Taxpayers must use
the annual estimates of median family in-
come released by the Department of Hous-
ing and Urban Development (HUD) and
mayrelyonthosefiguresuntil45daysaf-
ter HUD releases a new list of income lim-
its, or until HUD’s effective date for the
new list, whichever is later.
(3)Individual’s family income. For pur-
poses of paragraph (d)(9)(i)(A)(1)ofthis
section, an individual’s family income is
determined using any one of the follow-
ing three methods for measuring family in-
come:
(i) Household income as measured by
the U.S. Census Bureau,
(ii) Adjusted gross income under sec-
tion 62 as reported on Internal Revenue
Service Form 1040. Adjusted gross in-
come must include the adjusted gross in-
come of any member of the individual’s
family (as defined in section 267(c)(4))
if the family member resides with the in-
dividual regardless of whether the family
member files a separate return,
(iii) Household income determined un-
der section 8 of the Housing Act of 1937,
as amended.
(B)Qualified active low-income com-
munity business requirements for low-in-
come targeted populations—(1)In gen-
eral. An entity will not be treated as a qual-
ified active low-income community busi-
ness for low-income targeted populations
unless—
(i) Except as provided in paragraph
(d)(9)(i)(D)(2) of this section, at least 50
percent of the entity’s total gross income
for any taxable year is derived from sales,
rentals, services, or other transactions with
individuals who are low-income persons
for purposes of section 45D(e)(2) and this
paragraph (d)(9);
(ii) At least 40 percent of the entity’s
employees are individuals who are low-
income persons for purposes of section
45D(e)(2) and this paragraph (d)(9); or
(iii) At least 50 percent of the entity is
owned by individuals who are low-income
persons for purposes of section 45D(e)(2)
and this paragraph (d)(9).
(2)Employee. The determination of
whether an employee is a low-income per-
son must be made at the time the employee
is hired. If the employee is a low-income
person at the time of hire, that employee is
considered a low-income person for pur-
poses of section 45D(e)(2) and this para-
graph (d)(9) throughout the time of em-
ployment, without regard to any increase
in the employee’s income after the time of
hire.
(3)Owner. The determination of
whether an owner is a low-income person
must be made at the time the qualified
low-income community investment is
made, or at the time the ownership interest
is acquired by the owner, whichever is
later. If an owner is a low-income per-
son at the time the qualified low-income
community investment is made or at the
time the ownership interest is acquired by
the owner, whichever is later, that owner
is considered a low-income person for
purposes of section 45D(e)(2) and this
paragraph (d)(9) throughout the time the
ownership interest is held by that owner.
(4)Derived from. For purposes of para-
graph (d)(9)(i)(B)(1)(i)ofthissection,the
January 23, 20123042012–4 I.R.B.

termderived fromincludes gross income
derived from:
(i) Payments made directly by low-in-
come persons to the entity; and
(ii) Money and the fair market value of
property or services provided to the en-
tity primarily for the benefit of low-income
persons, but only if the persons providing
the money, property, or services do not re-
ceive a direct benefit from the entity (for
this purpose, a contribution that benefits
the general public is not a direct benefit).
(5)Fair market value of sales, rentals,
services, or other transactions. For pur-
poses of paragraph (d)(9)(i)(B)(1)(i)of
this section, an entity with gross income
that is derived from sales, rentals, ser-
vices, or other transactions with both non
low-income persons and low-income per-
sons may treat the gross income derived
from the sales, rentals, services, or other
transactions with low-income persons as
including the full fair market value even
if the low-income persons do not pay fair
market value.
(C)120-percent-income restric-
tion—(1)In general—(i)Innocasewill
an entity be treated as a qualified active
low-income community business under
paragraph (d)(9)(i) of this section if the en-
tity is located in a population census tract
for which the median family income ex-
ceeds 120 percent of, in the case of a tract
not located within a metropolitan area, the
statewide median family income, or in the
case of a tract located within a metropoli-
tan area, the greater of statewide median
family income or metropolitan area me-
dian family income (120-percent-income
restriction).
(ii) The 120-percent-income restriction
shall not apply to an entity located within
a population census tract with a population
of less than 2,000 if such tract is not located
in a metropolitan area.
(iii) The 120-percent-income restric-
tion shall not apply to an entity located
within a population census tract with a
population of less than 2,000 if such tract
is located in a metropolitan area and more
than 75 percent of the tract is zoned for
commercial or industrial use. For this
purpose, the 75 percent calculation should
be made using the area of the popula-
tion census tract. For purposes of this
paragraph (d)(9)(i)(C)(1)(iii), property for
which commercial or industrial use is a
permissible zoning use will be treated as
zoned for commercial or industrial use.
(2)Population census tract loca-
tion—(i) For purposes of the 120-per-
cent-income restriction, an entity will be
considered to be located in a population
census tract for which the median fam-
ily income exceeds 120 percent of the
applicable median family income under
paragraph (d)(9)(i)(C)(1)(i)ofthissection
(non-qualifying population census tract)
if at least 50 percent of the total gross
income of the entity is derived from the
active conduct of a qualified business (as
defined in paragraph (d)(5) of this section)
within one or more non-qualifying popu-
lation census tracts (non-qualifying gross
income amount); at least 40 percent of the
use of the tangible property of the entity
(whether owned or leased) is within one
or more non-qualifying population census
tracts (non-qualifying tangible property
usage); and at least 40 percent of the
services performed for the entity by its
employees are performed in one or more
non-qualifying population census tracts
(non-qualifying services performance).
(ii) The entity is considered to have the
non-qualifying gross income amount if the
entity has non-qualifying tangible property
usage or non-qualifying services perfor-
mance of at least 50 percent instead of 40
percent.
(iii) If the entity has no employees, the
entity is considered to have the non-quali-
fying gross income amount and non-qual-
ifying services performance if at least 85
percent of the use of the tangible property
of the entity (whether owned or leased) is
within one or more non-qualifying popula-
tion census tracts.
(D)Rental of real property for low-in-
come targeted populations—(1)In gen-
eral. An entity that rents to others real
property for low-income targeted pop-
ulations and that otherwise satisfies the
requirements to be a qualified business
under paragraph (d)(5) of this section will
be treated as located in a low-income com-
munity for purposes of paragraph (d)(5)(ii)
of this section if at least 50 percent of the
entity’s total gross income is derived from
rentals to individuals who are low-income
persons for purposes of section 45D(e)(2)
and this paragraph (d)(9) or rentals to a
qualified active low-income community
business that meets the requirements for
low-income targeted populations under
paragraphs (d)(9)(i)(B)(1)(i)or(ii)and
(d)(9)(i)(B)(2)ofthissection.
(2)Special rule for entities whose sole
business is the rental to others of real prop-
erty. If an entity’s sole business is the
rental to others of real property under para-
graph (d)(9)(i)(D)(1) of this section, then
the gross income requirement in paragraph
(d)(9)(i)(B)(1)(i) of this section will be
considered satisfied if the entity is treated
as being located in a low-income commu-
nity under paragraph (d)(9)(i)(D)(1)ofthis
section.
(ii)Individuals who otherwise lack
adequate access to loans or equity in-
vestments—(A)In general. Paragraph
(d)(9)(ii) of this section may be applied
only with regard to qualified low-income
community investments made under the
increase in the new markets tax credit lim-
itation pursuant to section 1400N(m)(2).
Therefore, only CDEs with a significant
mission of recovery and redevelopment of
the Gulf Opportunity Zone (GO Zone) that
receive an allocation from the increase
described in section 1400N(m)(2) may
make qualified low-income community
investments from that allocation pursuant
to the rules in paragraph (d)(9)(ii) of this
section.
(B)GO Zone Targeted Population.For
purposes of the targeted populations rules
under section 45D(e)(2), an individual oth-
erwise lacks adequate access to loans or
equity investments only if the individual
was displaced from his or her principal
residence as a result of Hurricane Katrina
or the individual lost his or her principal
source of employment as a result of Hurri-
cane Katrina (GO Zone Targeted Popula-
tion). In order to meet this definition, the
individual’s principal residence or princi-
pal source of employment, as applicable,
must have been located in a population
census tract within the GO Zone that con-
tains one or more areas designated by the
Federal Emergency Management Agency
(FEMA) as flooded, having sustained ex-
tensive damage, or having sustained cata-
strophic damage as a result of Hurricane
Katrina.
(C)Qualified active low-income com-
munity business requirements for the
GO Zone Targeted Population—(1)In
general. An entity will not be treated as
a qualified active low-income community
business for the GO Zone Targeted
Population unless—
2012–4 I.R.B.305January 23, 2012

(i) At least 50 percent of the entity’s to-
tal gross income for any taxable year is
derived from sales, rentals, services, or
other transactions with the GO Zone Tar-
geted Population, low-income persons as
defined in paragraph (d)(9)(i) of this sec-
tion, or some combination thereof;
(ii) At least 40 percent of the entity’s
employees consist of the GO Zone Tar-
geted Population, low-income persons as
defined in paragraph (d)(9)(i) of this sec-
tion, or some combination thereof; or
(iii) At least 50 percent of the entity
is owned by the GO Zone Targeted Pop-
ulation, low-income persons as defined in
paragraph (d)(9)(i) of this section, or some
combination thereof.
(2)Location—(i)In general.Inor-
der to be a qualified active low-income
community business under paragraph
(d)(9)(ii)(C) of this section, the entity
must be located in a population census
tract within the GO Zone that contains
one or more areas designated by FEMA
as flooded, having sustained extensive
damage, or having sustained catastrophic
damage as a result of Hurricane Katrina
(qualifying population census tract).
(ii)Determination— For purposes of
the preceding paragraph, an entity will be
considered to be located in a qualifying
population census tract if at least 50 per-
cent of the total gross income of the en-
tity is derived from the active conduct of
a qualified business (as defined in para-
graph (d)(5) of this section) within one or
more qualifying population census tracts
(gross income requirement); at least 40
percent of the use of the tangible property
of the entity (whether owned or leased)
is within one or more qualifying popula-
tion census tracts (use of tangible property
requirement); and at least 40 percent of
the services performed for the entity by its
employees are performed in one or more
qualifying population census tracts (ser-
vices performed requirement). The entity
is deemed to satisfy the gross income re-
quirement if the entity satisfies the use of
tangible property requirement or the ser-
vices performed requirement on the basis
of at least 50 percent instead of 40 per-
cent. If the entity has no employees, the
entity is deemed to satisfy the services per-
formed requirement and the gross income
requirement if at least 85 percent of the
use of the tangible property of the entity
(whether owned or leased) is within one or
more qualifying population census tracts.
(D)200-percent-income restric-
tion—(1)In general—(i) In no case will
an entity be treated as a qualified active
low-income community business under
paragraph(d)(9)(ii)ofthissectionifthe
entity is located in a population census
tract for which the median family income
exceeds 200 percent of, in the case of a
tract not located within a metropolitan
area, the statewide median family income,
or, in the case of a tract located within a
metropolitan area, the greater of statewide
median family income or metropolitan
area median family income (200-per-
cent-income restriction).
(ii) The 200-percent-income restriction
shall not apply to an entity located within
a population census tract with a population
of less than 2,000 if such tract is not located
in a metropolitan area.
(iii) The 200-percent-income restric-
tion shall not apply to an entity located
within a population census tract with a
population of less than 2,000 if such tract
is located in a metropolitan area and more
than 75 percent of the tract is zoned for
commercial or industrial use. For this
purpose, the 75 percent calculation should
be made using the area of the population
census tract. For purposes of this para-
graph (d)(9)(ii)(D)(1)(iii), property for
which commercial or industrial use is a
permissible zoning use will be treated as
zoned for commercial or industrial use.
(2)Population census tract loca-
tion—(i) For purposes of the 200-per-
cent-income restriction, an entity will be
considered to be located in a population
census tract for which the median fam-
ily income exceeds 200 percent of the
applicable median family income under
paragraph (d)(9)(ii)(D)(1)(i) of this sec-
tion (non-qualifying population census
tract) if— at least 50 percent of the total
gross income of the entity is derived from
the active conduct of a qualified business
(as defined in paragraph (d)(5) of this sec-
tion) within one or more non-qualifying
population census tracts (non-qualifying
gross income amount); at least 40 percent
of the use of the tangible property of the
entity (whether owned or leased) is within
one or more non-qualifying population
census tracts (non-qualifying tangible
property usage); andat least 40 percent of
the services performed for the entity by its
employees are performed in one or more
non-qualifying population census tracts
(non-qualifying services performance).
(ii) The entity is considered to have the
non-qualifying gross income amount if the
entity has non-qualifying tangible property
usage or non-qualifying services perfor-
mance of at least 50 percent instead of 40
percent.
(iii) If the entity has no employees, the
entity is considered to have the non-quali-
fying gross income amount and non-qual-
ifying services performance if at least 85
percent of the use of the tangible property
of the entity (whether owned or leased) is
within one or more non-qualifying popula-
tion census tracts.
(E)Rental of real property for the
GO Zone Targeted Population.The
rental to others of real property for
the GO Zone Targeted Population that
otherwise satisfies the requirements to
be a qualified business under paragraph
(d)(5) of this section will be treated
as located in a low-income community
for purposes of paragraph (d)(5)(ii) of
this section if at least 50 percent of the
entity’s total gross income is derived
from rentals to the GO Zone Targeted
Population, rentals to low-income persons
as defined in paragraph (d)(9)(i) of this
section, or rentals to a qualified active
low-income community business that
meets the requirements for the GO Zone
Targeted Population under paragraph
(d)(9)(ii)(C)(1)(i)or(ii
)ofthissection.
*****
(h)Effective/applicability dates.
*****
(3)Targeted populations.Therulesin
paragraph (d)(9) of this section and the last
sentence in paragraph (d)(4)(iv)(A) of this
section apply to taxable years ending on
or after December 5, 2011. A taxpayer
may apply the rules in paragraph (d)(9) of
this section to taxable years ending be-
fore December 5, 2011 for designations
made by the Secretary after October 22,
2004.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved November 22, 2011.
January 23, 20123062012–4 I.R.B.

Emily S. McMahon,
Acting Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 2,
2011, 8:45 a.m., and published in the issue of the Federal
Register for December 5, 2011, 76 F.R. 75774)
2012–4 I.R.B.307January 23, 2012

Part III. Administrative, Procedural, and Miscellaneous
Iowa Low-Income Housing
Credit Disaster Relief
Notice 2
012–7
The Internal Revenue Service is sus-
pending certain requirements under § 42 of
the Internal Revenue Code for low-income
housing credit projects to provide emer-
gency housing relief needed as a result of
thedevastationinIowacausedbyflooding
during the period of May 25, 2011, to Au-
gust 1, 2011. This relief is being granted
pursuant to the Service’s authority under
§ 42(n) and § 1.42–13(a) of the Income Tax
Regulations.
BACKGROUND
On Ju
ne 27, 2011, the President de-
clar
ed a major disaster for the State of
Iowa
. This declaration was made under
the R
obert T. Stafford Disaster Relief and
Eme
rgency Assistance Act, 42 U.S.C.
512
1et seq. On October 18, 2011, the
Fed
eral Emergency Management Agency
(FE
MA) designated jurisdictions for In-
div
idual Assistance resulting from the
fl
ooding during the period of May 25,
20
11, to August 1, 2011. The State of
Io
wa has requested that the Service al-
lo
w owners of low-income housing credit
pr
ojects to provide temporary housing in
va
cant units to individuals who resided
i
n jurisdictions designated for Individual
A
ssistanceinIowaandwhohavebeen
d
isplaced because their residences were
d
estroyed or damaged as a result of the
d
evastation caused by the flooding. Based
upon this request andbecause of the wide-
spread damage to housing caused by the
flooding, the Service has determined that
the Iowa Finance Authority (Authority)
may provide approval to project owners to
provide temporary emergency housing for
displaced individuals in accordance with
this notice.
I. SUSPENSION OF INCOME
LIMITATIONS
The Service has determined that it is
appropriate to temporarily suspend certain
income limitation requirements under § 42
for certain qualified low-income housing
projects. The suspension will apply to
low-income housing projects approved by
the Authority, in which vacant units are
rented to displaced individuals. The Au-
thority will determine the appropriate pe-
riod of temporary housing for each project,
not to extend beyond December 31, 2012
(temporary housing period).
II. STATUS OF UNITS
A. Units in the first year of the credit
period
A displaced individual temporarily
occupying a unit during the first year of
the credit period under § 42(f)(1) will be
deemed a qualified low-income tenant
for purposes of determining the project’s
qualified basis under § 42(c)(1), and for
meeting the project’s 20-50 test or 40-60
test as elected by the project owner under
§ 42(g)(1). After the end of the temporary
housing period established by the Author-
ity (not to extend beyond December 31,
2012), a displaced individual will no
longer be deemed a qualified low-income
tenant.
B. Vacant units after the first year of the
credit period
During the temporary housing period
established by the Authority, the status of a
vacant unit (that is, market-rate or low-in-
come for purposes of § 42 or never previ-
ously occupied) after the first year of the
credit period that becomes temporarily oc-
cupied by a displaced individual remains
the same as the unit’s status before the
displaced individual moves in. Displaced
individuals temporarily occupying vacant
units will not be treated as low-income
tenants under § 42(i)(3)(A)(ii). However,
even if it houses a displaced individual, a
low-income or market rate unit that was
vacant before the effective date of this no-
tice will continue to be treated as a va-
cant low-income or market rate unit. Sim-
ilarly, a unit that was never previously oc-
cupied before the effective date of this no-
tice will continue to be treated as a unit
that has never been previously occupied
even if it houses a displaced individual.
Thus, the fact that a vacant unit becomes
occupied by a displaced individual will
not affect the building’s applicable frac-
tion under § 42(c)(1)(B) for purposes of
determining the building’s qualified basis,
nor will it affect the 20-50 test or 40-60
test of § 42(g)(1). If the income of oc-
cupants in low-income units exceeds 140
percent of the applicable income limita-
tion, the temporary occupancy of a unit by
a displaced individual will not cause ap-
plication of the available unit rule under
§ 42(g)(2)(D)(ii). In addition, the project
owner is not required during the temporary
housing period to make attempts to rent
to low-income individuals the low-income
units that house displaced individuals.
III. S
USPENSION OF
NON-T
RANSIENT REQUIREMENTS
The non-transient use requirement of
§ 42(i)(3)(B)(i) shall not apply to any
unit providing temporary housing to a
displaced individual during the temporary
housing period determined by the Author-
ity in accordance with section I of this
notice.
IV. OTHER REQUIREMENTS
All
other rules and requirements of
§42
will continue to apply during the
tem
porary housing period established
by t
he Authority. After the end of the
tem
porary housing period, the appli-
ca
ble income limitations contained in
§4
2(g)(1), the available unit rule un-
de
r § 42(g)(2)(D)(ii), the nontransient
re
quirement of § 42(i)(3)(B)(i), and the
re
quirement to make reasonable attempts
to
rent vacant units to low-income individ-
u
als shall resume. If a project owner offers
t
o rent a unit to a displaced individual after
t
he end of the temporary housing period,
t
he displaced individual must be certified
u
nder the requirements of § 42(i)(3)(A)(ii)
and § 1.42–5(b) and (c) to be a qualified
low-income tenant. To qualify for the re-
lief in this notice, the project owner must
additionally meet all of the following re-
quirements:
(1) Major Disaster Area
The displaced individual must have
residedinanIowajurisdictiondesignated
for Individual Assistance by FEMA as a
result of the devastation in Iowa caused
by flooding during the period of May 25,
2011, to August 1, 2011.
January 23, 20123082012–4 I.R.B.

(2) Approval of the Authority
The project owner must obtain approval
from the Authority for the relief described
in this notice. The Authority will deter-
mine the appropriate period of temporary
housing for each project, not to extend be-
yond December 31, 2012.
(3) Certificationsand Recordkeeping
To comply with the requirements of
§ 1.42–5, project owners are required to
maintain and certify certain information
concerning each displaced individual tem-
porarily housed in the project, specifically
the following: name, address of damaged
residence, social security number, and a
statement signed under penalties of perjury
by the displaced individual that, because
of damage to the individual’s residence
in an Iowa jurisdiction designated for In-
dividual Assistance by FEMA as a result
of the devastation caused in Iowa caused
by flooding during the period of May 25,
2011, to August 1, 2011, the individual
requires temporary housing. The owner
must notify the Authority that vacant units
are available for rent to displaced individ-
uals.
The owner must also certify the date the
displaced individual began temporary oc-
cupancy and the date the project will dis-
continue providing temporary housing as
established by the Authority. The certi-
fications and recordkeeping for displaced
individuals must be maintained as part of
the annual compliance monitoring process
with the Authority.
(4) Rent Restrictions
Rents for the low-income units that
house displaced individuals must not ex-
ceed the existing rent-restricted rates for
the low-income units established under
§ 42(g)(2).
(5) Protection of Existing Tenants
Existing tenants in occupied low-in-
come units cannot be evicted or have their
tenancy terminated as a result of efforts to
provide temporary housing for displaced
individuals.
EFFECTIVE DATES
This notice is effective June 27, 2011
(the date of the President’s major disas-
ter declaration for devastation caused by
flooding during the period of May 25,
2011, to August 1, 2011).
PAPERWORK REDUCTION ACT
The collection of information contained
in this notice has been reviewed and ap-
proved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–2223.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information in this
notice is in the section titled “OTHER RE-
QUIREMENTS” under “(3) Certifications
and Recordkeeping.” This information is
required to enable the Service to verify
whether individuals are displaced as a
result of the devastation in Iowa caused
by flooding during the period of May 25,
2011, to August 1, 2011, and thus warrant
temporary housing in vacant low-income
housing units. The collection of informa-
tion is required to obtain a benefit. The
likely respondents are individuals and
businesses.
The estimated total annual recordkeep-
ing burden is 125 hours.
The estimated annual burden per
recordkeeper is approximately 15 minutes.
The estimated number of recordkeepers is
500.
Books or records relating to a collection
of information must be retained as long
as their contents may become material to
the administration of the internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this notice is
David Selig of the Office of Associate
Chief Counsel (Passthroughs & Special
Industries). For further information re-
garding this notice, contact Mr. Selig at
(202) 622–3040 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct liability.
(Also: Part I, sections 66, 6015.)
Notice 2012–8
This notice provides a proposed rev-
enue procedure that would update Rev.
Proc. 2003–61, 2003–2 C.B. 296, which
provides guidance regarding equitable re-
lief from income tax liability under section
66(c) and section 6015(f) of the Internal
Revenue Code. Since the issuance of Rev.
Proc. 2003–61 in August 2003, the Inter-
nal Revenue Service’s experience in work-
ing section 6015(f) equitable relief cases
has grown significantly. This proposed up-
date to Rev. Proc. 2003–61 addresses the
criteria used in making innocent spouse re-
lief determinations for section 6015(f) eq-
uitable relief cases and revises the factors
for granting equitable relief. The factors
have been revised to ensure that requests
for innocent spouse relief are granted un-
der section 6015(f) when the facts and cir-
cumstances warrant and that, when appro-
priate, requests are granted in the initial
stage of the administrative process.
Significantly, this proposed revenue
procedure expands how the IRS will take
into account abuse andfinancial control
by the nonrequesting spouse in determin-
ing whether equitable relief is warranted.
Review of the innocent spouse program
demonstrated that when a requesting
spouse has been abused by the nonre-
questing spouse, the requesting spouse
may not have been able to challenge the
treatment of any items on the joint return,
question the payment of the taxes reported
as due on the joint return, or challenge
the nonrequesting spouse’s assurance re-
garding the payment of the taxes. Review
of the program also highlighted that lack
of financial control may have a similar
impact on the requesting spouse’s ability
to satisfy joint tax liabilities. As a result,
this proposed revenue procedure provides
that abuse or lack of financial control may
mitigate other factors that might otherwise
weigh against granting equitable relief
under section 6015(f).
The proposed revenue procedure also
provides for certain streamlined case de-
terminations; new guidance on the poten-
tial impact of economic hardship; and the
weight to be accorded to certain factual
2012–4 I.R.B.309January 23, 2012

circumstances in determining equitable re-
lief.
The proposed revenue procedure sets
forth the background concerning the re-
lief from joint and several liability under
section 6015, a summary of the proposed
changes to Rev. Proc. 2003–61, and the
proposed text of the updated revenue pro-
cedure. Before issuing an updated revenue
procedure addressing the equitable relief
under section 6015(f), the Department of
the Treasury and the Internal Revenue
Service invite comments from the public
regarding the proposed revenue proce-
dure. Treasury and the Service also invite
comments related to the administration
of the innocent spouse relief program.
Because the provisions in the proposed
revenue procedure expand the equitable
relief analysis by providing additional con-
siderations for taxpayers seeking relief,
until the revenue procedure is finalized,
the Service will apply the provisions in
the proposed revenue procedure instead
of Rev. Proc. 2003–61 in evaluating
claims for equitable relief under section
6015(f). If taxpayers conclude that they
would receive more favorable treatment
under one or more of the factors provided
in Rev. Proc. 2003–61 they should ad-
vise the Service in their application for
relief or supplement an already existing
application. Then the Service will apply
those factors from Rev. Proc. 2003–61,
until a new revenue procedure is final-
ized. Comments also are requested on any
factors contained in Rev. Proc. 2003–61
that might be interpreted as being more
favorable to requesting spouses than those
proposed in this notice.
CommentsshouldbesubmittedbyFeb-
ruary 21, 2012 to:
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2012–8)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
or hand deliver comments Monday
through Friday between the hours of
8a.m.and4p.m.to:
Courier’s Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2012–8)
1111 Constitution Avenue, N.W.
Washington, D.C. 20224
Alternatively, persons may sub-
mit comments electronically via
e-mail to the following address:
Notice.Comments@irscounsel.treas.gov.
Persons should include “Notice 2012–8”
in the subject line. All comments
submitted by the public will be available
for public inspection and copying in their
entirety.
Proposed Rev. Proc. [XXXX–XX]
SECTION 1. PURPOSE AND SCOPE
.01Purpose.This revenue procedure
provides guidance for a taxpayer seeking
equitable relief from income tax liability
under section 66(c) or section 6015(f) of
the Internal Revenue Code (a “request-
ing spouse”). Section 4.01 of this rev-
enue procedure provides the threshold re-
quirements for any request for equitable
relief. Section 4.02 of this revenue proce-
dure sets forth the conditions under which
the Internal Revenue Service will make
streamlined relief determinations granting
equitable relief under section 6015(f) from
an understatement of income tax or an
underpayment of income tax reported on
a joint return. Section 4.03 of this rev-
enue procedure provides a nonexclusive
list of factors for consideration in deter-
mining whether relief should be granted
under section 6015(f) because it would
be inequitable to hold a requesting spouse
jointly and severally liable when the con-
ditions of section 4.02 are not met. The
factorsinsection4.03alsowillapplyin
determining whether to relieve a spouse
from income tax liability resulting from
the operation of community property law
under the equitable relief provision of sec-
tion 66(c).
.02Scope.This revenue procedure ap-
plies to spouses who request either equi-
table relief from joint and several liability
under section 6015(f), or equitable relief
under section 66(c) from income tax lia-
bility resulting from the operation of com-
munity property law.
SECTION 2. BACKGROUND
.01 Section 6013(d)(3) provides that
married taxpayers who file a joint return
under section 6013 will be jointly and
severally liable for the income tax arising
from that joint return. For purposes of
section 6013(d)(3) and this revenue pro-
cedure, the term “tax” includes penalties,
additions to tax, and interest. See sections
6601(e)(1) and 6665(a)(2).
.02 Section 3201(a) of the Internal Rev-
enue Service Restructuring and Reform
Act of 1998, Pub. L. No. 105–206, 112
Stat. 685, 734 (RRA), enacted section
6015, which provides relief in certain
circumstances from the joint and several
liability imposed by section 6013(d)(3).
Section 6015(b) and (c) specify two sets
of circumstances under which relief from
joint and several liability is available in
cases involving understatements of tax.
Section 6015(b) is modeled after former
section 6013(e), the prior innocent spouse
statute, and section 6015(c) provides for
separation of liability. If relief is not avail-
able under section 6015(b) or (c), section
6015(f) authorizes the Secretary to grant
equitable relief if, taking into account all
the facts and circumstances, the Secretary
determines that it is inequitable to hold a
requesting spouse liable for any unpaid
tax or any deficiency (or any portion of
either). Section 66(c) provides relief from
income tax liability resulting from the
operation of community property law to
taxpayers domiciled in a community prop-
erty state who do not file a joint return.
Section 3201(b) of RRA amended section
66(c) to add an equitable relief provision
similar to section 6015(f).
.03Section6015providesreliefonly
from joint and several liability arising from
a joint return. If an individual signs a
joint return under duress, the election to
file jointly is not valid and there is no valid
joint return. The individual is not jointly
and severally liable for any income tax lia-
bilities arising from that return. Therefore,
section 6015 does not apply and is not nec-
essary for obtaining relief.
.04 Under section 6015(b) and (c), re-
lief is available only from an understate-
ment or a deficiency. Section 6015(b) and
(c) do not authorize relief from an under-
payment of income tax reported on a joint
return. Section 66(c) and section 6015(f)
permit equitable relief from an underpay-
January 23, 20123102012–4 I.R.B.

ment of income tax or from a deficiency.
The legislative history of section 6015 pro-
vides that Congress intended for the Secre-
tary to exercise discretion in granting eq-
uitable relief from an underpayment of in-
come tax if a requesting spouse “does not
know, and had no reason to know, that
funds intended for the payment of tax were
instead taken by the other spouse for such
other spouse’s benefit.” H.R. Conf. Rep.
No. 105–599, at 254 (1998). Congress
also intended for the Secretary to exercise
the equitable relief authority under section
6015(f) in other situations if, “taking into
account all the facts and circumstances, it
is inequitable to hold an individual liable
for all or part of any unpaid tax or defi-
ciency arising from a joint return.”Id.
SECTION 3. SIGNIFICANT CHANGES
This revenue procedure supersedes
Revenue Procedure 2003–61, changing
the following:
.01 Section 4.01(3) of this revenue pro-
cedure provides that a request for equi-
table relief under section 6015(f) or section
66(c) must be filed before the expiration of
the period of limitation for collection un-
der section 6502, or, if applicable, the pe-
riod of limitation for credit or refund under
section 6511. This is a significant change
to the requirement in Revenue Procedure
2003–61, section 4.01(3) and Treas. Reg.
§ 1.6015–5(b)(1) (T.D. 9003), that the re-
questing spouse’s claim for equitable relief
must be filed no later than two years after
the date of the Service’s first collection ac-
tivity.SeeNotice 2011–70.
.02 Section 4.01(7)(e) of this revenue
procedure adds a new exception to the
threshold condition in section 4.01(7) that
the income tax liability must be attrib-
utable to an item of the nonrequesting
spouse, when the nonrequesting spouse’s
fraud gave rise to the understatement of
tax or deficiency.
.03 Section 4.02 of this revenue proce-
dure has been revised to apply to under-
statements of income tax in addition to un-
derpayments. Section 4.02 has also been
revised to apply to claims for equitable re-
lief under section 66(c).
.04Section4.03(2)isrevisedtoclar-
ify that no one factoror a majority of fac-
tors necessarily controls the determination.
Therefore, depending on the facts and cir-
cumstances of the case, relief may still be
appropriate if the number of factors weigh-
ing against relief exceeds the number of
factors weighing in favor of relief, or a de-
nial of relief may still be appropriate if the
number of factors weighing in favor of re-
lief exceeds the number of factors weigh-
ing against relief.
.05 Section 4.03(2)(b) of this revenue
procedure revises the economic hardship
equitable factor to provide minimum stan-
dards based on income, expenses, and
assets, for determining whether the re-
questing spouse would suffer economic
hardship if relief is not granted. Section
4.03(2)(b) is also revised to provide that
the lack of a finding of economic hardship
does not weigh against relief.
.06 Section 4.03(2)(c)(i) of this revenue
procedure provides that actual knowledge
of the item giving rise to an understatement
or deficiency will no longer be weighed
more heavily than other factors. Further,
section 4.03(2)(c)(ii) clarifies that, for
purposes of this factor, if the nonrequest-
ing spouse abused the requesting spouse
or maintained control over the house-
hold finances by restricting the requesting
spouse’s access to financial information,
and, therefore, because of the abuse or
financial control the requesting spouse
was not able to challenge the treatment of
any items on the joint return for fear of the
nonrequesting spouse’s retaliation, then
that abuse or financialcontrolwillresultin
this factor weighing in favor of relief even
if the requesting spouse had knowledge or
reason to know of the items giving rise to
the understatement or deficiency.
.07 Section 4.03(2)(c)(ii) of this rev-
enue procedure provides that, in deter-
mining whether the requesting spouse
had knowledge or reason to know that
the nonrequesting spouse would not pay
the tax reported as due, the Service will
consider whether the requesting spouse
reasonably expected that the nonrequest-
ing spouse would pay the tax liability
within a reasonably prompt time. Fur-
ther, section 4.03(2)(c)(ii) clarifies that for
purposes of this factor, if the nonrequest-
ing spouse abused the requesting spouse
or maintained control over the house-
hold finances by restricting the requesting
spouse’s access to financial information,
and, therefore, because of the abuse or fi-
nancial control the requesting spouse was
not able to question the payment of the
taxes reported as due on the joint return
or challenge the nonrequesting spouse’s
assurance regarding payment of the taxes
for fear of the nonrequesting spouse’s
retaliation, then that abuse or financial
control will result in this factor weighing
in favor of relief even if the requesting
spouse had knowledge or reason to know
that the nonrequesting spouse would not
pay the tax liability.
.08 Section 4.03(2)(d) of this rev-
enue procedure clarifies that a requesting
spouse’s legal obligation to pay outstand-
ing tax liabilities is a factor to consider
in determining whether equitable relief
should be granted, in addition to whether
the nonrequesting spouse has a legal obli-
gation to pay the tax liabilities.
.09 Section 4.03(2)(f) of this revenue
procedure is revised to provide that the fact
that a requesting spouse is subsequently
compliant with all Federal income tax laws
is a factor that may weigh in favor of relief.
.10 Section 4.04 of this revenue proce-
dure broadens the availability of refunds in
cases involving deficiencies by eliminat-
ing the rule in section 4.04(1) of Rev. Proc.
2003–61 that limited refunds in cases in-
volving deficiencies to payments made by
the requesting spouse pursuant to an in-
stallment agreement.
SECTION 4. GENERAL CONDITIONS
FOR RELIEF
.01Eligibility for equitable relief.A
requesting spouse must satisfy all of the
following threshold conditions to be eli-
gible to submit a request for equitable re-
lief under section 6015(f). With the excep-
tion of conditions (1) and (2), a request-
ing spouse must satisfy all of the follow-
ing threshold conditions to be eligible to
submit a request for equitable relief under
section 66(c). The Service may relieve a
requesting spouse who satisfies all the ap-
plicable threshold conditions set forth be-
low of all or part of the income tax liabil-
ity under section 66(c) or section 6015(f)
if, taking into account all the facts and cir-
cumstances, the Service determines that it
would be inequitable to hold the requesting
spouse liable for the income tax liability.
The threshold conditions are as follows:
(1) The requesting spouse filed a joint
return for the taxable year for which he or
she seeks relief.
(2) Relief is not available to the request-
ing spouse under section 6015(b) or (c).
2012–4 I.R.B.311January 23, 2012

(3) Time for filing claim for relief:
(a) If the requesting spouse is applying
for relief from a liability or a portion of a li-
ability that remains unpaid, the request for
relief must be made before the expiration
of the period of limitation on collection of
the income tax liability, as provided in sec-
tion 6502. Generally, that period expires
10 years after the assessment of tax. Sec-
tion 6502.
(b) Claims for credit or refund of
amounts paid must be made before the
expiration of the period of limitation on
credit or refund, as provided in section
6511. Generally, that period expires three
years from the time the return was filed or
two years from the time the tax was paid,
whichever is later.
(4) No assets were transferred between
the spouses as part of a fraudulent scheme
by the spouses.
(5) The nonrequesting spouse did not
transfer disqualified assets to the request-
ing spouse. For this purpose, the term
“disqualified asset” has the meaning given
the term by section 6015(c)(4)(B). If the
nonrequesting spouse transferred disqual-
ified assets to the requesting spouse, relief
will be available only to the extent that the
income tax liability exceeds the value of
the disqualified assets. This condition will
not result in the requesting spouse being
ineligible for relief if the nonrequesting
spouse abused the requesting spouse or
maintained control over the household
finances by restricting the requesting
spouse’s access to financial information,
or the requesting spouse did not have ac-
tual knowledge that disqualified assets
were transferred.
(6) The requesting spouse did not
knowingly participate in the filing of a
fraudulent joint return.
(7) The income tax liability from which
the requesting spouse seeks relief is attrib-
utable (either in full or in part) to an item
of the nonrequesting spouse or an under-
payment resulting from the nonrequesting
spouse’s income. If the liability is partially
attributable to the requesting spouse, then
relief can only be considered for the por-
tion of the liability attributable to the non-
requesting spouse. Nonetheless, the Ser-
vice will consider granting relief regard-
less of whether the understatement, defi-
ciency, or underpayment is attributable (in
full or in part) to the requesting spouse if
any of the following exceptions applies:
(a)Attribution solely due to the oper-
ation of community property law.Ifan
item is attributable or partially attribut-
able to the requesting spouse solely due to
the operation of community property law,
then for purposes of this revenue proce-
dure, that item (or portion thereof) will be
considered to be attributable to the nonre-
questing spouse.
(b)Nominal ownership. If the item is
titled in the name of the requesting spouse,
the item is presumptively attributable to
the requesting spouse. This presumption
is rebuttable. For example, H opens an in-
dividual retirement account (IRA) in W’s
name and forges W’s signature on the IRA
in 2006. Thereafter, H makes contribu-
tions to the IRA and in 2008 takes a tax-
able distribution from the IRA. H and W
file a joint return for the 2008 taxable year,
but do not report the taxable distribution
on their joint return. The Service later de-
termines a deficiency relating to the tax-
able IRA distribution. W requests relief
from joint and several liability under sec-
tion 6015. W establishes that W did not
contribute to the IRA, sign paperwork re-
lating to the IRA, or otherwise act as if W
were the owner of the IRA. W thereby re-
butted the presumption that the IRA is at-
tributable to W.
(c)Misappropriation of funds.Ifthe
requesting spouse did not know, and had
no reason to know, that funds intended for
the payment of tax were misappropriated
by the nonrequesting spouse for the nonre-
questing spouse’s benefit, the Service will
consider granting equitable relief although
the underpayment may be attributable in
part or in full to an item of the requesting
spouse. The Service will consider granting
relief in the case only to the extent that the
funds intended for the payment of tax were
taken by the nonrequesting spouse.
(d)Abuse not amounting to duress.If
the requesting spouse establishes that he or
shewasthevictimofabusepriortothe
time the return was signed, and that, as
a result of the prior abuse, the requesting
spouse did not challenge the treatment of
any items on the return, or question the
payment of any balance due reported on
the return, for fear of the nonrequesting
spouse’s retaliation, the Service will con-
sider granting equitable relief even though
the deficiency or underpayment may be at-
tributable in part or in full to an item of the
requesting spouse.
(e)Fraud committed by nonrequesting
spouse. The Service will consider granting
relief notwithstanding that the item giving
rise to the understatement or deficiency is
attributable to the requesting spouse, if the
requesting spouse establishes that the non-
requesting spouse’s fraud is the reason for
the erroneous item. For example, W fraud-
ulently accesses H’s brokerage account to
sell stock that H had separately received
from an inheritance. W deposits the funds
from the sale in a separate bank account
to which H does not have access. H and
W file a joint Federal income tax return
for the year, which does not report the in-
come from the sale of the stock. The Ser-
vice determines a deficiency based on the
omission of the income from the sale of
the stock. H requests relief from the defi-
ciency under section 6015(f). The income
from the sale of the stock normally would
be attributable to H. Because W commit-
ted fraud with respect to H, however, and
because this fraud was the reason for the
erroneous item, the liability is properly at-
tributable to W.
.02.Circumstances under which the
Service will make streamlined determina-
tions granting equitable relief under sec-
tions 66(c) and 6015(f).
If a requesting spouse who filed a joint
return, or a requesting spouse who filed
a separate return in a community prop-
erty state, satisfies the threshold condi-
tions of section 4.01, the Service will con-
sider whether the requesting spouse is en-
titled to a streamlined determination of eq-
uitable relief under section 66(c) or sec-
tion 6015(f) under section 4.02. If a re-
questing spouse is not entitled to a stream-
lined determination because the requesting
spouse does not satisfy all the elements in
section 4.02, the requesting spouse is still
entitled to be considered for relief under
the equitable factors in section 4.03. The
Service will make streamlined determina-
tions granting equitable relief under sec-
tions 66(c) and 6015(f), in cases in which
the requesting spouse establishes that the
requesting spouse:
(1) Is no longer married to the non-
requesting spouse as set forth in section
4.03(2)(a);
(2) Would suffer economic hardship if
relief were not granted as set forth in sec-
tion 4.03(2)(b); and
(3) Did not know or have reason to
know that there was an understatement or
January 23, 20123122012–4 I.R.B.

deficiency on the joint return, as set forth
in section 4.03(2)(c)(i), or did not know
or have reason to know that the nonre-
questing spouse would not or could not
pay the underpayment of tax reported on
the joint income tax return, as set forth in
section 4.03(2)(c)(ii). If the nonrequest-
ing spouse abused the requesting spouse
or maintained control over the house-
hold finances by restricting the requesting
spouse’s access to financial information,
and therefore, becauseof the abuse or fi-
nancial control the requesting spouse was
not able to challenge the treatment of any
items on the joint return, or to question
the payment of the taxes reported as due
on the joint return or challenge the non-
requesting spouse’s assurance regarding
payment of the taxes, for fear of the non-
requesting spouse’s retaliation, then the
abuse or financial control will result in this
factor being satisfied even if the request-
ing spouse had knowledge or reason to
know of the items giving rise to the under-
statement or deficiency or had knowledge
or reason to know that the nonrequesting
spouse would not pay the tax liability.
.03.Factors for determining whether to
grant equitable relief.
(1)Applicability. This section 4.03 ap-
pliestorequestingspouseswhorequestre-
lief under section 66(c) or section 6015(f),
and satisfy the threshold conditions of sec-
tion 4.01, but do not qualify for stream-
lined determinations granting relief under
section 4.02.
(2)Factors. In determining whether it
is inequitable to hold the requesting spouse
liable for all or part of the unpaid income
tax liability or deficiency, and full or par-
tial equitable relief under section 66(c) or
section 6015(f) should be granted, all the
facts and circumstances of the case are
to be taken into account. The degree of
importance of each factor varies depend-
ing on the circumstances of the requesting
spouse and the factual context surrounding
the marriage. The factors are designed as
guides. It is not intended that only the fac-
tors described in this paragraph are to be
taken into account in making the determi-
nation. No one factor or a majority of fac-
tors necessarily determines the outcome.
Factors to consider include the following:
(a)Marital status. Whether the request-
ing spouse is no longer married to the non-
requesting spouse as of the date the Service
makes its determination. If the requesting
spouse is still married to the nonrequesting
spouse, this factor is neutral. If the request-
ing spouse is no longer married to the non-
requesting spouse, this factor will weigh in
favor of relief. For purposes of this sec-
tion, a requesting spouse will be treated as
being no longer married to the nonrequest-
ing spouse only in the following situations:
(i) The requesting spouse is divorced
from the nonrequesting spouse,
(ii) The requesting spouse is legally
separated from the nonrequesting spouse
under applicable state law,
(iii) The requesting spouse is a widow
or widower and is not an heir to the nonre-
questing spouse’s estate which would have
sufficient assets to pay the tax liability, or
(iv) The requesting spouse has not been
a member of the same household as the
nonrequesting spouse at any time during
the 12-month period ending on the date
relief was requested. For these purposes,
a temporary absence (e.g., due to incarcer-
ation, illness, business, military service,
or education) is not considered separa-
tion if the absent spouse is expected to
return to the household. See Treas. Reg.
§ 1.6015–3(b)(3)(i). A requesting spouse
is a member of the same household as
the nonrequesting spouse for any period
in which the spouses maintain the same
residence.
(b)Economic hardship.Whetherthe
requesting spouse will suffer economic
hardship if relief is not granted. For pur-
poses of this factor, an economic hardship
exists if satisfaction of the tax liability in
whole or in part willcause the requesting
spouse to be unable to pay reasonable basic
living expenses. Whether the request-
ing spouse will suffer economic hardship
is determined based on rules similar to
those provided in §301.6343–1(b)(4), and
will take into consideration a requesting
spouse’s current income and expenses and
the requesting spouse’s assets. In deter-
mining the requesting spouse’s reasonable
basic living expenses, the Service will
consider whether the requesting spouse
shares expenses or has expenses paid by
another individual (such as a spouse). If
denying relief from the joint and several
liability will cause the requesting spouse
to suffer economic hardship, this factor
will weigh in favor of relief. If denying
relief from the joint and several liability
will not cause the requesting spouse to
suffer economic hardship, this factor will
be neutral.
In determining whether the requesting
spouse would suffer economic hardship if
relief is not granted, the Service will com-
pare the requesting spouse’s income to the
Federal poverty guidelines (as updated pe-
riodically in the Federal Register by the
U.S. Department of Health and Human
Services under the authority of 42 U.S.C.
§ 9902(2)) for the requesting spouse’s fam-
ily size and will determine by how much, if
at all, the requesting spouse’s monthly in-
come exceeds the spouse’s reasonable ba-
sic monthly living expenses. If the re-
questing spouse’s income is below 250%
of the Federal poverty guidelines, or if the
requesting spouse’s monthly income ex-
ceeds the requesting spouse’s reasonable
basic monthly living expenses by $300 or
less, then this factor will weigh in favor
of relief unless the requesting spouse has
assets out of which the requesting spouse
can make payments towards the tax liabil-
ity and still adequately meet the requesting
spouse’s reasonable basic living expenses.
If the requesting spouse’s income exceeds
these standards, the Service will consider
all facts and circumstances in determin-
ing whether the requesting spouse would
suffer economic hardship if relief is not
granted. If the requesting spouse is de-
ceased, this factor is neutral.
(c)Knowledgeorreasontoknow.
(i)Understatement cases. Whether the
requesting spouse knew or had reason to
know of the item giving rise to the under-
statement or deficiency at the time the re-
questing spouse signed the joint return (in-
cluding a joint amended return). In the
case of an income tax liability that arose
from an understatement or a deficiency,
this factor will weigh in favor of relief if
the requesting spouse did not know and
had no reason to know of the item giving
rise to the understatement. If the request-
ing spouse knew or had reason to know of
the item giving rise to the understatement,
this factor will weigh against relief. Ac-
tual knowledge of the item giving rise to
the understatement or deficiency will not
be weighed more heavily than any other
factor. Depending on the facts and cir-
cumstances, if the requesting spouse was
abused by the nonrequesting spouse (as de-
scribed in section 4.03(2)(c)(iv)), or the
nonrequesting spouse maintained control
of the household finances by restricting
2012–4 I.R.B.313January 23, 2012

the requesting spouse’s access to financial
information and, therefore, the requesting
spouse was not able to challenge the treat-
ment of any items on the joint return for
fear of the nonrequesting spouse’s retalia-
tion, this factor will weigh in favor of relief
even if the requesting spouse had knowl-
edge or reason to know of the items giving
rise to the understatement or deficiency.
(ii)Underpayment cases. In the case of
an income tax liability that was properly
reported on a joint return (including a joint
amended return) but not paid, whether the
requesting spouse knew or had reason to
know at the time the requesting spouse
signed the joint return that the nonrequest-
ing spouse would not or could not pay the
tax liability at the time the joint return was
filed or within a reasonably prompt time
after the filing of the joint return. This
factor will weigh in favor of relief if the
requesting spouse reasonably expected the
nonrequesting spouse to pay the tax liabil-
ityreportedonthejointreturn.Thisfactor
will weigh against relief if, based on the
facts and circumstances of the case, it was
not reasonable for the requesting spouse
to believe that the nonrequesting spouse
would or could pay the tax liability shown
on the joint return within a reasonably
prompt time after filing of the return. For
example, if prior to signing the return, the
requesting spouse knew of the nonrequest-
ing spouse’s prior bankruptcies, financial
difficulties, or other issues with the IRS or
other creditors, or was otherwise aware of
difficulties in timely paying bills, then this
factor will generally weigh against relief.
Depending on the facts and circumstances,
if the requesting spouse was abused by the
nonrequesting spouse (as described in sec-
tion 4.03(2)(c)(iv)), or the nonrequesting
spouse maintained control of the house-
hold finances by restricting the requesting
spouse’s access to financial information
and, therefore, the requesting spouse was
not able to question the payment of the
taxes reported as due on the joint return
or challenge the nonrequesting spouse’s
assurance regarding payment of the taxes
for fear of the nonrequesting spouse’s re-
taliation, this factor will weigh in favor
of relief even if the requesting spouse had
knowledge or reason to know regarding
the nonrequesting spouse’s intent or abil-
ity to pay the taxes due.
(iii)Reason to know. The facts and cir-
cumstances that are considered in deter-
mining whether the requesting spouse had
reason to know of an understatement, or
reason to know the nonrequesting spouse
could not or would pay the reported tax li-
ability, include, but are not limited to, the
requesting spouse’s level of education, any
deceit or evasiveness of the nonrequest-
ing spouse, the requesting spouse’s de-
gree of involvement in the activity gener-
ating the income tax liability, the request-
ing spouse’s involvement in business and
household financial matters, the request-
ing spouse’s business or financial exper-
tise, and any lavish or unusual expendi-
tures compared with past spending levels.
(iv)Abuse by the nonrequesting spouse.
For purposes of this revenue procedure, if
the requesting spouse establishes that he or
she was the victim of abuse (not amounting
to duress, see Treas. Reg. § 1.6015–1(b)),
then depending on the facts and circum-
stances of the requesting spouse’s situa-
tion, the abuse may result in certain fac-
tors weighing in favor of relief when other-
wise the factor may have weighed against
relief. Abuse comes in many forms and
can include physical, psychological, sex-
ual, or emotional abuse, including efforts
to control, isolate, humiliate and intimidate
the requesting spouse, or to undermine the
requesting spouse’s ability to reason inde-
pendentlyandbeabletodowhatisre-
quired under the tax laws. All the facts
and circumstances are considered in deter-
mining whether a requesting spouse was
abused. The impact of a nonrequesting
spouse’s alcohol or drug abuse is also con-
sidered in determining whether a request-
ing spouse was abused.
(d)Legal obligation.Whetherthe
requesting spouse or the nonrequesting
spouse has a legal obligation to pay the
outstanding Federal income tax liability.
For purposes of this factor, a legal obliga-
tion is an obligation arising from a divorce
decree or other legally binding agreement.
This factor will weigh in favor of relief if
the nonrequesting spouse has the sole legal
obligation to pay the outstanding income
tax liability pursuant to a divorce decree
or agreement. This factor, however, will
be neutral if the requesting spouse knew
or had reason to know, when entering into
the divorce decree or agreement, that the
nonrequesting spouse would not pay the
income tax liability. This factor will weigh
against relief if the requesting spouse has
the sole legal obligation. The fact that the
nonrequesting spouse has been relieved of
liability for the taxes at issue as a result of
a discharge in bankruptcy is disregarded
in determining whether the requesting
spouse has the sole legal obligation. If,
based on an agreement or consent order,
both spouses have a legal obligation to pay
the outstanding income tax liability, the
spouses are not separated or divorced, or
the divorce decree or agreement is silent
as to any obligation to pay the outstanding
income tax liability, this factor is neutral.
(e)Significant benefit. Whether the
requesting spouse received significant
benefit (beyond normal support) from the
unpaid income tax liability or item giving
rise to the deficiency. See Treas. Reg.
§ 1.6015–2(d). If the requesting spouse
enjoyed the benefits of a lavish lifestyle,
such as owning luxury assets and tak-
ing expensive vacations, this factor will
weigh against relief. If the nonrequest-
ing spouse controlled the household and
business finances or there was abuse (as
described in section 4.03(2)(c)(iv)) such
that the nonrequesting spouse made the
decision on spending funds for a lavish
lifestyle, then this mitigates this factor so
that it is neutral. If only the nonrequest-
ing spouse significantly benefitted from
the unpaid tax or item giving rise to an
understatement or deficiency, and the re-
questing spouse had little or no benefit, or
the nonrequesting spouse enjoyed the ben-
efit to the requesting spouse’s detriment,
this factor will weigh in favor of relief. If
the amount of unpaid tax or understated
tax was small such that neither spouse
received a significant benefit, then this
factor is neutral.
(f)Compliance with income tax laws.
Whether the requesting spouse has made
a good faith effort to comply with the in-
come tax laws in the taxable years follow-
ing the taxable year or years to which the
request for relief relates.
(1) If the requesting spouse is compliant
for taxable years after being divorced from
the nonrequesting spouse, then this factor
will weigh in favor of relief. If the re-
questing spouse is not compliant, then this
factor will weigh against relief. If the re-
questing spouse made a good faith effort to
comply with the tax laws but was unable to
fully comply, then this factor will be neu-
tral. For example, if the requesting spouse
timely filed an income tax return but was
unable to fully pay the tax liability due to
January 23, 20123142012–4 I.R.B.

spouse’s poor financial or economic situa-
tion after the divorce, then this factor will
be neutral.
(2) If the requesting spouse remains
married to the nonrequesting spouse,
whether or not legally separated or living
apart, and continues to file joint returns
with the nonrequesting spouse after re-
questing relief, then this factor will be
neutral if the joint returns are compliant
with the tax laws, but will weigh against
relief if the returns are not compliant.
(3) If the requesting spouse remains
married to the nonrequesting spouse but
files separate returns, this factor will weigh
infavorofreliefiftherequestingspouseis
compliant with the tax laws and will weigh
against relief if the requesting spouse is
not compliant with the tax laws. If the
requesting spouse made a good faith effort
to comply with the tax laws but was un-
able to fully comply, then this factor will
be neutral. For example, if the requesting
spouse timely filed an income tax return
but was unable to fully pay the tax lia-
bility due to the requesting spouse’s poor
financial or economic situation as a result
of being separated or living apart from the
nonrequesting spouse, then this factor will
be neutral.
(g)Mental or physical health.Whether
the requesting spouse was in poor physical
or mental health. This factor will weigh
infavorofreliefiftherequestingspouse
was in poor mental or physical health at
the time the requesting spouse signed the
return or returns for which the request for
relief relates or at the time the requesting
spouse requested relief. The Service will
consider the nature, extent, and duration of
the condition. If the requesting spouse was
in neither poor physical nor poor mental
health, this factor is neutral.
04.Refunds. In both understatement
and underpayment cases, a requesting
spouse is eligible for a refund of separate
payments made by the requesting spouse
after July 22, 1998, and the requesting
spouse establishes that the funds used to
make the payment for which a refund is
sought were provided by the requesting
spouse. A requesting spouse is not eligible
for refunds of payments made with the
joint return, joint payments, or payments
that the nonrequesting spouse made. A re-
questing spouse, however, may be eligible
for a refund of the requesting spouse’s por-
tion of the requesting and nonrequesting
spouse’s joint overpayment from another
tax year that was applied to the joint in-
come tax liability to the extent that the
requesting spouse can establish that the
requesting spouse provided the funds for
the overpayment. The availability of re-
funds is subject to the refund limitations
of section 6511.
SECTION 5. PROCEDURE
A requesting spouse seeking equi-
table relief under section 66(c) or section
6015(f) must file Form 8857,Request for
Innocent Spouse Relief(and Separation of
Liability, and Equitable Relief), or other
similar statement signed under penalties
of perjury, within the applicable period of
limitation as set forth in section 4.01(3) of
this revenue procedure.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Revenue Procedure 2003–61, 2003–2
C.B. 296, is superseded.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective
for requests for relief filed on or after
[INSERTDATEREVENUEPROCE-
DURE IS RELEASED TO THE PUB-
LIC]. In addition, this revenue procedure
is effective for requests for equitable relief
pending on[INSERT DATE REVENUE
PROCEDURE IS RELEASED TO THE
PUBLIC], whether with the Service, the
Office of Appeals, or in a case docketed
with a Federal court.
SECTION 8. DRAFTING
INFORMATION
The principal authors of this rev-
enue procedure are Nancy Rose
and Sheida Lahabi of the Office of
Associate Chief Counsel (Procedure &
Administration). For further information
regarding this revenue procedure, contact
Branches 1 or 2 of Procedure and
Administration at (202) 622–4910 or (202)
622–4940 (not a toll-free call).
Interim Guidance on
Informational Reporting
to Employees of the Cost of
Their Group Health Insurance
Coverage
Notice 2012–9
I. PURPOSE
This notice restates and amends the in-
terim guidance on informational reporting
to employees of the cost of their em-
ployer-sponsored group health plan cover-
age initially provided in Notice 2011–28,
2011–16 I.R.B. 656. This informational
reporting is required under § 6051(a)(14)
of the Internal Revenue Code (Code),
enacted as part of the Patient Protection
and Affordable Care Act of 2010 (the Af-
fordable Care Act), Public Law, 111–148,
to provide useful and comparable con-
sumer information to employees on the
cost of their health care coverage. Notice
2011–28 solicited comments on various
aspects of the reporting requirement. In
response to comments, this notice su-
persedes Notice 2011–28 and makes the
following changes to the guidance pro-
vided in Notice 2011–28:
•Modifies Q&A–3 to provide that un-
til further guidance is issued, the re-
porting requirement will not apply to
tribally chartered corporations wholly
owned by Federally recognized Indian
tribal governments.
•Modifies Q&A–3 to clarify the appli-
cation of the interim relief from the re-
porting requirement for employers fil-
ing fewer than 250 Forms W–2 for the
preceding calendar year.
•Modifies Q&A–7 to clarify the appli-
cation of the reporting requirement to
certain related employers not using a
common paymaster.
•Adds a new example to Q&A–19
that demonstrates that the reporting
requirement does not apply to cover-
age under a health flexible spending
arrangement (FSA) if contributions
occur only through employee salary
reduction elections.
•Modifies Q&A–20 to clarify that the
standard for determining whether cov-
erage under a dental plan or vision plan
is subject to the reporting requirement
2012–4 I.R.B.315January 23, 2012

is based upon the same standard for de-
termining whether the coverage is sub-
ject to the rules set forth in the regula-
tions under the Health Insurance Porta-
bility and Accountability Act of 1996
(HIPAA).
•Modifies and corrects Q&A–23 to clar-
ify that the reporting requirement does
not apply to the cost of coverage in-
cludible in income under § 105(h), or
payments or reimbursements of health
insurance premiums for a 2% share-
holder-employee of an S corporation
whoisrequiredtoincludethepremium
payments in gross income.
•Modifies Q&A–28 to clarify the appli-
cation of the reporting requirement if
a composite rate is used with respect
to the premium charged active partic-
ipants, but not the premium charged
under COBRA to a qualifying benefi-
ciary.
The notice also provides the following
additional guidance through new Q&A’s:
•Provides that employers are not re-
quired to include the cost of coverage
under an employee assistance program
(EAP), wellness program, or on-site
medical clinic in the reportable amount
if the employer does not charge a
premium with respect to that type of
coverage provided under COBRA to a
qualified beneficiary (Q&A–32).
•Clarifies that employers may include
the cost of coverage under programs
not required to be included under ap-
plicable interim relief, such as the cost
of coverage under a Health Reimburse-
ment Arrangement (HRA) (Q&A–33).
•Clarifies how to calculate the re-
portable amount for coverage only a
portion of which constitutes coverage
under a group health plan (Q&A–34).
•Clarifies how to calculate the re-
portable amount if an employer is
provided notice after December 31 of
a calendar year of events that occurred
on or before December 31 of a cal-
endar year that affect the prior year’s
coverage, such as an employee pro-
viding an employer notice of a divorce
or other change in family status that
occurred during a prior calendar year
(Q&A–35).
•Clarifies how to calculate the re-
portable amount where coverage ex-
tends over the payroll period including
December 31 (Q&A–36).
•Clarifies the application of the excep-
tion for certain hospital indemnity or
other fixed indemnity insurance of-
feredbyanemployeronanafter-tax
basis (Q&A–37 and Q&A–38).
•Provides that the reportable amount is
not required to be included on a Form
W–2providedbyathird-partysickpay
provider (Q&A–39).
This reporting to employees is for their
information only. The reporting is in-
tended to inform them of the cost of their
health care coverage, and does not cause
excludable employer-provided health care
coverage to become taxable. Nothing in
§ 6051(a)(14), this notice, or the addi-
tional guidance that is contemplated under
§ 6051(a)(14), causes or will cause other-
wise excludable employer-provided health
care coverage to become taxable.
Section 6051(a)(14) was added to the
Code by § 9002 of the Affordable Care
Act, and provides that the reporting be
made on Form W–2,Wage and Tax State-
ment. Notice 2010–69, 2010–44 I.R.B.
576, provides that this reporting will not
be mandatory for 2011 Forms W–2 (that
is, the forms required for the calendar year
2011 that employers are generally required
to give employees by the end of January
2012 and then file with the Social Security
Administration (SSA)).
This notice provides interim guidance
that generally is applicable beginning with
2012 Forms W–2 (that is, the forms re-
quired for the calendar year 2012 that em-
ployers are generally required to give em-
ployees by the end of January 2013 and
then file with the SSA). In addition, em-
ployers may rely on the guidance provided
in this notice if they voluntarily choose to
report the cost of coverage on 2011 Forms
W–2, even though this reporting is not re-
quired for 2011. This interim guidance is
applicable until further guidance is issued.
Treasury and the IRS will continue to con-
sider comments submitted in response to
Notice 2011–28 as they work to develop
regulations under § 6051(a)(14). To the
extent that future guidance applies the re-
porting requirement to additional employ-
ers or categories of employers or addi-
tional types of coverage, that guidance will
apply prospectively only and will not ap-
ply to any calendar year beginning within
six months of the date the guidance is is-
sued.
As explained above, this notice pro-
vides transition relief for certain employ-
ers and with respect to certain types of
employer-sponsored coverage. This tran-
sition relief will be available at least for
2012 Forms W–2 and the availability of
this transition relief for 2012 Forms W–2
will not be affected by the issuance of any
further guidance. Thus, reporting by em-
ployers and with respect to the types of
coverage covered by the exceptions pro-
vided in this notice will not be required for
2012 Forms W–2. For example, as pro-
vided in Q&A–3 of this notice, employ-
ers that are required to file fewer than 250
2011 Forms W–2 will not be subject to
the reporting requirement for 2012 Forms
W–2.
The interim guidance is set forth in
section III of this notice. Q&A–1 and
Q&A–2 discuss the general requirements.
Q&A–3 identifies the employers subject
to the reporting requirements. Q&A–4
through Q&A–10 provide the methods for
reporting the cost of the coverage on the
Form W–2. Q&A–11 through Q&A–15
define certain terms related to the cost of
coverage required to be reported on the
Form W–2. Q&A–16 through Q&A–23
set forth the types of coverage the cost
of which is required to be included in
the amount reported on the Form W–2.
Q&A–24 through Q&A–27 describe sev-
eral calculation methods that may be used
to determine the cost of the coverage.
Q&A–28 through Q&A–31 address a
number of other issues employers may
encounter in determining the cost of the
coverage. Q&A–32 through Q&A–38
contain additions to the guidance initially
set forth in Notice 2011–28. Section IV
of this notice contains transition relief
for certain employers and with respect to
certain types of employer-sponsored cov-
erage. Section V of this notice states that
Notice 2011–28 is superseded.
II. BACKGROUND
Section 6051(a) provides generally that
an employer must provide a written state-
ment to each employee showing the re-
muneration paid by such person to such
employee during the calendar year on or
before January 31 of the succeeding year
(or, if the employee terminates employ-
January 23, 20123162012–4 I.R.B.

ment during the year, within 30 days af-
ter the date of receipt of a written request
from such employee submitted before Jan-
uary 2). Form W–2,Wage and Tax State-
ment, is the form used to provide an em-
ployee this information.
Section 6051(a)(14) provides gener-
ally that the aggregate cost of applicable
employer-sponsored coverage must be
included in the information reported on
Form W–2, effective for taxable years
beginning on or after January 1, 2011.
Section 6051(a)(14), provides that, for this
purpose, the aggregate cost is to be deter-
mined under rules similar to the rules of
§ 4980B(f)(4), referring to the definition
of the “applicable premium” for purposes
of COBRA continuation coverage.
Section 6051(a)(14) does not apply
to the amount contributed to any Archer
MSA (as defined in § 220(d)) or to any
health savings account (as defined in
§ 223(d)) of an employee or an employee’s
spouse. See § 6051(a)(11) and (a)(12).
Section 6051(a)(14) also does not apply
to the amount of any salary reduction
contributions to a health flexible spend-
ing arrangement (within the meaning of
§§ 106(c)(2) and 125).
Section 6051(a)(14) provides that
the aggregate cost of applicable em-
ployer-sponsored coverage (the amount
required to be reported on Form W–2)
has the same meaning as in § 4980I(d)(1).
Section 4980I(d)(1)(A) provides that the
term “applicable employer-sponsored
coverage” means, with respect to any
employee, coverage under any group
health plan made available to the em-
ployee by an employer which is exclud-
able from the employee’s gross income
under § 106, or would be so excludable
if it were employer-provided coverage
(within the meaning of § 106). Section
4980I(f)(4) provides that, for purposes
of § 4980I(d)(1), the term “group health
plan” has the same meaning as under
§ 5000(b)(1).
Under § 4980I(d)(1)(B), the term “ap-
plicable employer-sponsored coverage”
does not include (i) any coverage (whether
through insurance or otherwise) described
in § 9832(c)(1) (other than coverage for
on-site medical clinics described in sub-
paragraph (G) thereof) or for long-term
care, or (ii) any coverage under a separate
policy, certificate, or contract of insurance
which provides benefits substantially all of
which are for treatment of the mouth (in-
cluding any organ or structure within the
mouth) or for treatment of the eye, or (iii)
any coverage described in § 9832(c)(3) the
payment for which is not excludable from
gross income and for which a deduction
under § 162(l) is not allowable.
The types of coverage described in
§ 9832(c)(1) (providing that certain “ex-
cepted benefits” are not subject to the
requirements of chapter 100 of the Code)
that are not subject to this reporting re-
quirement are the following:
•coverage only for accident, or disabil-
ity income insurance, or any combina-
tion thereof;
•coverage issued as a supplement to li-
ability insurance;
•liability insurance, including general
liability insurance and automobile lia-
bility insurance;
•workers’ compensation or similar in-
surance;
•automobile medical payment insur-
ance;
•credit-only insurance;
•other similar insurance coverage, spec-
ified in regulations, under which ben-
efits for medical care are secondary or
incidental to other insurance benefits.
The types of coverage described in
§ 9832(c)(3) include the following, pro-
vided that such coverage is offered as
independent, noncoordinated benefits:
(A) coverage only for a specified dis-
ease or illness; and
(B) hospital indemnity or other fixed
indemnity insurance.
Section 4980I(d)(1)(C) provides that
coverage shall be treated as applicable em-
ployer-sponsored coverage without regard
to whether the employer or employee pays
for the coverage.
Section 4980I(d)(1)(E) provides that
applicable employer-sponsored coverage
shall include coverage under any group
health plan established and maintained
primarily for its civilian 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 such government.
Section 4980B(f)(4)(A) provides that
the term “applicable premium” means,
with respect to any period of continua-
tion coverage of qualified beneficiaries,
the cost to the plan for such period of the
coverage for similarly situated beneficia-
ries with respect to whom a qualifying
event has not occurred (without regard to
whether such cost is paid by the employer
or employee). Section 4980B(f)(4)(B)
provides a special rule for self-insured
plans, generally requiring that such plans
calculate the applicable premium through
one of two methods — the actuarial
method or the past cost method. Section
4980B(f)(4)(C) provides that the determi-
nation of any applicable premium shall
be made for a period of 12 months and
shall be made before the beginning of such
period.
Section 54.4980B–1, Q&A–2 of the
Miscellaneous Excise Tax Regulations,
provides that, for purposes of § 4980B,
for topics relating to the COBRA contin-
uation coverage requirements of § 4980B
that are not addressed in §§54.4980B–1
through 54.4980B–10 (such as methods
for calculating the applicable premium),
plans and employers must operate in good
faith compliance with a reasonable inter-
pretation of the statutory requirements in
§ 4980B.
III. INTERIM GUIDANCE
This interim guidance generally is ap-
plicable to 2012 Forms W–2 (that is, the
forms required for the calendar year 2012
that employers generally are required to
furnish to employees by the end of Jan-
uary 2013 and then file with the SSA) and
Forms W–2 for later years. In addition,
employers may rely on the guidance pro-
vided in this notice if they voluntarily re-
port the cost of coverage on 2011 Forms
W–2, even though such reporting is not
required for 2011. This interim guidance
is applicable until further guidance is is-
sued. To the extent that future guidance
applies the reporting requirement to addi-
tional employers or categories of employ-
ers, additional types of coverage, or oth-
erwise applies the reporting requirement
more expansively, that guidance will ap-
ply prospectively only and will not apply
to any calendar year beginning within six
months of the date the guidance is issued.
See also Section IV of this notice for cer-
tain transition relief that will be extended
at least for the 2012 Forms W–2.
Except as otherwise specified, the in-
terim guidance in this section applies
2012–4 I.R.B.317January 23, 2012

solely for purposes of § 6051(a)(14) and
no inference should be drawn concerning
any other provision of the Code.
In General (Q&A–1 and Q&A–2)
Q–1: What does § 6051(a)(14) require?
A–1: Section 6051(a)(14) generally re-
quires the aggregate cost of applicable em-
ployer-sponsored coverage to be reported
on Form W–2.
Q–2: Does the requirement under
§ 6051(a)(14) to report the aggregate cost
of employer-sponsored coverage on Form
W–2, or compliance with this require-
ment, have any impact on whether such
coverage is taxable?
A–2: No. The requirement is in-
formational only. The provisions of
§ 6051(a)(14) do not affect whether any
particular coverage is excludable from
gross income under § 106 or any other
Code provision, and the reporting of any
amount on Form W–2 in compliance with
the requirements of § 6051(a)(14) will not
affect the amount includable in income or
the amount reported in any other box on
Form W–2. The purpose of the reporting
is to provide useful and comparable con-
sumer information to employees on the
cost of their health care coverage.
Employers Subject to the Reporting
Requirement (Q&A–3)
Q–3: What employers are sub-
ject to the reportingrequirement under
§ 6051(a)(14)?
A–3: Except as provided in this
Q&A–3, all employers that provide ap-
plicable employer-sponsored coverage
(see Q&A–12) during a calendar year are
subject to the reporting requirement under
§ 6051(a)(14). This includes employers
that are federal, state and local govern-
ment entities, churches and other religious
organizations, and employers that are not
subject to the COBRA continuation cov-
erage requirements under § 4980B, to the
extent such employers provide applica-
ble employer-sponsored coverage under
a group health plan. (Notice 2010–69,
2010–44 I.R.B. 576, provides that report-
ing by these employers is not mandatory
prior to the issuance of the 2012 Forms
W–2 (the forms required for the calen-
dar year 2012 that employers generally
are required to furnish to employees by
the end of January 2013 and then file
with the Social Security Administration
(SSA))). Employers that are Federally rec-
ognized Indian tribal governments are not
subject to the reporting requirements of
§ 6051(a)(14). Until further guidance is is-
sued, employers that are tribally chartered
corporations wholly-owned by a Federally
recognized Indian tribal government also
are not subject to the reporting require-
ments.
Also, in the case of the 2012 Forms
W–2 (and Forms W–2 for later years un-
less and until further guidance is issued),
an employer is not subject to the report-
ing requirement for any calendar year if
the employer was required to file fewer
than 250 Forms W–2 for the preceding cal-
endar year. (This rule is based upon the
rule in § 6011(e) that exempts employers
from filing returns electronically if they
file fewer than 250 returns.) Therefore,
if an employer is required to file fewer
than 250 2011 Forms W–2, the employer
would not be subject to the reporting re-
quirement for 2012 Forms W–2. For this
purpose, whether an employer is required
to file fewer than 250 Forms W–2 for a
calendar year is determined based on the
Forms W–2 that employer would be re-
quired to file if it filed Forms W–2 to re-
port all wages paid by that employer and
without regard to the use of an agent un-
der § 3504. For example, an employer that
would have filed only 100 Forms W–2 for
the previous year had it not used an agent
under § 3504 will not be subject to the re-
porting requirement for the year, nor will
an agent under § 3504 with respect to that
employer’s Forms W–2 for the year. In
contrast, if the same employer would have
filed 300 Forms W–2 for the previous year
had it not used an agent under § 3504 of
the Code, that employer would be subject
to the reporting requirement for the year so
that if an agent under § 3504 is used again
the information will need to be provided to
the agent and reported on the Form W–2.
See also Q&A–21 for an exception to
the reporting requirement for coverage un-
der a self-insured plan that is not subject to
any federal continuation coverage require-
ments and Q&A–22 for an exception from
the reporting requirement for plans main-
tained primarily for members of the mili-
tary, or primarily for members of the mili-
tary and their families.
Method of Reporting on the Form W–2
(Q&A–4 through Q&A–10)
Q–4: Is the reporting of the aggregate
cost of applicable employer-sponsored
coverage required for Forms W–2 issued
for the 2010 or 2011 calendar years?
A–4: No. Section 6051(a)(14) does not
apply to Forms W–2 for calendar years
prior to 2011 and, accordingly, reporting
of the aggregate cost of applicable em-
ployer-sponsored coverage is not required
for Forms W–2 issued for the 2010 calen-
dar year. Moreover, Notice 2010–69 pro-
vides that reporting will not be mandatory
for the 2011 calendar year and, accord-
ingly, an employer will not be treated as
failing to meet the requirements of § 6051
for 2011, and will not be subject to any
penalties for failure to meet such require-
ments, merely because it does not report
the aggregate cost of applicable employer-
sponsored coverage on Forms W–2 for
2011.
Q–5: How is the aggregate reportable
cost reported on Form W–2?
A–5: The aggregate reportable cost is
reported on Form W–2 in box 12, using
code DD.
Q–6: What rules apply in the case of
coverage provided by the employer to an
employee for a period during a calendar
year after that employee has terminated
employment?
A–6: An employer may apply any rea-
sonable method of reporting the cost of
coverage provided under a group health
plan for an employee who terminated
employment during the calendar year, pro-
vided that the method is used consistently
for all employees receiving coverage
under that plan who terminate employ-
ment during the plan year and continue
or otherwise receive coverage after the
termination of employment. However,
regardless of the method of reporting used
by the employer for other terminated em-
ployees, an employer is not required to
report any amount in box 12 using Code
DD for an employee who, pursuant to
§31.6051–1(d)(1)(i), has requested to re-
ceive a Form W–2 before the end of the
calendar year during which the employee
terminated employment.
Example 1. Employee is an employee of Em-
ployer on January 1, and continues in employment
through April 25. During that entire period and
through April 30, Employee had individual cov-
erage for himself under a group health plan with
January 23, 20123182012–4 I.R.B.

a cost of coverage of $350 per month. Employee
elects continuation coverage for the six months fol-
lowing termination of employment, covering the
period May 1 through October 31, for which the
Employee pays $350 per month. Employer reports
$1,400 as the reportable cost under the plan for the
calendar year, covering the four months during which
Employee performed services and had coverage as
an active employee. Employer applies this method
consistently for all employees terminating during the
calendar year who have coverage under that group
health plan. Employer has applied a reasonable
method of reporting Employee’s reportable cost
under the plan.
Example 2. Same facts asExample 1, except that
Employer reports $3,500 as the reportable cost un-
der the plan for the calendar year, covering both the
monthly periods during which Employee performed
services and had coverage as an active employee, and
the monthly periods during which Employee retained
continuation coverage under the plan. Employer ap-
plies this method consistently for all employees ter-
minating during the calendar year who retained cov-
erage under that group health plan. Employer has ap-
plied a reasonable method of reporting Employee’s
reportable cost under the plan.
Q–7: In the case of an individual who is
an employee of multiple employers within
a calendar year, must each employer pro-
vide a Form W–2 reporting the aggregate
reportable cost that such employer pro-
vided?
A–7: Each employer providing em-
ployer-sponsored coverage must report
the aggregate reportable cost of coverage
it provides. However, if the employers
concurrently employ an employee and
are related employers within the meaning
of § 3121(s) and one such employer is a
common paymaster within the meaning of
§ 3121(s) for wages paid to an employee
that is concurrently employed, the com-
mon paymaster must include the aggregate
reportable cost of the coverage provided
to that employee by all the employers for
whom it serves as the common paymaster
on the Form W–2 issued by the common
paymaster. In such case, the related em-
ployers that use the common paymaster
and that are not the common paymaster
must not report the cost of coverage they
provide. If the employers are related em-
ployers within the meaning of § 3121(s)
but do not compensate an employee that
is concurrently employed with a common
paymaster, then with respect to that em-
ployee, the related employers may either
report the entire aggregate reportable cost
on one of the Forms W–2 provided to
the employee, or allocate the aggregate
reportable cost among the employers that
concurrently employ the employee using
any reasonable method of allocation.
For employers participating in a multi-
employer healthcare plan, see Q&A–17.
Q–8: In the case of an individual
who transfers to a new employer that
qualifies as a successor employer under
§ 3121(a)(1), must both the predecessor
and successor employers report the ag-
gregate reportable cost of coverage each
provided?
A–8: Yes, each of the predecessor and
successor employers must report the ag-
gregate reportable cost of coverage that
that employer provided, unless the suc-
cessor employer follows the optional pro-
cedure in Rev. Proc. 2004–53, 2004–2
C.B. 320, and issues one Form W–2 re-
flecting wages paid to the employee dur-
ing the calendar year by both the predeces-
sor employer and the successor employer.
Consistent with the rules applicable to re-
porting of wages, the successor employer
following the optional procedure must in-
clude the aggregate reportable cost of cov-
erage provided by both employers on the
Form W–2 that it issues, and the predeces-
sor employer must not report the cost of
coverage it provides.
Q–9: Must an employer issue a Form
W–2 including the aggregate reportable
cost to an individual to whom the employer
is not otherwise required to issue a Form
W–2, such as a retiree or other former
employee receiving no compensation re-
quired to be reported on a Form W–2?
A–9: No. An employer is not required
to issue a Form W–2 reporting the ag-
gregate reportable cost to an individual to
whom the employer is not otherwise re-
quired to issue a Form W–2.
Q–10: Is the total of the aggregate re-
portable costs attributable to an employer’s
employees required to be reported on Form
W–3,Transmittal of Wage and Tax State-
ments?
A–10: No. The total of the aggre-
gate reportable costs attributable to an em-
ployer’s employees is not required to be re-
ported on Form W–3,Transmittal of Wage
and Tax Statements.
Aggregate Cost of Applicable
Employer-Sponsored Coverage
(Q&A–11 through Q&A–15)
Q–11: What is the aggregate cost of
applicable employer-sponsored coverage
and how is the aggregate cost of applica-
ble employer-sponsored coverage referred
to in this notice?
A–11: The aggregate cost of applicable
employer-sponsored coverage is the total
cost of coverage under all applicable em-
ployer-sponsored coverage (as defined in
Q&A–12) provided to the employee. In
this notice, the cost of coverage under a
group health plan is referred to as the re-
portable cost and the aggregate cost of ap-
plicable employer-sponsored coverage is
referred to as the aggregate reportable cost.
Q–12: What is applicable employer-
sponsored coverage?
A–12: Applicable employer-sponsored
coverage means, with respect to any em-
ployee, coverage under any group health
plan (see Q&A–13) made available to the
employee by an employer that is exclud-
able from the employee’s gross income un-
der § 106, or would be so excludable if it
were employer-provided coverage (within
the meaning of such § 106), except that
applicable employer-sponsored coverage
does not include:
(1) any coverage for long-term care,
(2) any coverage (whether through
insurance or otherwise) described in
§ 9832(c)(1) (other than subparagraph
(G) thereof (coverage for on-site medi-
cal clinics)),
(3) any coverage under a separate
policy, certificate, or contract of in-
surance which provides benefits sub-
stantially all of which are for treatment
of the mouth (including any organ or
structure within the mouth) or for treat-
ment of the eye, and
(4) any coverage described in
§ 9832(c)(3) the payment for which is
not excludable from gross income and
for which a deduction under § 162(l) is
not allowable.
See Q&A–16 through Q&A–23 for
guidance on applicable employer-spon-
sored coverage that is not required to be
included in the aggregate reportable cost.
Q–13: What is a group health plan?
A–13: A group health plan is a plan
(including a self-insured plan) of, or con-
tributed to by, an employer (including a
self-employed person) or employee organ-
ization to provide health care (directly or
otherwise) to the employees, former em-
ployees, the employer, others associated or
formerly associated with the employer in
a business relationship, or their families.
2012–4 I.R.B.319January 23, 2012

Until further guidance is issued, for pur-
poses of identifying whether a specific ar-
rangement is a group health plan, taxpay-
ers may rely upon a good faith application
of a reasonable interpretation of the statu-
tory provisions and applicable guidance,
including §54.4980B–2, Q&A–1.
Q–14: Does the aggregate reportable
cost include both the portion of the cost
paid by the employer and the portion of the
cost paid by the employee?
A–14: Yes. The aggregate reportable
cost generally includes both the portion of
the cost paid by the employer and the por-
tion of the cost paid by the employee, re-
gardless of whether the employee paid for
that cost through pre-tax or after-tax con-
tributions. However, see Q&A–19 regard-
ing contributions to a health FSA.
Q–15: Does the aggregate reportable
cost include any portion of the cost of cov-
erage under an employer-sponsored group
health plan that is includible in the em-
ployee’s gross income, for example, the
cost of coverage for a person other than an
employee, the spouse of the employee, a
dependent of the employee, or a child of
the employee (provided that child will not
have attained age 27 by the end of the tax-
able year)?
A–15: Yes. The aggregate reportable
cost includes the cost of coverage under
the employer-sponsored group health plan
of the employee and any person covered
by the plan because of a relationship to
the employee, including any portion of the
cost that is includible in an employee’s
gross income. Thus, the aggregate re-
portable cost is not reduced by the amount
of the cost of coverage included in the em-
ployee’s gross income. For the treatment
of coverage included in gross income un-
der § 105(h), or payments or reimburse-
ments of health insurance premiums for
a 2% shareholder-employee of an S cor-
poration who is required to include the
premium payments in gross income, see
Q&A–23.
Example. An employee has family health cover-
age under an employer-sponsored group health plan
for himself, his spouse and dependents, and an adult
child age 28, with a cost of coverage of $15,000. The
fair market value of the health coverage for the adult
child age 28 is included in the income and wages of
the employee. The aggregate reportable cost with re-
spect to the family health coverage is $15,000.
Cost of Coverage Required to be
Included in the Aggregate Reportable
Cost (Q&A–16 through Q&A–23)
Q–16: Is the cost of coverage under
all applicable employer-sponsored cover-
age required to be included in the aggre-
gate reportable cost?
A–16: Except as provided in this Q&A
and in Q&A–17 through Q&A–23, the cost
of coverage under all applicable employer-
sponsored coverage must be included in
the aggregate reportable cost. However,
the following amounts are not included in
the aggregate reportable cost and are not
reported under § 6051(a)(14)
1
:
(1) the amount contributed to any
Archer MSA (as defined in § 220(d)),
(2) the amount contributed to any
Health Savings Account (as defined in
§ 223(d)), and
(3) the amount of any salary re-
duction election to a health Flexible
Spending Arrangement (FSA)(within
themeaningof§§106(c)(2)and125).
Q–17: Is the cost of coverage un-
der a multiemployer plan (as defined in
§ 54.4980B–2, Q&A–3) required to be
included in the aggregate reportable cost
reported on Form W–2?
A–17: No. An employer that con-
tributes to a multiemployer plan is not re-
quired to include the cost of coverage pro-
vided to an employee under that multi-
employer plan in determining the aggre-
gate reportable cost. If the only applicable
employer-sponsored coverage provided to
an employee is provided under a multiem-
ployer plan, the employer is not required
to report any amount under § 6051(a)(14)
on the Form W–2 for that employee.
Q–18: Is the cost of coverage under
a Health Reimbursement Arrangement
(HRA)requiredtobeincludedintheag-
gregate reportable cost reported on Form
W–2?
A–18: No. An employer is not re-
quired to include the cost of coverage
under an HRA in determining the aggre-
gate reportable cost. If the only applicable
employer-sponsored coverage provided to
an employee is an HRA, the employer is
not required to report any amount under
§ 6051(a)(14) on the Form W–2 for that
employee.
Q–19: If an employer offers a health
FSA through a § 125 cafeteria plan, is the
amount of the health FSA required to be
included in the aggregate reportable cost
reported on Form W–2?
A–19: Yes, the amount of the health
FSA is required to be included in the ag-
gregate reportable cost reported on Form
W–2, but only if the amount of the health
FSA for the plan year exceeds the salary
reduction elected by the employee for the
plan year. The amount of a health FSA
for a cafeteria plan year equals the amount
of salary reduction (as defined in Pro-
posed Treas. Reg. §1.125–1(r)) elected
by the employee for the plan year, plus
the amount of any optional employer flex
credits (as defined under Proposed Treas.
Reg. §1.125–5(b)) that the employee
elects to apply to the health FSA. In deter-
mining the aggregate reportable cost, the
amount of the health FSA is reduced (but
not below zero) by the employee’s salary
reduction election (see Q&A–16).
If the amount of salary reduction (for
all qualified benefits) elected by an em-
ployee equals or exceeds the amount of the
health FSA for the plan year, the employer
does not include the amount of the health
FSA for that employee in the aggregate re-
portable cost. However, if the amount of
the health FSA for the plan year exceeds
the salary reduction elected by the em-
ployee for the plan year, then the amount of
that employee’s health FSA minus the em-
ployee’s salary reduction election for the
health FSA must be included in the ag-
gregate reportable cost and reported under
§ 6051(a)(14).
For purposes of this Q&A–19, a health
FSA means an FSA (as defined in Pro-
posed Treas. Reg. §1.125–5(a)) that is a
medical reimbursement arrangement.
Example 1:Employer maintains a § 125 cafe-
teria plan that offers permitted taxable benefits (in-
cluding cash) and qualified nontaxable benefits (in-
cluding a health FSA). The plan permits contribu-
tions only through employee salary reduction elec-
tions, and does not offer any employer flex credits.
Employee makes a $2,000 salary reduction election
for several qualified benefits under the plan, includ-
ing a health FSA for $1,500. For purposes of report-
ing on Form W–2, none of the health FSA amount
is included for purposes of determining the aggregate
reportable cost.
Example 2: Employer maintains a § 125 cafeteria
plan that offers permitted taxable benefits (including
cash) and qualified nontaxable benefits (including a
1
Contributions to an Archer MSA are separately required to be reported ona Form W–2 under § 6051(a)(11), and contributions to a Health Savings Account are separately required to be
reported on a Form W–2 under § 6051(a)(12).
January 23, 20123202012–4 I.R.B.

health FSA). The plan offers an employer flex credit
of $1,000. Employee makes a $2,000 salary reduc-
tion election for several qualified benefits under the
plan, including a health FSA for $1,500. The cost of
the qualified benefits for Employee under the plan for
the year is $3,000. The amount of Employee’s salary
reduction election ($2,000) for the plan year equals or
exceeds the amount of the health FSA ($1,500) for the
plan year. Thus, for purposes of reporting on Form
W–2, none of the health FSA amount is permitted to
be included for purposes of determining the aggregate
reportable cost.
Example 3: Employer maintains a § 125 cafeteria
plan that offers permitted taxable benefits (including
cash) and qualified nontaxable benefits (including a
health FSA). The plan offers a flex credit in the form
of a match of each employee’s salary reduction con-
tribution. Employee makes a $700 salary reduction
election for a health FSA. Employer provides an ad-
ditional $700 to the health FSA to match Employee’s
salary reduction election. The amount of the health
FSA for Employee for the plan year is $1,400. The
amount of Employee’s health FSA ($1,400) for the
plan year exceeds the salary reduction election ($700)
for the plan year. The employer must include $700
($1,400 health FSA amount minus $700 salary reduc-
tion) in determining the aggregate reportable cost.
Q–20: Is the cost of coverage under a
dental plan or a vision plan included in
the aggregate reportable cost if that plan
satisfies the requirements for being ex-
cepted benefits for purposes of HIPAA un-
der §54.9831–1(c)(3)?
A–20: No. An employer is not re-
quired to include the cost of coverage un-
der a dental plan or a vision plan if the
plan satisfies the requirements for being
excepted benefits for purposes of HIPAA
under §54.9831–1(c)(3). (Generally, to be
excepted benefits for purposes of HIPAA
under §54.9831–1(c)(3), the dental or vi-
sion benefits must either (1) be offered un-
der a separate policy, certificate, or con-
tract of insurance (that is, not offered un-
der the same policy, certificate, or contract
of insurance under which major medical or
other health benefits are offered) or (2) par-
ticipants must have the right not to elect
the dental or vision benefits and if they do
elect the dental or vision benefits they must
pay an additional premium or contribution
for that coverage.) An employer must in-
clude the cost of coverage under a den-
tal plan or a vision plan if the plan does
not satisfy the requirements for being ex-
cepted benefits for purposes of HIPAA un-
der §54.9831–1(c)(3).
Q–21: Is the cost of coverage pro-
vided under a self-insured group health
plan that is not subject to any federal
continuation coverage requirements (for
example, a church plan within the mean-
ing of § 4980B(d)(3) that is a self-insured
group health plan) required to be included
in the aggregate reportable cost reported
on Form W–2?
A–21: No. An employer is not required
to include in the aggregate reportable cost
the cost of coverage provided under a
self-insured group health plan that is not
subject to any federalcontinuation cov-
erage requirements. If the only group
health plan coverage provided to an em-
ployee by the employer is provided under
a self-insured group health plan that is
not subject to any federal continuation
coverage requirements, the employer is
not required to report any amount under
§ 6051(a)(14) on the Form W–2 for that
employee. Employers who provide cover-
age under a self-insured group health plan
that is subject to Federal continuation cov-
erage requirements must report the cost of
coverage on Form W–2. For this purpose,
federal continuation coverage require-
ments include the COBRA requirements
under the Code, the Employee Retirement
Income Security Act of 1974, or the Pub-
lic Health Service Act and the temporary
continuation coverage requirement under
the Federal Employees Health Benefits
Program.
Q–22: Is the cost of coverage provided
by the Government of the United States,
the government of any State or political
subdivision thereof, or any agency or in-
strumentality of any such government, un-
der a plan maintained primarily for mem-
bers of the military or for members of the
military and their families, required to be
included in the aggregate reportable cost
reported on Form W–2?
A–22: No. The cost of coverage pro-
vided by the Government of the United
States, the government of any State or po-
litical subdivision thereof, or any agency
or instrumentality of any such govern-
ment, under a plan maintained primarily
for members of the military or for mem-
bers of the military and their families,
is not required to be included in the ag-
gregate reportable cost reported on Form
W–2
Q–23: In determining the aggregate
reportable cost, how should an employer
treat an excess reimbursement of a highly
compensated individual that is included in
gross income under § 105(h), or payments
or reimbursements of health insurance
premiums for a 2% shareholder-employee
of an S corporation who is required to
include the premium payments in gross
income?
A–23: The cost of applicable em-
ployer-sponsored coverage does not in-
clude excess reimbursements of highly
compensated individuals that are included
in gross income under § 105(h); that is,
an excess reimbursement that is included
in income is subtracted from the cost of
coverage in determining the aggregate
reportable cost. Similarly, the cost of
applicable employer-sponsored coverage
does not include the cost of coverage taken
into income as the result of an employee
being a 2% shareholder-employee of an
employer that is an S corporation. For
more information regarding the treatment
of the employer payment or reimburse-
ment of health insurance premiums for
a 2% shareholder-employee, see Notice
2008–1, 2008–1 C.B. 251.
Example: Employer provides self-insured health
coverage with a cost of coverage of $12,000 under
which a highly compensated individual receives a
$4,000 excess reimbursement. As a result, under
§ 105(h), that individual must include the $4,000 ex-
cess reimbursement in gross income. The excess re-
imbursement is not included in the determination of
the aggregate reportable cost, so that Employer must
include $8,000 as the cost of coverage under the plan
in determining the aggregate reportable cost for that
individual.
Methods of Calculating the Cost of
Coverage (Q&A–24 through Q&A–27)
Q–24: How may an employer calculate
thereportablecostunderaplan?
A–24: An employer may calculate
the reportable cost under a plan using
the COBRA applicable premium method
(Q&A–25). Alternatively, (1) an em-
ployer that is determining the cost of
coverage for an employee covered by the
employer’s insured plan may calculate the
reportable cost using the premium charged
method (Q&A–26); and (2) an employer
that subsidizes the cost of coverage or
that determines the cost of coverage for a
year by applying the cost of coverage in
a prior year may calculate the reportable
cost using the modified COBRA premium
method (Q&A–27). For employers that
charge employees a composite rate (the
same premium for different types of cover-
age under a plan, for example, a premium
for self-only coverage versus family cov-
erage), see Q&A–28.
2012–4 I.R.B.321January 23, 2012

The reportable cost for an employee
receiving coverage under the plan is the
sum of the reportable costs for each period
(such as a month) during the year as deter-
mined under the method used by the em-
ployer. An employer is not required to use
the same method for every plan, but must
use the same method with respect to a plan
for every employee receiving coverage un-
der that plan.
Q–25: How does an employer calculate
the reportable cost for a period under the
COBRA applicable premium method?
A–25: Under the COBRA applicable
premium method, the reportable cost for
a period equals the COBRA applicable
premium for that coverage for that pe-
riod. If the employer applies this method,
the employer must calculate the COBRA
applicable premium in a manner that satis-
fies the requirements under § 4980B(f)(4).
Under current guidance, the COBRA ap-
plicable premium calculation would meet
these requirements if the employer made
such calculation in good faith compliance
with a reasonable interpretation of the
statutory requirements under § 4980B (see
§54.4980B–1, Q&A–2).
Q–26: How does an employer calculate
the reportable cost for a period under the
premium charged method?
A–26: The premium charged method
maybeusedtodeterminethereportable
cost only for an employee covered by an
employer’s insured group health plan. In
such a case, if the employer applies this
method, the employer must use the pre-
mium charged by the insurer for that em-
ployee’s coverage (for example, for self-
only coverage or for family coverage, as
applicable to the employee) for each pe-
riod as the reportable cost for that period.
Q–27: How does an employer calculate
the reportable cost for a period under the
modified COBRA premium method?
A–27: An employer may use the mod-
ified COBRA premium method with
respect to a plan only where it subsidizes
the cost of COBRA (so that the premium
charged to COBRA qualified beneficiaries
is less than the COBRA applicable
premium) or where the actual premium
charged by the employer to COBRA
qualified beneficiaries for each period in
the current year is equal to the COBRA
applicable premium for each period in
a prior year. If the employer subsidizes
the cost of COBRA, the employer may
determine the reportable cost for a
period based upon a reasonable good
faith estimate of the COBRA applicable
premium for that period, if such reasonable
good faith estimate is used as the basis
for determining the subsidized COBRA
premium. If the actual premium charged
by the employer to COBRA qualified
beneficiaries for each period in the current
year is equal to the COBRA applicable
premium for each period in a prior year, the
employer may use the COBRA applicable
premium for each period in the prior year
as the reportable cost for each period in
the current year.
Example 1:For the calendar year 2012, Employer
A subsidizes 50% of a reasonable good faith esti-
mate of the COBRA applicable premium. Employer
A’s reasonable good faith estimate of the COBRA
applicable premium for self-only coverage for each
month in 2012 is $300. Accordingly, the actual
COBRA premium Employer A charges individuals
eligible for COBRA continuation coverage electing
self-only coverage is $150 per month. Solely for
purposes of § 6051(a)(14) reporting, if Employer
A uses the modified COBRA premium method, it
must treat $300 per month (the reasonable good faith
estimate of the COBRA applicable premium) as the
monthly reportable cost for self-only coverage for
the calendar year 2012.
Example 2:Employer B determined that the
COBRA applicable premium for each month in
calendar year 2011 for individuals eligible for
COBRA continuation coverage electing self-only
coverage would be $350 per month, and charged an
actual COBRA premium for such coverage of $357
per month ($350 x 102%). Employer B knows that
the cost of coverage for 2012 is not less than the
COBRA applicable premium for 2011 and decides
not to make a new determination of the COBRA
applicable premium for the calendar year 2012
but rather to continue to charge an actual COBRA
premium for self-only coverage of $357 per month
($350 x 102%). Solely for purposes of § 6051(a)(14)
reporting, if Employer B uses the modified COBRA
premium method, it must treat $350 per month ($357
charged - $7 increase permissible under COBRA) as
the monthly reportable cost for self-only coverage
for the calendar year 2012.
Example 3:Employer C makes a good faith
estimate of the COBRA applicable premium for
the calendar year 2012 for individuals eligible for
COBRA continuation coverage electing self-only
coverage of $500 per month. To ensure compli-
ance with the COBRA requirements despite not
calculating a precise COBRA applicable premium,
Employer C charges an actual COBRA premium of
$350 per month for individuals eligible for COBRA
coverage electing self-only coverage. Solely for
purposes of § 6051(a)(14) reporting, if Employer C
uses the modified COBRA premium method, it must
treat $500 per month as the monthly reportable cost
for self-only coverage for the calendar year 2012.
Other Issues Relating to Calculating
the Cost of Coverage (Q&A–28 through
Q&A–31)
Q–28: How may an employer charging
an employee a composite rate calculate the
reportable cost for a period?
A–28: An employer is considered to
charge employees a composite rate if (1)
there is a single coverage class under the
plan (that is, if an employee elects cover-
age, all individuals eligible for coverage
under the plan because of their relation-
ship to the employee are included in the
elections and no greater amount is charged
to the employee regardless of whether the
coverage will include only the employee or
the employee plus other such individuals),
or (2) there are different types of coverage
under a plan (for example, self-only cover-
age and family coverage, or self-plus-one
coverage and family coverage) and em-
ployees are charged the same premium for
each type of coverage. In such a case, the
employer using a composite rate may cal-
culate and use the same reportable cost for
a period for (1) the single class of cover-
age under the plan, or (2) all the different
types of coverage under the plan for which
the same premium is charged to employ-
ees, provided this method is applied to all
types of coverage provided under the plan.
For example, if a plan charges one pre-
mium for either self-only coverage, or self-
and-spouse coverage (the first coverage
group), and also charges one premium for
family coverage regardless of the number
of family members covered (the second
coverage group), an employer may calcu-
late and report the same reportable cost for
all of the coverage provided in the first
coverage group, and the same reportable
cost for all of the coverage provided in the
second coverage group. In such a case,
the reportable costs under the plan must be
determined under one of the methods de-
scribed in Q&A–25 through Q&A–27 for
which the employer is eligible.
If an employer is using a composite rate
for active employees, but is not using a
composite rate for determining applicable
COBRA premiums for qualified benefi-
ciaries, the employer may use either the
composite rate or the applicable COBRA
premium for determining the aggregate
cost of coverage, provided that the same
method is used consistently for all active
employees and is used consistently for all
January 23, 20123222012–4 I.R.B.

qualified beneficiaries receiving COBRA
coverage.
Q–29: If the reportable cost for a pe-
riod changes during the year, must the re-
portable cost under the plan for the year
for an employee reflect the increase or de-
crease?
A–29: If the cost for a period changes
during the year (for example, under the
COBRA applicable premium method be-
cause the 12-month period for determining
the COBRA applicable premium is not the
calendar year), the reportable cost under
the plan for an employee for the year must
reflect the increase or decrease for the pe-
riods to which the increase or decrease ap-
plies. For examples of the application of
this rule, see Q&A–30.
Q–30: How is the reportable cost un-
der a plan calculated if an employee com-
mences, changes or terminates coverage
during the year?
A–30: If an employee changes cover-
age during the year, the reportable cost un-
der the plan for the employee for the year
must take into account the change in cov-
erage by reflecting thedifferent reportable
costs for the coverage elected by the em-
ployee for the periods for which such cov-
erage is elected. If the change in cover-
age occurs during a period (for example,
in the middle of a month where costs are
determined on a monthly basis), an em-
ployer may use any reasonable method to
determine the reportable cost for such pe-
riod, such as using the reportable cost at
the beginning of the period or at the end
of the period, or averaging or prorating the
reportable costs, provided that the same
method is used for all employees with cov-
erage under that plan. Similarly, if an
employee commences coverage or termi-
nates coverage during a period, an em-
ployer may use any reasonable method to
calculate the reportable cost for that pe-
riod, provided that the same method is used
for all employees with coverage under the
plan.
The following examples illustrate
theprinciplessetforthinQ&A–29and
Q&A–30:
Example 1:Employer determines that the
monthly reportable cost under a group health plan
for self-only coverage for the calendar year 2012 is
$500. Employee is employed by employer for the
entire calendar year 2012, and had self-only coverage
under the group health plan for the entire year. For
purposes of reporting for the 2012 calendar year,
Employer must treat the 2012 reportable cost under
the plan for Employee as $6,000 ($500 x 12).
Example 2: Employer determines that the
monthly reportable cost under a group health plan
for self-only coverage for the period October 1, 2011
through September 30, 2012 is $500, and that the
monthly reportable cost under a group health plan
for self-only coverage for the period October 1, 2012
through September 30, 2013 is $520. Employee is
employed by employer for the entire calendar year
2012 and had self-only coverage under the group
health plan for the entire year. For purposes of re-
porting for the 2012 calendar year, Employer must
treat the 2012 reportable cost under the plan for
Employee as $6,060 (($500 x 9) + ($520 x 3)).
Example 3:Employer determines that the
monthly reportable cost under a group health plan
for self-only coverage for the calendar year 2012 is
$500, and that the monthly reportable cost under the
same group health plan for self-plus-spouse coverage
for the calendar year 2012 is $1,000. Employee
is employed by Employer for the entire calendar
year 2012. Employee had self-only coverage un-
der the group health plan from January 1, 2012
through June 30, 2012, and then had self-plus-spouse
coverage from July 1, 2012 through December 31,
2012. For purposes of reporting for the 2012 calendar
year, Employer must treat the 2012 reportable cost
under the plan for Employee as $9,000 (($500 x 6) +
($1,000 x 6)).
Example 4: Employer determines that the
monthly reportable cost under a group health plan
for self-only coverage for the calendar year 2012
is $500. Employee commences employment and
self-only coverage under the group health plan on
March 14, 2012, and continues employment and
self-only coverage through the remainder of the
calendar year. For purposes of reporting for the 2012
calendar year, Employer treats the cost of coverage
under the plan for Employee for March 2012 as $250
($500 x
1
/2). Because Employer’s method of calcu-
lating the reportable cost under the plan for March
2012 by prorating the reportable cost for March
2012 to reflect Employee’s date of commencement
of coverage is reasonable, Employer must treat the
2012 reportable cost under the plan for Employee as
$4,750 (($500 x
1
/2) + ($500 x 9)).
Q–31: If an employer has used a
12-month determination period that is not
the calendar year for purposes of applying
the COBRA applicable premium under
a plan, may the employer also use that
12-month determination period for pur-
poses of calculating the reportable cost for
the year under the plan?
A–31: No. The reportable cost under
a plan must be determined on a calendar
year basis. For rules on translating the
COBRA applicable premium to a calendar
year amount, see Q&A–29 and Q&A–30.
Additional Issues
Q–32: Is the cost of coverage provided
under an employee assistance program
(EAP), wellness program, or on-site med-
ical clinic required to be included in the
aggregate reportable cost reported on
Form W–2?
A–32: Coverage provided under an
EAP, wellness program, or on-site medical
clinic is only includible in the aggregate
reportable cost to the extent that the cov-
erage is provided under a program that
is a group health plan for purposes of
§ 5000(b)(1). An employer is not re-
quired to include the cost of coverage
provided under an EAP, wellness program,
or on-site medical clinic that otherwise
wouldberequiredtobeincludedinthe
aggregate reportable cost reported on
Form W–2 because it constitutes applica-
ble employer-sponsored coverage, if that
employer does not charge a premium with
respect to that type of coverage provided
to a beneficiary qualifying for coverage
in accordance with any applicable federal
continuation coverage requirements. If
an employer charges a premium with re-
spect to that type of coverage provided
to a beneficiary qualifying for coverage
in accordance with any applicable federal
continuation coverage requirements, that
employer is required to include the cost
of that type of coverage provided. An
employer that is not subject to any federal
continuation coverage requirements is not
required to include the cost of coverage
provided under an EAP, wellness program,
or on-site medical clinic. For this purpose,
federal continuation coverage require-
ments include the COBRA requirements
under the Code, the Employee Retirement
Income Security Act of 1974, or the Pub-
lic Health Service Act and the temporary
continuation coverage requirement under
the Federal Employees Health Benefits
Program.
Q–33: Are there circumstances in
which an employer may include in the ag-
gregate reportable cost reported on Form
W–2 the cost of coverage that is not re-
quired to be included in the aggregate
reportable cost under applicable interim
relief?
A–33: Yes. An employer may include
in the aggregate reportable cost the cost of
coverage that is not required to be included
in the aggregate reportable cost under ap-
plicable interim relief, such as the cost of
coverage under a Health Reimbursement
Account (HRA), a multi-employer plan, an
EAP, wellness program, or on-site medical
clinic, provided that the calculation of the
2012–4 I.R.B.323January 23, 2012

cost of coverage otherwise meets the re-
quirements of Q&A–24 through Q&A–27,
and provided that such coverage consti-
tutes applicable employer-sponsored cov-
erage.
Q–34: How may an employer calculate
the reportable cost under a program pro-
viding benefits that constitute applicable
employer-sponsored coverage and other
benefits that do not constitute applicable
employer-sponsored coverage, such as
a long-term disability program that also
provides certain health care benefits?
A–34: For a program under which an
employee receives benefits that constitute
applicable employer-sponsored coverage
and other benefits that do not constitute ap-
plicable employer-sponsored coverage, an
employer may use any reasonable alloca-
tion method to determine the cost of the
portion of the program providing applica-
ble employer-sponsored coverage.
If the portion of the program providing
a benefit that is applicable employer-spon-
sored coverage is only incidental in com-
parison to the portion of the program
providing other benefits, the employer is
not required to include either portion of
the cost in the aggregate reportable cost.
Similarly, if the portion of the program
providing a benefit that is not applica-
ble employer-sponsored coverage is only
incidental to the portion of the program
providing a benefit that is applicable em-
ployer-sponsored coverage, the employer
may, at its option, include the benefit
that is not applicable employer-sponsored
coverage in determining the reportable
cost, notwithstanding the prohibition in
Q&A–33 on reporting coverage that is not
applicable employer-sponsored coverage.
Q–35: Must the aggregate reportable
cost reported on Form W–2 for a calendar
year be adjusted for any elections or noti-
fications in the subsequent year that may
have an effect on the cost of coverage in
the earlier year, such as notice of a divorce
in the earlier year?
A–35: No. The aggregate reportable
cost for a calendar year reported on
FormW–2maybebasedonthein-
formation available to the employer as
of December 31 of the calendar year.
Therefore, any electionornotificationthat
is made or provided in the subsequent
calendar year that has a retroactive effect
on coverage in the earlier year is not
required to be included in the calculation
of the aggregate reportable cost for the
calendar year. In addition, an employer
is not required to furnish a Form W–2c if
a Form W–2 has already been provided
for a calendar year, before this type of
election or notification (for example, if a
Form W–2 is provided on January 15, and
the election or notification is provided on
January 20).
Q–36: How may an employer address
a coverage period, such as the final pay-
roll period of a calendar year that includes
December 31 but continues into the subse-
quent calendar year?
A–36: An employer may include
the coverage period that includes
December 31 but continues into the
subsequent calendar year in one of the
following manners: (1) treat the coverage
as provided during the calendar year
that includes December 31; (2) treat the
coverage as provided during the calendar
year immediately subsequent to the
calendar year that includes December 31;
or (3) allocate the cost of coverage for
the coverage period between each of the
two calendar years under any reasonable
allocation method, which generally should
relate to the number of days in the
period of coverage that fall within each
of the two calendar years. Whichever
method the employer uses must be applied
consistently to all employees.
Q–37: Is the cost of coverage provided
under hospital indemnity or other fixed in-
demnity insurance by an employer on an
excludible or pre-tax basis required to be
included in the aggregate reportable cost
reported on Form W–2?
A–37: Yes. An employer is required to
include in the aggregate reportable cost re-
ported on Form W–2 the cost of coverage
provided under hospital indemnity or other
fixed indemnity insurance, or the cost of
coverage only for a specified disease or ill-
ness, if the employer makes any contribu-
tion to the cost of coverage that is exclud-
able under § 106 or if the employee pur-
chases the policy on a pre-tax basis under
a § 125 cafeteria plan.
Q–38: Is the cost of coverage provided
under hospital indemnity or other fixed in-
demnity insurance required to be included
in the aggregate reportable cost reported
on Form W–2 if the payment for those ben-
efits is includable in the employee’s gross
income (or, in the case of a self-employed
individual, the payment is one for which a
deduction under § 162(l) is allowable) ?
A–38: No. An employer is not required
to include in the aggregate reportable cost
reported on Form W–2 the cost of cov-
erage provided under hospital indemnity
or other fixed indemnity insurance, or the
cost of coverage only for a specified dis-
ease or illness, if those benefits are offered
as independent, noncoordinated benefits
and if the payment for those benefits is in-
cludable in the employee’s gross income
(or, in the case of a self-employed individ-
ual, the payment is one for which a deduc-
tion under § 162(l) is allowable). There-
fore, to the extent the employer merely
provides the opportunity for employees to
purchase an independent, noncoordinated
fixed indemnity policy and the employee
pays the full amount of the premium with
after-tax dollars, the cost of coverage pro-
vided under that policy is not required to
be reported on Form W–2.
Q–39: Must the aggregate reportable
cost be reported on a Form W–2 provided
by a third-party sick pay provider?
A–39: No. Third-party sick pay
providers are required to furnish Forms
W–2 to employees to report the sick pay
unless (1) the third party withholds and
deposits the employee tax and notifies the
employer within the required time period,
or (2) the third party is acting only as the
agent of the employer and has not other-
wise agreed with the employer to act as the
employer with respect to the sick pay. The
aggregate reportable cost is not required to
be reported on a Form W–2 furnished by
a third-party sick pay provider. However,
a Form W–2 furnished by the employer to
an employee must include the aggregate
reportable cost regardless of whether that
Form W–2 includes sick pay, or whether a
third-party sick pay provider is furnishing
a separate Form W–2 reporting the sick
pay. For more information about reporting
of third-party payments of sick pay, see
Publication 15-A,Employer’s Supplemen-
tal Tax Guide (Circular E), Section 6 (Sick
Pay Reporting).
IV. TRANSITION RELIEF
Certain provisions of this interim guid-
ance provide transition relief intended to
facilitate compliance with the reporting
requirement under § 6051(a)(14). See
Q&A–3 (relief for employers filing fewer
January 23, 20123242012–4 I.R.B.

than 250 Forms W–2); Q&A–6 (relief
with respect to certain Forms W–2 fur-
nished to terminated employees before
the end of the year); Q&A–17 (relief with
respect to multiemployer plans); Q&A–18
(relief for HRAs); Q&A–20 (relief with
respect to certain dental and vision plans);
Q&A–21 (relief with respect to self-in-
sured plans of employers not subject to
COBRA continuation coverage or similar
requirements); and Q&A–32 (relief for
certain employers with respect to coverage
under an employee assistance program,
on-site medical clinic or wellness pro-
gram). Future guidance may limit the
availability of some or all of this tran-
sition relief; however, any such future
guidance will be prospective only and will
not be applicable earlier than January 1
of the calendar year beginning at least six
months after the date of issuance of the
guidance. In no case will any such future
guidance limit the availability of this tran-
sition relief for the 2012 Forms W–2 (the
Forms W–2 for the calendar year 2012
that employers generally are required to
furnish to employees in January 2013 and
then file with the SSA). For example, in no
event will reporting be required for 2012
Forms W–2 for any employer required to
file fewer than 250 2011 Forms W–2.
V. EFFECT ON OTHER
DOCUMENTS
Notice 2011–28 is superseded by this
notice.
VI. DRAFTING INFORMATION
The principal author of this notice
is Leslie Paul of the Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities), though
other Treasury Department and IRS offi-
cials participated in its development. For
further information on the provisions of
this notice, contact Leslie Paul at (202)
622–6080 (not a toll-free number).
2012–4 I.R.B.325January 23, 2012

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking an
dNoticeof
Public Hearin
g
Basis Reporti
ng by
Securities B
rokers and
Basis Determ
ination for Debt
Instrument
sandOptions
REG–102988–11
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Noti
ce of proposed rulemaking
and notice o
f public hearing.
SUMMARY: This document contains pro-
posed regulations relating to reporting by
brokers for transactions related to debt in-
struments and options. The proposed reg-
ulations reflect changes in the law made
by the Energy Improvement and Extension
Act of 2008 (the Act) that require brokers
when reporting the sale of securities to the
IRS to include the customer’s adjusted ba-
sis in the sold securities and to classify
any gain or loss as long-term or short-term.
The proposed regulations also implement
the Act’s requirement that a broker report
gross proceeds from a sale or closing trans-
action with respect to certain options. In
addition, this document contains proposed
regulations that implement reporting re-
quirements for a transfer of a debt instru-
ment or an option to another broker and
for an organizational action that affects the
basis of a debt instrument or option. This
document also provides for a notice of a
public hearing on these proposed regula-
tions.
DATES: Written or electronic comments
must be received by February 23, 2012.
Outlines of topics to be discussed at
the public hearing scheduled for Friday,
March 16, 2012, must be received by Fri-
day, February 24, 2012.
ADDRE
SSES: Send submissions to:
CC:PA
:LPD:PR(REG–102988–11),
room 5
203, Internal Revenue Service,
PO Box
7604, Ben Franklin Station,
Washi
ngton, DC 20044. Submissions may
be hand-deliv
ered Monday through Friday
between the ho
urs of 8 a.m. and 4 p.m.
to CC:PA:LPD:
PR (REG–102988–11),
Courier’s Des
k, Internal Revenue
Service, 1111
Constitution Avenue, NW,
Washington,
DC, or sent electronically
viatheFeder
aleRulemaking
Portal atwww
.regulations.gov(IRS
REG–102988–
11). The public hearing
will be held
in the Auditorium, beginning
at 10:00 a.m
. at the Internal Revenue
Building, 1
111 Constitution Avenue, NW,
Washington
,DC.
FOR FURTHER
INFORMATION
CONTACT: Co
ncerning the proposed
regulation
s, Pamela Lew of the Office of
Associate
Chief Counsel (Financial Insti-
tutions an
d Products) at (202) 622–3950;
concernin
g submissions of comments, the
public hea
ring, and/or to be placed on the
building
access list to attend the public
hearing,
Richard Hurst at (202) 622–7180
(not toll
-free numbers).
SUPPLEMEN
TARY INFORMATION:
Paperwork
Reduction Act
The collec
tion of information contained
in this not
ice of proposed rulemaking re-
latingtot
he furnishing of information in
connectio
n with the transfer of securities
was previ
ously reviewed and approved
by the Off
ice of Management and Budget
in accord
ance with the Paperwork Re-
duction A
ct of 1995 (44 U.S.C. 3507(d))
under con
trol number 1545–2186. Com-
ments on
the collection of information
should b
esenttotheOffice of Man-
agement
and Budget
, Attn: Desk Offi-
cer for t
he Department of the Treasury,
Office o
f Information and Regulatory
Affair
s, Washington, DC 20503, with
copies
to theInternal Revenue Service,
Attn: I
RS Reports Clearance Officer,
SE:W:C
AR:MP:T:M:S, Washington, DC
20224.
Comments on the collection of
infor
mation should be received by Febru-
ary 23
, 2012. Comments are specifically
reque
sted concerning:
Wheth
er the proposed collection of in-
forma
tion is necessary for the proper per-
forma
nce of the functions of the IRS, in-
cludi
ng whether the information will have
prac
tical utility;
The accuracy o
f the estimated burden
associated wi
th the proposed collection of
information;
How the qualit
y, utility, and clarity of
the informati
on to be collected may be en-
hanced;
How the burden
of complying with the
proposed col
lection of information may be
minimized, i
ncluding through the appli-
cation of aut
omated collection techniques
or other form
s of information technology;
and
Estimates of
capital or start-up costs
and costs of
operation, maintenance, and
purchase of
services to provide informa-
tion.
The collect
ion of information is in
§§ 1.6045–1
(c)(3)(xi)(C) and 1.6045A–1
of these pro
posed regulations and is an
increase in
the total annual burden from
the burden
in the current regulations to
reflect th
e addition of debt instruments
and option
s to the definition of covered
securitie
s. The collection of information
is necessa
ry to allow brokers that effect
sales of t
ransferred covered securities to
determin
e and report the adjusted basis of
the secur
ities and whether any gain or loss
with resp
ect to the securities is long-term
or short
-term in compliance with section
6045(g)
of the Internal Revenue Code.
The coll
ection of information is required to
comply w
ith the provisions of section 403
of the En
ergy Improvement and Extension
Act of 2
008, Division B of Public Law
110–34
3 (122 Stat. 3765, 3854 (2008)).
The lik
ely respondents are brokers of se-
curiti
es and issuers, transfer agents, and
profes
sional custodians of securities that
do not
effect sales.
Estima
ted total annual reporting burden
is 450
,000 hours.
Estima
ted average annual burden per
respo
ndent is 15 hours.
Estima
ted average burden per response
is 4 mi
nutes.
Estim
ated number of respondents is
30,00
0.
Estim
ated total frequency of responses
is 7 mi
llion.
The bu
rden for the collection of infor-
matio
n contained in the proposed amend-
ments
to §1.6045–1 will be reflected in
the bu
rden on Form 1099–B, “Proceeds
from B
roker and Barter Exchange Trans-
January 23, 20123262012–4 I.R.B.

actions,” when revised to request the addi-
tional information in the regulation. The
burden for the collection of information
contained in the proposed amendments to
§1.6045B–1 will be reflected in the bur-
den on Form 8937, “Report of Organi-
zational Actions Affecting Basis of Secu-
rities,” when revised to request the addi-
tional information in the regulation.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) relating to infor-
mation reporting by brokers and others
as required by section 6045 of the Inter-
nal Revenue Code (Code). This section
was amended by section 403 of the En-
ergy Improvement and Extension Act of
2008, Division B of Public Law 110–343
(122 Stat. 3765, 3854 (2008)) (the Act)
to require the reporting of adjusted basis
for a covered security and whether any
gain or loss upon the sale of the security
is long-term or short-term. The Act also
requires the reporting of gross proceeds
for an option that is a covered security. In
addition, the Act added section 6045A to
the Code, which requires certain informa-
tion to be reported in connection with a
transfer of a covered security to another
broker, and section 6045B, which requires
an issuer of a specified security to file a
return relating to certain actions that affect
the basis of the security. Final regulations
under these provisions relating to stock
were published in theFederal Registeron
October 18, 2010, in T.D. 9504, 2010–47
I.R.B. 670. The proposed regulations in
this document address reporting by bro-
kers under §1.6045–1 for debt instruments
and options. This document also contains
proposed amendments to the Income Tax
Regulations under sections 6045A and
6045B for debt instruments and options.
Section 6045(g)(1) requires every bro-
ker that is required to file a return with
the IRS under section 6045(a) showing the
gross proceeds from the sale of a covered
security to include in the return the cus-
tomer’s adjusted basis in the security and
whether any gain or loss with respect to the
security is long-term or short-term. Under
section 6045(g)(3), a note, bond, deben-
ture, or other evidence of indebtedness ac-
quired on or after January 1, 2013, is a
security subject to the information report-
ing rules in section 6045(g)(1). Section
6045(h) provides rules for reporting cer-
tain information, including gross proceeds,
with respect to the sale, exercise, lapse, or
other closing transaction with respect to an
option on a specified security granted or
acquired on or after January 1, 2013.
Explanation of the Provisions
In general, these regulations would
amend §§1.6045–1, 1.6045A–1, and
1.6045B–1 to require additional infor-
mation reporting by a broker for a debt
instrument acquired on or after January 1,
2013. The proposed regulations also re-
quire information reporting for an option
granted or acquired on or after January 1,
2013. Many of the changes are techni-
cal provisions needed toincorporate debt
instruments and options into the rules es-
tablished for stock in the final regulations
published in T.D. 9504. As a result of these
changes, the general rules of §1.6045–1
that currently apply to stock also will ap-
ply to a debt instrument or an option that
is a covered security, including the wash
sale and short sale provisions. In addition,
the general rules of §1.6045A–1 relating
to transfer statement requirements and
§1.6045B–1 relating to issuer statement
requirements will apply to a debt instru-
ment or an option. Certain substantive
changes were also needed to accommo-
date debt instruments and options. Certain
other changes were made that will affect
all specified securities, including stock.
The significant substantive changes to the
regulations are described in this preamble.
A.Section 1.6045–1
1.Options
Under section 6045(h), for any sale or
other closing transaction with respect to an
option that is a covered security, a broker is
required to report gross proceeds, adjusted
basis, and whether any gain or loss is short-
term or long-term.
For purposes of §1.6045–1, certain op-
tions have been added to the definition
of asecurity,specified security,andcov-
ered security. In general, an option on
one or more specified securities, includ-
inganindexofsuchsecuritiesorfinan-
cial attributes of such securities, that is
granted or acquired on or after January 1,
2013, will be a covered security. For ex-
ample, as indicated by the Joint Commit-
tee on Taxation, the proposed regulations
would apply to an option on the S&P 500
Index.See General Explanation of Tax
Legislation Enacted in the 110
th
Congress,
JCS–1–09 at 366.
An exception to the general rules de-
scribed in proposed §1.6045–1(m) for re-
porting basis for an option is provided for
a compensation-related option. The pro-
posed rules retain the existing rules for
a compensation-related option, but make
those rules applicable to all compensation-
related options, and not just those granted
or acquired before January 1, 2013. Un-
der the regulations, if a customer exercises
a compensation-related option, a broker is
permitted, but not required, to adjust basis
of the acquired stock for any amounts in-
cluded as compensation income. Instruc-
tions to the Form 1040 (Schedule D) and
other IRS forms and publications will be
amended to remind a taxpayer that a rec-
onciliation of basis may be required if the
sale reported on a Form 1099–B is a sale of
stock acquired through a stock grant or the
exercise of a compensatory option. The
IRS is exploring the possibility of adding
an indicator on the Form 1099–B to denote
a sale of compensation-related stock.
The definitions for the termsclosing
transactionandsalehave been updated
to be consistent with sections 1234 and
1234A and to accommodate the reporting
of options granted or acquired on or after
January 1, 2013. In particular, the cancel-
lation, lapse, expiration, or other termina-
tion of an option will be a closing transac-
tion, as will a cash settlement.
For an option that is a covered secu-
rity, reporting requirements will depend on
whether or not the option was physically
settled. If an option is physically settled,
the premium paid or received, as the case
may be, will be used by the broker for
the asset purchaser to adjust the basis of
the purchased asset and by the broker for
the asset seller to adjust reported proceeds.
Publication 550,Investment Income and
Expenses, contains a detailed explanation
of the appropriate tax treatment of the ex-
ercise or lapse of an option. If an option
that is a covered security is sold or is part
2012–4 I.R.B.327January 23, 2012

of a closing transaction that does not entail
physical settlement, a broker is required to
report gross proceeds and whether the gain
or loss is long-term or short-term. It should
be noted that if a customer sells any option
prior to expiration, including an option ac-
quired prior to January 1, 2013, the regu-
lations currently in effect already require
a broker to report the gross proceeds from
that sale except in cases in which an option
is closed by offset.
If a customer receives a warrant or stock
right in a section 305(a) distribution, a bro-
ker must determine the basis of the war-
rant or stock right by applying the rules de-
scribed in sections 305 and 307.
2.Debt instruments
Under section 6045(g), upon the sale of
a debt instrument that is a covered security,
a broker is required to report the adjusted
basis of the debt instrument and whether
any gain or loss is short-term or long-term.
Pursuant to section 6045(g), the proposed
regulations amend §1.6045–1 to include a
debt instrument in the definition of aspec-
ified securityand a debt instrument ac-
quired for cash in an account on or after
January 1, 2013, in the definition of acov-
ered security.
For purposes of §1.6045–1, the pro-
posed regulations define a debt instrument
to include any instrument described in
§1.1275–1(d) and any instrument or po-
sition that is treated as a debt instrument
under a specific provision of the Internal
Revenue Code. This definition of a debt
instrument applies whenever the termdebt
instrument,bond,debt obligation,orobli-
gationis used anywhere in §1.6045–1.
Under the proposed regulations, solely for
purposes of §1.6045–1, a security clas-
sified as debt by the issuer is treated as
a debt instrument. If the issuer has not
classified the security, however, the se-
curity is not treated as a debt instrument
unless the broker knows that the secu-
rity is reasonably classified as debt under
general Federal tax principles or that the
instrument or position is treated as a debt
instrument under a specific provision of
the Internal Revenue Code.
Due to the difficulties in implementing
a broker’s reporting obligations under sec-
tion 6045(g) that would arise with respect
to debt instruments described in section
1272(a)(6) (debt instruments with princi-
pal subject to acceleration) that are ac-
quired on or after January 1, 2013, the pro-
posed regulations provide that a debt in-
strument described in section 1272(a)(6) is
not a covered security.
If a debt instrument is acquired on or
after January 1, 2013, a broker will be
required to determine and account for
original issue discount (“OID”), bond
premium, acquisition premium, market
discount, and principal payments to de-
termine the adjusted basis of the debt
instrument and whether any gain or loss
upon the sale of the debt instrument is
short-term or long-term. Further, a broker
will be required to report the amount of
any market discount that has accrued as
of the date of a sale or transfer of a debt
instrument.
Under §1.6045–1(d)(6)(i) of the exist-
ing final regulations, a broker is not re-
quired to consider elections occurring out-
side the account. Consistent with this rule,
a broker generally is required to calcu-
late amounts relating to OID, bond pre-
mium, acquisition premium, and market
discount by assuming that the customer
has not made any elections with respect to
the debt instrument. The proposed regu-
lations, however, provide two exceptions
to this general rule: 1) a broker must as-
sume that a customer has elected to use the
constant interest rate method under sec-
tion 1276(b)(2) to determine the amount of
accrued market discount; and 2) a broker
must assume that the customer has elected
under section 171 to amortize bond pre-
mium on a taxable debt instrument.
Both of these elections have the effect
of minimizing the customer’s ordinary in-
come inclusion when compared with the
alternatives available under the existing
rules. It is also expected that prescrib-
ing which elections aretobeignoredand
whichelectionsareassumedtobemade
will standardize, and therefore simplify,
the information reporting required with re-
spect to OID, bond premium, acquisition
premium, and market discount.
The Treasury Department and the IRS
recognize that the section 171 election as-
sumption is inconsistent with the rule un-
der section 6049 providing that a payor is
not permitted to take premium into account
for purposes of reporting a holder’s inter-
est or OID income on Form 1099–INT or
1099–OID each year. However, because
the Treasury Department and the IRS be-
lieve that most holders will make a section
171 election to treat the premium as an off-
set to ordinary income rather than as a cap-
ital loss, the Treasury Department and the
IRS believe that the section 171 election
assumption will result in fewer instances
in which a customer will need to reconcile
the reported adjusted basis number to the
proper number.
In general, the proposed regulations
will result in the following outcomes for a
debt instrument:
a. If a debt instrument is sold prior to
maturity, a broker will report any accrued
market discount as of the sale date based
on a constant interest rate.
b. Except as provided in c below, a bro-
ker must determine a customer’s basis in
a debt instrument by computing any OID,
bond premium, or acquisition premium us-
ing the default method described in the rel-
evant provisions of the Code or regula-
tions. A broker also must adjust the basis
for any principal payments received.
c. If a taxable debt instrument has
bond premium, a broker must assume a
customer has elected current amortization
when computing the amount of the cus-
tomer’s basis.
A broker generally must use a consis-
tent accrual period to determine the accru-
als of discount or premium on a debt in-
strument. If a debt instrument has both
OID and market discount, the accrual pe-
riod used for the OID computation must be
used for the market discount computation.
In all other situations, a broker must use
the shorter of an annual accrual period or a
period that matches the frequency of regu-
lar coupon or principal payments.
The rules in §1.6045–1(n) only apply
for purposes of a broker’s reporting obli-
gation under section 6045. A customer
can use any method or make any elec-
tion permitted under the relevant provi-
sions of the Code and regulations and is
not bound by the assumptions that the bro-
ker uses to satisfy the broker’s reporting
obligations under section 6045. For ex-
ample, even though a broker will compute
and report any accrued market discount on
adebtinstrumentbyassumingthatacus-
tomer made the constant yield election un-
der section 1276(b)(2), the customer can
determine the amount of accrued market
discount using ratable accrual as described
in section 1276(b)(1).
January 23, 20123282012–4 I.R.B.

Notwithstanding the information re-
ported by a broker, a customer is still
required to comply with all relevant pro-
visions of the Code and regulations. For
example, if a customer sells a debt instru-
ment at a loss in one account with Broker
A and reacquires a substantially identi-
cal debt instrument in a different account
with Broker B within 30 days of the loss
transaction, Broker A is not required to
apply the wash sale rules under section
1091 when reporting the sale. However,
the customer is required to properly apply
the rules of section 1091 to defer some or
all of the loss and must make appropriate
basis adjustments.
If a customer uses an assumption or
method different from the assumption or
method used by the broker to determine a
debt instrument’s adjusted basis or other
information for purposes of the Form
1099–B sent to the customer, the customer
must reconcile the amount reported on the
Form 1099–B to the amount reported on
the customer’s tax return.
3.Changes affecting all specified
securities (including stock)
Under §1.6045–1(d)(5) of the final reg-
ulations relating to stock, a broker may
choose to report gross proceeds from the
sale of a security as the entire proceeds
from the sale or as the proceeds reduced by
the commissions and transfer taxes related
to the sale. Commenters requested that
the regulations remove this choice in order
to standardize broker reporting on Form
1099–B and taxpayer reporting on Form
1040. The proposed regulations adopt this
request and require brokers to reduce re-
ported gross proceeds by commissions and
transfer taxes related to a sale.
Under §1.6045–1(d)(6) of the final reg-
ulations relating to stock, a broker cur-
rently must adjust basis reported for an
organizational action taken by an issuer
of a security during the period the broker
has custody of the security. For a trans-
ferred security, the regulations exclude ad-
justments for organizational actions taken
on the transfer settlement date. The pro-
posed regulations amend this exclusion to
clarify that the exclusion applies only to
the broker receiving custody of a trans-
ferred security. The proposed regulations
require that a broker transferring a security
reflect all necessary adjustments for orga-
nizational actions taken through and on the
transfer settlement date when completing a
transfer statement.
B.Section 1.6045A–1
If a specified security is transferred
between brokers, the transferring bro-
ker must provide the receiving broker
with certain information related to the
transferred security that will enable the
receiving broker to properly report under
section 6045. The existing regulations un-
der §1.6045A–1(b)(1) list information that
must be reported for a transfer of any spec-
ified security. The proposed regulations
under §1.6045A–1 modify this existing
list by adding information about whether
the security was acquired through an eq-
uity-based compensation arrangement.
Because debt instruments and options
are being added to the definition of spec-
ified security under proposed changes
to §1.6045–1(a)(14), the information re-
quired to be provided for stock under
§1.6045A–1(b)(1) also will be required
to be provided for debt instruments and
options. Further, additional data specific
to the transfer of a debt instrument or an
option is required to be provided. This
additional data falls into two broad cate-
gories: 1) data that adequately identifies
the instrument; and 2) data that is specific
to the particular customer, particularly
tradedateandpriceorpremium.
This additional information is required
to enable a broker that receives a debt in-
strument pursuant to a transfer to compute
OID, market discount, bond premium, or
acquisition premium.The description of
the payment terms may be done in any
manner that fully describes the debt instru-
ment. The information can be in the form
of a table of payments, or may be a descrip-
tion of the payment terms. The use of a
single identifier, such as a CUSIP number,
that can be used by the transferee broker
to identify the security and its related pay-
ment terms is also an acceptable means of
providing the additional information to the
transferee broker.
For an option, a transfer statement must
include the date the option was granted or
acquired, the amount of the premium, and
whether the premium was paid or received.
The data also must include any other infor-
mation required to describe fully the op-
tion. This information may be a descrip-
tion of the relevant terms, or it may be
an identifier, such as a CUSIP or Options
Clearing Corporationnumber or code that
can be used by the transferee broker to
identify the security and its related terms.
C.§1.6045B–1
Under §1.6045B–1, if the issuer of a
specified security takes an organizational
action that affects the basis of the secu-
rity, the issuer must file an issuer return.
A commenter asked for clarification about
how this rule applies to option writers, be-
cause an organizational action usually is
initiated by the issuer of the security un-
derlying an option. The proposed regula-
tions amend §1.6045B–1 to provide rules
for certain option writers if there is an or-
ganizational action. If the organizational
action results in an option writer replacing
the original option contract with a differ-
ent number of option contracts, the option
writer must prepare an issuer return as re-
quired by §1.6045B–1.
Proposed Effective/Applicability Dates
These regulations are proposed to take
effect when published in theFederal Reg-
isteras final regulations. In general, the
regulations regarding reporting of basis
and whether any gain or loss on a sale
is long-term or short-term under section
6045(g) are proposed to apply to debt in-
struments acquired on or after January 1,
2013. The regulations regarding report-
ing of gross proceeds, basis, and whether
any gain or loss on a sale is long-term
or short-term under section 6045(h) are
proposed to apply to options granted or
acquired on or after January 1, 2013.
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 supplemented by Execu-
tive Order 13563. Therefore, a regulatory
assessment 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 this regulation.
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby certi-
fied that this regulation will not have a sig-
nificant economic impact on a substantial
number of small entities, because any ef-
2012–4 I.R.B.329January 23, 2012

fect on small entities by the rules proposed
in this document flows directly from sec-
tion 403 of the Energy Improvement and
Extension Act of 2008, Division B of Pub-
lic Law 110–343 (122 Stat. 3765, 3854
(2008)).
Section 403(a) of the Act modifies sec-
tion 6045 to require that brokers report the
adjusted basis of the securities and whether
any gain or loss with respect to the secu-
rities is long-term or short-term when re-
porting the sale of a covered security. The
Act also requires gross proceeds report-
ing for options. It is anticipated that these
statutory requirements will fall only on fi-
nancial services firms with annual receipts
greater than $7 million and, therefore, on
no small entities. Further, in implementing
the statutory requirements, the regulation
proposes to limit reporting to information
required under the Act.
Section 403(c) of the Act added sec-
tion 6045A, which requires applicable per-
sons to furnish a transfer statement in con-
nection with the transfer of custody of a
covered security. The proposed modifica-
tions to §1.6045A–1 effectuate the Act by
giving the broker who receives the trans-
fer statement the information necessary to
determine and report adjusted basis and
whether any gain or loss with respect to
a debt instrument or option is long-term
orshort-termasrequiredbysection6045
when the security is subsequently sold.
Consequently, the regulation does not add
to the impact on small entities imposed by
the statutory scheme. Instead, it limits the
information to be reported to only those
items necessary to effectuate the statutory
scheme.
Section 403(d) of the Act added section
6045B, which requires issuer reporting by
all issuers of specified securities regardless
of size and even when the securities are not
publicly traded. The proposed modifica-
tions to §1.6045B–1 limit reporting to the
additional information for options neces-
sary to meet the Act’s requirements. Ad-
ditionally, the regulation, as modified, re-
tains the rule that permits an issuer to re-
port each action publicly instead of filing
a return and furnishing each nominee or
holder a statement about the action. The
regulation therefore does not add to the
statutory impact on small entities but in-
stead eases this impact to the extent the
statute permits.
Therefore, because this regulation will
not have a significant economic impact
on a substantial number of small entities,
a regulatory flexibility analysis is not re-
quired. The Treasury Department and IRS
request comments on the accuracy of this
statement. Pursuantto section 7805(f) of
the Code, this regulation has been sub-
mitted 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 timely submitted to the IRS.
The IRS and Treasury Department specif-
ically request comments on the clarity of
the proposed regulations and how they can
be made easier to understand. The IRS
and Treasury Department further request
comments about suggested changes or im-
provements to sections of §1.6045–1 that
are not specifically affected by the pro-
posed regulation. The IRS and Treasury
Department also request comments on the
accuracy of the certification that the regu-
lation in this document will not have a sig-
nificant economic impact on a substantial
number of small entities. All comments
will be available for public inspection and
copying.
A public hearing has been sched-
uled for Friday, March 16, 2012,
beginning at 10 a.m. in the IRS
Auditorium, 1111 Constitution Avenue,
NW, Washington, DC. Due to building
security procedures, visitors must enter
through the Constitution Avenue entrance.
In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immediate
entrance area more than 30 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION
CONTACT” section 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 or electronic comments by
February 23, 2012 and submit an outline
of the topics to be discussed and the time
to be devoted to each topic (a signed orig-
inal and eight (8) copies) by Friday, Feb-
ruary 24, 2012. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the sched-
uling of speakers will be prepared after the
deadline for receivingoutlines 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 Pamela Lew, Office of Asso-
ciate Chief Counsel (Financial Institutions
and Products). 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 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6045–1 is amended
by:
1. Revising paragraphs (a)(3)(v) and
(a)(3)(vi) and adding paragraph (a)(3)(vii).
2. Revising paragraphs (a)(8) and
(a)(9).
3. Revising paragraphs (a)(14) and
(a)(15)(i)(A).
4.Redesignating paragraph
(a)(15)(i)(C) as paragraph (a)(15)(i)(E)
and adding new paragraphs (a)(15)(i)(C)
and (a)(15)(i)(D).
5. Revising newly redesignated para-
graph (a)(15)(i)(E).
6. Adding a new sentence to the end of
paragraph (a)(15)(ii).
7.Adding a new paragraph
(a)(15)(iv)(E).
8. Adding a new paragraph (a)(17).
9. Revising paragraph (c)(3)(x) and
the first two sentences in paragraph
(c)(3)(xi)(C).
10. Revising the last sentence of para-
graph (c)(4)Example 9(i).
11. Adding a sentence at the end of
paragraph (d)(2)(i) and revising paragraph
(d)(2)(ii).
January 23, 20123302012–4 I.R.B.

12. Revising paragraphs (d)(3), (d)(5),
(d)(6)(i), and (d)(6)(ii)(A).
13. Revising the heading for paragraph
(d)(6)(ii)(B).
14. Revising the sixth and seventh sen-
tences and removing the last sentence in
paragraph (d)(6)(vii)Example 4.
15. Adding paragraphs (m) and (n).
The additions and revisions read as fol-
lows:
§1.6045–1 Returns of information of
brokers and barter exchanges.
(a) * * *
(3) * * *
(v) An interest in or right to purchase
any of the foregoing in connection with the
issuance thereof from the issuer or an agent
of the issuer or from an underwriter that
purchases any of the foregoing from the
issuer;
(vi) An interest in a security described
in paragraph (a)(3)(i) or (iv) (but not in-
cluding executory contracts that require
delivery of such type of security); or
(vii) An option described in paragraph
(m)(1) of this section.
*****
(8) The termclosing transactionmeans
any cancellation, lapse, expiration, settle-
ment, abandonment, or other termination
of a right or an obligation under a forward
contract, a regulated futures contract, or an
option.
(9) The termsalemeans any disposition
of securities, commodities,options,reg-
ulated futures contracts, or forward con-
tracts, and includes redemptions of stock,
retirements of debt instruments, and enter-
ings into short sales, but only to the extent
any of these actions are conducted for cash.
In the case of an option, a regulated fu-
tures contract, or a forward contract, a sale
includes any closingtransaction. When a
closing transaction in a regulated futures
contract involves making or taking deliv-
ery, the profit or loss on the contract is
a sale and the delivery is a separate sale.
When a closing transaction in a forward
contract involves making or taking deliv-
ery, the delivery is a sale without separat-
ing the profit or loss on the contract from
the profit or loss on the delivery, except
that taking delivery for United States dol-
lars is not a sale. The termsaledoes not in-
clude entering into a contract that requires
delivery of personal property or an interest
therein, the initial grant or purchase of an
option, or the exercise of a call option for
physical delivery. For purposes of this sec-
tion only, a constructive sale under section
1259 and a mark to fair market value under
section 475 or 1296 are not sales.
*****
(14) The termspecified securitymeans:
(i)Anyshareofstock(oranyinterest
treated as stock, including, for example,
an American Depositary Receipt) in an en-
tity organized as, or treated for Federal tax
purposes as, a corporation, either foreign
or domestic (Solely for purposes of this
paragraph (a)(14)(i), a security classified
as stock by the issuer is treated as stock.
If the issuer has not classified the security,
the security is not treated as stock unless
the broker knows thatthe security is rea-
sonably classified as stock under general
Federal tax principles.);
(ii) Any debt instrument described in
paragraph (a)(17) of this section; or
(iii) Any option described in paragraph
(m)(1) of this section.
(15) * * *
(i) * * *
(A) A specified security described in
paragraph (a)(14)(i) of this section ac-
quired for cash in an account on or after
January 1, 2011, except stock for which
the average basis method is available un-
der §1.1012–1(e).
*****
(C) A debt instrument described in
paragraph (a)(14)(ii) of this section ac-
quired for cash in an account on or after
January 1, 2013.
(D) An option described in paragraph
(a)(14)(iii) of this section granted or ac-
quired for cash in an account on or after
January 1, 2013.
(E) A specified security transferred to
an account if the broker or other custodian
of the account receives atransfer statement
(as described in §1.6045A–1) reporting the
security as a covered security.
(ii)***Acquiringasecurityinanac-
count includes a security that represents a
liability (for example, granting an option).
*****
(iv) * * *
(E) A debt instrument that is described
in paragraph (n)(2)(ii) of this section.
*****
(17) For purposes of this section, the
termsdebt instrument,bond,debt obliga-
tion,andobligationmean a debt instru-
ment as defined in §1.1275–1(d) and any
instrument or position that is treated as
a debt instrument under a specific pro-
vision of the Internal Revenue Code (for
example, a regular interest in a REMIC
as defined in section 860G(a)(1) and
§1.860G–1). Solely for purposes of this
section, a security classified as debt by the
issuer is treated as debt. If the issuer has
not classified the security, the security is
not treated as debt unless the broker knows
that the security is reasonably classified as
debt under general Federal tax principles
or that the instrument or position is treated
as a debt instrument under a specific pro-
vision of the Internal Revenue Code.
*****
(c) * * *
(3) * * *
(x)Certain retirements.Noreturnof
information is required from an issuer or
its agent with respect to the retirement of
book entry or registered form debt instru-
ments issued before January 1, 2013, as to
which the relevant books and records in-
dicate that no interim transfers have oc-
curred.
(xi)***
(C)Short sale obligation transferred
to another account. If a short sale obli-
gation is satisfied by delivery of a secu-
rity transferred into a customer’s account
accompanied by a transfer statement (as
described in §1.6045A–1(b)(7)) indicating
that the security was borrowed, the broker
receiving custody of the security may not
file a return of information under this sec-
tion. The receiving broker must furnish a
statement to the transferor that reports the
amount of gross proceeds received from
the short sale, the date of the sale, the quan-
tity of shares, units, or amounts sold, and
the Committee on Uniform Security Iden-
tification Procedures(CUSIP) number of
the sold security (if applicable) or other se-
curity identifier number that the Secretary
may designate by publication in theFed-
eral Registeror in the Internal Revenue
Bulletin (see §601.601(d)(2) of this chap-
ter). ***
*****
(4) * * *
2012–4 I.R.B.331January 23, 2012

Example 9. ***
(i) * * * N indicates on the transfer statement
that the transferred stock was borrowed in accordance
with §1.6045A–1(b)(7).
*****
(d) * * *
(2) * * *
(i)***Seeparagraph(m)ofthissec-
tion for additional rules related to options
and paragraph (n) of this section for addi-
tional rules related to debt instruments.
(ii)Specific identification of securities.
Except as provided in §1.1012–1(e)(7)(ii),
for securities described in paragraph
(a)(14)(i) of this section sold on or after
January 1, 2011, or securities described in
paragraph (a)(14)(ii) or (a)(14)(iii) of this
sectionsoldonorafterJanuary1,2013,a
broker must report a sale of less than the
entire position in an account of a specified
security that was acquired on different
dates or at different prices consistently
with a customer’s adequate and timely
identification of the security to be sold.
See§1.1012–1(c). If the customer does
not provide an adequate and timely identi-
fication for the sale, the broker must first
report the sale of securities in the account
for which the broker does not know the ac-
quisition or purchase date followed by the
earliest securities purchased or acquired,
whether covered securities or noncovered
securities.
*****
(3)Sales between interest payment
dates. For each sale of a debt instrument
prior to maturity with respect to which
a broker is required to make a return of
information under this section, a broker
must show separately on Form 1099 the
amount of accrued and unpaid interest
as of the sale date that must be reported
by the customer as interest income under
§1.61–7(d) (but not the amount of any
market discount on a noncovered security
or original issue discount). Such interest
information must be shown in the manner
and at the time required by Form 1099 and
section 6049.
*****
(5)Gross proceeds. For purposes of
this section,gross proceedson a sale are
the total amount paid to the customer or
credited to the customer’s account as a
result of the sale reduced by the amount
of any stated interest reported under para-
graph (d)(3) of this section and increased
by any amount not paid or credited by rea-
son of repayment of margin loans. In the
case of a closing transaction that results in
a loss, gross proceeds are the amount deb-
ited from the customer’s account. For sales
before January 1, 2013, a broker may, but
is not required to, reduce gross proceeds
by the amount of commissions and trans-
fer taxes, provided the treatment chosen
is consistent with the books of the broker.
For sales on or after January 1, 2013, a
broker must reduce gross proceeds by the
amount of commissions and transfer taxes
related to the sale of the security. For secu-
rities sold pursuant to the exercise of an op-
tion granted or acquired before January 1,
2013, a broker may, but is not required to,
take the option premiums into account in
determining the gross proceeds of the se-
curities sold, provided the treatment cho-
sen is consistent with the books of the bro-
ker. For securities sold pursuant to the ex-
ercise of an option granted or acquired on
or after January 1, 2013, see paragraph (m)
of this section. A broker must report the
gross proceeds of identical stock (within
the meaning of §1.1012–1(e)(4)) by av-
eraging the proceeds of each share if the
stock is sold at separate times on the same
calendar day in executing a single trade or-
der and the broker executing the trade pro-
vides a single confirmation to the customer
that reports an aggregate total price or an
average price per share. However, a bro-
ker may not average the proceeds if the
customer notifies the broker in writing of
an intent to determine the proceeds of the
stock by the actual proceeds per share and
the broker receives the notification by Jan-
uary 15 of the calendar year following the
year of the sale. A broker may extend the
January 15 deadline but not beyond the due
date for filing the return required under this
section.
(6)Adjusted basis—(i)In general.For
purposes of this section, the adjusted basis
of a security is determined from the initial
basis under paragraph (d)(6)(ii) of this sec-
tion as of the date the security is acquired
in an account, increased by the commis-
sions and transfer taxes related to its sale to
the extent not accounted for in gross pro-
ceeds as described in paragraph (d)(5) of
this section. A broker is not required to
consider transactions, elections, or events
occurring outside the account except for
an organizational action taken by an issuer
during the period the broker holds custody
of the security (not including the settle-
ment date that the broker received a trans-
ferred security) reported on an issuer state-
ment (as described in §1.6045B–1) fur-
nished or deemed furnished to the broker.
For rules related to the adjusted basis of a
debt instrument, see paragraph (n) of this
section.
(ii)Initial basis—(A)Cost basis.Fora
security acquired for cash, the initial basis
generally is the total amount of cash paid
by the customer or credited against the cus-
tomer’s account for the security, increased
by the commissions and transfer taxes re-
lated to its acquisition. A broker may, but
is not required to, take option premiums
into account in determining the initial ba-
sis of securities purchased or acquired pur-
suant to the exercise of an option granted
or acquired before January 1, 2013. For
rules related to options granted or acquired
on or after January 1, 2013, see paragraph
(m) of this section. A broker may, but is
not required to, increase initial basis for
income recognized upon the exercise of a
compensatory option or the vesting or ex-
ercise of other equity-based compensation
arrangements. A broker must report the
basis of identical stock (within the mean-
ing of §1.1012–1(e)(4)) by averaging the
basis of each share if the stock is purchased
at separate times on the same calendar day
in executing a single trade order and the
broker executing the trade provides a sin-
gle confirmation to the customer that re-
ports an aggregate total price or an aver-
age price per share. However, a broker
may not average the basis if the customer
timely notifies the broker in writing of an
intent to determine the basis of the stock
by the actual cost per share in accordance
with §1.1012–1(c)(1)(ii).
(B)Basis of transferred securities***
*****
(vii)***
Example 4. * * * Under paragraph (d)(6)(ii)(A) of
this section, C is permitted, but not required, to deter-
mine adjusted basis from the amount R pays under the
terms of the option. Under paragraph (d)(6)(ii)(A) of
this section, C is permitted, but not required, to adjust
basis for any amount R must include as wage income
with respect to the October2, 2013, stock purchase.
*****
(m)Additional rules for option trans-
actions—(1)Scope. This paragraph (m)
applies to the following types of options
granted or acquired on or after January 1,
2013:
January 23, 20123322012–4 I.R.B.

(i)Anoptionononeormorespecified
securities. For purposes of this paragraph
(m), the phraseone or more specified secu-
ritiesincludes an index substantially all the
components of which are specified securi-
ties, and the termoptionincludes a warrant
or a stock right.
(ii) An option on financial attributes of
specified securities, such as interest rates
or dividend yields.
(2)Physically settled option.Ifacov-
ered security is acquired or disposed of
pursuant to the exercise of an option that
was granted or acquired in the same ac-
count as the covered security, a broker
must adjust the basis of the acquired asset
or the gross proceeds amount as appropri-
ate to account for any premium related to
the option.
(3)Rules for an option that is not phys-
ically settled. For purposes of paragraph
(d) of this section, for an option that is not
physically settled and is sold (as defined
in paragraph (a)(9) of this section), the fol-
lowing rules apply:
(i)Gross proceeds.Abrokermustin-
crease gross proceeds for all payments re-
ceived on the option and decrease gross
proceeds for all payments paid on the op-
tion.
(ii)Long-term or short-term gain or
loss. For purposes of paragraph (d)(7) of
this section, when determining if any gain
or loss is long-term or short-term within
the meaning of section 1222, a broker must
apply the rules described in sections 1234
and 1234A.
(4)Rules for warrants and stock rights.
For a right to acquire stock (including a
warrant) received in the same account as
the underlying equity in a distribution that
is described in section 305(a), a broker
must determine basis in the option in ac-
cordance with the rules described in sec-
tions 305 and 307. Upon exercise or sale of
a warrant or stock right, a broker must ac-
count for the warrant or stock right as if it
were purchased and must treat as premium
paid any basis allocated to the warrant or
stock right.
(5)Example. The following example
illustrates the rules in this paragraph (m):
Example. (i) On January 15, 2013, C, an indi-
vidual, sells a 2-year exchange-traded option on 100
shares of Company X through Broker D. C receives
a premium for the option of $100 and pays no com-
mission. In C’s hands, Company X stock is a capital
asset. On December 16, 2013, C pays $110 to close
out the option.
(ii) D is required to report information about the
closing transaction because the option is on a cov-
ered security as described in paragraph (a)(15)(i)(D)
of this section and was part of a closing transaction
described in paragraph (a)(8) of this section. D will
report as gross proceeds the net of the $100 received
as option premium minus the $110 C paid to close out
the option, for a total of -$10. Under the rules of sec-
tion 1234(b)(1) and paragraph (d)(2) of this section,
D will also report that the loss on the closing transac-
tion is a short-term loss.
(6)Multiple options documented in a
single contract. If more than one option
described in paragraph (m)(1) of this sec-
tion is documented in a single contract, a
broker must separately report the required
information for each option as that option
is sold.
(n)Reporting for bond transac-
tions—(1)In general. For purposes of
paragraph (d) of this section, this para-
graph (n) provides rules for brokers to
determine and report information for a
debt instrument.
(2)Scope—(i)In general. Except as
provided in paragraph (n)(2)(ii) of this sec-
tion, this paragraph (n) applies to a debt in-
strument that is a covered security under
paragraph (a)(15)(i)(C) of this section.
(ii)Excluded debt instruments.Adebt
instrument subject to section 1272(a)(6)
(certain interests in or mortgages held by
a REMIC, certain other debt instruments
with payments subject to acceleration,
and pools of debt instruments the yield on
which may be affected by prepayments) is
not a covered security.
(3)Reportingofaccruedmarketdis-
count. In addition to the information re-
quired to be reported under paragraph (d)
of this section, if a debt instrument is sub-
ject to the market discount rules in sections
1276 through 1278, a broker also must re-
port the amount of market discount that
has accrued on the debt instrument as of
the date of the sale. A broker must com-
pute the accruals of market discount by as-
suming that the customer elected to use the
constant interest rate method under section
1276(b)(2) for the taxable year in which
the customer acquired the debt instrument.
See paragraph (n)(5) of this section to de-
termine the accrual period to be used to
compute the accruals of market discount.
(4)Adjusted basis. For purposes of this
section, a broker must use the rules in this
paragraph (n)(4) to determine the adjusted
basis of a debt instrument. To the extent
the rules in this paragraph (n)(4) are incon-
sistent with the rules in paragraph (d)(6)
of this section, the rules in this paragraph
(n)(4) control.
(i)Original issue discount.Ifadebtin-
strument is subject to the original issue dis-
count rules in sections 1271 through 1275
and section 6049, a broker must increase a
customer’s basis in the debt instrument by
the amount of original issue discount re-
ported to the customer under section 6049
for each year the debt instrument is held by
the customer in the account. If the debt in-
strument is not subject to section 6049 or
is a tax-exempt debt instrument subject to
section 1288, the broker must increase the
customer’s basis in the debt instrument by
the amount of original issue discount that
accrued on the debt instrument while held
by the customer in the account. To deter-
mine this amount, the broker must use the
accrual period required under paragraph
(n)(5) of this section.
(ii)Bond premium. If a debt instrument
is subject to the bond premium rules in sec-
tion 171, a broker must decrease a cus-
tomer’s basis in the debt instrument by the
amount of bond premium allocable to the
period the debt instrument is held by the
customer in the account. In the case of
a taxable debt instrument, a broker must
compute any basis adjustment for bond
premium by assuming that the customer
elected to amortize bond premium under
section 171(c) for the taxable year in which
the customer acquired the debt instrument
and that such election remained in effect
for all subsequent years.
(iii)Acquisition premium.Ifadebt
instrument is acquired at an acquisi-
tion premium (as determined under
§1.1272–2(b)(3)), a broker must decrease
the customer’s basis in the debt instrument
by the amount of acquisition premium
that is taken into account each year to
reduce the amount of the original issue
discount that is otherwise includible in
the customer’s income for that year.See
§1.1272–2(b)(4) to determine the amount
of the acquisition premium taken into ac-
count each year.
(iv)Principal and certain other pay-
ments. A broker must decrease the cus-
tomer’s basis by the amount of any pay-
ment made to the customer during the pe-
riod the debt instrument is held in the ac-
count, other than a payment of qualified
stated interest as defined in §1.1273–1(c).
2012–4 I.R.B.333January 23, 2012

(5)Accrual period. If a debt instrument
is subject both to the original issue dis-
count and the market discount rules, a bro-
ker must use the same accrual period that
is used to determine the original issue dis-
count reported to the customer under sec-
tion 6049 to compute accruals of market
discount. In any other situation, a broker
must use an annual accrual period or, if
there are scheduled payments of principal
or interest at regular intervals of one year
or less over the entire term of the debt in-
strument, a broker must use an accrual pe-
riod equal in length to this interval. For
example, if a debt instrument provides for
semiannual payments of interest over the
entire term of the debt instrument, the bro-
ker should use a semiannual accrual pe-
riod.
(6)Broker assumptions not controlling
for customer. The rules in this paragraph
(n) only apply for purposes of a broker’s
reporting obligation under section 6045. A
customer is not bound by the assumptions
that the broker uses to satisfy the broker’s
reporting obligations under section 6045.
*****
Par. 3. Section 1.6045A–1 is amended
by:
1. Revising paragraphs (b)(1) introduc-
tory text and (b)(1)(v).
2. Redesignating paragraphs (b)(2)
through (b)(9) as paragraphs (b)(5)
through (b)(12) respectively.
3. Redesignating paragraph (b)(1)(viii)
as paragraph (b)(2).
4. Revising the introductory text to the
examples in newly redesignated paragraph
(b)(2).
5. Revising newly redesignated para-
graph (b)(5).
6. Revising the first and last sentences
of newly redesignated paragraph (b)(6).
7. Revising newly redesignated para-
graph (b)(8)(ii).
8. Revising the first sentence of newly
redesignated paragraph (b)(9)(ii).
9. Revising the introductory text to the
examples in newly redesignated paragraph
(b)(9)(iii), the fifth sentence of paragraph
(b)(9)(iii)Example 1, and the second sen-
tence of paragraph (b)(9)(iii)Example 2.
10. Revising the last sentence of newly
redesignated paragraph (b)(10).
11. Adding new paragraphs (b)(1)(viii),
(b)(3) and (b)(4).
12. Revising paragraph (d).
The additions and revisions read as fol-
lows:
§1.6045A–1 Sta
tements of information
required in con
nection with transfers of
securities.
*****
(b)Information required—(1)In gen-
eral. For all specified securities, each
transfer statement must include the infor-
mation described in this paragraph (b)(1).
*****
(v)Security identifiers. The Committee
on Uniform Security Identification Pro-
cedures (CUSIP) number of the security
transferred (if applicable) or other secu-
rity identifier number that the Secretary
may designate by publication in theFed-
eral Registeror in the Internal Revenue
Bulletin (see§601.601(d)(2) of this chap-
ter), quantity of shares, units, or amounts,
and classification of the security (such as
stock).
*****
(viii)Relationship to a compensation
arrangement. Whether the security was re-
ceived in connection with the exercise of
a compensatory option or the vesting or
exercise of any other equity-based com-
pensation arrangement and whether basis
has been adjusted for any compensation in-
come.
(2)Examples. The following examples
illustrate the rules of paragraph (b)(1) of
this section:
*****
(3)Additional information required for
a transfer of a debt instrument. In addi-
tion to the information required in para-
graph (b)(1) of this section, for a transfer
of a debt instrument that is a covered secu-
rity, the following additional information
is required:
(i) A description of the payment terms;
(ii)Theissuepriceofthedebtinstru-
ment;
(iii) The issue date of the debt instru-
ment;
(iv) The adjusted issue price of the debt
instrument as of the transfer date;
(v) The customer’s initial basis in the
debt instrument;
(vi) The yield used to compute any ac-
cruals of original issue discount, bond pre-
mium, and/or market discount;
(vii) Any market discount that has ac-
crued as of the transfer date (as determined
under §1.6045–1(n)); and
(viii) Any bond premium that has been
amortized as of the transfer date (as deter-
mined under §1.6045–1(n)).
(4)Additional information required for
option transfers. In addition to the infor-
mation required in paragraph (b)(1) of this
section, for a transfer of an option that is a
covered security, thefollowing additional
information is required:
(i) The date of grant or acquisition of
the option;
(ii) The amount of premium paid or re-
ceived; and
(iii) Any other information required to
fully describe the option.
(5)Format of identification.Anap-
plicable person furnishing a transfer state-
ment and a broker receiving the transfer
statement may agree to combine the in-
formation required in paragraphs (b)(1),
(b)(3), and (b)(4) of this section in any for-
mat or to use a code in place of one or more
required items. For example, a transferor
and a receiving broker may agree to use
a single code to represent the broker in-
stead of the broker’s name, address, and
telephone number, or may use a security
symbol or other identification number or
scheme instead of the security identifier
required by paragraphs (b)(1), (b)(3), and
(b)(4) of this section.
(6)Transfers of noncovered securities.
The information described in paragraphs
(b)(1)(vii), (b)(8), and (b)(9) of this section
is not required for a transfer of a noncov-
ered security if the transfer statement iden-
tifies the security as a noncovered security.
* * * For purposes of this paragraph (b)(6),
a transferor must treat a security for which
a broker makes a single-account election
described in §1.1012–1(e)(11)(i) as a cov-
ered security.
*****
(8) * * *
(ii)Transfersofsharestosatisfyacash
legacy. If a security is transferred from a
decedent or a decedent’s estate to satisfy a
cash legacy, paragraph (b)(1) of this sec-
tion applies and paragraph (b)(8)(i) of this
section does not apply.
*****
(9) * * *
(ii)Subsequent transfers of gifts by the
same customer. If a transferor transfers to
January 23, 20123342012–4 I.R.B.

a different account of the same customer
a security that a prior transfer statement
reported as a gifted security, the trans-
feror must include on the transfer state-
ment the information described in para-
graph (b)(9)(i) of this section for the date
of the gift to the customer. * * *
(iii)Examples. The following examples
illustrate the rules of this paragraph (b)(9):
Example 1. * * * Under paragraph (b)(9)(i) of
this section, S must provide a transfer statement to T
that identifies the securities as gifted securities and
indicates X’s adjusted basis and original acquisition
date. * * *
Example 2. * * * Under paragraph (b)(9)(ii) of
this section, T must provide a transfer statement to
U that identifies the securities as gifted securities and
indicates X’s adjusted basis and original acquisition
date of the stock. * * *
(10) * * * If the customer does not pro-
vide an adequate and timely identification
for the transfer, a transferor must first re-
port the transfer of any securities in the
account for which the transferor does not
know the acquisition or purchase date fol-
lowed by the earliest securities purchased
or acquired, whether covered securities or
noncovered securities.
*****
(d)Effective/applicability dates.This
section applies to:
(1) A transfer on or after January 1,
2011, of stock other than stock in a reg-
ulated investment company within the
meaning of §1.1012–1(e)(5);
(2) A transfer of stock in a regulated
investment company on or after January 1,
2012; and
(3) A transfer of a debt instrument or an
option on or after January 1, 2013.
Par. 4. Section 1.6045B–1 is amended
by redesignating paragraph (h) as para-
graph (j), adding new paragraphs (h) and
(i), and revising newly-designated para-
graph (j) to read as follows:
§1.6045B–1 Returns relating to actions
affecting basis of securities.
*****
(h)Rule for options—(1)In general.
For an option granted or acquired on or af-
ter January 1, 2013, if the original contract
is replaced by a different number of option
contracts, the option writer is the issuer of
the option for purposes of section 6045B
and the option writer must prepare an is-
suer return.
(2)Example. The following example
illustrates the rule of paragraph (h)(1) of
this section:
Example. On January 15, 2013, F, an individual,
purchases a one-year exchange-traded call option on
100 shares of Company X stock, with a strike price
of $110. The call option is cleared through Clearing-
house G. Company X undertakes a 2-for–1 stock split
as of April 1, 2013. Due to the stock split, the terms
of F’s option are altered, resulting in two option con-
tracts, each on 100 shares of Company X stock with
a strike price of $55. All other terms of F’s option
remain the same. Under paragraph (h)(1) of this sec-
tion, Clearinghouse G is required to prepare an issuer
report to F.
(i) [Reserved]
(j)Effective/applicability dates.This
section applies to—
(1) Organizationalactions occurring on
or after January 1, 2011, that affect the ba-
sis of specified securities within the mean-
ing of §1.6045–1(a)(14)(i) other than stock
in a regulated investment company within
the meaning of §1.1012–1(e)(5);
(2) Organizationalactions occurring on
or after January 1, 2012, that affect stock
in a regulated investment company;
(3) Organizational actions occur-
ring on or after January 1, 2013, that
affect debt instruments described in
§1.6045–1(a)(14)(ii), and
(4) Actions occurring on or after Jan-
uary 1, 2013, that affect options described
in §1.6045–1(a)(14)(iii).
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on November 22,
2012, 4:15 p.m., and published in the issue of the Federal
Register for November 25, 2012, 76 F.R. 72652)
Deadline to Submit Opinion
and Advisory Letter
Applications for Pre-Approved
Defined Contribution Plans is
Extended to April 2, 2012
Announcement 2012–3
This announcement extends to April 2,
2012, the deadline to submit on-cycle ap-
plications for opinion and advisory let-
ters for pre-approved defined contribution
plans for the plans’ second six-year reme-
dial amendment cycle. Under Rev. Proc.
2007–44, 2007–2 C.B. 54, and Rev. Proc.
2011–49, 2011–44 I.R.B. 608, the sub-
mission period for these applications was
scheduled to expire on January 31, 2012.
The extension provided by this an-
nouncement applies to the deadline for
submitting on-cycle applications for opin-
ion and advisory letters for mass submitter
lead plans, word-for-word identical plans,
master and prototype plan minor modifier
placeholder applications and non-mass
submitter defined contribution plans.
Effect on Other Documents
Rev. Proc. 2007–44 and Rev. Proc.
2011–49 are modified.
DRAFTING INFORMATION
The principal author of this an-
nouncement is Angelique Carrington
of the Employee Plans, Tax Exempt
and Government Entities Division.
For further information regarding this
announcement, please call the Employee
Plans taxpayer assistance answering
service at (877) 829–5500 (a toll-free
number)oremailMs. Carringtonat
retirementplanquestions@irs.gov.
Regulations Governing the
Performance of Actuarial
Services Under the Employee
Retirement Income Security
Act of 1974; Correction
Announcement 2012–4
AGENCY: Joint Board for the Enrollment
of Actuaries.
ACTION: Correction to final regulations.
SUMMARY: This document contains cor-
rections to final regulations (T.D. 9517,
2011–15 I.R.B. 610) that were published
in the Federal Register on Thursday,
March 31, 2011 (76 FR 17762) relating to
the enrollment of actuaries.
DATES: This correction is effective on
December 28, 2011, and is applicable on
March 31, 2011.
FOR FURTHER INFORMATION
CONTACT: Patrick McDonough, Execu-
tive Director, Joint Board for the Enroll-
2012–4 I.R.B.335January 23, 2012

ment of Actuaries, at (202) 622–8229 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations (T.D. 9517) that
are the subject of this correction are un-
der section 3042 of the Employee Re-
tirement Income Security Act of 1974
(88 Stat. 829), Public Law 93–406
(ERISA).
Need for Correction
As published, final regulations (T.D.
9517) contain errors that may prove to be
misleading and are in need of clarification.
Correction of Publication
Accordingly, the publication of the fi-
nal regulations (T.D. 9517) which were the
subject of FR Doc. 2011–7573 is corrected
as follows:
On page 17762, column 1, in
the preamble, under the paragraph
heading “Paperwork Reduction Act”,
last paragraph of the column, fourth
line, the language “901.11(f)(2)(D),
901.11(f)(2)(G) and (H),” is cor-
rected to read “901.11(f)(2)(i)(D),
901.11(f)(2)(i)(G) and (H),”.
Guy R. Traynor,
Acting Chief, Publications
and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on December 27
2011, 8:45 a.m., and published in the issue of the Federal
Register for December 28,2011, 76 F.R. 81362)
January 23, 20123362012–4 I.R.B.

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.
2012–4 I.R.B.iJanuary 23, 2012

Numerical Finding List
1
Bulletins 2012–1 through 2012–4
Announcements:
2012-1, 2012-1 I.R.B.249
2012-2, 2012-2 I.R.B.285
2012-3, 2012-4 I.R.B.335
2012-4, 2012-4 I.R.B.335
Notices:
2012-1, 2012-2 I.R.B.260
2012-3, 2012-3 I.R.B.289
2012-4, 2012-3 I.R.B.290
2012-5, 2012-3 I.R.B.291
2012-6, 2012-3 I.R.B.293
2012-7, 2012-4 I.R.B.308
2012-8, 2012-4 I.R.B.309
2012-9, 2012-4 I.R.B.315
Proposed Regulations:
REG-149625-10, 2012-2 I.R.B.279
REG-102988-11, 2012-4 I.R.B.326
Revenue Procedures:
2012-1, 2012-1 I.R.B.1
2012-2, 2012-1 I.R.B.92
2012-3, 2012-1 I.R.B.113
2012-4, 2012-1 I.R.B.125
2012-5, 2012-1 I.R.B.169
2012-6, 2012-1 I.R.B.197
2012-7, 2012-1 I.R.B.232
2012-8, 2012-1 I.R.B.235
2012-9, 2012-2 I.R.B.261
2012-10, 2012-2 I.R.B.273
2012-12, 2012-2 I.R.B.275
2012-13, 2012-3 I.R.B.295
2012-14, 2012-3 I.R.B.296
Revenue Rulings:
2012-1, 2012-2 I.R.B.255
2012-2, 2012-3 I.R.B.286
Treasury Decisions:
9559, 2012-2 I.R.B.252
9560, 2012-4 I.R.B.299
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin
2011–52, dated December 27, 2011.
January 23, 2012ii2012–4 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2012–1 through 2012–4
Notices:
2010-88
As modified by Ann. 2011-40, is superseded by
Notice 2012-1, 2012-2 I.R.B.260
2011-28
Superseded by
Notice 2012-9, 2012-4 I.R.B.315
Revenue Procedures:
2003-61
Superseded by
Notice 2012-8, 2012-4 I.R.B.309
2007-44
Modified by
Ann. 2012-3, 2012-4 I.R.B.335
2011-1
Superseded by
Rev. Proc. 2012-1, 2012-1 I.R.B.1
2011-2
Superseded by
Rev. Proc. 2012-2, 2012-1 I.R.B.92
2011-3
Superseded by
Rev. Proc. 2012-3, 2012-1 I.R.B.113
2011-4
Superseded by
Rev. Proc. 2012-4, 2012-1 I.R.B.125
2011-5
Superseded by
Rev. Proc. 2012-5, 2012-1 I.R.B.169
2011-6
Superseded by
Rev. Proc. 2012-6, 2012-1 I.R.B.197
2011-7
Superseded by
Rev. Proc. 2012-7, 2012-1 I.R.B.232
2011-8
Superseded by
Rev. Proc. 2012-8, 2012-1 I.R.B.235
2011-9
Superseded by
Rev. Proc. 2012-9, 2012-2 I.R.B.261
2011-10
Superseded by
Rev. Proc. 2012-10, 2012-2 I.R.B.273
Revenue Procedures— Continued:
2011-49
Modified by
Ann. 2012-3, 2012-4 I.R.B.335
Revenue Rulings:
2008-40
Modified by
Notice 2012-6, 2012-3 I.R.B.293
2011-1
Modified by
Notice 2012-6, 2012-3 I.R.B.293
Treasury Decision:
9517
Corrected by
Ann. 2012-4, 2012-4 I.R.B.335
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin 2011–52, dated December 27,
2011.
2012–4 I.R.B.iiiJanuary 23, 2012

January 23, 20122012–4 I.R.B.

2012–4 I.R.B.January 23, 2012

January 23, 20122012–4 I.R.B.

INTERNAL REVENUE BULLETIN
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tendent of Documents when their subscriptions must be renewed.
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