Internal Revenue Bulletin 2014-36 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# Internal Revenue bulletin
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## 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

### Notice 2014-46, page 520.

Clarification and Modification of Notice 2013-29 and Notice
2013-60. This notice clarifies and modifies Notice 2013-29
and Notice 2013-60 regarding the application of the Physical
Work Test, the ability to transfer a facility after construction
has begun, and modifies the application of the Safe Harbor for
certain facilities with respect to which a taxpayer paid or
incurred less than five percent, but at least three percent, of
the total cost of the facility before January 1, 2014.

### Rev. Proc. 2014-48, page 527.

This revenue procedure provides the exclusive procedures for
taxpayers to obtain the automatic consent of the Commis-
sioner to change a method of accounting under the retail
inventory method to comply with final regulations under § 471
of the Code. The final regulations (TD 9688) were published in
the Federal Register on August 15, 2014.

### T.D. 9687, page 486.

This document contains final regulations that provide compre-
hensive guidance for the award program authorized under
Internal Revenue Code section 7623. These regulations are
effective on August 12, 2014.

### T.D. 9688, page 482.

Final regulations provide rules under section 471 of the Code
relating to the retail inventory method of accounting. The final
regulations clarify the computation of ending inventory values
under the retail inventory method and provide special rules for
vendor allowances required to reduce only cost of goods sold
and for margin protection payments. These regulations are
effective on August 15, 2014.

### T.D. 9689, page 456.

Final regulations regarding dispositions of property subject to
depreciation under section 168 of the Internal Revenue Code
(Modified Accelerated Cost Recovery System (MACRS) prop-
erty). The final regulations also amend the general asset ac-
count regulations under § 1.168(i)-1 and the accounting for
MACRS property regulations under § 1.168(i)-7. The final
regulations provide rules for determining gain or loss upon the
disposition of MACRS property, determining the asset dis-
posed of, and accounting for partial dispositions of MACRS
property. The final regulations also remove temporary regula-
tions under section 168 regarding general asset accounts and
disposition of MACRS property. These regulations are effective
on August 18, 2014.

## EMPLOYEE PLANS

### Notice 2014-48, page 523.

This notice sets forth updates on the corporate bond monthly
yield curve, the corresponding spot segment rates for July
2014 used under § 417(e)(3)(D), the 24-month average seg-
ment rates applicable for August 2014, and the 30-year Trea-
sury rates. These rates reflect the application of
§ 430(h)(2)(C)(iv), which was added by the Moving Ahead for
Progress in the 21st Century Act, Public Law 112-141 (MAP-
21) and amended by section 2003 of the Highway and Trans-
portation Funding Act of 2014 (HATFA).

(Continued on the next page)

Finding Lists begin on page ii.
Index for July through September begins on page iv.

Department of the Treasury
Internal Revenue Service

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## EXCISE TAX

### Notice 2014-47, page 522.

Section 9010 of the Patient Protection and Affordable Care Act
(PPACA), Public Law 111-148 (124 Stat. 119 (2010), as
amended by § 10905 of PPACA, and as further amended by
§ 1406 of the Health Care and Education Reconciliation Act of
2010, Public Law 111-152 (124 Stat. 1029 (2010)) imposes
an annual fee on certain health insurance providers. Notice
2014-47 clarifies how the Internal Revenue Service and the
Department of Treasury will administer the definition of a "cov-
ered entity" for the 2014 fee year. Entities that meet the
requirements of an exclusion under § 9010(c)(2) to the defini-
tion of a covered entity for the entire 2013 data year or for the
entire 2014 fee year, will not be treated as covered entities for
purposes of the 2014 fee year. Additionally, a controlled group
should not report in 2014 the net premiums written in 2013 of
a controlled group member who would not qualify as a covered
entity in the 2014 fee year if it were a stand-alone entity. The
notice applies only to the 2014 fee year.

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## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with 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.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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, identify-
ing 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 .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.

### Part II .- Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion 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 Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative 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 contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

### Section 168 .- Accelerated cost recovery system

#### T.D. 9689

26 CFR 1.168(i)-8T-Dispositions of MACRS Prop-
erty (Temporary).

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

### Guidance Regarding Dispositions of Tangible Depreciable Property

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains fi-
nal regulations regarding dispositions of
property subject to depreciation under
section 168 of the Internal Revenue Code
(Code) (Modified Accelerated Cost Re-
covery System (MACRS) property). The
final regulations also amend the general
asset account regulations and the account-
ing for MACRS property regulations. The
final regulations provide rules for deter-
mining gain or loss upon the disposition
of MACRS property, determining the as-
set disposed of, and accounting for partial
dispositions of MACRS property. The fi-
nal regulations affect taxpayers that dis-
pose of MACRS property. The final reg-
ulations also remove temporary regulations
under section 168 regarding general asset
accounts and disposition of MACRS
property.

DATES: Effective Date: These regula-
tions are effective on August 18, 2014.

Applicability Dates: These regulations
apply to taxable years beginning on or
after January 1, 2014. For dates of appli-
cability of the final regulations, see
§§ 1.168(i)-1(m), 1.168(i)-7(e), and
1.168(i)-8(j).

FOR FURTHER INFORMATION
CONTACT: Kathleen Reed or Patrick
Clinton, Office of Associate Chief Coun-
sel (Income Tax and Accounting), (202)
317-7005 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

#### Background

On December 27, 2011, the IRS and
the Treasury Department published in the
Federal Register (76 FR 81060) tempo-
rary regulations (TD 9564) regarding the
accounting for, and dispositions of, prop-
erty subject to depreciation under section
168 (MACRS property). The temporary
regulations also amended the general asset
account regulations under § 1.168(i)-1.
On the same date, the IRS published in the
Federal Register (76 FR 81128) a notice
of proposed rulemaking (REG-168745-
03) cross-referencing the temporary regu-
lations (2011 proposed regulations). The
IRS and the Treasury Department re-
ceived numerous written comments re-
sponding to the 2011 proposed regulations
and held a public hearing on May 9, 2012.

The temporary regulations initially ap-
plied to taxable years beginning on or
after January 1, 2012. In response to the
comments received and the statements
made at the public hearing, the IRS and
the Treasury Department released Notice
2012 -73, 2012-51 IRB 713, on Novem-
ber 20, 2012, announcing that, to help
taxpayers transition to the final regula-
tions, the IRS and the Treasury Depart-
ment would change the applicability date
of the temporary regulations to taxable
years beginning on or after January 1,
2014, while permitting taxpayers to
choose to apply the temporary regulations
to taxable years beginning on or after Jan-
uary 1, 2012, and before the applicability
date of the final regulations. Notice
2012-73 also alerted taxpayers that the
IRS and the Treasury Department in-
tended to publish final regulations in 2013
and expected the final regulations to apply
to taxable years beginning on or after Jan-
uary 1, 2014, but that the final regulations
would permit taxpayers to apply the pro-
visions of the final regulations to taxable

years beginning on or after January 1,
2012. On December 17, 2012, the IRS and
the Treasury Department published in the
Federal Register (77 FR 74583) a tech-
nical amendment to TD 9564, which
amended the applicability date of the tem-
porary regulations to taxable years begin-
ning on or after January 1, 2014, while
permitting taxpayers to choose to apply
the temporary regulations to taxable years
beginning on or after January 1, 2012, and
before the applicability date of the final
regulations.

Notice 2012-73 also alerted taxpayers
that the IRS and the Treasury Department
intended to revise the disposition rules in
the temporary regulations. After consider-
ing the comment letters and the statements
made at the public hearing, the IRS and
the Treasury Department removed the
temporary regulations under section 167
and § 1.168(i)-7 and issued final regula-
tions in the Federal Register on Septem-
ber 19, 2013 (78 FR 57686). The final
regulations under section 167 provide
rules for depreciation of leasehold im-
provements and amend existing regula-
tions under section 167 regarding ac-
counting for and retirement of depreciable
property. Section 1.168(i)-7 provides
rules for how to account for MACRS
property. On the same date, the IRS also
withdrew the 2011 proposed regulations
under §§ 1.168(i)-1 and 1.168(i)-8 and
published a notice of proposed rulemaking
(REG-110732-13) under §§ 1.168(i)-1,
1.168(i)-7, and 1.168(i)-8 (2013 pro-
posed regulations) in the Federal Regis-
ter (78 FR 57547). The 2011 proposed
regulations under § 1.168(i)-1 amended
the existing regulations on general asset
accounts, and the 2011 proposed regula-
tions under § 1.168(i)-8 provided rules
for dispositions of MACRS property. The
IRS and the Treasury Department did not
withdraw or remove the temporary regu-
lations under §§ 1.168(i)-1T and
1.168(i)-8T and taxpayers continued to
have the option of applying those tempo-
rary regulations to taxable years begin-
ning on or after January 1, 2012, and
before the applicability date of the final
regulations.

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No comments were received from the
public in response to the 2013 proposed
regulations. No public hearing was re-
quested or held. However, the IRS and the
Treasury Department are making clarify-
ing changes to the 2013 proposed regula-
tions regarding the determination of the
unadjusted depreciable basis of a disposed
asset in a general or multiple asset account
or a disposed portion of an asset, and the
manner of making certain disposition
elections for assets included in a general
asset account when section 280B applies.
These revisions are discussed in this pre-
amble. The IRS and the Treasury Depart-
ment are removing the temporary regula-
tions under §§ 1.168(i)-1T and 1.168(i)-8T
and are issuing final regulations under
§§ 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8.
The 2013 proposed regulations are ad-
opted as amended by this Treasury deci-
sion.

### Explanation of Provisions and Revisions

#### I. Overview

The final regulations under §§ 1.168(i)-1,
1.168(i)-7, and 1.168(i)-8 generally re-
tain all of the provisions of the 2013 pro-
posed regulations. Section 1.168(i)-1
amends the existing general asset account
regulations regarding establishment of
general asset accounts, depreciation of a
general asset account, and dispositions of
assets in a general asset account. Section
1.168(i)-7 amends the existing regula-
tions on accounting for MACRS property
to address partial dispositions of MACRS
property. Section 1.168(i)-8 provides
rules for dispositions of MACRS prop-
erty. These final regulations generally ap-
ply to taxable years beginning on or after
January 1, 2014.

II. Disposition Rules for MACRS Prop-
erty Under § 1.168(i)-8

Section 1.168(i)-8 provides the basic
rules applicable to dispositions of
MACRS property, and § 1.168(i) -1 pro-
vides special rules applicable to MACRS
property included in a general asset ac-
count.

#### A. Definition of disposition

The final regulations retain the defini-
tion of "disposition" for MACRS property
that is set forth in the 2013 proposed reg-
ulations. A disposition occurs when own-
ership of the asset is transferred or when

the asset is permanently withdrawn from
use either in the taxpayer's trade or busi-
ness or in the production of income. A
disposition includes the sale, exchange,
retirement, physical abandonment, or de-
struction of an asset. A disposition also
includes the retirement of a structural
component (or a portion thereof) of a
building only if the partial disposition rule
(discussed in II.C) applies to such struc-
tural component (or a portion thereof).
Finally, the manner of disposition (for ex-
ample, abnormal retirement or normal re-
tirement) is not taken into consideration in
determining whether a disposition occurs
or gain or loss is recognized.

B. Determining appropriate disposed
asset

The final regulations also retain the
rules in the 2013 proposed regulations for
determining the disposed asset for tax dis-
position purposes. In general, the facts
and circumstances of each disposition are
considered in determining the appropriate
disposed asset. However and as provided
in the 2013 proposed regulations, the asset
for tax disposition purposes may not con-
sist of items placed in service by the tax-
payer on different dates (without taking
into account the applicable convention).
Further, the unit of property as determined
under § 1.263(a)-3(e) or in published
guidance in the Internal Revenue Bulletin
under section 263(a) does not apply for
purposes of determining what is the ap-
propriate disposed asset.

In addition to these general rules, the
final regulations provide special rules for
certain types of properties. The final reg-
ulations retain the rule in the 2013 pro-
posed regulations that each building (in-
cluding its structural components) is the
asset for tax disposition purposes, unless
more than one building (including its
structural components) is treated as the
asset under § 1.1250-1(a)(2)(ii), there is
an improvement or addition to an existing
building (including its structural compo-
nents), or the building includes two or
more condominium or cooperative units.
If there is an improvement or addition to
an existing building (including its struc-
tural components), the improvement or
addition is the asset. If a building includes
two or more condominium or cooperative
units, each condominium or cooperative

unit (including its structural components)
is the asset.

The final regulations also provide that
if a taxpayer properly includes an item in
one of the asset classes 00.11 through 00.4
of Rev. Proc. 87-56 (1987-2 CB 674) or
classifies an item in one of the categories
under section 168(e)(3) (other than a cat-
egory that includes buildings or structural
components; for example, retail motor fu-
els outlet and qualified leasehold improve-
ment property), each item is the asset pro-
vided it is not an improvement or addition
to an existing asset.

Finally, and consistent with section
168(i)(6), the final regulations provide
that if the taxpayer places in service an
improvement or addition to an asset after
the taxpayer placed the asset in service,
the improvement or addition is a separate
asset.

#### C. Partial dispositions

The final regulations also retain the
partial disposition rule in the 2013 pro-
posed regulations. Consequently, the dis-
position rules in the final regulations ap-
ply to a partial disposition of an asset (for
example, the disposition of a roof (or a
portion of a roof)). The partial disposition
rule allows taxpayers to claim a loss upon
the disposition of a structural component
(or a portion thereof) of a building or upon
the disposition of a component (or a por-
tion thereof) of any other asset without
identifying the component as an asset be-
fore the disposition event. The partial dis-
position rule also minimizes circum-
stances in which an original part and any
subsequent replacements of the same part
are required to be capitalized and depre-
ciated simultaneously. These final regula-
tions provide examples demonstrating the
application of the partial disposition rule.

In many cases, the partial disposition
rule is elective ("partial disposition elec-
tion"). However, consistent with the 2013
proposed regulations and the operation of
sections 165, 168(i)(7), 1031, and 1033,
and because sales of a portion of an asset
are common, the partial disposition rule is
required to be applied to a disposition of a
portion of an asset as a result of a casualty
event described in section 165, to a dis-
position of a portion of an asset for which
gain (determined without regard to section
1245 or 1250) is not recognized in whole
or in part under section 1031 or 1033, to a

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transfer of a portion of an asset in a step-
in-the-shoes transaction described in sec-
tion 168(i)(7)(B), or to a sale of a portion
of an asset. Consequently, a disposition
includes a disposition of a portion of an
asset under these circumstances, even if
the taxpayer does not make the partial
disposition election for that disposed por-
tion. For other transactions, a disposition
includes a disposition of a portion of an
asset only if the taxpayer makes the partial
disposition election for that disposed por-
tion.

A taxpayer may make the partial dis-
position election for the disposition of a
portion of any type of MACRS property,
including an asset that is properly in-
cluded in one of the asset classes 00.11
through 00.4 of Rev. Proc. 87-56. How-
ever, consistent with section 168(i)(6) and
the 2013 proposed regulations, a taxpayer
making the partial disposition election for
the disposition of a portion of an asset that
is properly included in one of the asset
classes 00.11 through 00.4 of Rev. Proc.
87-56 must classify the replacement por-
tion of the asset under the same asset class
as the disposed portion of the asset.

The partial disposition election is made
on the taxpayer's timely filed original
Federal tax return, including extensions,
for the taxable year in which the portion
of the asset is disposed of by the taxpayer.
This election may not be made or revoked
by the filing of an application for a change
in method of accounting. A taxpayer may
revoke a partial disposition election by
filing a request for a letter ruling and
obtaining the consent of the Commis-
sioner of Internal Revenue to revoke this
election. The Commissioner may grant a
request to revoke this election if the tax-
payer acted reasonably and in good faith,
and the revocation will not prejudice the
interests of the Government. In deciding
whether to grant such a request, the Com-
missioner anticipates applying standards
similar to the standards under
§ 301.9100-3 of this chapter for granting
extensions of time for making regulatory
elections. If a taxpayer chooses to apply
these final regulations to its taxable year
beginning in 2012 or 2013, these final
regulations also provide rules for making
the partial disposition election for the por-
tion of an asset disposed of by the tax-
payer during those taxable years.

The final regulations also provide a
special partial disposition rule to address
the effect of an IRS disallowance of a
taxpayer's characterization of the replace-
ment of a portion of an asset as a repair.
When the IRS disallows a taxpayer's re-
pair deduction for the amount paid or in-
curred for the replacement of a portion of
an asset and capitalizes such amount un-
der § 1.263(a)-2 or § 1.263(a)-3, the tax-
payer may make the partial disposition
election for the disposition of the portion
of the asset to which the IRS's adjustment
pertains by filing an application for
change in accounting method, provided
the asset of which the disposed portion
was a part is owned by the taxpayer at the
beginning of the year of change (as de-
fined for purposes of section 446(e)).

##### D. Gain or loss

The final regulations also retain the
rules in the 2013 proposed regulations for
determining gain or loss upon the dispo-
sition of MACRS property. These rules
are generally consistent with the disposi-
tion rules under § 1.168-6 of the pro-
posed regulations on the Accelerated Cost
Recovery System of former section 168
(ACRS) (which generally have been ap-
plied to MACRS property). If an asset is
disposed of by sale, exchange, or involun-
tary conversion, gain or loss is recognized
under the applicable provisions of the
Code. If an asset is disposed of by phys-
ical abandonment, loss is recognized in
the amount of the asset's adjusted depre-
ciable basis at the time of the abandon-
ment, unless an abandoned asset is subject
to nonrecourse indebtedness in which case
the asset is treated in the same manner as
an asset disposed of by sale. Finally, if an
asset is disposed of other than by sale,
exchange, involuntary conversion, physi-
cal abandonment, or conversion to per-
sonal use (for example, when the asset is
transferred to a supplies or scrap account),
gain is not recognized but loss is recog-
nized in the amount of the excess of the
asset's adjusted depreciable basis over its
fair market value at the time of disposi-
tion. The same rules apply when the par-
tial disposition rule applies to a disposi-
tion of a portion of an asset.

E. Determination of basis of disposed
asset

The final regulations retain the rule in
the 2013 proposed regulations on deter-

mining the unadjusted depreciable basis
of a disposed asset if that asset is in a
multiple asset account and it is impracti-
cable from the taxpayer's records to de-
termine the unadjusted depreciable basis
of the disposed asset. In such a situation,
the final regulations provide that the tax-
payer may use any reasonable method that
is consistently applied to all assets in the
same multiple asset account. The IRS and
the Treasury Department expect that rea-
sonable methods are available that use
information readily available or known to
the taxpayer and do not necessitate under-
taking an expensive study.

These final regulations also provide
nonexclusive examples of reasonable
methods. These examples are the same
examples in the 2013 proposed regula-
tions, except that the final regulations do
not include discounting the cost of the
replacement asset by the Consumer Price
Index as an example of a reasonable
method. After further review, the IRS and
the Treasury Department have determined
that the Producer Price Index for Finished
Goods (and its successor, the Producer
Price Index for Final Demand) more ac-
curately reflects inflation for capital ex-
penditures. The final regulations also clar-
ify that discounting the cost of the
replacement asset using the Producer
Price Index for Finished Goods is a rea-
sonable method only if the replacement
asset is a restoration under § 1.263(a)-
3(k) and is not a betterment under
§ 1.263(a)-3(j) or is not an adaptation to a
new or different use under § 1.263(a)-
3(l). The examples in the final regulations
include the following: (1) discounting the
cost of the replacement asset to its placed-
in-service year cost using the Producer
Price Index for Finished Goods (or its
successor, the Producer Price Index for
Final Demand, or any other index desig-
nated by guidance in the Internal Revenue
Bulletin (see § 601.601(d)(2) of the chap-
ter) for purposes of the final regulations)
where the replacement asset is a restora-
tion under § 1.263(a)-3(k) and is not a
betterment under § 1.263(a)-3(j) or is not
an adaptation to a new or different use
under § 1.263(a)-3(1); (2) a pro rata allo-
cation of the unadjusted depreciable basis
of the multiple asset account based on the
replacement cost of the disposed asset and
the replacement cost of all of the assets in

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the multiple asset account; and (3) a study
allocating the cost of the asset to its indi-
vidual components.

The final regulations also provide rules
to determine the unadjusted depreciable
basis of the disposed portion of an asset
when the partial disposition rule applies.
While these rules retain most of the rules
in the 2013 proposed regulations, the final
regulations were changed to clarify when
a taxpayer may use a reasonable method
for determining the unadjusted deprecia-
ble basis of a disposed portion of an asset.
The IRS and the Treasury Department in-
tended to allow taxpayers to use a reason-
able method under the same circum-
stances as described above for determining
the unadjusted depreciable basis of a dis-
posed asset in a multiple asset account.
However, the 2013 proposed regulations
did not reflect this intent. Consequently,
the final regulations clarify that a taxpayer
may use any reasonable method for deter-
mining the unadjusted depreciable basis
of the disposed portion of the asset only if
it is impracticable from the taxpayer's re-
cords to determine such unadjusted depre-
ciable basis. If a taxpayer disposes of
more than one portion of the same asset
and it is impracticable from the taxpayer's
records to determine the unadjusted de-
preciable basis of the first disposed por-
tion of the asset, the reasonable method
used by the taxpayer must be consistently
applied to all portions of the same asset
for purposes of determining the unad-
justed depreciable basis of each disposed
portion of the asset. If the asset, a portion
of which is disposed of, is in a multiple
asset account, the reasonable method used
by the taxpayer must be consistently ap-
plied to all assets and portions of assets in
the same multiple asset account. Finally,
the final regulations provide nonexclusive
examples of reasonable methods that are
similar to those discussed in the preceding
paragraph.

###### F. Identification of disposed asset

The final regulations retain the rules in
the 2013 proposed regulations for deter-
mining the placed-in-service year of a dis-
posed asset. In general, a taxpayer must
use the specific identification method. Un-
der this method, the taxpayer can deter-
mine when the asset disposed of was
placed in service. If an asset is in a mul-
tiple asset account and it is impracticable

from the taxpayer's records to determine
the particular year in which the asset was
placed in service by the taxpayer, the final
regulations allow the taxpayer to identify
the asset by using the following: a first-in,
first-out (FIFO) method, a modified FIFO
method, a mortality dispersion table if the
asset is a mass asset, or any other method
designated by the Secretary in published
guidance. A last-in, first-out (LIFO) method
is not permitted. These rules also apply
when the partial disposition rule applies
to a disposition of a portion of an asset
and it is impracticable from the taxpay-
er's records to determine the particular
taxable year in which the asset was
placed in service by the taxpayer. The
final regulations provide an additional
example of the LIFO method, which is
impermissible.

###### III. General Asset Accounts Under § 1.168(i)-1

Section 168(i)(4) provides that, under
regulations, a taxpayer may maintain one
or more general asset accounts for any
MACRS property. Except as provided in
regulations, all proceeds realized on any
disposition of property in a general asset
account shall be included in income as
ordinary income.

The final regulations generally retain
all of the provisions in the 2013 proposed
regulations for general asset accounts. The
final regulations apply only to assets for
which the taxpayer has made an election
to account for the assets in general asset
accounts. Each general asset account ef-
fectively is treated as the asset.

A. Establishing general asset accounts
The final regulations retain the rules in
the 2013 proposed regulations for estab-
lishing general asset accounts. The final
regulations provide that assets may be
grouped into one or more general asset
accounts. In general, each general asset
account must include assets that have the
same depreciation method, recovery pe-
riod, and convention, and are placed in
service in the same taxable year. However
and as provided in the 2013 proposed reg-
ulations, the final regulations provide spe-
cial rules in certain circumstances for es-
tablishing general asset accounts. For
example, assets eligible for the additional
first year depreciation deduction cannot be
grouped with assets ineligible for the ad-
ditional first year depreciation deduction.

Also, assets eligible for the additional first
year depreciation deduction may be
grouped only with assets eligible for the
same percentage of the additional first
year depreciation.

B. Depreciation of a general asset ac-
count

The final regulations retain the rules in
the 2013 proposed regulations for deter-
mining depreciation for each general asset
account. The final regulations explain how
to determine depreciation for a general
asset account when all the assets in the
account are eligible for the additional first
year depreciation deduction and when all
the assets in the account are not eligible
for that deduction.

C. Disposition of an asset from a gen-
eral asset account

#### 1. Disposition Definition

The final regulations retain the defini-
tion of "disposition" that is set forth in the
2013 proposed regulations. This definition
is the same as the definition of "disposi-
tion" that was previously discussed under
the disposition rules for MACRS property
under § 1.168(i)-8. That is, a disposition
occurs when ownership of the asset is
transferred or when the asset is perma-
nently withdrawn from use either in the
taxpayer's trade or business or in the pro-
duction of income. A disposition includes
the sale, exchange, retirement, physical
abandonment, or destruction of an asset.
A disposition also includes the retirement
of a structural component (or a portion
thereof) of a building only if the partial
disposition rule (discussed in III.C.4) ap-
plies to such structural component (or a
portion thereof). Finally, the manner of
disposition (for example, abnormal retire-
ment or normal retirement) is not taken
into consideration in determining whether
a disposition occurs or gain or loss is
recognized.

2\. Determining the Appropriate Dis-
posed Asset

The final regulations also retain the
rules in the 2013 proposed regulations for
determining the disposed asset included in
a general asset account for tax disposition
purposes. These rules are the same as
those previously discussed for determin-
ing the disposed asset for purposes of
§ 1.168(i)-8.

In general, the facts and circumstances
of each disposition are considered in de-

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termining the appropriate disposed asset
included in a general asset account. How-
ever, the asset for tax disposition purposes
may not consist of items placed in service
by the taxpayer on different dates (without
taking into account the applicable conven-
tion under section 168(d)). Further, the
unit of property as determined under
§ 1.263(a)-3(e) or in published guidance
in the Internal Revenue Bulletin under
section 263(a) does not apply for purposes
of determining what is the appropriate dis-
posed asset.

In addition to these general rules, the
final regulations retain the special rules in
the 2013 proposed regulations for certain
types of properties. These special rules are
the same as the previously discussed spe-
cial rules for determining the appropriate
disposed asset under § 1.168(i)-8. The
final regulations provide special rules for
determining the appropriate disposed as-
set that is included in a general asset ac-
count and that is: (a) a building (including
its structural components); (b) a building
that includes two or more condominium
or cooperative units; (c) an item properly
included in one of the asset classes 00.11
through 00.4 of Rev. Proc. 87-56 (1987-2
CB 674) or classified in one of the cate-
gories under section 168(e)(3) (other than
a category that includes buildings or struc-
tural components; for example, retail mo-
tor fuels outlet and qualified leasehold im-
provement property); or (d) an improvement
or addition to an existing asset.

#### 3. Disposition Rules

The final regulations retain the dispo-
sition rules in the 2013 proposed regula-
tions. Immediately before any disposition
of an asset (or a portion thereof) in a
general asset account, the final regulations
provide that the asset (or a portion
thereof) is treated as having an adjusted
depreciable basis of zero for purposes of
section 1011. Therefore, no loss is real-
ized upon the disposition of the asset (or a
portion thereof). The final regulations also
provide that any amount realized on a
disposition generally is recognized as or-
dinary income. Further, the final regula-
tions provide that the unadjusted deprecia-
ble basis and depreciation reserve of the
general asset account are not affected by
the disposition. Accordingly, a taxpayer
continues to depreciate the general asset
account, including the disposed asset (or a

portion thereof), as though no disposition
occurred.

The final regulations also allow a tax-
payer to terminate general asset account
treatment upon certain dispositions. Un-
der the final regulations, a taxpayer may
elect to recognize gain or loss for a gen-
eral asset account when the taxpayer dis-
poses of all of the assets, the last asset, or
the remaining portion of the last asset in
the account.

The final regulations further allow a
taxpayer to elect to terminate general asset
account treatment for an asset in a general
asset account when the taxpayer disposes
of the asset in a qualifying disposition. A
qualifying disposition is a disposition that
does not involve all the assets, the last
asset, or the remaining portion of the last
asset, remaining in a general asset account
and that is: (1) a direct result of a fire,
storm, shipwreck, or other casualty, or
from theft; (2) a charitable contribution
for which a deduction is allowable under
section 170; (3) a direct result of a cessa-
tion, termination, or disposition of a busi-
ness, manufacturing, or other income pro-
ducing process, operation, facility, plant,
or other unit (other than by transfer to a
supplies, scrap, or similar account); or (4)
generally a transaction to which a nonrec-
ognition section of the Code applies. If a
taxpayer elects to terminate general asset
account treatment for an asset disposed of
in a qualifying disposition, the taxpayer
must remove the disposed asset from the
general asset account and adjust the unad-
justed depreciable basis and depreciation
reserve of the account.

The final regulations retain the rules in
the 2013 proposed regulations on the
manner of making (1) the election to ter-
minate the general asset account upon the
disposition of all of the assets, the last
asset, or the remaining portion of the last
asset in that general asset account, or (2)
the qualifying disposition election. The
final regulations provide that a taxpayer
making either of these elections must apply
section 280B and § 1.280B-1 to determine
whether and to what extent gain or loss is
recognized. Generally, a taxpayer makes
these elections by reporting the gain, loss, or
other deduction on the taxpayer's timely
filed original Federal tax return (including
extensions) for the taxable year in which the
disposition occurs.

In the case of a loss sustained on ac-
count of the demolition of a structure to
which section 280B and § 1.280B -1 ap-
ply, however, the loss is capitalized to the
land on which the demolished structure
was located, and no gain or loss is re-
ported at the time of demolition. Never-
theless, a taxpayer generally will report a
depreciation deduction for the demolished
structure for the taxable year in which the
demolition occurs. Accordingly, the final
regulations clarify that a taxpayer makes
the election to terminate the general asset
account or the qualifying disposition elec-
tion by ending depreciation for the demol-
ished structure at the time of disposition
(taking into account the applicable con-
vention) and reporting the depreciation
amount for that structure for the taxable
year in which the disposition occurs on
the taxpayer's timely filed original Fed-
eral tax return (including extensions) for
that taxable year.

For assets in general asset accounts, the
final regulations also require a taxpayer to
terminate general asset account treatment
for an asset that is disposed of in a trans-
action subject to section 167(i)(7)(B), sec-
tion 1031, or section 1033, disposed of in
an abusive transaction described under the
final regulations, or used for any personal
use. In such a case, the taxpayer must
remove the disposed asset from the gen-
eral asset account and adjust the unad-
justed depreciable basis and depreciation
reserve of the account.

In addition, the final regulations re-
quire a partnership to terminate its general
asset accounts upon the technical termina-
tion of the partnership under section
708(b)(1)(B). If there is a redetermination
of basis of an asset in a general asset
account (for example, due to contingent
purchase price or discharge of indebted-
ness), the final regulations provide that the
general asset account election for the asset
also applies to the increase or decrease in
basis and require the taxpayer to establish
a new general asset account for that in-
crease or decrease in basis.

#### 4. Partial Dispositions

The final regulations retain the partial
disposition rule in the 2013 proposed reg-
ulations. Similar to the partial disposition
rule under § 1.168(i)-8 that was previ-
ously discussed, the disposition rules in
§ 1.168(i)-1 apply to a partial disposition

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of an asset included in a general asset
account. Consequently, a disposition in-
cludes a disposition of a portion of an
asset as a result of a casualty event de-
scribed in section 165, a disposition of a
portion of an asset for which gain (deter-
mined without regard to section 1245 or
1250) is not recognized in whole or in part
under section 1031 or 1033, a transfer of a
portion of an asset in a transaction de-
scribed in section 168(i)(7)(B), a sale of a
portion of an asset, or a disposition of a
portion of an asset in a transaction de-
scribed under the anti-abuse rules applica-
ble to general asset accounts. For other
transactions, a disposition includes a dis-
position of a portion of an asset only if the
taxpayer makes the election to terminate
the general asset account upon the dispo-
sition of all of the assets, the last asset, or
the remaining portion of the last asset in
that general asset account or makes the
qualifying disposition election for that
disposed portion. A separate partial dispo-
sition election is not provided for assets in
a general asset account because a taxpayer
can claim a loss upon the disposition of an
asset (or a portion thereof) in a general
asset account only when the taxpayer
makes either one of these two elections.

D. Determination of basis of disposed
asset

The final regulations generally retain
the rules in the 2013 proposed regulations
on determining the unadjusted depreciable
basis of an asset for which general asset
account treatment is terminated. Because
the general asset account is the asset, the
final regulations provide that a taxpayer
may use any reasonable method that is
consistently applied to all assets in the
same general asset account to determine
the unadjusted depreciable basis of a dis-
posed asset in that account if it is imprac-
ticable from the taxpayer's records to de-
termine the unadjusted depreciable basis
of that asset. This rule also applies when
the partial disposition rule applies to a
disposition of a portion of an asset in-
cluded in a general asset account. The IRS
and the Treasury Department expect that
reasonable methods are available that use
information readily available or known to
the taxpayer and do not necessitate under-
taking an expensive study.

These final regulations also provide
nonexclusive examples of reasonable

methods. These examples are the same
examples in the 2013 proposed regula-
tions, except the final regulations do not
include the Consumer Price Index as an
example of a reasonable method for the
reason previously discussed in II.E. Sim-
ilar to the rules for determining the unad-
justed depreciable basis of a disposed asset
under § 1.168(i)-8, the final regulations
clarify that, when discounting the cost of
the replacement asset, using the Producer
Price Index for Finished Goods (or its
successor, the Producer Price Index for
Final Demand) is a reasonable method.
The examples in the final regulations in-
clude the following: (1) discounting the
cost of the replacement asset to its placed-
in-service year cost using the Producer
Price Index for Finished Goods (or its
successor, the Producer Price Index for
Final Demand, or any other index desig-
nated by guidance in the Internal Revenue
Bulletin (see § 601.601(d)(2) of the chap-
ter) only if the replacement asset is a
restoration under § 1.263(a)-3(k) and is
not a betterment under § 1.263(a)-3(j) or
is not an adaptation to a new or different
use under § 1.263(a)-3(1); (2) a pro rata
allocation of the unadjusted depreciable
basis of the general asset account based on
the replacement cost of the disposed asset
and the replacement cost of all of the
assets in the general asset account; and (3)
a study allocating the cost of the asset to
its individual components.

##### E. Identification of disposed asset

The final regulations retain the rules in
the 2013 proposed regulations for deter-
mining the placed-in-service year of an
asset for which general asset account
treatment is terminated. These rules are
the same as those previously discussed for
identifying the placed-in-service year of
the disposed asset for purposes of
§ 1.168(i)-8: the specific identification
method, the FIFO method, the modified
FIFO method, a mortality dispersion table
if the asset is a mass asset, or any other
method designated by the Secretary in
published guidance. A LIFO method is
not permitted. These rules also apply
when the partial disposition rule applies to
a disposition of a portion of an asset in-
cluded in a general asset account. The
final regulations provide an additional ex-
ample of the LIFO method, which is im-
permissible.

#### IV. Accounting for MACRS Property Under § 1.168(i)-7

The final regulations retain the rule in
the 2013 proposed regulations regarding
how to account for a disposed portion of
an asset. The final regulations under
§ 1.168(i)-8 provide that if a taxpayer
disposes of a portion of an asset and the
partial disposition rule applies to that dis-
position, the taxpayer must account for the
disposed portion in a single asset account
beginning in the taxable year in which the
disposition occurs. This rule also is pro-
vided in the final regulations under
§ 1.168(i)-7.

#### V. Conforming Changes

The final regulations also amend
§§ 1.165-2, 1.168(i)-7, 1.263(a)-3, and
1.1016-3 to replace references to the tem-
porary regulations and the 2013 proposed
regulations with references to these final
regulations.

#### VI. Applicability Dates

The final regulations apply to taxable
years beginning on or after January 1,
2014. Alternatively, a taxpayer may
choose to apply the final regulations to
taxable years beginning on or after Janu-
ary 1, 2012.

A taxpayer also may choose to rely on
the provisions of the 2013 proposed reg-
ulations for taxable years beginning on or
after January 1, 2012, and beginning be-
fore January 1, 2014. Finally, a taxpayer
may choose to apply the temporary regu-
lations to taxable years beginning on or
after January 1, 2012, and beginning be-
fore January 1, 2014.

### Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866, as supplemented by
Executive Order 13563. Therefore, a reg-
ulatory assessment is not required. It also
has been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because these regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not ap-
ply. Pursuant to section 7805(f) of the
Code, the 2013 proposed regulations pre-
ceding this regulation were submitted to
the Chief Counsel for Advocacy of the

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Small Business Administration for com-
ment on their impact on small business,
and no comments were received.

### Statement of Availability for IRS Document

For copies of recently issued Revenue
Procedures, Revenue Rulings, notices,
and other guidance published in the Inter-
nal Revenue Bulletin please visit the IRS
website at http://www.irs.gov or the Su-
perintendent of Documents, U.S. Govern-
ment Printing Office, Washington, DC
20402.

#### Drafting Information

The principal author of these regula-
tions is Kathleen Reed, Office of the As-
sociate Chief Counsel (Income Tax and
Accounting). However, other personnel
from the IRS and the Treasury Depart-
ment 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 revised by adding an entry for
§ 1.168(i)-1 to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.168(i)-1 also issued under 26
U.S.C. 168(i)(4).

Par. 2. Section 1.165-2 is amended by
revising the first sentence in paragraph (c)
to read as follows:

### § 1.165-2 Obsolescence of nondepreciable property.

* * * * *

(c) Cross references. For the allowance
under section 165(a) of losses arising
from the permanent withdrawal of depre-
ciable property from use in the trade or
business or in the production of income,
see § 1.167(a)-8, § 1.168(i)-1, or
§ 1.168(i)-8, as applicable. * * *
* * * * *

Par. 3. Section 1.168(i)-0 is amended
by:

a. Redesignating the entries for para-
graphs (b)(4), (5), and (6) as paragraphs
(b)(5), (6), and (7), respectively, and re-
vising newly redesignated paragraphs
(b)(6) and (7).

b. Adding entries for paragraphs (b)(4),
(b)(8), and (b)(9).

c. Revising entries for paragraphs
(c)(3), (d)(2), (d)(3), (e), (e)(1), (e)(2)(v)
through (viii), (e)(3)(vi), (h)(1), (i), and
(m).

d. Adding entries for paragraphs
(e)(1)(i) and (ii).

e. Removing the entry for paragraph
(h)(2) and redesignating the entry for
paragraph (h)(3) as paragraph (h)(2).

The additions and revisions read as fol-
lows:

§ 1.168(i)-0 Table of contents for the
general asset account rules.

* * * * *

§ 1.168(i)-1 General asset accounts.

* * * * *

(b) * * *

(4) Building.

* * *

(6) Mass assets.

(7) Portion of an asset.

(8) Remaining adjusted depreciable ba-
sis of the general asset account.

(9) Structural component.

(c) * * *

(3) Examples.

* * * * *

(d) * * *

(2) Assets in general asset account are
eligible for additional first year deprecia-
tion deduction.

(3) No assets in general asset account
are eligible for additional first year depre-
ciation deduction.

* * * * *

(e) Dispositions from a general asset
account.

(1) Scope and definition.

(i) In general.

(ii) Disposition of a portion of an asset.

(2) * * *

(v) Manner of disposition.

(vi) Disposition by transfer to a sup-
plies account.

(vii) Leasehold improvements.

(viii) Determination of asset disposed
of.

* * * * *

(3) * * *

(vi) Technical termination of a partner-
ship.

* * * * *

(h) * * *

(1) Conversion to any personal use.

* * * * *

(i) Redetermination of basis.

* * * * *

(m) Effective/applicability dates.

## § 1.168(i)-0T [Removed]

Par. 4. Section 1.168(i)-OT is re-
moved.

Par. 5. Section 1.168(i)-1 is amended
by revising paragraphs (a) through (l)(1),
and (m) to read as follows:

§ 1.168(i)-1 General asset accounts.

(a) Scope. This section provides rules
for general asset accounts under section
168(i)(4). The provisions of this section
apply only to assets for which an election
has been made under paragraph (l) of this
section.

(b) Definitions. For purposes of this
section, the following definitions apply:

(1) Unadjusted depreciable basis has
the same meaning given such term in
§ 1.168(b)-1(a)(3).

(2) Unadjusted depreciable basis of the
general asset account is the sum of the
unadjusted depreciable bases of all assets
included in the general asset account.

(3) Adjusted depreciable basis of the
general asset account is the unadjusted
depreciable basis of the general asset ac-
count less the adjustments to basis de-
scribed in section 1016(a)(2) and (3).

(4) Building has the same meaning as
that term is defined in § 1.48-1(e)(1).

(5) Expensed cost is the amount of any
allowable credit or deduction treated as a
deduction allowable for depreciation or
amortization for purposes of section 1245
(for example, a credit allowable under
section 30 or a deduction allowable under
section 179, section 179A, or section
190). Expensed cost does not include any
additional first year depreciation deduc-
tion.

(6) Mass assets is a mass or group of
individual items of depreciable assets-

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(i) That are not necessarily homoge-
nous;

(ii) Each of which is minor in value
relative to the total value of the mass or
group;

(iii) Numerous in quantity;

(iv) Usually accounted for only on a
total dollar or quantity basis;

(v) With respect to which separate
identification is impracticable; and

(vi) Placed in service in the same tax-
able year.

(7) Portion of an asset is any part of an
asset that is less than the entire asset as
determined under paragraph (e)(2)(viii) of
this section.

(8) Remaining adjusted depreciable
basis of the general asset account is the
unadjusted depreciable basis of the gen-
eral asset account less the amount of the
additional first year depreciation deduc-
tion allowed or allowable, whichever is
greater, for the general asset account.

(9) Structural component has the same
meaning as that term is defined in § 1.48-
1(e)(2).

(c) Establishment of general asset ac-
counts-(1) Assets eligible for general as-
set accounts-(i) General rules. Assets that
are subject to either the general deprecia-
tion system of section 168(a) or the alter-
native depreciation system of section
168(g) may be accounted for in one or
more general asset accounts. An asset is
included in a general asset account only to
the extent of the asset's unadjusted depre-
ciable basis. However, an asset is not to be
included in a general asset account if the
asset is used both in a trade or business or
for the production of income and in a
personal activity at any time during the
taxable year in which the asset is placed in
service by the taxpayer or if the asset is
placed in service and disposed of during
the same taxable year.

(ii) Special rules for assets generating
foreign source income. (A) Assets that
generate foreign source income, both
United States and foreign source income,
or combined gross income of a foreign
sales corporation (as defined in former
section 922), domestic international sales
corporation (as defined in section 992(a)),
or possession corporation (as defined in
section 936) and its related supplier may
be included in a general asset account if
the requirements of paragraph (c)(2)(i) of

this section are satisfied. If, however, the
inclusion of these assets in a general asset
account results in a substantial distortion
of income, the Commissioner may disre-
gard the general asset account election
and make any reallocations of income or
expense necessary to clearly reflect in-
come.

(B) A general asset account shall be
treated as a single asset for purposes of
applying the rules in § 1.861-9T(g)(3)
(relating to allocation and apportionment
of interest expense under the asset
method). A general asset account that gen-
erates income in more than one grouping
of income (statutory and residual) is a
multiple category asset (as defined in
§ 1.861-9T(g)(3)(ii)), and the income
yield from the general asset account must
be determined by applying the rules for
multiple category assets as if the general
asset account were a single asset.c-
counts-(i) General rules. If a taxpayer
makes the election under paragraph (l) of
this section, assets that are subject to the
election are grouped into one or more
general asset accounts. Assets that are el-
igible to be grouped into a single general
asset account may be divided into more
than one general asset account. Each gen-
eral asset account must include only assets
that-

(A) Have the same applicable depreci-
ation method;

(B) Have the same applicable recovery
period;

(C) Have the same applicable conven-
tion; and

(D) Are placed in service by the tax-
payer in the same taxable year.

(ii) Special rules. In addition to the
general rules in paragraph (c)(2)(i) of this
section, the following rules apply when
establishing general asset accounts-

(A) Assets subject to the mid-quarter
convention may only be grouped into a
general asset account with assets that are
placed in service in the same quarter of
the taxable year;

(B) Assets subject to the mid-month
convention may only be grouped into a
general asset account with assets that are
placed in service in the same month of the
taxable year;

(C) Passenger automobiles for which
the depreciation allowance is limited un-

der section 280F(a) must be grouped into
a separate general asset account;

(D) Assets not eligible for any addi-
tional first year depreciation deduction
(including assets for which the taxpayer
elected not to deduct the additional first
year depreciation) provided by, for exam-
ple, section 168(k), section 168(l), section
168(m), section 168(n), section 1400L(b),
or section 1400N(d), must be grouped into
a separate general asset account;

(E) Assets eligible for the additional
first year depreciation deduction may only
be grouped into a general asset account
with assets for which the taxpayer claimed
the same percentage of the additional first
year depreciation (for example, 30 per-
cent, 50 percent, or 100 percent);

(F) Except for passenger automobiles
described in paragraph (c)(2)(ii)(C) of this
section, listed property (as defined in sec-
tion 280F(d)(4)) must be grouped into a
separate general asset account;

(G) Assets for which the depreciation
allowance for the placed-in-service year is
not determined by using an optional de-
preciation table (for further guidance, see
section 8 of Rev. Proc. 87-57, 1987-2 CB
687, 693 (see § 601.601(d)(2) of this
chapter)) must be grouped into a separate
general asset account;

(H) Mass assets that are or will be
subject to paragraph (j)(2)(i)(D) of this
section (disposed of or converted mass
asset is identified by a mortality disper-
sion table) must be grouped into a sepa-
rate general asset account; and

(I) Assets subject to paragraph
(h)(2)(iii)(A) of this section (change in
use results in a shorter recovery period or
a more accelerated depreciation method)
for which the depreciation allowance for
the year of change (as defined in
§ 1.168(i)-4(a)) is not determined by us-
ing an optional depreciation table must be
grouped into a separate general asset ac-
count.

(3) Examples. The following examples illus-
trate the application of this paragraph (c):

Example 1. In 2014, J, a proprietorship with a
calendar year-end, purchases and places in ser-
vice one item of equipment that costs $550,000.
This equipment is section 179 property and also is
5-year property under section 168(e). On its Fed-
eral tax return for 2014, J makes an election
under section 179 to expense $25,000 of the equip-
ment's cost and makes an election under para-
graph (l) of this section to include the equipment
in a general asset account. As a result, the unad-

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justed depreciable basis of the equipment is
$525,000. In accordance with paragraph (c)(1) of
this section, J must include only $525,000 of the
equipment's cost in the general asset account.

Example 2. In 2014, K, a proprietorship with
a calendar year-end, purchases and places in ser-
vice 100 items of equipment. All of these items are
5-year property under section 168(e), are not
listed property, and are not eligible for any addi-
tional first year depreciation deduction. On its
Federal tax return for 2014, K does not make an
election under section 179 to expense the cost of
any of the 100 items of equipment and does make
an election under paragraph (l) of this section to
include the 100 items of equipment in a general
asset account. K depreciates its 5-year property
placed in service in 2014 using the optional de-
preciation table that corresponds with the general
depreciation system, the 200-percent declining
balance method, a 5-year recovery period, and
the half-year convention. In accordance with
paragraph (c)(2) of this section, K includes all of
the 100 items of equipment in one general asset
account.

Example 3. The facts are the same as in Ex-
ample 2, except that K decides not to include all of
the 100 items of equipment in one general asset
account. Instead and in accordance with para-
graph (c)(2) of this section, K establishes 100
general asset accounts and includes one item of
equipment in each general asset account.

Example 4. L, a calendar-year corporation, is
a wholesale distributer. In 2014, L places in ser-
vice the following properties for use in its whole-
sale distribution business: computers, automo-
biles, and forklifts. On its Federal tax return for
2014, L does not make an election under section
179 to expense the cost of any of these items of
equipment and does make an election under
paragraph (l) of this section to include all of these
items of equipment in a general asset account. All
of these items are 5-year property under section
168(e) and are not eligible for any additional first
year depreciation deduction. The computers are
listed property, and the automobiles are listed
property and are subject to section 280F(a). L
depreciates its 5-year property placed in service
in 2014 using the optional depreciation table that
corresponds with the general depreciation sys-
tem, the 200-percent declining balance method, a
5-year recovery period, and the half-year conven-
tion. Although the computers, automobiles, and
forklifts are 5-year property, L cannot include all
of them in one general asset account because the
computers and automobiles are listed property.
Further, even though the computers and automo-
biles are listed property, L cannot include them in
one general asset account because the automo-
biles also are subject to section 280F(a). In accor-
dance with paragraph (c)(2) of this section, L
establishes three general asset accounts: one for
the computers, one for the automobiles, and one
for the forklifts.

Example 5. M, a fiscal-year corporation with a
taxable year ending June 30, purchases and
places in service ten items of new equipment in
October 2014, and purchases and places in ser-
vice five other items of new equipment in Febru-

ary 2015. On its Federal tax return for the taxable
year ending June 30, 2015, M does not make an
election under section 179 to expense the cost of
any of these items of equipment and does make an
election under paragraph (l) of this section to
include all of these items of equipment in a gen-
eral asset account. All of these items of equipment
are 7-year property under section 168(e), are not
listed property, and are property described in
section 168(k)(2)(B). All of the ten items of equip-
ment placed in service in October 2014 are eligi-
ble for the 50-percent additional first year depre-
ciation deduction provided by section 168(k)(1).
All of the five items of equipment placed in ser-
vice in February 2015 are not eligible for any
additional first year depreciation deduction. M
depreciates its 7-year property placed in service
for the taxable year ending June 30, 2015, using
the optional depreciation table that corresponds
with the general depreciation system, the 200-
percent declining balance method, a 7-year recov-
ery period, and the half-year convention. Al-
though the 15 items of equipment are depreciated
using the same depreciation method, recovery
period, and convention, M cannot include all of
them in one general asset account because some
of items of equipment are not eligible for any
additional first year depreciation deduction. In
accordance with paragraph (c)(2) of this section,
M establishes two general asset accounts: one for
the ten items of equipment eligible for the 50-
percent additional first year depreciation deduc-
tion and one for the five items of equipment not
eligible for any additional first year depreciation
deduction.

(d) Determination of depreciation al-
lowance-(1) In general. Depreciation al-
lowances are determined for each general
asset account. The depreciation allow-
ances must be recorded in a depreciation
reserve account for each general asset ac-
count. The allowance for depreciation un-
der this section constitutes the amount of
depreciation allowable under section
167(a).

(2) Assets in general asset account are
eligible for additional first year deprecia-
tion deduction. If all the assets in a general
asset account are eligible for the addi-
tional first year depreciation deduction,
the taxpayer first must determine the al-
lowable additional first year depreciation
deduction for the general asset account for
the placed-in-service year and then must
determine the amount otherwise allowable
as a depreciation deduction for the general
asset account for the placed-in-service
year and any subsequent taxable year. The
allowable additional first year deprecia-
tion deduction for the general asset ac-
count for the placed-in-service year is de-
termined by multiplying the unadjusted
depreciable basis of the general asset ac-

count by the additional first year depreci-
ation deduction percentage applicable to
the assets in the account (for example, 30
percent, 50 percent, or 100 percent). The
remaining adjusted depreciable basis of
the general asset account then is depreci-
ated using the applicable depreciation
method, recovery period, and convention
for the assets in the account.

(3) No assets in general asset account
are eligible for additional first year depre-
ciation deduction. If none of the assets in
a general asset account are eligible for the
additional first year depreciation deduc-
tion, the taxpayer must determine the al-
lowable depreciation deduction for the
general asset account for the placed-in-
service year and any subsequent taxable
year by using the applicable depreciation
method, recovery period, and convention
for the assets in the account.

(4) Special rule for passenger automo-
biles. For purposes of applying section
280F(a), the depreciation allowance for a
general asset account established for pas-
senger automobiles is limited for each tax-
able year to the amount prescribed in sec-
tion 280F(a) multiplied by the excess of
the number of automobiles originally in-
cluded in the account over the number of
automobiles disposed of during the tax-
able year or in any prior taxable year in a
transaction described in paragraph
(e)(3)(iii) (disposition of an asset in a
qualifying disposition), paragraph (e)(3)(iv)
(transactions subject to section 168(i)(7)),
paragraph (e)(3)(v) (transactions subject
to section 1031 or section 1033), para-
graph (e)(3)(vi) (technical termination of
a partnership), paragraph (e)(3)(vii) (anti-
abuse rule), paragraph (g) (assets subject
to recapture), or paragraph (h)(1) (conver-
sion to any personal use) of this section.

(e) Dispositions from a general asset
account-(1) Scope and definition-(i) In
general. This paragraph (e) provides rules
applicable to dispositions of assets in-
cluded in a general asset account. For
purposes of this paragraph (e), an asset in
a general asset account is disposed of
when ownership of the asset is transferred
or when the asset is permanently with-
drawn from use either in the taxpayer's
trade or business or in the production of
income. A disposition includes the sale,
exchange, retirement, physical abandon-
ment, or destruction of an asset. A dispo-

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sition also occurs when an asset is trans-
ferred to a supplies, scrap, or similar
account, or when a portion of an asset is
disposed of as described in paragraph
(e)(1)(ii) of this section. If a structural
component, or a portion thereof, of a
building is disposed of in a disposition
described in paragraph (e)(1)(ii) of this
section, a disposition also includes the
disposition of such structural component
or such portion thereof.

(ii) Disposition of a portion of an asset.
For purposes of applying paragraph (e) of
this section, a disposition includes a dis-
position of a portion of an asset in a gen-
eral asset account as a result of a casualty
event described in section 165, a disposi-
tion of a portion of an asset in a general
asset account for which gain, determined
without regard to section 1245 or section
1250, is not recognized in whole or in part
under section 1031 or section 1033, a
transfer of a portion of an asset in a gen-
eral asset account in a transaction de-
scribed in section 168(i)(7)(B), a sale of a
portion of an asset in a general asset ac-
count, or a disposition of a portion of an
asset in a general asset account in a trans-
action described in paragraph (e)(3)(vii)(B)
of this section. For other transactions, a
disposition includes a disposition of a por-
tion of an asset in a general asset account
only if the taxpayer makes the election
under paragraph (e)(3)(ii) of this section
to terminate the general asset account in
which that disposed portion is included or
makes the election under paragraph
(e)(3)(iii) of this section for that disposed
portion.

(2) General rules for a disposition-(i)
No immediate recovery of basis. Except as
provided in paragraph (e)(3) of this sec-
tion, immediately before a disposition of
any asset in a general asset account or a
disposition of a portion of such asset as
described in paragraph (e)(1)(ii) of this
section, the asset or the portion of the
asset, as applicable, is treated as having an
adjusted depreciable basis (as defined in
§ 1.168(b)-1(a)(4)) of zero for purposes
of section 1011. Therefore, no loss is re-
alized upon the disposition of an asset
from the general asset account or upon the
disposition of a portion of such asset as
described in paragraph (e)(1)(ii) of this
section. Similarly, where an asset or a
portion of an asset, as applicable, is dis-

posed of by transfer to a supplies, scrap,
or similar account, the basis of the asset or
the portion of the asset, as applicable, in
the supplies, scrap, or similar account will
be zero.

(ii) Treatment of amount realized. Any
amount realized on a disposition is recog-
nized as ordinary income, notwithstand-
ing any other provision of subtitle A of the
Internal Revenue Code (Code), to the ex-
tent the sum of the unadjusted depreciable
basis of the general asset account and any
expensed cost (as defined in paragraph
(b)(5) of this section) for assets in the
account exceeds any amounts previously
recognized as ordinary income upon the
disposition of other assets in the account
or upon the disposition of portions of such
assets as described in paragraph (e)(1)(ii)
of this section. The recognition and char-
acter of any excess amount realized are
determined under other applicable provi-
sions of the Code other than sections 1245
and 1250 or provisions of the Code that
treat gain on a disposition as subject to
section 1245 or section 1250.

(iii) Effect of disposition on a general
asset account. Except as provided in para-
graph (e)(3) of this section, the unadjusted
depreciable basis and the depreciation re-
serve of the general asset account are not
affected as a result of a disposition of an
asset from the general asset account or of
a disposition of a portion of such asset as
described in paragraph (e)(1)(ii) of this
section.

(iv) Coordination with nonrecognition
provisions. For purposes of determining
the basis of an asset or a portion of an
asset, as applicable, acquired in a transac-
tion, other than a transaction described in
paragraph (e)(3)(iv) (pertaining to trans-
actions subject to section 168(i)(7)), para-
graph (e)(3)(v) (pertaining to transactions
subject to section 1031 or section 1033),
and paragraph (e)(3)(vi) (pertaining to
technical terminations of partnerships) of
this section, to which a nonrecognition
section of the Code applies, determined
without regard to this section, the amount
of ordinary income recognized under this
paragraph (e)(2) is treated as the amount
of gain recognized on the disposition.

(v) Manner of disposition. The manner
of disposition (for example, normal retire-
ment, abnormal retirement, ordinary re-
tirement, or extraordinary retirement) is

not taken into account in determining
whether a disposition occurs or gain or
loss is recognized.

(vi) Disposition by transfer to a sup-
plies account. If a taxpayer made an elec-
tion under § 1.162-3(d) to treat the cost of
any rotable spare part, temporary spare
part, or standby emergency spare part (as
defined in § 1.162-3(c)) as a capital ex-
penditure subject to the allowance for de-
preciation and also made an election un-
der paragraph (l) of this section to include
that rotable, temporary, or standby emer-
gency spare part in a general asset ac-
count, the taxpayer can dispose of the
rotable, temporary, or standby emergency
spare part by transferring it to a supplies
account only if the taxpayer has obtained
the consent of the Commissioner to re-
voke the § 1.162-3(d) election. If a tax-
payer made an election under § 1.162-
3T(d) to treat the cost of any material and
supply (as defined in § 1.162-3T(c)(1)) as
a capital expenditure subject to the allow-
ance for depreciation and also made an
election under paragraph (l) of this section
to include that material and supply in a
general asset account, the taxpayer can
dispose of the material and supply by
transferring it to a supplies account only if
the taxpayer has obtained the consent of
the Commissioner to revoke the § 1.162-
3T(d) election. See § 1.162-3(d)(3) for
the procedures for revoking a § 1.162-
3(d) or a § 1.162-3T(d) election.

(vii) Leasehold improvements. The
rules of paragraph (e) of this section also
apply to-

(A) A lessor of leased property that
made an improvement to that property for
the lessee of the property, has a deprecia-
ble basis in the improvement, made an
election under paragraph (l) of this section
to include the improvement in a general
asset account, and disposes of the im-
provement, or disposes of a portion of the
improvement as described in paragraph
(e)(1)(ii) of this section, before or upon
the termination of the lease with the les-
see. See section 168(i)(8)(B); and

(B) A lessee of leased property that
made an improvement to that property,
has a depreciable basis in the improve-
ment, made an election under paragraph
(l) of this section to include the improve-
ment in a general asset account, and dis-
poses of the improvement, or disposes of

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a portion of the improvement as described
in paragraph (e)(1)(ii) of this section, be-
fore or upon the termination of the lease.

(viii) Determination of asset disposed
of (A) General rules. For purposes of
applying paragraph (e) of this section to
the disposition of an asset in a general
asset account, instead of the disposition of
the general asset account, the facts and
circumstances of each disposition are con-
sidered in determining what is the appro-
priate asset disposed of. The asset for dis-
position purposes may not consist of items
placed in service by the taxpayer on dif-
ferent dates, without taking into account
the applicable convention. For purposes of
determining what is the appropriate asset
disposed of, the unit of property determi-
nation under § 1.263(a)-3(e) or in pub-
lished guidance in the Internal Revenue
Bulletin under section 263(a) (see
§ 601.601(d)(2) of this chapter) does not
apply.

(B) Special rules. In addition to the
general rules in paragraph (e)(2)(viii)(A)
of this section, the following rules apply
for purposes of applying paragraph (e) of
this section to the disposition of an asset
in a general asset account instead of the
disposition of the general asset account:

(1) Each building, including its struc-
tural components, is the asset, except as
provided in § 1.1250-1(a)(2)(ii) or in
paragraph (e)(2)(viii)(B)(2) or (4) of this
section.

(2) If a building has two or more con-
dominium or cooperative units, each con-
dominium or cooperative unit, including
its structural components, is the asset, ex-
cept as provided in § 1.1250-1(a)(2)(ii) or
in paragraph (e)(2)(viii)(B)(4) of this sec-
tion.

(3) If a taxpayer properly includes an
item in one of the asset classes 00.11
through 00.4 of Rev. Proc. 87-56 (1987-2
CB 674) (see § 601.601(d)(2) of this chap-
ter) or properly classifies an item in one of
the categories under section 168(e)(3), ex-
cept for a category that includes buildings
or structural components (for example, re-
tail motor fuels outlet, qualified leasehold
improvement property, qualified restaurant
property, and qualified retail improvement
property), each item is the asset, provided
that paragraph (e)(2)(viii)(B)(4) of this sec-
tion does not apply to the item. For exam-
ple, each desk is the asset, each computer

is the asset, and each qualified smart elec-
tric meter is the asset.

(4) If the taxpayer places in service an
improvement or addition to an asset after
the taxpayer placed the asset in service,
the improvement or addition and, if appli-
cable, its structural components are a sep-
arate asset.

(ix) Examples. The following examples
illustrate the application of this paragraph
(e)(2):

Example 1. A, a calendar-year partnership,
maintains one general asset account for one office
building that cost $10 million. A discovers a leak
in the roof of the building and decides to replace
the entire roof. The roof is a structural compo-
nent of the building. In accordance with para-
graph (e)(2)(viii)(B)(1) of this section, the office
building, including its structural components, is
the asset for disposition purposes. The retirement
of the replaced roof is not a disposition of a
portion of an asset as described in paragraph
(e)(1)(ii) of this section. Thus, the retirement of
the replaced roof is not a disposition under para-
graph (e)(1) of this section. As a result, A contin-
ues to depreciate the $10 million cost of the gen-
eral asset account. If A must capitalize the
amount paid for the replacement roof pursuant to
§ 1.263(a)-3, the replacement roof is a separate
asset for disposition purposes pursuant to para-
graph (e)(2)(viii)(B)(4) of this section and for de-
preciation purposes pursuant to section 168(i)(6).

Example 2. B, a calendar-year commercial
airline company, maintains one general asset ac-
count for five aircraft that cost a total of $500
million. These aircraft are described in asset class
45.0 of Rev. Proc. 87-56. B replaces the existing
engines on one of the aircraft with new engines.
Assume each aircraft is a unit of property as
determined under § 1.263(a)-3(e)(3) and each en-
gine of an aircraft is a major component or sub-
stantial structural part of the aircraft as deter-
mined under § 1.263(a)-3(k)(6). Assume also that
B treats each aircraft as the asset for disposition
purposes in accordance with paragraph
(e)(2)(viii) of this section. The retirement of the
replaced engines is not a disposition of a portion
of an asset as described in paragraph (e)(1)(ii) of
this section. Thus, the retirement of the replaced
engines is not a disposition under paragraph
(e)(1) of this section. As a result, B continues to
depreciate the $500 million cost of the general
asset account. If B must capitalize the amount
paid for the replacement engines pursuant to
§ 1.263(a)-3, the replacement engines are a sep-
arate asset for disposition purposes pursuant to
paragraph (e)(2)(viii)(B)(4) of this section and for
depreciation purposes pursuant to section
168(i)(6).

Example 3. (i) R, a calendar-year corporation,
maintains one general asset account for ten ma-
chines. The machines cost a total of $10,000 and
are placed in service in June 2014. Of the ten
machines, one machine costs $8,200 and nine ma-
chines cost a total of $1,800. Assume R depreci-
ates this general asset account using the optional

depreciation table that corresponds with the gen-
eral depreciation system, the 200-percent declin-
ing balance method, a 5-year recovery period,
and a half-year convention. R does not make a
section 179 election for any of the machines, and
all of the machines are not eligible for any addi-
tional first year depreciation deduction. As of
January 1, 2015, the depreciation reserve of the
account is $2,000 ($10,000 × 20%).

(ii) On February 8, 2015, R sells the machine
that cost $8,200 to an unrelated party for $9,000.
Under paragraph (e)(2)(i) of this section, this ma-
chine has an adjusted depreciable basis of zero.

(iii) On its 2015 tax return, R recognizes the
amount realized of $9,000 as ordinary income
because such amount does not exceed the unad-
justed depreciable basis of the general asset ac-
count ($10,000), plus any expensed cost for assets
in the account ($0), less amounts previously rec-
ognized as ordinary income ($0). Moreover, the
unadjusted depreciable basis and depreciation re-
serve of the account are not affected by the dis-
position of the machine. Thus, the depreciation
allowance for the account in 2015 is $3,200
($10,000 × 32%).

Example 4. (i) The facts are the same as in
Example 3. In addition, on June 4, 2016, R sells
seven machines to an unrelated party for a total
of $1,100. In accordance with paragraph (e)(2)(i)
of this section, these machines have an adjusted
depreciable basis of zero.

(ii) On its 2016 tax return, R recognizes $1,000
as ordinary income (the unadjusted depreciable
basis of $10,000, plus the expensed cost of $0, less
the amount of $9,000 previously recognized as
ordinary income). The recognition and character
of the excess amount realized of $100 ($1,100-
$1,000) are determined under applicable provi-
sions of the Code other than section 1245 (such as
section 1231). Moreover, the unadjusted depre-
ciable basis and depreciation reserve of the ac-
count are not affected by the disposition of the
machines. Thus, the depreciation allowance for
the account in 2016 is $1,920 ($10,000 x 19.2%).

(3) Special rules-(i) In general. This
paragraph (e)(3) provides the rules for ter-
minating general asset account treatment
upon certain dispositions. While the rules
under paragraphs (e)(3)(ii) and (iii) of this
section are optional rules, the rules under
paragraphs (e)(3)(iv), (v), (vi), and (vii) of
this section are mandatory rules. A tax-
payer elects to apply paragraph (e)(3)(ii)
or (iii) of this section by reporting the
gain, loss, or other deduction on the tax-
payer's timely filed original Federal tax
return, including extensions, for the tax-
able year in which the disposition occurs.
However, if the loss is on account of the
demolition of a structure to which section
280B and § 1.280B-1 apply, a taxpayer
elects to apply paragraph (e)(3)(ii) or (iii)
of this section by ending depreciation for
the structure at the time of the disposition

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of the structure, taking into account the
convention applicable to the general asset
account in which the demolished structure
was included, and reporting the amount of
depreciation for that structure for the tax-
able year in which the disposition occurs
on the taxpayer's timely filed original
Federal tax return, including extensions,
for that taxable year. A taxpayer may re-
voke the election to apply paragraph
(e)(3)(ii) or (iii) of this section only by
filing a request for a private letter ruling
and obtaining the Commissioner's con-
sent to revoke the election. The Commis-
sioner may grant a request to revoke this
election if the taxpayer acted reasonably
and in good faith, and the revocation will
not prejudice the interests of the Govern-
ment. See generally § 301.9100-3 of this
chapter. The election to apply paragraph
(e)(3)(ii) or (iii) of this section may not be
made or revoked through the filing of an
application for change in accounting
method. For purposes of applying para-
graphs (e)(3)(iii) through (vii) of this sec-
tion, see paragraph (j) of this section for
identifying an asset disposed of and its
unadjusted depreciable basis. Solely for
purposes of applying paragraphs
(e)(3)(iii), (e)(3)(iv)(C), (e)(3)(v)(B), and
(e)(3)(vii) of this section, the term asset is:

(A) The asset as determined under
paragraph (e)(2)(viii) of this section; or

(B) The portion of such asset that is
disposed of in a disposition described in
paragraph (e)(1)(ii) of this section.

(ii) Disposition of all assets remaining
in a general asset account-(A) Optional
termination of a general asset account.
Upon the disposition of all of the assets,
the last asset, or the remaining portion of
the last asset in a general asset account, a
taxpayer may apply this paragraph
(e)(3)(ii) to recover the adjusted deprecia-
ble basis of the general asset account
rather than having paragraph (e)(2) of this
section apply. Under this paragraph
(e)(3)(ii), the general asset account termi-
nates and the amount of gain or loss for
the general asset account is determined
under section 1001(a) by taking into ac-
count the adjusted depreciable basis of the
general asset account at the time of the
disposition, as determined under the ap-
plicable convention for the general asset
account. Whether and to what extent gain
or loss is recognized is determined under

other applicable provisions of the Code,
including section 280B and § 1.280B-1.
The character of the gain or loss is deter-
mined under other applicable provisions
of the Code, except that the amount of
gain subject to section 1245 is limited to
the excess of the depreciation allowed or
allowable for the general asset account,
including any expensed cost, over any
amounts previously recognized as ordi-
nary income under paragraph (e)(2) of this
section, and the amount of gain subject to
section 1250 is limited to the excess of the
additional depreciation allowed or allow-
able for the general asset account, over
any amounts previously recognized as or-
dinary income under paragraph (e)(2) of
this section.

(B) Examples. The following examples
illustrate the application of this paragraph
(e)(3)(ii):

Example 1. (i) T, a calendar-year corporation,
maintains a general asset account for 1,000 cal-
culators. The calculators cost a total of $60,000
and are placed in service in 2014. Assume T
depreciates this general asset account using the
optional depreciation table that corresponds with
the general depreciation system, the 200-percent
declining balance method, a 5-year recovery pe-
riod, and a half-year convention. T does not make
a section 179 election for any of the calculators,
and all of the calculators are not eligible for any
additional first year depreciation deduction. In
2015, T sells 200 of the calculators to an unrelated
party for a total of $10,000 and recognizes the
$10,000 as ordinary income in accordance with
paragraph (e)(2) of this section.

(ii) On March 26, 2016, T sells the remaining
calculators in the general asset account to an
unrelated party for $35,000. T elects to apply
paragraph (e)(3)(ii) of this section. As a result, the
account terminates and gain or loss is determined
for the account.

(iii) On the date of disposition, the adjusted
depreciable basis of the account is $23,040 (unad-
justed depreciable basis of $60,000 less the depre-
ciation allowed or allowable of $36,960). Thus, in
2016, T recognizes gain of $11,960 (amount real-
ized of $35,000 less the adjusted depreciable basis
of $23,040). The gain of $11,960 is subject to
section 1245 to the extent of the depreciation
allowed or allowable for the account, plus the
expensed cost for assets in the account, less the
amounts previously recognized as ordinary in-
come ($36,960 + $0 - $10,000 = $26,960). As a
result, the entire gain of $11,960 is subject to
section 1245.

Example 2. (i) J, a calendar-year corporation,
maintains a general asset account for one item of
equipment. This equipment costs $2,000 and is
placed in service in 2014. Assume J depreciates
this general asset account using the optional de-
preciation table that corresponds with the general
depreciation system, the 200-percent declining

balance method, a 5-year recovery period, and a
half-year convention. J does not make a section
179 election for the equipment, and it is not eli-
gible for any additional first year depreciation
deduction. In June 2016, J sells the equipment to
an unrelated party for $1,000. J elects to apply
paragraph (e)(3)(ii) of this section. As a result, the
account terminates and gain or loss is determined
for the account.

(ii) On the date of disposition, the adjusted
depreciable basis of the account is $768 (unad-
justed depreciable basis of $2,000 less the depre-
ciation allowed or allowable of $1,232). Thus, in
2016, J recognizes gain of $232 (amount realized
of $1,000 less the adjusted depreciable basis of
$768). The gain of $232 is subject to section 1245
to the extent of the depreciation allowed or allow-
able for the account (plus the expensed cost for
assets in the account) less the amounts previously
recognized as ordinary income ($1,232 + $0- $0
= $1,232). As a result, the entire gain of $232 is
subject to section 1245.

(iii) Disposition of an asset in a qual-
ifying disposition-(A) Optional determi-
nation of the amount of gain, loss, or
other deduction. In the case of a qualify-
ing disposition (described in paragraph
(e)(3)(iii)(B) of this section) of an asset, a
taxpayer may elect to apply this paragraph
(e)(3)(iii) rather than having paragraph
(e)(2) of this section apply. Under this
paragraph (e)(3)(iii), general asset account
treatment for the asset terminates as of the
first day of the taxable year in which the
qualifying disposition occurs, and the
amount of gain, loss, or other deduction for
the asset is determined under § 1.168(i)-8
by taking into account the asset's adjusted
depreciable basis at the time of the disposi-
tion. The adjusted depreciable basis of the
asset at the time of the disposition, as deter-
mined under the applicable convention for
the general asset account in which the asset
was included, equals the unadjusted depre-
ciable basis of the asset less the depreciation
allowed or allowable for the asset, com-
puted by using the depreciation method, re-
covery period, and convention applicable to
the general asset account in which the asset
was included and by including the portion
of the additional first year depreciation de-
duction claimed for the general asset ac-
count that is attributable to the asset dis-
posed of. Whether and to what extent gain,
loss, or other deduction is recognized is de-
termined under other applicable provisions
of the Code, including section 280B and
§ 1.280B-1. The character of the gain, loss,
or other deduction is determined under other
applicable provisions of the Code, except
that the amount of gain subject to section

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1245 or section 1250 is limited to the lesser
of-

(1) The depreciation allowed or allow-
able for the asset, including any expensed
cost or, in the case of section 1250 prop-
erty, the additional depreciation allowed
or allowable for the asset; or

(2) The excess of-

(i) The original unadjusted depreciable
basis of the general asset account plus, in
the case of section 1245 property origi-
nally included in the general asset ac-
count, any expensed cost; over

(ii) The cumulative amounts of gain
previously recognized as ordinary income
under either paragraph (e)(2) of this sec-
tion or section 1245 or section 1250.

(B) Qualifying dispositions. A qualify-
ing disposition is a disposition that does
not involve all the assets, the last asset, or
the remaining portion of the last asset
remaining in a general asset account and
that is-

(1) A direct result of a fire, storm,
shipwreck, or other casualty, or from
theft;

(2) A charitable contribution for which
a deduction is allowable under section
170;

(3) A direct result of a cessation, ter-
mination, or disposition of a business,
manufacturing or other income producing
process, operation, facility, plant, or other
unit, other than by transfer to a supplies,
scrap, or similar account; or

(4) A transaction, other than a transac-
tion described in paragraph (e)(3)(iv)
(pertaining to transactions subject to sec-
tion 168(i)(7)), paragraph (e)(3)(v) (per-
taining to transactions subject to section
1031 or section 1033), paragraph
(e)(3)(vi) (pertaining to technical termina-
tions of partnerships), or paragraph
(e)(3)(vii) (anti-abuse rule) of this section,
to which a nonrecognition section of the
Internal Revenue Code applies (deter-
mined without regard to this section).

(C) Effect of a qualifying disposition
on a general asset account. If the taxpayer
elects to apply this paragraph (e)(3)(iii) to
a qualifying disposition of an asset,
then-

(1) The asset is removed from the gen-
eral asset account as of the first day of the
taxable year in which the qualifying dis-
position occurs. For that taxable year, the
taxpayer accounts for the asset in a single

asset account in accordance with the rules
under § 1.168(i)-7(b);

(2) The unadjusted depreciable basis of
the general asset account is reduced by the
unadjusted depreciable basis of the asset
as of the first day of the taxable year in
which the disposition occurs;

(3) The depreciation reserve of the gen-
eral asset account is reduced by the depre-
ciation allowed or allowable for the asset
as of the end of the taxable year immedi-
ately preceding the year of disposition,
computed by using the depreciation
method, recovery period, and convention
applicable to the general asset account in
which the asset was included and by in-
cluding the portion of the additional first
year depreciation deduction claimed for
the general asset account that is attribut-
able to the asset disposed of; and

(4) For purposes of determining the
amount of gain realized on subsequent
dispositions that is subject to ordinary in-
come treatment under paragraph (e)(2)(ii)
of this section, the amount of any ex-
pensed cost with respect to the asset is
disregarded.

(D) Examples. The following examples
illustrate the application of this paragraph
(e)(3)(iii):

Example 1. (i) Z, a calendar-year corporation,
maintains one general asset account for 12 ma-
chines. Each machine costs $15,000 and is placed
in service in 2014. Of the 12 machines, nine ma-
chines that cost a total of $135,000 are used in Z's
Kentucky plant, and three machines that cost a
total of $45,000 are used in Z's Ohio plant. As-
sume Z depreciates this general asset account
using the optional depreciation table that corre-
sponds with the general depreciation system, the
200-percent declining balance method, a 5-year
recovery period, and the half-year convention. Z
does not make a section 179 election for any of the
machines, and all of the machines are not eligible
for any additional first year depreciation deduc-
tion. As of December 31, 2015, the depreciation
reserve for the account is $93,600.

(ii) On May 27, 2016, Z sells its entire manu-
facturing plant in Ohio to an unrelated party. The
sales proceeds allocated to each of the three ma-
chines at the Ohio plant is $5,000. This transac-
tion is a qualifying disposition under paragraph
(e)(3)(iii)(B)(3) of this section, and Z elects to
apply paragraph (e)(3)(iii) of this section.

(iii) For Z's 2016 return, the depreciation al-
lowance for the account is computed as follows.
As of December 31, 2015, the depreciation al-
lowed or allowable for the three machines at the
Ohio plant is $23,400. Thus, as of January 1,
2016, the unadjusted depreciable basis of the ac-
count is reduced from $180,000 to $135,000
($180,000 less the unadjusted depreciable basis of

$45,000 for the three machines), and, as of De-
cember 31, 2015, the depreciation reserve of the
account is decreased from $93,600 to $70,200
($93,600 less the depreciation allowed or allow-
able of $23,400 for the three machines as of De-
cember 31, 2015). Consequently, the depreciation
allowance for the account in 2016 is $25,920
($135,000 × 19.2%).

(iv) For Z's 2016 return, gain or loss for each
of the three machines at the Ohio plant is deter-
mined as follows. The depreciation allowed or
allowable in 2016 for each machine is $1,440
(($15,000 × 19.2%)/ 2). Thus, the adjusted depre-
ciable basis of each machine under section 1011 is
$5,760 (the adjusted depreciable basis of $7,200
removed from the account less the depreciation
allowed or allowable of $1,440 in 2016). As a
result, the loss recognized in 2016 for each ma-
chine is $760 ($5,000- $5,760), which is subject to
section 1231.

Example 2. (i) A, a calendar-year partnership,
maintains one general asset account for one office
building that cost $20 million and was placed in
service in July 2011. A depreciates this general
asset account using the optional depreciation ta-
ble that corresponds with the general deprecia-
tion system, the straight-line method, a 39-year
recovery period, and the mid-month convention.
As of January 1, 2014, the depreciation reserve
for the account is $1,261,000.

(ii) In May 2014, a tornado occurs where the
building is located and damages the roof of the
building. A decides to replace the entire roof. The
roof is replaced in June 2014. The roof is a struc-
tural component of the building. Because the roof
was damaged as a result of a casualty event de-
scribed in section 165, the partial disposition rule
provided under paragraph (e)(1)(ii) of this section
applies to the roof. Although the office building,
including its structural components, is the asset
for disposition purposes, the partial disposition
rule provides that the retirement of the replaced
roof is a disposition under paragraph (e)(1) of this
section. This retirement is a qualifying disposition
under paragraph (e)(3)(iii)(B)(1) of this section,
and A elects to apply paragraph (e)(3)(iii) of this
section for the retirement of the damaged roof.

(iii) Of the $20 million cost of the office build-
ing, assume $1 million is the cost of the retired
roof.

(iv) For A's 2014 return, the depreciation allow-
ance for the account is computed as follows. As of
December 31, 2013, the depreciation allowed or
allowable for the retired roof is $63,050. Thus, as of
January 1, 2014, the unadjusted depreciable basis
of the account is reduced from $20,000,000 to
$19,000,000 ($20,000,000 less the unadjusted depre-
ciable basis of $1,000,000 for the retired roof), and
the depreciation reserve of the account is decreased
from $1,261,000 to $1,197,950 ($1,261,000 less the
depreciation allowed or allowable of $63,050 for the
retired roof as of December 31, 2013). Conse-
quently, the depreciation allowance for the account
in 2014 is $487,160 ($19,000,000 × 2.564%).

(v) For A's 2014 return, gain or loss for the
retired roof is determined as follows. The depre-
ciation allowed or allowable in 2014 for the re-
tired roof is $11,752 (($1,000,000 × 2.564%) x

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5.5/12). Thus, the adjusted depreciable basis of
the retired roof under section 1011 is $925,198
(the adjusted depreciable basis of $936,950 re-
moved from the account less the depreciation
allowed or allowable of $11,752 in 2014). As a
result, the loss recognized in 2014 for the retired
roof is $925,198, which is subject to section 1231.

(vi) If A must capitalize the amount paid for
the replacement roof under § 1.263(a)-3, the re-
placement roof is a separate asset for deprecia-
tion purposes pursuant to section 168(i)(6). If A
includes the replacement roof in a general asset
account, the replacement roof is a separate asset
for disposition purposes pursuant to paragraph
(e)(2)(viii)(B)(4) of this section. If A includes the
replacement roof in a single asset account or a
multiple asset account under § 1.168(i)-7, the re-
placement roof is a separate asset for disposition
purposes pursuant to § 1.168(i)-8(c)(4)(ii)(D).

(iv) Transactions subject to section
168(i)(7)-(A) In general. If a taxpayer
transfers one or more assets, or a portion
of such asset, in a general asset account in
a transaction described in section
168(i)(7)(B) (pertaining to treatment of
transferees in certain nonrecognition
transactions), the taxpayer (the transferor)
and the transferee must apply this para-
graph (e)(3)(iv) to the asset or the portion
of such asset, instead of applying para-
graph (e)(2), (e)(3)(ii), or (e)(3)(iii) of this
section. The transferee is bound by the
transferor's election under paragraph (1)
of this section for the portion of the trans-
feree's basis in the asset or the portion of
such asset that does not exceed the trans-
feror's adjusted depreciable basis of the
general asset account or the asset or the
portion of such asset, as applicable, as
determined under paragraph (e)(3)(iv)(B)(2)
or (C)(2) of this section, as applicable.

(B) All assets remaining in general as-
set account are transferred. If a taxpayer
transfers all the assets, the last asset, or the
remaining portion of the last asset in a
general asset account in a transaction de-
scribed in section 168(i)(7)(B)-

(1) The taxpayer (the transferor) must
terminate the general asset account on the
date of the transfer. The allowable depre-
ciation deduction for the general asset ac-
count for the transferor's taxable year in
which the section 168(i)(7)(B) transaction
occurs is computed by using the depreci-
ation method, recovery period, and con-
vention applicable to the general asset ac-
count. This allowable depreciation deduction
is allocated between the transferor and the
transferee on a monthly basis. This allo-
cation is made in accordance with the

rules in § 1.168(d)-1(b)(7)(ii) for allocat-
ing the depreciation deduction between
the transferor and the transferee;

(2) The transferee must establish a new
general asset account for all the assets, the
last asset, or the remaining portion of the
last asset, in the taxable year in which the
section 168(i)(7)(B) transaction occurs for
the portion of its basis in the assets that
does not exceed the transferor's adjusted
depreciable basis of the general asset ac-
count in which all the assets, the last asset,
or the remaining portion of the last asset,
were included. The transferor's adjusted
depreciable basis of this general asset ac-
count is equal to the adjusted depreciable
basis of that account as of the beginning
of the transferor's taxable year in which
the transaction occurs, decreased by the
amount of depreciation allocable to the
transferor for the year of the transfer, as
determined under paragraph (e)(3)(iv)(B)(1)
of this section. The transferee is treated as
the transferor for purposes of computing
the allowable depreciation deduction for
the new general asset account under sec-
tion 168. The new general asset account
must be established in accordance with
the rules in paragraph (c) of this section,
except that the unadjusted depreciable
bases of all the assets, the last asset, or the
remaining portion of the last asset, and the
greater of the depreciation allowed or al-
lowable for all the assets, the last asset, or
the remaining portion of the last asset,
including the amount of depreciation for
the transferred assets that is allocable to
the transferor for the year of the transfer,
are included in the newly established gen-
eral asset account. Consequently, this gen-
eral asset account in the year of the trans-
fer will have a beginning balance for both
the unadjusted depreciable basis and the
depreciation reserve of the general asset
account; and

(3) For purposes of section 168 and this
section, the transferee treats the portion of
its basis in the assets that exceeds the
transferor's adjusted depreciable basis of
the general asset account in which all the
assets, the last asset, or the remaining por-
tion of the last asset, were included, as
determined under paragraph (e)(3)(iv)(B)(2)
of this section, as a separate asset that the
transferee placed in service on the date of
the transfer. The transferee accounts for
this asset under § 1.168(i)-7 or may make

an election under paragraph (l) of this
section to include the asset in a general
asset account.

(C) Not all assets remaining in general
asset account are transferred. If a taxpayer
transfers an asset in a general asset account
in a transaction described in section
168(i)(7)(B) and if paragraph (e)(3)(iv)(B)
of this section does not apply to this asset-

(1) The taxpayer (the transferor) must
remove the transferred asset from the gen-
eral asset account in which the asset is
included, as of the first day of the taxable
year in which the section 168(i)(7)(B)
transaction occurs. In addition, the adjust-
ments to the general asset account de-
scribed in paragraphs (e)(3)(iii)(C)(2)
through (4) of this section must be made.
The allowable depreciation deduction for
the asset for the transferor's taxable year
in which the section 168(i)(7)(B) transac-
tion occurs is computed by using the de-
preciation method, recovery period, and
convention applicable to the general asset
account in which the asset was included.
This allowable depreciation deduction is
allocated between the transferor and the
transferee on a monthly basis. This allo-
cation is made in accordance with the
rules in § 1.168(d)-1(b)(7)(ii) for allocat-
ing the depreciation deduction between
the transferor and the transferee;

(2) The transferee must establish a new
general asset account for the asset in the
taxable year in which the section 168(i)(7)(B)
transaction occurs for the portion of its
basis in the asset that does not exceed the
transferor's adjusted depreciable basis of
the asset. The transferor's adjusted depre-
ciable basis of this asset is equal to the
adjusted depreciable basis of the asset as
of the beginning of the transferor's tax-
able year in which the transaction occurs,
decreased by the amount of depreciation
allocable to the transferor for the year of
the transfer, as determined under para-
graph (e)(3)(iv)(C)(1) of this section. The
transferee is treated as the transferor for
purposes of computing the allowable de-
preciation deduction for the new general
asset account under section 168. The new
general asset account must be established
in accordance with the rules in paragraph
(c) of this section, except that the unad-
justed depreciable basis of the asset, and
the greater of the depreciation allowed or
allowable for the asset, including the

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amount of depreciation for the transferred
asset that is allocable to the transferor for
the year of the transfer, are included in the
newly established general asset account.
Consequently, this general asset account
in the year of the transfer will have a
beginning balance for both the unadjusted
depreciable basis and the depreciation re-
serve of the general asset account; and

(3) For purposes of section 168 and this
section, the transferee treats the portion of
its basis in the asset that exceeds the trans-
feror's adjusted depreciable basis of the
asset, as determined under paragraph
(e)(3)(iv)(C)(2) of this section, as a sepa-
rate asset that the transferee placed in ser-
vice on the date of the transfer. The trans-
feree accounts for this asset under
§ 1.168(i)-7 or may make an election
under paragraph (l) of this section to in-
clude the asset in a general asset account.

(v) Transactions subject to section
1031 or section 1033-(A) Like-kind ex-
change or involuntary conversion of all
assets remaining in a general asset ac-
count. If all the assets, the last asset, or the
remaining portion of the last asset in a
general asset account are transferred by a
taxpayer in a like-kind exchange (as de-
fined under § 1.168-6(b)(11)) or in an
involuntary conversion (as defined under
§ 1.168-6(b)(12)), the taxpayer must ap-
ply this paragraph (e)(3)(v)(A) instead of
applying paragraph (e)(2), (e)(3)(ii), or
(e)(3)(iii) of this section. Under this para-
graph (e)(3)(v)(A), the general asset ac-
count terminates as of the first day of the
year of disposition (as defined in
§ 1.168(i)-6(b)(5)) and-

(1) The amount of gain or loss for the
general asset account is determined under
section 1001(a) by taking into account the
adjusted depreciable basis of the general
asset account at the time of disposition (as
defined in § 1.168(i)-6(b)(3)). The depre-
ciation allowance for the general asset ac-
count in the year of disposition is deter-
mined in the same manner as the
depreciation allowance for the relin-
quished MACRS property (as defined in
§ 1.168(i)-6(b)(2)) in the year of disposi-
tion is determined under § 1.168(i)-6.
The recognition and character of gain or
loss are determined in accordance with
paragraph (e)(3)(ii)(A) of this section,
notwithstanding that paragraph (e)(3)(ii)
of this section is an optional rule; and

(2) The adjusted depreciable basis of
the general asset account at the time of
disposition is treated as the adjusted de-
preciable basis of the relinquished
MACRS property.

(B) Like-kind exchange or involuntary
conversion of less than all assets remain-
ing in a general asset account. If an asset
in a general asset account is transferred by
a taxpayer in a like-kind exchange or in an
involuntary conversion and if paragraph
(e)(3)(v)(A) of this section does not apply
to this asset, the taxpayer must apply this
paragraph (e)(3)(v)(B) instead of applying
paragraph (e)(2), (e)(3)(ii), or (e)(3)(iii) of
this section. Under this paragraph (e)(3)(v)(B),
general asset account treatment for the
asset terminates as of the first day of the
year of disposition (as defined in
§ 1.168(i)-6(b)(5)), and-

(1) The amount of gain or loss for the
asset is determined by taking into account
the asset's adjusted depreciable basis at
the time of disposition (as defined in
§ 1.168(i)-6(b)(3)). The adjusted depre-
ciable basis of the asset at the time of
disposition equals the unadjusted depre-
ciable basis of the asset less the depreci-
ation allowed or allowable for the asset,
computed by using the depreciation
method, recovery period, and convention
applicable to the general asset account in
which the asset was included and by in-
cluding the portion of the additional first
year depreciation deduction claimed for
the general asset account that is attribut-
able to the relinquished asset. The depre-
ciation allowance for the asset in the year
of disposition is determined in the same
manner as the depreciation allowance for
the relinquished MACRS property (as de-
fined in § 1.168(i)-6(b)(2)) in the year of
disposition is determined under § 1.168(i)-6.
The recognition and character of the gain
or loss are determined in accordance with
paragraph (e)(3)(iii)(A) of this section,
notwithstanding that paragraph (e)(3)(iii)
of this section is an optional rule; and

(2) As of the first day of the year of
disposition, the taxpayer must remove the
relinquished asset from the general asset
account and make the adjustments to the
general asset account described in para-
graphs (e)(3)(iii)(C)(2) through (4) of this
section.

(vi) Technical termination of a part-
nership. In the case of a technical termi-

nation of a partnership under section
708(b)(1)(B), the terminated partnership
must apply this paragraph (e)(3)(vi) in-
stead of applying paragraph (e)(2),
(e)(3)(ii), or (e)(3)(iii) of this section. Un-
der this paragraph (e)(3)(vi), all of the
terminated partnership's general asset ac-
counts terminate as of the date of its ter-
mination under section 708(b)(1)(B). The
terminated partnership computes the al-
lowable depreciation deduction for each
of its general asset accounts for the tax-
able year in which the technical termina-
tion occurs by using the depreciation
method, recovery period, and convention
applicable to the general asset account.
The new partnership is not bound by the
terminated partnership's election under
paragraph (l) of this section.

(vii) Anti-abuse rule-(A) In general.
If an asset in a general asset account is
disposed of by a taxpayer in a transaction
described in paragraph (e)(3)(vii)(B) of
this section, general asset account treat-
ment for the asset terminates as of the first
day of the taxable year in which the dis-
position occurs. Consequently, the tax-
payer must determine the amount of gain,
loss, or other deduction attributable to the
disposition in the manner described in
paragraph (e)(3)(iii)(A) of this section,
notwithstanding that paragraph (e)(3)(iii)(A)
of this section is an optional rule, and
must make the adjustments to the general
asset account described in paragraphs
(e)(3)(iii)(C)(1) through (4) of this sec-
tion.

(B) Abusive transactions. A transaction
is described in this paragraph (e)(3)(vii)(B)
if the transaction is not described in para-
graph (e)(3)(iv), (e)(3)(v), or (e)(3)(vi) of
this section, and if the transaction is en-
tered into, or made, with a principal pur-
pose of achieving a tax benefit or result
that would not be available absent an elec-
tion under this section. Examples of these
types of transactions include-

(1) A transaction entered into with a
principal purpose of shifting income or
deductions among taxpayers in a manner
that would not be possible absent an elec-
tion under this section to take advantage
of differing effective tax rates among the
taxpayers; or

(2) An election made under this section
with a principal purpose of disposing of
an asset from a general asset account to

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utilize an expiring net operating loss or
credit if the transaction is not a bona fide
disposition. The fact that a taxpayer with a
net operating loss carryover or a credit
carryover transfers an asset to a related
person or transfers an asset pursuant to an
arrangement where the asset continues to
be used or is available for use by the
taxpayer pursuant to a lease or otherwise
indicates, absent strong evidence to the
contrary, that the transaction is described
in this paragraph (e)(3)(vii)(B).

(f) Assets generating foreign source in-
come-(1) In general. This paragraph (f)
provides the rules for determining the
source of any income, gain, or loss recog-
nized, and the appropriate section 904(d)
separate limitation category or categories
for any foreign source income, gain, or
loss recognized on a disposition (within
the meaning of paragraph (e)(1) of this
section) of an asset in a general asset
account that consists of assets generating
both United States and foreign source in-
come. These rules apply only to a dispo-
sition to which paragraph (e)(2) (general
disposition rules), paragraph (e)(3)(ii)
(disposition of all assets remaining in a
general asset account), paragraph
(e)(3)(iii) (disposition of an asset in a
qualifying disposition), paragraph (e)(3)(v)

(transactions subject to section 1031 or
section 1033), or paragraph (e)(3)(vii)
(anti-abuse rule) of this section applies.
Solely for purposes of applying this para-
graph (f), the term asset is:

(i) The asset as determined under para-
graph (e)(2)(viii) of this section; or

(ii) The portion of such asset that is
disposed of in a disposition described in
paragraph (e)(1)(ii) of this section.

(2) Source of ordinary income, gain, or
loss-(i) Source determined by allocation
and apportionment of depreciation al-
lowed. The amount of any ordinary in-
come, gain, or loss that is recognized on
the disposition of an asset in a general
asset account must be apportioned be-
tween United States and foreign sources
based on the allocation and apportionment
of the-

(A) Depreciation allowed for the gen-
eral asset account as of the end of the
taxable year in which the disposition oc-
curs if paragraph (e)(2) of this section
applies to the disposition;

(B) Depreciation allowed for the gen-
eral asset account as of the time of dispo-
sition if the taxpayer applies paragraph
(e)(3)(ii) of this section to the disposition
of all assets, the last asset, or the remain-
ing portion of the last asset, in the general

asset account, or if all the assets, the last
asset, or the remaining portion of the last
asset, in the general asset account are dis-
posed of in a transaction described in
paragraph (e)(3)(v)(A) of this section; or

(C) Depreciation allowed for the asset
disposed of for only the taxable year in
which the disposition occurs if the tax-
payer applies paragraph (e)(3)(iii) of this
section to the disposition of the asset in a
qualifying disposition, if the asset is dis-
posed of in a transaction described in
paragraph (e)(3)(v)(B) of this section
(like-kind exchange or involuntary con-
version), or if the asset is disposed of in a
transaction described in paragraph (e)(3)(vii)
of this section (anti-abuse rule).

(ii) Formula for determining foreign
source income, gain, or loss. The amount
of ordinary income, gain, or loss recog-
nized on the disposition that shall be
treated as foreign source income, gain, or
loss must be determined under the for-
mula in this paragraph (f)(2)(ii). For pur-
poses of this formula, the allowed depre-
ciation deductions are determined for the
applicable time period provided in para-
graph (f)(2)(i) of this section. The formula
is:

Foreign

Total

Allowed

Source

Ordinary

Depreciation

Income, Gain,

Income,

Deductions

or Loss from =

Gain, or

X

Allocated and

The

Loss from the

Apportioned to

Disposition

Disposition Foreign Source

of an Asset

of an Asset

Income/Total

Allowed
Depreciation
Deductions for
the General
Asset Account
or for the
Asset Disposed of
(as applicable)

(3) Section 904(d) separate categories.
If the assets in the general asset account
generate foreign source income in more

than one separate category under section
904(d)(1) or another section of the Code
(for example, income treated as foreign

source income under section 904(g)(10)),
or under a United States income tax treaty
that requires the foreign tax credit limita-

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tion to be determined separately for spec-
ified types of income, the amount of for-
eign source income, gain, or loss from the
disposition of an asset, as determined un-
der the formula in paragraph (f)(2)(ii) of

this section, must be allocated and appor-
tioned to the applicable separate category
or categories under the formula in this
paragraph (f)(3). For purposes of this for-
mula, the allowed depreciation deductions

are determined for the applicable time pe-
riod provided in paragraph (f)(2)(i) of this
section. The formula is:

Foreign

Source
Income, Gain,
or Loss in a
Separate
Category

=

Foreign
Source
Income,
Gain, or

X

Loss from

The
Disposition
of an Asset

Allowed
Depreciation
Deductions
Allocated and
Apportioned to
a Separate
Category Total/
Allowed
Depreciation
Deductions and
Apportioned to
Foreign Source
Income

(g) Assets subject to recapture. If the
basis of an asset in a general asset account
is increased as a result of the recapture of
any allowable credit or deduction (for ex-
ample, the basis adjustment for the recap-
ture amount under section 30(e)(5),
50(c)(2), 168(l)(6), 168(n)(4), 179(d)(10),
179A(e)(4), or 1400N(d)(5)), general as-
set account treatment for the asset termi-
nates as of the first day of the taxable year
in which the recapture event occurs. Con-
sequently, the taxpayer must remove the
asset from the general asset account as of
that day and must make the adjustments to
the general asset account described in
paragraphs (e)(3)(iii)(C)(2) through (4) of
this section.

(h) Changes in use-(1) Conversion to
any personal use. An asset in a general
asset account becomes ineligible for gen-
eral asset account treatment if a taxpayer
uses the asset in any personal activity dur-
ing a taxable year. Upon a conversion to
any personal use, the taxpayer must re-
move the asset from the general asset ac-
count as of the first day of the taxable year
in which the change in use occurs (the
year of change) and must make the adjust-
ments to the general asset account de-
scribed in paragraphs (e)(3)(iii)(C)(2)
through (4) of this section.

(2) Change in use results in a different
recovery period and/or depreciation

method-(i) No effect on general asset
account election. A change in the use de-
scribed in § 1.168(i)-4(d) (change in use
results in a different recovery period or
depreciation method) of an asset in a gen-
eral asset account shall not cause or per-
mit the revocation of the election made
under this section.

(ii) Asset is removed from the general
asset account. Upon a change in the use
described in § 1.168(i)-4(d), the taxpayer
must remove the asset from the general
asset account as of the first day of the year
of change (as defined in § 1.168(i)-4(a))
and must make the adjustments to the
general asset account described in para-
graphs (e)(3)(iii)(C)(2) through (4) of this
section. If, however, the result of the
change in use is described in § 1.168(i)-
4(d)(3) (change in use results in a shorter
recovery period or a more accelerated de-
preciation method) and the taxpayer elects
to treat the asset as though the change in
use had not occurred pursuant to
§ 1.168(i)-4(d)(3)(ii), no adjustment is
made to the general asset account upon
the change in use.

(iii) New general asset account is es-
tablished-(A) Change in use results in a
shorter recovery period or a more accel-
erated depreciation method. If the result
of the change in use is described in
§ 1.168(i)-4(d)(3) (change in use results

in a shorter recovery period or a more
accelerated depreciation method) and ad-
justments to the general asset account are
made pursuant to paragraph (h)(2)(ii) of
this section, the taxpayer must establish a
new general asset account for the asset in
the year of change in accordance with the
rules in paragraph (c) of this section, ex-
cept that the adjusted depreciable basis of
the asset as of the first day of the year of
change is included in the general asset
account. For purposes of paragraph (c)(2)
of this section, the applicable depreciation
method, recovery period, and convention
are determined under § 1.168(i)-4(d)(3)(i).

(B) Change in use results in a longer
recovery period or a slower depreciation
method. If the result of the change in use
is described in § 1.168(i)-4(d)(4) (change
in use results in a longer recovery period
or a slower depreciation method), the tax-
payer must establish a separate general
asset account for the asset in the year of
change in accordance with the rules in
paragraph (c) of this section, except that
the unadjusted depreciable basis of the
asset, and the greater of the depreciation
of the asset allowed or allowable in accor-
dance with section 1016(a)(2), as of the
first day of the year of change are included
in the newly established general asset ac-
count. Consequently, this general asset ac-
count as of the first day of the year of

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change will have a beginning balance for
both the unadjusted depreciable basis and
the depreciation reserve of the general as-
set account. For purposes of paragraph
(c)(2) of this section, the applicable depre-
ciation method, recovery period, and con-
vention are determined under § 1.168(i)-
4(d)(4)(ii).

(i) Redetermination of basis. If, after
the placed-in-service year, the unadjusted
depreciable basis of an asset in a general
asset account is redetermined due to a
transaction other than that described in
paragraph (g) of this section (for example,
due to contingent purchase price or dis-
charge of indebtedness), the taxpayer's
election under paragraph (l) of this section
for the asset also applies to the increase or
decrease in basis resulting from the rede-
termination. For the taxable year in which
the increase or decrease in basis occurs,
the taxpayer must establish a new general
asset account for the amount of the in-
crease or decrease in basis in accordance
with the rules in paragraph (c) of this
section. For purposes of paragraph (c)(2)
of this section, the applicable recovery
period for the increase or decrease in basis
is the recovery period of the asset remain-
ing as of the beginning of the taxable year
in which the increase or decrease in basis
occurs, the applicable depreciation method
and applicable convention for the increase
or decrease in basis are the same depreci-
ation method and convention applicable to
the asset that applies for the taxable year
in which the increase or decrease in basis
occurs, and the increase or decrease in
basis is deemed to be placed in service in
the same taxable year as the asset.

(j) Identification of disposed or con-
verted asset-(1) In general. The rules of
this paragraph (j) apply when an asset in a
general asset account is disposed of or
converted in a transaction described in
paragraph (e)(3)(iii) (disposition of an as-
set in a qualifying disposition), paragraph
(e)(3)(iv)(B) (transactions subject to sec-
tion 168(i)(7)), paragraph (e)(3)(v)(B)
(transactions subject to section 1031 or
section 1033), paragraph (e)(3)(vii) (anti-
abuse rule), paragraph (g) (assets subject
to recapture), or paragraph (h)(1) (conver-
sion to any personal use) of this section.

(2) Identifying which asset is disposed
of or converted-(i) In general. For pur-
poses of identifying which asset in a gen-

eral asset account is disposed of or con-
verted, a taxpayer must identify the
disposed of or converted asset by using-

(A) The specific identification method
of accounting. Under this method of ac-
counting, the taxpayer can determine the
particular taxable year in which the dis-
posed of or converted asset was placed in
service by the taxpayer;

(B) A first-in, first-out method of ac-
counting if the taxpayer can readily deter-
mine from its records the total disposi-
tions of assets with the same recovery
period during the taxable year but the tax-
payer cannot readily determine from its
records the unadjusted depreciable basis
of the disposed of or converted asset. Un-
der this method of accounting, the tax-
payer identifies the general asset account
with the earliest placed-in-service year
that has the same recovery period as the
disposed of or converted asset and that has
assets at the beginning of the taxable year
of the disposition or conversion, and the
taxpayer treats the disposed of or con-
verted asset as being from that general
asset account. To determine which general
asset account has assets at the beginning
of the taxable year of the disposition or
conversion, the taxpayer reduces the num-
ber of assets originally included in the
account by the number of assets disposed
of or converted in any prior taxable year
in a transaction to which this paragraph (j)
applies;

(C) A modified first-in, first-out
method of accounting if the taxpayer can
readily determine from its records the to-
tal dispositions of assets with the same
recovery period during the taxable year
and the unadjusted depreciable basis of
the disposed of or converted asset. Under
this method of accounting, the taxpayer
identifies the general asset account with
the earliest placed-in-service year that has
the same recovery period as the disposed
of or converted asset and that has assets at
the beginning of the taxable year of the
disposition or conversion with the same
unadjusted depreciable basis as the dis-
posed of or converted asset, and the tax-
payer treats the disposed of or converted
asset as being from that general asset ac-
count. To determine which general asset
account has assets at the beginning of the
taxable year of the disposition or conver-
sion, the taxpayer reduces the number of

assets originally included in the account
by the number of assets disposed of or
converted in any prior taxable year in a
transaction to which this paragraph (j) ap-
plies;

(D) A mortality dispersion table if the
asset is a mass asset accounted for in a
separate general asset account in accor-
dance with paragraph (c)(2)(ii)(H) of this
section and if the taxpayer can readily
determine from its records the total dispo-
sitions of assets with the same recovery
period during the taxable year. The mor-
tality dispersion table must be based upon
an acceptable sampling of the taxpayer's
actual disposition and conversion experi-
ence for mass assets or other acceptable
statistical or engineering techniques. To
use a mortality dispersion table, the tax-
payer must adopt recordkeeping practices
consistent with the taxpayer's prior prac-
tices and consonant with good accounting
and engineering practices; or

(E) Any other method as the Secretary
may designate by publication in the Fed-
eral Register or in the Internal Revenue
Bulletin (see § 601.601(d)(2) of this chap-
ter) on or after September 19, 2013. See
paragraph (j)(2)(iii) of this section regard-
ing the last-in, first-out method of ac-
counting.

(ii) Disposition of a portion of an asset.
If a taxpayer disposes of a portion of an
asset and paragraph (e)(1)(ii) of this sec-
tion applies to that disposition, the tax-
payer may identify the asset by using any
applicable method provided in paragraph
(j)(2)(i) of this section, after taking into
account paragraph (j)(2)(iii) of this sec-
tion.

(iii) Last-in, first-out method of ac-
counting. For purposes of paragraph (j)(2)
of this section, a last-in, first-out method
of accounting may not be used. Examples
of a last-in, first-out method of accounting
include the taxpayer identifying the gen-
eral asset account with the most recent
placed-in-service year that has the same
recovery period as the disposed of or con-
verted asset and that has assets at the
beginning of the taxable year of the dis-
position or conversion, and the taxpayer
treating the disposed of or converted asset
as being from that general asset account,
or the taxpayer treating the disposed por-
tion of an asset as being from the general
asset account with the most recent placed-

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in-service year that has assets that are the
same as the asset of which the disposed
portion is a part.

(3) Basis of disposed of or converted
asset. (i) Solely for purposes of this para-
graph (j)(3), the term asset is the asset as
determined under paragraph (e)(2)(viii) of
this section or the portion of such asset
that is disposed of in a disposition de-
scribed in paragraph (e)(1)(ii) of this sec-
tion. After identifying which asset in a
general asset account is disposed of or
converted, the taxpayer must determine
the unadjusted depreciable basis of, and
the depreciation allowed or allowable for,
the disposed of or converted asset. If it is
impracticable from the taxpayer's records
to determine the unadjusted depreciable
basis of the disposed of or converted asset,
the taxpayer may use any reasonable
method that is consistently applied to all
assets in the same general asset account
for purposes of determining the unad-
justed depreciable basis of the disposed of
or converted asset in that general asset
account. Examples of a reasonable
method include, but are not limited to, the
following:

(A) If the replacement asset is a resto-
ration (as defined in § 1.263(a)-3(k)), and
is not a betterment (as defined in
§ 1.263(a)-3(j)) or an adaptation to a new
or different use (as defined in § 1.263(a)-
3(l)), discounting the cost of the replace-
ment asset to its placed-in-service year
cost using the Producer Price Index for
Finished Goods or its successor, the Pro-
ducer Price Index for Final Demand, or
any other index designated by guidance in
the Internal Revenue Bulletin (see
§ 601.601(d)(2) of this chapter) for pur-
poses of this paragraph (j)(3);

(B) A pro rata allocation of the unad-
justed depreciable basis of the general as-
set account based on the replacement cost
of the disposed asset and the replacement
cost of all of the assets in the general asset
account; and

(C) A study allocating the cost of the
asset to its individual components.

(ii) The depreciation allowed or allow-
able for the disposed of or converted asset
is computed by using the depreciation
method, recovery period, and convention
applicable to the general asset account in
which the disposed of or converted asset
was included and by including the addi-

tional first year depreciation deduction
claimed for the disposed of or converted
asset.

(k) Effect of adjustments on prior dis-
positions. The adjustments to a general
asset account under paragraph (e)(3)(iii),
(e)(3)(iv), (e)(3)(v), (e)(3)(vii), (g), or (h)
of this section have no effect on the rec-
ognition and character of prior disposi-
tions subject to paragraph (e)(2) of this
section.

(1) Election-(1) Irrevocable election.
If a taxpayer makes an election under this
paragraph (l), the taxpayer consents to,
and agrees to apply, all of the provisions
of this section to the assets included in a
general asset account. Except as provided
in paragraph (c)(1)(ii)(A), (e)(3), (g), or
(h) of this section or except as otherwise
expressly provided by other guidance
published in the Internal Revenue Bulletin
(see § 601.601(d)(2) of this chapter), an
election made under this section is irrevo-
cable and will be binding on the taxpayer
for computing taxable income for the tax-
able year for which the election is made
and for all subsequent taxable years. An
election under this paragraph (l) is made
separately by each person owning an asset
to which this section applies (for example,
by each member of a consolidated group,
at the partnership level and not by the
partner separately, or at the S corporation
level and not by the shareholder sepa-
rately).

* * * * *

(m) Effective/applicability dates-(1)
In general. This section applies to taxable
years beginning on or after January 1,
2014. Except as provided in paragraphs
(m)(2), (m)(3), and (m)(4) of this section,
§ 1.168(i)-1 as contained in 26 CFR part
1 edition revised as of April 1, 2011,
applies to taxable years beginning before
January 1, 2014.

(2) Early application of this section. A
taxpayer may choose to apply the provi-
sions of this section to taxable years be-
ginning on or after January 1, 2012.

(3) Early application of regulation
project REG-110732-13. A taxpayer may
rely on the provisions of this section in
regulation project REG-110732-13
(2013-43 IRB 404) (see § 601.601(d)(2)
of this chapter) for taxable years begin-
ning on or after January 1, 2012. How-
ever, a taxpayer may not rely on the pro-

visions of this section in regulation project
REG-110732-13 for taxable years begin-
ning on or after January 1, 2014.

(4) Optional application of TD 9564. A
taxpayer may choose to apply
§ 1.168(i)-1T as contained in 26 CFR part
1 edition revised as of April 1, 2014, to
taxable years beginning on or after Janu-
ary 1, 2012. However, a taxpayer may not
apply § 1.168(i)-1T as contained in 26
CFR part 1 edition revised as of April 1,
2014, to taxable years beginning on or
after January 1, 2014.

(5) Change in method of accounting. A
change to comply with this section for
depreciable assets placed in service in a
taxable year ending on or after December
30, 2003, is a change in method of ac-
counting to which the provisions of sec-
tion 446(e) and the regulations under sec-
tion 446(e) apply. A taxpayer also may
treat a change to comply with this section
for depreciable assets placed in service in
a taxable year ending before December
30, 2003, as a change in method of ac-
counting to which the provisions of sec-
tion 446(e) and the regulations under sec-
tion 446(e) apply. This paragraph (m)(5)
does not apply to a change to comply with
paragraph (e)(3)(ii), (e)(3)(iii), or (l) of
this section, except as otherwise expressly
provided by other guidance published in
the Internal Revenue Bulletin (see
§ 601.601(d)(2) of this chapter).

### § 1.168(i)-1T [Removed]

Par. 6. Section 1.168(i)-1T is removed.

Par. 7. Section 1.168(i)-7 is amended
by revising the last sentence in paragraph
(a) and revising paragraphs (b), (c)(2)(ii)(H),
and (e) to read as follows:

§ 1.168(i)-7 Accounting for MACRS
property.

(a) * * * For rules applicable to general
asset accounts, see § 1.168(i)-1.

(b) Required use of single asset ac-
counts. A taxpayer must account for an
asset in a single asset account if the taxpayer
uses the asset both in a trade or business or
for the production of income and in a per-
sonal activity, or if the taxpayer places in
service and disposes of the asset during the
same taxable year. Also, if general asset
account treatment for an asset terminates
under § 1.168(i)-1(c)(1)(ii)(A), (e)(3)(iii),

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(e)(3)(v), (e)(3)(vii), (g), or (h)(1), as ap-
plicable, the taxpayer must account for the
asset in a single asset account beginning
in the taxable year in which the general
asset account treatment for the asset ter-
minates. If a taxpayer accounts for an
asset in a multiple asset account or a pool
and the taxpayer disposes of the asset, the
taxpayer must account for the asset in a
single asset account beginning in the tax-
able year in which the disposition occurs.
See § 1.168(i)-8(h)(2)(i). If a taxpayer
disposes of a portion of an asset and
§ 1.168(i)-8(d)(1) applies to that disposi-
tion, the taxpayer must account for the
disposed portion in a single asset account
beginning in the taxable year in which the
disposition occurs. See § 1.168(i)-
8(h)(3)(i).

(c) * * *

(2) * * *

(ii) * * *

(H) Mass assets (as defined in
§ 1.168(i)-8(b)(3)) that are or will be
subject to § 1.168(i)-8(g)(2)(iii) (dis-
posed of or converted mass asset is iden-
tified by a mortality dispersion table) must
be grouped into a separate multiple asset
account or pool.

* * * * *

(e) Effective/applicability dates-(1)
In general. This section applies to taxable
years beginning on or after January 1,
2014.

(2) Early application of this section. A
taxpayer may choose to apply the provi-
sions of this section to taxable years be-
ginning on or after January 1, 2012.

(3) Early application of regulation
project REG-110732-13. A taxpayer may
rely on the provisions of this section in
regulation project REG-110732-13
(2013-43 IRB 404) (see § 601.601(d)(2)
of this chapter) for taxable years begin-
ning on or after January 1, 2012. How-
ever, a taxpayer may not rely on the pro-
visions of this section in regulation project
REG-110732-13 for taxable years begin-
ning on or after January 1, 2014.

(4) Optional application of TD 9564. A
taxpayer may choose to apply
§ 1.168(i)-7T as contained in 26 CFR part
1 edition revised as of April 1, 2013, to
taxable years beginning on or after Janu-
ary 1, 2012. However, a taxpayer may not
apply § 1.168(i)-7T as contained in 26
CFR part 1 edition revised as of April 1,

2013, to taxable years beginning on or
after January 1, 2014.

(5) Change in method of accounting. A
change to comply with this section for
depreciable assets placed in service in a
taxable year ending on or after December
30, 2003, is a change in method of ac-
counting to which the provisions of sec-
tion 446(e) and the regulations under sec-
tion 446(e) apply. A taxpayer also may
treat a change to comply with this section
for depreciable assets placed in service in
a taxable year ending before December
30, 2003, as a change in method of ac-
counting to which the provisions of sec-
tion 446(e) and the regulations under sec-
tion 446(e) apply.

Par. 8. Section 1.168(i)-8 is added to
read as follows:

§ 1.168(i)-8 Dispositions of MACRS
property.

(a) Scope. This section provides rules
applicable to dispositions of MACRS
property (as defined in § 1.168(b)-1(a)(2))
or to depreciable property (as defined in
§ 1.168(b)-1(a)(1)) that would be
MACRS property but for an election
made by the taxpayer either to expense all
or some of the property's cost under sec-
tion 179, section 179A, section 179B, sec-
tion 179C, section 179D, or section
1400I(a)(1), or any similar provision, or to
amortize all or some of the property's cost
under section 1400I(a)(2) or any similar
provision. This section also applies to dis-
positions described in paragraph (d)(1) of
this section of a portion of such property.
Except as provided in § 1.168(i)-1(e)(3),
this section does not apply to dispositions
of assets included in a general asset ac-
count. For rules applicable to dispositions
of assets included in a general asset ac-
count, see § 1.168(i)-1(e).

(b) Definitions. For purposes of this
section-

(1) Building has the same meaning as
that term is defined in § 1.48-1(e)(1).

(2) Disposition occurs when ownership
of the asset is transferred or when the
asset is permanently withdrawn from use
either in the taxpayer's trade or business
or in the production of income. A dispo-
sition includes the sale, exchange, retire-
ment, physical abandonment, or destruc-
tion of an asset. A disposition also occurs

when an asset is transferred to a supplies,
scrap, or similar account, or when a por-
tion of an asset is disposed of as described
in paragraph (d)(1) of this section. If a
structural component, or a portion thereof,
of a building is disposed of in a disposi-
tion described in paragraph (d)(1) of this
section, a disposition also includes the
disposition of such structural component
or such portion thereof.

(3) Mass assets is a mass or group of
individual items of depreciable assets-

(i) That are not necessarily homoge-
nous;

(ii) Each of which is minor in value
relative to the total value of the mass or
group;

(iii) Numerous in quantity;

(iv) Usually accounted for only on a
total dollar or quantity basis;

(v) With respect to which separate
identification is impracticable; and

(vi) Placed in service in the same tax-
able year.

(4) Portion of an asset is any part of an
asset that is less than the entire asset as
determined under paragraph (c)(4) of this
section.

(5) Structural component has the same
meaning as that term is defined in § 1.48-
1(e)(2).

(6) Unadjusted depreciable basis of the
multiple asset account or pool is the sum
of the unadjusted depreciable bases (as
defined in § 1.168(b)-1(a)(3)) of all assets
included in the multiple asset account or
pool.

(c) Special rules-(1) Manner of dis-
position. The manner of disposition (for
example, normal retirement, abnormal re-
tirement, ordinary retirement, or extraor-
dinary retirement) is not taken into ac-
count in determining whether a disposition
occurs or gain or loss is recognized.

(2) Disposition by transfer to a sup-
plies account. If a taxpayer made an elec-
tion under § 1.162-3(d) to treat the cost of
any rotable spare part, temporary spare
part, or standby emergency spare part (as
defined in § 1.162-3(c)) as a capital ex-
penditure subject to the allowance for de-
preciation, the taxpayer can dispose of the
rotable, temporary, or standby emergency
spare part by transferring it to a supplies
account only if the taxpayer has obtained
the consent of the Commissioner to re-
voke the § 1.162-3(d) election. If a tax-

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payer made an election under § 1.162-
3T(d) to treat the cost of any material and
supply (as defined in § 1.162-3T(c)(1)) as
a capital expenditure subject to the allow-
ance for depreciation, the taxpayer can
dispose of the material and supply by
transferring it to a supplies account only if
the taxpayer has obtained the consent of
the Commissioner to revoke the § 1.162-
3T(d) election. See § 1.162-3(d)(3) for
the procedures for revoking a § 1.162-
3(d) or a § 1.162-3T(d) election.

(3) Leasehold improvements. This sec-
tion also applies to-

(i) A lessor of leased property that
made an improvement to that property for
the lessee of the property, has a deprecia-
ble basis in the improvement, and dis-
poses of the improvement, or disposes of
a portion of the improvement under para-
graph (d)(1) of this section, before or upon
the termination of the lease with the les-
see. See section 168(i)(8)(B); and

(ii) A lessee of leased property that
made an improvement to that property,
has a depreciable basis in the improve-
ment, and disposes of the improvement, or
disposes of a portion of the improvement
under paragraph (d)(1) of this section, be-
fore or upon the termination of the lease.

(4) Determination of asset disposed
of- (i) General rules. For purposes of ap-
plying this section, the facts and circum-
stances of each disposition are considered
in determining what is the appropriate as-
set disposed of. The asset for disposition
purposes may not consist of items placed
in service by the taxpayer on different
dates, without taking into account the ap-
plicable convention. For purposes of de-
termining what is the appropriate asset
disposed of, the unit of property determi-
nation under § 1.263(a)-3(e) or in pub-
lished guidance in the Internal Revenue
Bulletin (see § 601.601(d)(2) of this chap-
ter) under section 263(a) does not apply.

(ii) Special rules. In addition to the
general rules in paragraph (c)(4)(i) of this
section, the following rules apply for pur-
poses of applying this section:

(A) Each building, including its struc-
tural components, is the asset, except as
provided in § 1.1250-1(a)(2)(ii) or in
paragraph (c)(4)(ii)(B) or (D) of this sec-
tion.

(B) If a building has two or more con-
dominium or cooperative units, each con-

dominium or cooperative unit, including
its structural components, is the asset, ex-
cept as provided in § 1.1250-1(a)(2)(ii) or
in paragraph (c)(4)(ii)(D) of this section.

(C) If a taxpayer properly includes an
item in one of the asset classes 00.11
through 00.4 of Rev. Proc. 87-56 (1987-2
CB 674) (see § 601.601(d)(2) of this chap-
ter) or properly classifies an item in one of
the categories under section 168(e)(3), ex-
cept for a category that includes buildings
or structural components (for example, re-
tail motor fuels outlet, qualified leasehold
improvement property, qualified restau-
rant property, and qualified retail im-
provement property), each item is the as-
set provided paragraph (c)(4)(ii)(D) of
this section does not apply to the item. For
example, each desk is the asset, each com-
puter is the asset, and each qualified smart
electric meter is the asset.

(D) If the taxpayer places in service an
improvement or addition to an asset after
the taxpayer placed the asset in service,
the improvement or addition and, if appli-
cable, its structural components are a sep-
arate asset.

(d) Disposition of a portion of an as-
set-(1) In general. For purposes of ap-
plying this section, a disposition includes
a disposition of a portion of an asset as a
result of a casualty event described in
section 165, a disposition of a portion of
an asset for which gain, determined with-
out regard to section 1245 or section 1250,
is not recognized in whole or in part under
section 1031 or section 1033, a transfer of
a portion of an asset in a transaction de-
scribed in section 168(i)(7)(B), or a sale of
a portion of an asset, even if the taxpayer
does not make the election under para-
graph (d)(2)(i) of this section for that dis-
posed portion. For other transactions, a
disposition includes a disposition of a por-
tion of an asset only if the taxpayer makes
the election under paragraph (d)(2)(i) of
this section for that disposed portion.

(2) Partial disposition election-(i) In
general. A taxpayer may make an election
under this paragraph (d)(2) to apply this
section to a disposition of a portion of an
asset. If the asset is properly included in
one of the asset classes 00.11 through 00.4
of Rev. Proc. 87-56, a taxpayer may make
an election under this paragraph (d)(2) to
apply this section to a disposition of a
portion of such asset only if the taxpayer

classifies the replacement portion of the
asset under the same asset class as the
disposed portion of the asset.

(ii) Time and manner for making elec-
tion-(A) Time for making election. Ex-
cept as provided in paragraph (d)(2)(iii) or
(iv) of this section, a taxpayer must make
the election specified in paragraph
(d)(2)(i) of this section by the due date,
including extensions, of the original Fed-
eral tax return for the taxable year in
which the portion of an asset is disposed
of by the taxpayer.

(B) Manner of making election. Except
as provided in paragraph (d)(2)(iii) or (iv)
of this section, a taxpayer must make the
election specified in paragraph (d)(2)(i) of
this section by applying the provisions of
this section for the taxable year in which
the portion of an asset is disposed of by
the taxpayer, by reporting the gain, loss,
or other deduction on the taxpayer's
timely filed, including extensions, original
Federal tax return for that taxable year,
and, if the asset is properly included in
one of the asset classes 00.11 through 00.4
of Rev. Proc. 87-56, by classifying the
replacement portion of such asset under
the same asset class as the disposed por-
tion of the asset in the taxable year in
which the replacement portion is placed in
service by the taxpayer. Except as pro-
vided in paragraph (d)(2)(iii) or (iv)(B) of
this section or except as otherwise ex-
pressly provided by other guidance pub-
lished in the Internal Revenue Bulletin
(see § 601.601(d)(2) of this chapter), the
election specified in paragraph (d)(2)(i) of
this section may not be made through the
filing of an application for change in ac-
counting method.

(iii) Special rule for subsequent Inter-
nal Revenue Service adjustment. This
paragraph (d)(2)(iii) applies when a tax-
payer deducted the amount paid or in-
curred for the replacement of a portion of
an asset as a repair under § 1.162-4, the
taxpayer did not make the election speci-
fied in paragraph (d)(2)(i) of this section
for the disposed portion of that asset
within the time and in the manner under
paragraph (d)(2)(ii) or (iv) of this section,
and as a result of an examination of the
taxpayer's Federal tax return, the Internal
Revenue Service disallows the taxpayer's
repair deduction for the amount paid or
incurred for the replacement of the portion

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of that asset and instead capitalizes such
amount under § 1.263(a)-2 or § 1.263(a)-3.
If this paragraph (d)(2)(iii) applies, the
taxpayer may make the election specified
in paragraph (d)(2)(i) of this section for
the disposition of the portion of the asset
to which the Internal Revenue Service's
adjustment pertains by filing an applica-
tion for change in accounting method,
provided the asset of which the disposed
portion was a part is owned by the tax-
payer at the beginning of the year of
change (as defined for purposes of section
446(e)).

(iv) Special rules for 2012 or 2013
returns. If, under paragraph (j)(2) of this
section, a taxpayer chooses to apply the
provisions of this section to a taxable year
beginning on or after January 1, 2012, and
ending on or before September 19, 2013
(applicable taxable year), and the taxpayer
did not make the election specified in
paragraph (d)(2)(i) of this section on its
timely filed original Federal tax return for
the applicable taxable year, including ex-
tensions, the taxpayer must make the elec-
tion specified in paragraph (d)(2)(i) of this
section for the applicable taxable year by
filing either-

(A) An amended Federal tax return for
the applicable taxable year on or before
180 days from the due date including ex-
tensions of the taxpayer's Federal tax re-
turn for the applicable taxable year, not-
withstanding that the taxpayer may not
have extended the due date; or

(B) An application for change in ac-
counting method with the taxpayer's
timely filed original Federal tax return for
the first or second taxable year succeeding
the applicable taxable year.

(v) Revocation. A taxpayer may revoke
the election specified in paragraph
(d)(2)(i) of this section only by filing a
request for a private letter ruling and ob-
taining the Commissioner's consent to re-
voke the election. The Commissioner may
grant a request to revoke this election if
the taxpayer acted reasonably and in good
faith, and the revocation will not prejudice
the interests of the Government. See gen-
erally § 301.9100-3 of this chapter. The
election specified in paragraph (d)(2)(i) of
this section may not be revoked through
the filing of an application for change in
accounting method.

(e) Gain or loss on dispositions. Solely
for purposes of this paragraph (e), the
term asset is an asset within the scope of
this section or the portion of such asset
that is disposed of in a disposition de-
scribed in paragraph (d)(1) of this section.
Except as provided by section 280B and
§ 1.280B-1, the following rules apply
when an asset is disposed of during a
taxable year:

(1) If an asset is disposed of by sale,
exchange, or involuntary conversion, gain
or loss must be recognized under the ap-
plicable provisions of the Internal Reve-
nue Code.

(2) If an asset is disposed of by phys-
ical abandonment, loss must be recog-
nized in the amount of the adjusted depre-
ciable basis (as defined in § 1.168(b)-
1(a)(4)) of the asset at the time of the
abandonment, taking into account the ap-
plicable convention. However, if the
abandoned asset is subject to nonrecourse
indebtedness, paragraph (e)(1) of this sec-
tion applies to the asset instead of this
paragraph (e)(2). For a loss from physical
abandonment to qualify for recognition
under this paragraph (e)(2), the taxpayer
must intend to discard the asset irrevoca-
bly so that the taxpayer will neither use
the asset again nor retrieve it for sale,
exchange, or other disposition.

(3) If an asset is disposed of other than
by sale, exchange, involuntary conver-
sion, physical abandonment, or conver-
sion to personal use (as, for example,
when the asset is transferred to a supplies
or scrap account), gain is not recognized.
Loss must be recognized in the amount of
the excess of the adjusted depreciable ba-
sis of the asset at the time of the disposi-
tion, taking into account the applicable
convention, over the asset's fair market
value at the time of the disposition, taking
into account the applicable convention.

(f) Basis of asset disposed of- (1) In
general. The adjusted basis of an asset
disposed of for computing gain or loss is
its adjusted depreciable basis at the time
of the asset's disposition, as determined
under the applicable convention for the
asset.

(2) Assets disposed of are in multiple
asset accounts. (i) If the taxpayer accounts
for the asset disposed of in a multiple
asset account or pool and it is impractica-
ble from the taxpayer's records to deter-

mine the unadjusted depreciable basis (as
defined in § 1.168(b)-1(a)(3)) of the asset
disposed of, the taxpayer may use any
reasonable method that is consistently ap-
plied to all assets in the same multiple
asset account or pool for purposes of de-
termining the unadjusted depreciable ba-
sis of assets disposed of. Examples of a
reasonable method include, but are not
limited to, the following:

(A) If the replacement asset is a resto-
ration (as defined in § 1.263(a)-3(k)), and
is not a betterment (as defined in
§ 1.263(a)-3(j)) or an adaptation to a new
or different use (as defined in § 1.263(a)-
3(l)), discounting the cost of the replace-
ment asset to its placed-in-service year
cost using the Producer Price Index for
Finished Goods or its successor, the Pro-
ducer Price Index for Final Demand, or
any other index designated by guidance in
the Internal Revenue Bulletin (see
§ 601.601(d)(2) of this chapter) for pur-
poses of this paragraph (f)(2);

(B) A pro rata allocation of the unad-
justed depreciable basis of the multiple
asset account or pool based on the re-
placement cost of the disposed asset and
the replacement cost of all of the assets in
the multiple asset account or pool; and

(C) A study allocating the cost of the
asset to its individual components.

(ii) To determine the adjusted depre-
ciable basis of an asset disposed of in a
multiple asset account or pool, the depre-
ciation allowed or allowable for the asset
disposed of is computed by using the de-
preciation method, recovery period, and
convention applicable to the multiple as-
set account or pool in which the asset
disposed of was included and by including
the additional first year depreciation de-
duction claimed for the asset disposed of.

(3) Disposition of a portion of an asset.
(i) This paragraph (f)(3) applies only
when a taxpayer disposes of a portion of
an asset and paragraph (d)(1) of this sec-
tion applies to that disposition. For com-
puting gain or loss, the adjusted basis of
the disposed portion of the asset is the
adjusted depreciable basis of that disposed
portion at the time of its disposition, as
determined under the applicable conven-
tion for the asset. If it is impracticable
from the taxpayer's records to determine
the unadjusted depreciable basis (as de-
fined in § 1.168(b)-1(a)(3)) of the dis-

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posed portion of the asset, the taxpayer
may use any reasonable method for pur-
poses of determining the unadjusted de-
preciable basis (as defined in § 1.168(b)-
1(a)(3)) of the disposed portion of the
asset. If a taxpayer disposes of more than
one portion of the same asset and it is
impracticable from the taxpayer's records
to determine the unadjusted depreciable
basis (as defined in § 1.168(b)-1(a)(3)) of
the first disposed portion of the asset, the
reasonable method used by the taxpayer
must be consistently applied to all por-
tions of the same asset for purposes of
determining the unadjusted depreciable
basis of each disposed portion of the asset.
If the asset, a portion of which is disposed
of, is in a multiple asset account or pool
and it is impracticable from the taxpayer's
records to determine the unadjusted de-
preciable basis (as defined in § 1.168(b)-
1(a)(3)) of the disposed portion of the
asset, the reasonable method used by the
taxpayer must be consistently applied to
all assets in the same multiple asset ac-
count or pool for purposes of determining
the unadjusted depreciable basis of assets
disposed of or any disposed portion of the
assets. Examples of a reasonable method
include, but are not limited to, the follow-
ing:

(A) If the replacement portion is a res-
toration (as defined in § 1.263(a)-3(k)),
and is not a betterment (as defined in
§ 1.263(a)-3(j)) or an adaptation to a new
or different use (as defined in § 1.263(a)-
3(l)), discounting the cost of the replace-
ment portion of the asset to its placed-in-
service year cost using the Producer Price
Index for Finished Goods or its successor,
the Producer Price Index for Final De-
mand, or any other index designated by
guidance in the Internal Revenue Bulletin
(see § 601.601(d)(2) of this chapter) for
purposes of this paragraph (f)(3);

(B) A pro rata allocation of the unad-
justed depreciable basis of the asset based
on the replacement cost of the disposed
portion of the asset and the replacement
cost of the asset; and

(C) A study allocating the cost of the
asset to its individual components.

(ii) To determine the adjusted depre-
ciable basis of the disposed portion of the
asset, the depreciation allowed or allow-
able for the disposed portion is computed
by using the depreciation method, recov-

ery period, and convention applicable to
the asset in which the disposed portion
was included and by including the portion
of the additional first year depreciation
deduction claimed for the asset that is
attributable to the disposed portion.

(g) Identification of asset disposed of --
(1) In general. Except as provided in para-
graph (g)(2) or (3) of this section, a tax-
payer must use the specific identification
method of accounting to identify which
asset is disposed of by the taxpayer. Under
this method of accounting, the taxpayer
can determine the particular taxable year
in which the asset disposed of was placed
in service by the taxpayer.

(2) Asset disposed of is in a multiple
asset account. If a taxpayer accounts for
the asset disposed of in a multiple asset
account or pool and the total dispositions
of assets with the same recovery period
during the taxable year are readily deter-
mined from the taxpayer's records, but it
is impracticable from the taxpayer's re-
cords to determine the particular taxable
year in which the asset disposed of was
placed in service by the taxpayer, the tax-
payer must identify the asset disposed of
by using-

(i) A first-in, first-out method of ac-
counting if the unadjusted depreciable ba-
sis of the asset disposed of cannot be
readily determined from the taxpayer's re-
cords. Under this method of accounting,
the taxpayer identifies the multiple asset
account or pool with the earliest placed-
in-service year that has the same recovery
period as the asset disposed of and that
has assets at the beginning of the taxable
year of the disposition, and the taxpayer
treats the asset disposed of as being from
that multiple asset account or pool;

(ii) A modified first-in, first-out method
of accounting if the unadjusted deprecia-
ble basis of the asset disposed of can be
readily determined from the taxpayer's re-
cords. Under this method of accounting,
the taxpayer identifies the multiple asset
account or pool with the earliest placed-
in-service year that has the same recovery
period as the asset disposed of and that
has assets at the beginning of the taxable
year of the disposition with the same un-
adjusted depreciable basis as the asset dis-
posed of, and the taxpayer treats the asset
disposed of as being from that multiple
asset account or pool;

(iii) A mortality dispersion table if the
asset disposed of is a mass asset. The
mortality dispersion table must be based
upon an acceptable sampling of the tax-
payer's actual disposition experience for
mass assets or other acceptable statistical
or engineering techniques. To use a mor-
tality dispersion table, the taxpayer must
adopt recordkeeping practices consistent
with the taxpayer's prior practices and
consonant with good accounting and en-
gineering practices; or

(iv) Any other method as the Secretary
may designate by publication in the Fed-
eral Register or in the Internal Revenue
Bulletin (see § 601.601(d)(2) of this chap-
ter) on or after September 19, 2013. See
paragraph (g)(4) of this section regarding
the last-in, first-out method of accounting.

(3) Disposition of a portion of an asset.
If a taxpayer disposes of a portion of an
asset and paragraph (d)(1) of this section
applies to that disposition, but it is imprac-
ticable from the taxpayer's records to de-
termine the particular taxable year in
which the asset was placed in service, the
taxpayer must identify the asset by using
any applicable method provided in para-
graph (g)(2) of this section, after taking
into account paragraph (g)(4) of this sec-
tion.

(4) Last-in, first-out method of ac-
counting. For purposes of this paragraph
(g), a last-in, first-out method of account-
ing may not be used. Examples of a last-
in, first-out method of accounting include
the taxpayer identifying the multiple asset
account or pool with the most recent
placed-in-service year that has the same
recovery period as the asset disposed of
and that has assets at the beginning of the
taxable year of the disposition, and the
taxpayer treating the asset disposed of as
being from that multiple asset account or
pool, or the taxpayer treating the disposed
portion of an asset as being from an asset
with the most recent placed-in-service
year that is the same as the asset of which
the disposed portion is a part.

(h) Accounting for asset disposed of-
(1) Depreciation ends. Depreciation ends
for an asset at the time of the asset's
disposition, as determined under the ap-
plicable convention for the asset. See
§ 1.167(a)-10(b). If the asset disposed of
is in a single asset account initially or as a
result of § 1.168(i)-8(h)(2)(i), § 1.168(i)-

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8(h)(3)(i), or general asset account treat-
ment for the asset terminated under
§ 1.168(i)-1(c)(1)(ii)(A), (e)(3)(iii),
(e)(3)(v), (e)(3)(vii), (g), or (h)(1), as ap-
plicable, the single asset account termi-
nates at the time of the asset's disposition,
as determined under the applicable con-
vention for the asset. If a taxpayer dis-
poses of a portion of an asset and para-
graph (d)(1) of this section applies to that
disposition, depreciation ends for that dis-
posed portion of the asset at the time of
the disposition of the disposed portion, as
determined under the applicable conven-
tion for the asset.

(2) Asset disposed of in a multiple asset
account or pool. If the taxpayer accounts
for the asset disposed of in a multiple
asset account or pool, then-

(i) As of the first day of the taxable
year in which the disposition occurs, the
asset disposed of is removed from the
multiple asset account or pool and is
placed into a single asset account. See
§ 1.168(i)-7(b);

(ii) The unadjusted depreciable basis of
the multiple asset account or pool must be
reduced by the unadjusted depreciable ba-
sis of the asset disposed of as of the first
day of the taxable year in which the dis-
position occurs. See paragraph (f)(2)(i) of
this section for determining the unad-
justed depreciable basis of the asset dis-
posed of;

(iii) The depreciation reserve of the
multiple asset account or pool must be
reduced by the depreciation allowed or
allowable for the asset disposed of as of
the end of the taxable year immediately
preceding the year of disposition, com-
puted by using the depreciation method,
recovery period, and convention applica-
ble to the multiple asset account or pool in
which the asset disposed of was included
and by including the additional first year
depreciation deduction claimed for the as-
set disposed of; and

(iv) In determining the adjusted depre-
ciable basis of the asset disposed of at the
time of disposition, taking into account
the applicable convention, the deprecia-
tion allowed or allowable for the asset
disposed of is computed by using the de-
preciation method, recovery period, and
convention applicable to the multiple as-
set account or pool in which the asset
disposed of was included and by including

the additional first year depreciation de-
duction claimed for the asset disposed of.

(3) Disposition of a portion of an asset.
This paragraph (h)(3) applies only when a
taxpayer disposes of a portion of an asset
and paragraph (d)(1) of this section ap-
plies to that disposition. In this case-

(i) As of the first day of the taxable
year in which the disposition occurs, the
disposed portion is placed into a single
asset account. See § 1.168(i)-7(b);

(ii) The unadjusted depreciable basis of
the asset must be reduced by the unad-
justed depreciable basis of the disposed
portion as of the first day of the taxable
year in which the disposition occurs. See
paragraph (f)(3)(i) of this section for de-
termining the unadjusted depreciable ba-
sis of the disposed portion;

(iii) The depreciation reserve of the
asset must be reduced by the depreciation
allowed or allowable for the disposed por-
tion as of the end of the taxable year
immediately preceding the year of dispo-
sition, computed by using the depreciation
method, recovery period, and convention
applicable to the asset in which the dis-
posed portion was included and by includ-
ing the portion of the additional first year
depreciation deduction claimed for the as-
set that is attributable to the disposed por-
tion; and

(iv) In determining the adjusted depre-
ciable basis of the disposed portion at the
time of disposition, taking into account
the applicable convention, the deprecia-
tion allowed or allowable for the disposed
portion is computed by using the depreci-
ation method, recovery period, and con-
vention applicable to the asset in which
the disposed portion was included and by
including the portion of the additional first
year depreciation deduction claimed for
the asset that is attributable to the dis-
posed portion.

(i) Examples. The application of this
section is illustrated by the following ex-
amples:

Example 1. A owns an office building with
four elevators. A replaces one of the elevators.
The elevator is a structural component of the
office building. In accordance with paragraph
(c)(4)(ii)(A) of this section, the office building,
including its structural components, is the asset
for disposition purposes. A does not make the
partial disposition election provided under para-
graph (d)(2) of this section for the elevator. Thus,
the retirement of the replaced elevator is not a
disposition. As a result, depreciation continues

for the cost of the building, including the cost of
the retired elevator and the building's other
structural components, and A does not recognize
a loss for this retired elevator. If A must capitalize
the amount paid for the replacement elevator
pursuant to § 1.263(a)-3, the replacement eleva-
tor is a separate asset for disposition purposes
pursuant to paragraph (c)(4)(ii)(D) of this section
and for depreciation purposes pursuant to section
168(i)(6).

Example 2. The facts are the same as in Ex-
ample 1, except A accounts for each structural
component of the office building as a separate
asset in its fixed asset system. Although A treats
each structural component as a separate asset in
its records, the office building, including its struc-
tural components, is the asset for disposition pur-
poses in accordance with paragraph (c)(4)(ii)(A)
of this section. Accordingly, the result is the same
as in Example 1.

Example 3. The facts are the same as in Ex-
ample 1, except A makes the partial disposition
election provided under paragraph (d)(2) of this
section for the elevator. Although the office build-
ing, including its structural components, is the
asset for disposition purposes, the result of A
making the partial disposition election for the
elevator is that the retirement of the replaced
elevator is a disposition. Thus, depreciation for
the retired elevator ceases at the time of its re-
tirement, taking into account the applicable con-
vention, and A recognizes a loss upon this retire-
ment. Further, A must capitalize the amount paid
for the replacement elevator pursuant to
§ 1.263(a)-3(k)(1)(i), and the replacement eleva-
tor is a separate asset for disposition purposes
pursuant to paragraph (c)(4)(ii)(D) of this section
and for depreciation purposes pursuant to section
168(i)(6).

Example 4. B, a calendar-year commercial
airline company, owns several aircraft that are
used in the commercial carrying of passengers
and described in asset class 45.0 of Rev. Proc.
87-56. B replaces the existing engines on one of
the aircraft with new engines. Assume each air-
craft is a unit of property as determined under
§ 1.263(a)-3(e)(3) and each engine of an aircraft is
a major component or substantial structural part
of the aircraft as determined under § 1.263(a)-
3(k)(6). Assume also that B treats each aircraft as
the asset for disposition purposes in accordance
with paragraph (c)(4) of this section. B makes the
partial disposition election provided under para-
graph (d)(2) of this section for the engines in the
aircraft. Although the aircraft is the asset for
disposition purposes, the result of B making the
partial disposition election for the engines is that
the retirement of the replaced engines is a dispo-
sition. Thus, depreciation for the retired engines
ceases at the time of their retirement, taking into
account the applicable convention, and B recog-
nizes a loss upon this retirement. Further, B must
capitalize the amount paid for the replacement
engines pursuant to § 1.263(a)-3(k)(1)(i), and the
replacement engines are a separate asset for dis-
position purposes pursuant to paragraph
(c)(4)(ii)(D) of this section and for depreciation
purposes pursuant to section 168(i)(6).

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Example 5. The facts are the same as in Ex-
ample 4, except B does not make the partial dis-
position election provided under paragraph (d)(2)
of this section for the engines. Thus, the retire-
ment of the replaced engines on one of the air-
craft is not a disposition. As a result, depreciation
continues for the cost of the aircraft, including the
cost of the retired engines, and B does not recog-
nize a loss for these retired engines. If B must
capitalize the amount paid for the replacement
engines pursuant to § 1.263(a)-3, the replacement
engines are a separate asset for disposition pur-
poses pursuant to paragraph (c)(4)(ii)(D) of this
section and for depreciation purposes pursuant to
section 168(i)(6).

Example 6. C, a corporation, owns several
trucks that are used in its trade or business and
described in asset class 00.241 of Rev. Proc. 87-
56. C replaces the engine on one of the trucks with
a new engine. Assume each truck is a unit of
property as determined under § 1.263(a)-3(e)(3)
and each engine is a major component or sub-
stantial structural part of the truck as determined
under § 1.263(a)-3(k)(6). Because the trucks are
described in asset class 00.241 of Rev. Proc. 87-
56, C must treat each truck as the asset for dis-
position purposes. C does not make the partial
disposition election provided under paragraph
(d)(2) of this section for the engine. Thus, the
retirement of the replaced engine on the truck is
not a disposition. As a result, depreciation con-
tinues for the cost of the truck, including the cost
of the retired engine, and C does not recognize a
loss for this retired engine. If C must capitalize
the amount paid for the replacement engine pur-
suant to § 1.263(a)-3, the replacement engine is a
separate asset for disposition purposes pursuant
to paragraph (c)(4)(ii)(D) of this section and for
depreciation purposes pursuant to section
168(i)(6).

Example 7. D owns a retail building. D re-
places 60% of the roof of this building. In accor-
dance with paragraph (c)(4)(ii)(A) of this section,
the retail building, including its structural com-
ponents, is the asset for disposition purposes. As-
sume D must capitalize the costs incurred for
replacing 60% of the roof pursuant to § 1.263(a)-
3(k)(1)(vi). D makes the partial disposition elec-
tion provided under paragraph (d)(2) of this sec-
tion for the 60% of the replaced roof. Thus, the
retirement of 60% of the roof is a disposition. As
a result, depreciation for 60% of the roof ceases
at the time of its retirement, taking into account
the applicable convention, and D recognizes a loss
upon this retirement. Further, D must capitalize
the amount paid for the 60% of the roof pursuant
to § 1.263(a)-3(k)(1)(i) and (vi) and the replace-
ment 60% of the roof is a separate asset for
disposition purposes pursuant to paragraph
(c)(4)(ii)(D) of this section and for depreciation
purposes pursuant to section 168(i)(6).

Example 8. (i) The facts are the same as in
Example 7. Ten years after replacing 60% of the
roof, D replaces 55% of the roof of the building.
In accordance with paragraph (c)(4)(ii)(A) and
(D) of this section, for disposition purposes, the
retail building, including its structural compo-
nents, except the replacement 60% of the roof, is

an asset and the replacement 60% of the roof is a
separate asset. Assume D must capitalize the costs
incurred for replacing 55% of the roof pursuant
to § 1.263(a)-3(k)(1)(vi). D makes the partial dis-
position election provided under paragraph (d)(2)
of this section for the 55% of the replaced roof.
Thus, the retirement of 55% of the roof is a
disposition.

(ii) However, D cannot determine from its
records whether the replaced 55% is part of the
60% of the roof replaced ten years ago or
whether the replaced 55% includes part or all of
the remaining 40% of the original roof. Pursuant
to paragraph (g)(3) of this section, D identifies
which asset it disposed of by using the first-in,
first-out method of accounting. As a result, D
disposed of the remaining 40% of the original
roof and 25% of the 60% of the roof replaced ten
years ago.

(iii) Thus, depreciation for the remaining 40%
of the original roof ceases at the time of its retire-
ment, taking into account the applicable conven-
tion, and D recognizes a loss upon this retirement.
Further, depreciation for 25% of the 60% of the
roof replaced ten years ago ceases at the time of
its retirement, taking into account the applicable
convention, and D recognizes a loss upon this
retirement. Also, D must capitalize the amount
paid for the 55% of the roof pursuant to
§ 1.263(a)-3(k)(1)(i) and (vi), and the replacement
55% of the roof is a separate asset for disposition
purposes pursuant to paragraph (c)(4)(ii)(D) of
this section and for depreciation purposes pursu-
ant to section 168(i)(6).

Example 9. (i) On July 1, 2011, E, a calendar-
year taxpayer, purchased and placed in service an
existing multi-story office building that costs
$20,000,000. The cost of each structural compo-
nent of the building was not separately stated. E
accounts for the building and its structural com-
ponents in its tax and financial accounting re-
cords as a single asset with a cost of $20,000,000.
E depreciates the building as nonresidential real
property and uses the optional depreciation table
that corresponds with the general depreciation
system, the straight-line method, a 39-year recov-
ery period, and the mid-month convention. As of
January 1, 2014, the depreciation reserve for the
building is $1,261,000.

(ii) On June 30, 2014, E replaces one of the
two elevators in the office building. E did not
dispose of any other structural components of this
building in 2014 and prior years. E makes the
partial disposition election provided under para-
graph (d)(2) of this section for this elevator. Al-
though the office building, including its structural
components, is the asset for disposition purposes,
the result of E making the partial disposition
election for the elevator is that the retirement of
the replaced elevator is a disposition. Assume the
replacement elevator is a restoration under
§ 1.263(a)-3(k), and not a betterment under
§ 1.263(a)-3(j)) or an adaptation to a new or
different use under § 1.263(a)-3(I)). Because E
cannot identify the cost of the elevator from its
records and the replacement elevator is a resto-
ration under § 1.263(a)-3(k), E determines the
cost of the disposed elevator by discounting the

cost of the replacement elevator to its placed-in-
service year cost using the Producer Price Index
for Final Demand. Using this reasonable method,
E determines the cost of the retired elevator by
discounting the cost of the replacement elevator
to its cost in 2011 (the placed-in-service year)
using the Producer Price Index for Final De-
mand, resulting in $150,000 of the $20,000,000
purchase price for the building to be the cost of
the retired elevator. Using the optional deprecia-
tion table that corresponds with the general de-
preciation system, the straight-line method, a 39-
year recovery period, and the mid-month
convention, the depreciation allowed or allowable
for the retired elevator as of December 31, 2013,
is $9,458.

(iii) For E's 2014 Federal tax return, the loss
for the retired elevator is determined as follows.
The depreciation allowed or allowable for 2014
for the retired elevator is $1,763 ((unadjusted
depreciable basis of $150,000 x depreciation rate
of 2.564% for 2014) x 5.5/12 months). Thus, the
adjusted depreciable basis of the retired elevator
is $138,779 (the adjusted depreciable basis of
$140,542 removed from the building cost less the
depreciation allowed or allowable of $1,763 for
2014). As a result, E recognizes a loss of $138,779
for the retired elevator in 2014.

(iv) For E's 2014 Federal tax return, the de-
preciation allowance for the building is computed
as follows. As of January 1, 2014, the unadjusted
depreciable basis of the building is reduced from
$20,000,000 to $19,850,000 ($20,000,000 less the
unadjusted depreciable basis of $150,000 for the
retired elevator), and the depreciation reserve of
the building is reduced from $1,261,000 to
$1,251,542 ($1,261,000 less the depreciation al-
lowed or allowable of $9,458 for the retired ele-
vator as of December 31, 2013). Consequently, the
depreciation allowance for the building for 2014
is $508,954 ($19,850,000 x depreciation rate of
2.564% for 2014).

(v) E also must capitalize the amount paid for
the replacement elevator pursuant to § 1.263(a)-
3(k)(1). The replacement elevator is a separate
asset for disposition purposes pursuant to para-
graph (c)(4)(ii)(D) of this section and for depre-
ciation purposes pursuant to section 168(i)(6).

Example 10. (i) Since 2005, F, a calendar year
taxpayer, has accounted for items of MACRS
property that are mass assets in pools. Each pool
includes only the mass assets that have the same
depreciation method, recovery period, and con-
vention, and are placed in service by F in the
same taxable year. None of the pools are general
asset accounts under section 168(i)(4) and the
regulations under section 168(i)(4). F identifies
any dispositions of these mass assets by specific
identification.

(ii) During 2014, F sells 10 items of mass assets
with a 5-year recovery period each for $100. Un-
der the specific identification method, F identifies
these mass assets as being from the pool estab-
lished by F in 2012 for mass assets with a 5-year
recovery period. Assume F depreciates this pool
using the optional depreciation table that corre-
sponds with the general depreciation system, the
200-percent declining balance method, a 5-year

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recovery period, and the half-year convention. F
elected not to deduct the additional first year
depreciation provided by section 168(k) for
5-year property placed in service during 2012. As
of January 1, 2014, this pool contains 100 similar
items of mass assets with a total cost of $25,000
and a total depreciation reserve of $13,000. Be-
cause all the items of mass assets in the pool are
similar, F allocates the cost and depreciation al-
lowed or allowable for the pool ratably among
each item in the pool. This allocation is a reason-
able method because all the items of mass assets
in the pool are similar. Using this reasonable
method, F allocates a cost of $250 ($25,000 x
(1/100)) to each disposed of mass asset and depre-
ciation allowed or allowable of $130 ($13,000 x
(1/100)) to each disposed of mass asset. The de-
preciation allowed or allowable in 2014 for each
disposed of mass asset is $24 (($250 × 19.2%) /2).
As a result, the adjusted depreciable basis of each
disposed of mass asset under section 1011 is $96
($250-$130-$24). Thus, F recognizes a gain of
$4 for each disposed of mass asset in 2014, which
is subject to section 1245.

(iii) Further, as of January 1, 2014, the unad-
justed depreciable basis of the 2012 pool of mass
assets with a 5-year recovery period is reduced
from $25,000 to $22,500 ($25,000 less the unad-
justed depreciable basis of $2,500 for the 10 dis-
posed of items), and the depreciation reserve of
this 2012 pool is reduced from $13,000 to $11,700
($13,000 less the depreciation allowed or allow-
able of $1,300 for the 10 disposed of items as of
December 31, 2013). Consequently, as of January
1, 2014, the 2012 pool of mass assets with a 5-year
recovery period has 90 items with a total cost of
$22,500 and a depreciation reserve of $11,700.
Thus, the depreciation allowance for this pool for
2014 is $4,320 ($22,500 x 19.2%).

Example 11. (i) The facts are the same as in
Example 10. Because of changes in F's record-
keeping in 2015, it is impracticable for F to con-
tinue to identify disposed of mass assets using
specific identification and to determine the unad-
justed depreciable basis of the disposed of mass
assets. As a result, F files a Form 3115, Applica-
tion for Change in Accounting Method, to change
to a first-in, first-out method beginning with the
taxable year beginning on January 1, 2015, on a
modified cut-off basis. See § 1.446-
1(e)(2)(ii)(d)(2)(vii). Under the first-in, first-out
method, the mass assets disposed of in a taxable
year are deemed to be from the pool with the
earliest placed-in-service year that has assets as of
the beginning of the taxable year of the disposi-
tion with the same recovery period as the asset
disposed of. The Commissioner of Internal Rev-
enue consents to this change in method of ac-
counting.

(ii) During 2015, F sells 20 items of mass assets
with a 5-year recovery period each for $50. As of
January 1, 2015, the 2008 pool is the pool with the
earliest placed-in-service year for mass assets
with a 5-year recovery period, and this pool con-
tains 25 items of mass assets with a total cost of
$10,000 and a total depreciation reserve of
$10,000. Thus, F allocates a cost of $400 ($10,000
x (1/25)) to each disposed of mass asset and

depreciation allowed or allowable of $400 to each
disposed of mass asset. As a result, the adjusted
depreciable basis of each disposed of mass asset is
$0. Thus, F recognizes a gain of $50 for each
disposed of mass asset in 2015, which is subject to
section 1245.

(iii) Further, as of January 1, 2015, the unad-
justed depreciable basis of the 2008 pool of mass
assets with a 5-year recovery period is reduced
from $10,000 to $2,000 ($10,000 less the unad-
justed depreciable basis of $8,000 for the 20 dis-
posed of items ($400 × 20)), and the depreciation
reserve of this 2008 pool is reduced from $10,000
to $2,000 ($10,000 less the depreciation allowed or
allowable of $8,000 for the 20 disposed of items as
of December 31, 2014). Consequently, as of Jan-
uary 1, 2015, the 2008 pool of mass assets with a
5-year recovery period has 5 items with a total
cost of $2,000 and a depreciation reserve of
$2,000.

(j) Effective/applicability dates-(1) In
general. This section applies to taxable
years beginning on or after January 1,
2014.

(2) Early application of this section. A
taxpayer may choose to apply the provi-
sions of this section to taxable years be-
ginning on or after January 1, 2012.

(3) Early application of regulation
project REG-110732-13. A taxpayer may
rely on the provisions of this section in
regulation project REG-110732-13
(2013-43 IRB 404) (see § 601.601(d)(2)
of this chapter) for taxable years begin-
ning on or after January 1, 2012. How-
ever, a taxpayer may not rely on the pro-
visions of this section in regulation project
REG-110732-13 for taxable years begin-
ning on or after January 1, 2014.

(4) Optional application of TD 9564. A
taxpayer may choose to apply
§ 1.168(i)-8T as contained in 26 CFR
part 1 edition revised as of April 1, 2014,
to taxable years beginning on or after Jan-
uary 1, 2012. However, a taxpayer may
not apply § 1.168(i)-8T as contained in
26 CFR part 1 edition revised as of April
1, 2014, to taxable years beginning on or
after January 1, 2014.

(5) Change in method of accounting. A
change to comply with this section for
depreciable assets placed in service in a
taxable year ending on or after December
30, 2003, is a change in method of ac-
counting to which the provisions of sec-
tion 446(e) and the regulations under sec-
tion 446(e) apply. A taxpayer also may
treat a change to comply with this section
for depreciable assets placed in service in
a taxable year ending before December

30, 2003, as a change in method of ac-
counting to which the provisions of sec-
tion 446(e) and the regulations under sec-
tion 446(e) apply. This paragraph (j)(5)
does not apply to a change to comply with
paragraph (d)(2) of this section, except as
provided in paragraph (d)(2)(iii) or (iv)(B)
of this section or otherwise provided by
other guidance published in the Internal
Revenue Bulletin (see § 601.601(d)(2) of
this chapter).

## § 1.168(i)-8T [Removed]

Par. 9. Section 1.168(i)-8T is re-
moved.

## § 1.263(a)-3 [Amended]

Par. 10. Section 1.263(a)-3 is amended
by:

a. In paragraphs (g)(2)(i), (g)(2)(ii) Ex-
ample 2, and (g)(2)(ii) Example 4, remov-
ing the language "Prop. Reg. § 1.168(i)-
8(d) (September 19, 2013)" and adding
the language "§ 1.168(i)-8(d)" in its
place.

b. In paragraph (g)(2)(i), removing the
language "§ 1.168(i)-1T(e)(3) nor Prop.
Reg. § 1.168(i)-1(e)(3) (September 19,
2013)" and adding the language
"§ 1.168(i)-1(e)(3)" in its place, and re-
moving the language "Prop. Reg.
§ 1.168(i)-1(e)(2)(ix) (September 19,
2013)" and adding the language
"§ 1.168(i)-1(e)(1)(ii)" in its place.

c. In paragraphs (g)(2)(ii) and (g)(2)(ii)
Example 1, removing the language "Prop.
Reg. § 1.168(i)-1(e) (September 19,
2013), or Prop. Reg. § 1.168(i)-8 (Sep-
tember 19, 2013)" and adding the lan-
guage "§ 1.168(i)-1(e) or § 1.168(i)-8" in
its place.

d. In paragraph (k)(7) Example 30, re-
moving the language "Prop. Reg.
§ 1.168(i)-8" and adding the language
"§ 1.168(i)-8" in its place, and removing
the language "Prop. Reg. § 1.168(i)-
8(c)(4)(ii)(A) (September 19, 2013)" and
adding the language "§ 1.168(i)-
8(c)(4)(ii)(A)" in its place.

e. In paragraph (k)(7) Example 30 and
Example 31, removing the language
"Prop. Reg. § 1.168(i)-8(d)(2) (Septem-
ber 19, 2013)," and adding the language
"§ 1.168(i)-8(d)(2)" in its place.

f. In paragraph (k)(7) Example 31, re-
moving the language "Prop. Reg.

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§ 1.68(i)-8(c)(4)(ii)(D) (September 19,
2013)" and adding the language
"§ 1.168(i)-8(c)(4)(ii)(D)" in its place.
Par. 11. Section 1.1016-3 is amended
by revising the fourth sentence in para-
graph (a)(1)(ii) to read as follows:

§ 1.1016-3 Exhaustion, wear and tear,
obsolescence, amortization, and
depletion for periods since February 13,
1913.

(a) * * *

(1) * * *

(ii) * * * For rules governing losses on
retirement or disposition of depreciable
property, including rules for determining
basis, see § 1.167(a)-8, 1.168(i)-1(e), or
1.168(i)-8, as applicable. * * *

John Dalrymple,
Deputy Commissioner for Services and
Enforcement.

Approved: July 11, 2014.

Mark J. Mazur,
Assistant Secretary of the Treasury
(Tax Policy).

(Filed by the Office of the Federal Register on August 14,
2014, 11:15 a.m., and published in the issue of the Federal
Register for August 18, 2014, 79 F.R. 48661)

## Section 471 .- General rule for inventories

26 CFR 1.471-8: Inventories of retail merchants

T.D. 9688

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

## Retail Inventory Method

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-
nal regulations relating to the retail inven-
tory method of accounting. The regula-
tions restate and clarify the computation

of ending inventory values under the retail
inventory method and provide a special
rule for certain taxpayers that receive mar-
gin protection payments or vendor allow-
ances that are required to reduce only cost
of goods sold. The regulations affect tax-
payers that are retailers and use a retail
inventory method.

DATES: Effective Date: These regula-
tions are effective on August 15, 2014.

Applicability Date: For date of appli-
cability, see § 1.471-8(f).

FOR FURTHER INFORMATION
CONTACT: Christopher Call, (202) 317-
7007 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

### Background

This document contains final regula-
tions that amend the Income Tax Regula-
tions (26 CFR part 1) relating to the retail
inventory method of accounting under
§ 1.471-8 of the Income Tax Regulations.
On October 7, 2011, a notice of proposed
rulemaking (REG-125949-10) was pub-
lished in the Federal Register (76 FR
62327). A public hearing was not re-
quested or held. No comments were re-
ceived during the comment period. Three
comments were received after the end of
the comment period and were considered,
as discussed later in this preamble. The
proposed regulations are adopted as
amended by this Treasury decision.

#### Summary of Comments and Explanation of Revisions

Section 471 of the Internal Revenue
Code provides that a taxpayer's method of
accounting for inventories must clearly
reflect income. Section 1.471-2(c) pro-
vides that the bases of inventory valuation
most commonly used and meeting the re-
quirements of section 471 are (1) cost and
(2) cost or market, whichever is lower
(LCM). Section 1.471-3 provides rules
for determining inventories at cost. Sec-
tion 1.471-4 provides rules for determin-
ing inventories at lower of cost or market.
Section 1.471-8 of the regulations con-
tains rules specific to retailers, allowing
them to approximate cost or LCM of the
goods in their ending inventory by using
the retail inventory method. Under the

retail inventory method, a taxpayer com-
putes the value of ending inventory by
multiplying a cost complement by the re-
tail selling prices of the goods on hand at
the end of the taxable year. The numerator
of the cost complement is the value of
beginning inventory plus the cost of pur-
chases during the taxable year, and the
denominator is the retail selling prices of
beginning inventory plus the initial retail
selling prices of purchases. For taxpayers
using the retail inventory method to value
inventories at cost (retail cost method), the
denominator of the cost complement is
adjusted for all permanent markups and
markdowns. Taxpayers using the retail in-
ventory method to value inventories at
LCM (retail LCM method) generally do
not make adjustments to the denominator
for markdowns.

The proposed regulations provided that
a taxpayer using the retail LCM method
may not reduce the numerator of the cost
complement by the amount of an allow-
ance, discount, or price rebate that is re-
lated to or intended to compensate for a
permanent reduction in the taxpayer's re-
tail selling price of inventory, often called
a margin protection payment or a mark-
down allowance. The proposed regula-
tions also provided that a taxpayer using
the retail inventory method (whether valu-
ing inventories at LCM or at cost) may not
reduce the numerator of the cost comple-
ment by the amount of a sales-based ven-
dor allowance.

Commenters suggested that taxpayers
using the retail LCM method to value
inventories should reduce the numerator
of the cost complement for all vendor
allowances and discounts, including mar-
gin protection payments and sales-based
vendor allowances (but should not be re-
quired to reduce the denominator by the
related price reduction), because all allow-
ances and discounts reduce the cost of
inventory and allow retailers to achieve
their margin goals. The commenters as-
serted that if the numerator of the cost
complement is not reduced for margin
protection payments and sales-based ven-
dor allowances, taxpayers' income will
not be clearly reflected, the economics of
the underlying business transaction will
be ignored, and small retailers would be
adversely affected. The commenters sug-
gested that small retailers have less bar-

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gaining power than large retailers and are
less able to negotiate purchase-based dis-
counts from vendors.

The final regulations do not adopt these
comments. A margin protection payment,
unlike other types of allowances, is inher-
ently related to a markdown that will be
reflected in the retail selling prices of the
items remaining in ending inventory.
When a taxpayer using retail LCM re-
duces the numerator of the cost comple-
ment by the amount of a margin protec-
tion payment without reducing the
denominator by the amount of the corre-
sponding markdown, ending inventory
value does not clearly reflect income, and
does not reflect the economics of the un-
derlying transaction. Taxpayers using the
retail cost method to value inventories, as
opposed to retail LCM, are allowed to
reduce the numerator of the cost comple-
ment by the amount of a margin protec-
tion payment because these taxpayers also
reduce the denominator of the cost com-
plement by the amount of a related mark-
down, maintaining the relationship be-
tween cost and retail price.

With regard to sales-based vendor al-
lowances, the final regulations adopt, with
a modification, the proposed rule that the
numerator of the cost complement is not
reduced for sales-based vendor allow-
ances. Proposed regulations under
§ 1.471-3(e) provided that sales-based
vendor allowances (the amount of an al-
lowance, discount, or price rebate that a
taxpayer earns by selling specific mer-
chandise) reduce cost of goods sold and
do not reduce ending inventory value. Be-
cause the retail inventory method pro-
duces an ending inventory value and
sales-based vendor allowances could not
be allocated to ending inventory, the pro-
posed regulations under § 1.471-8 pro-
vided that sales-based vendor allowances
do not reduce the numerator of the cost
complement. The final regulations under
§ 1.471-3(e) (TD 9652, 79 FR 2094) ap-
ply specifically to only one type of sales-
based vendor allowance, a sales-based
vendor chargeback, and reserve rules for
other types of sales-based vendor allow-
ances. To conform to this modification,
these final regulations under § 1.471-8
provide that sales-based vendor allow-
ances that are required to reduce only cost
of goods sold under § 1.471-3(e) do not

reduce the numerator of the cost comple-
ment. This rule will apply only to sales-
based vendor chargebacks until further
guidance is issued under § 1.471-3(e).

Commenters also requested that the fi-
nal regulations allow retail LCM taxpay-
ers to reduce the numerator of the cost
complement by margin protection pay-
ments and sales-based vendor allowances
because requiring taxpayers to track mar-
gin protection payments and sales-based
vendor allowances separately from other
types of allowances would create burden-
some recordkeeping requirements. This
comment is not adopted because, as dis-
cussed earlier in this preamble, allowing a
retail LCM taxpayer to reduce the numer-
ator of the cost complement by the
amount of a margin protection payment
without reducing the denominator by the
amount of the corresponding markdown
would not clearly reflect income and
would not reflect the economics of the
underlying transaction. Nonetheless, as
discussed later in this preamble, to ease
taxpayers' compliance burden, the final
regulations provide alternative methods
and procedures for computing the cost
complement for retail LCM taxpayers.

The preamble to the proposed regula-
tions requested comments on an alterna-
tive method for retail LCM taxpayers to
account for margin protection payments
when computing the cost complement.
The method described in that preamble
would have permitted retail LCM taxpay-
ers to reduce the numerator of the cost
complement for all non-sales-based al-
lowances, discounts, or price rebates, in-
cluding margin protection payments or
markdown allowances, and also would
have required a reduction of the denomina-
tor of the cost complement for permanent
markdowns to which the margin protection
payments or markdown allowances relate
(related markdowns). Although comment-
ers did not address this proposal explic-
itly, they stated that in some cases, based
on the nature of their business dealings
with vendors and the variety of allow-
ances offered, taxpayers have difficulty
distinguishing between the different types
of vendor allowances their vendors pro-
vide. For example, commenters contend
that it might be difficult for a taxpayer to
distinguish the amount of a margin pro-
tection payment or markdown allowance

received from a vendor from the amounts
of other types of allowances received
from that vendor, thus making it difficult
to determine the amount by which they
were required to reduce the numerator of
the cost complement under the proposed
regulations.

The final regulations address these
comments and ease taxpayers' compli-
ance with the regulations by allowing re-
tail LCM taxpayers to use a method sim-
ilar to the method described in the
preamble to the proposed regulations that
does not require taxpayers to distinguish
the amounts of margin protection pay-
ments from the amounts of other vendor
allowances (except for vendor allowances
required to be allocated to cost of goods
sold under § 1.471-3(e)). Under the alter-
native method provided in the final regu-
lations, retail LCM taxpayers reduce the
numerator for margin protection payments
and must quantify and reduce the denom-
inator for the related markdowns. This
alternative method results in a reduction
of the numerator of the cost complement
by all vendor allowances other than those
required to reduce cost of goods sold un-
der § 1.471-3(e). This alternative method
accordingly reduces the compliance bur-
den for taxpayers that cannot distinguish
margin protection payments from other
allowances, but that can identify the mark-
downs related to those margin protection
payments.

Commenters also stated that some ac-
counting systems cannot sufficiently track
the related markdowns. Accordingly, a
second alternative provided in the final
regulations allows taxpayers that are able
to determine the amount of their margin
protection payments to reduce the numer-
ator of the cost complement for the mar-
gin protection payments and adjust the
denominator by the amount that, in con-
junction with the reduction of the numer-
ator, maintains what would have been the
cost complement percentage before taking
into account the margin protection pay-
ments and related markdowns. This sec-
ond alternative method assumes that a
margin protection payment maintains the
taxpayer's profit margin after a related
markdown in retail selling price. Thus, if
before taking into account the margin pro-
tection payment and the related mark-
down the cost complement is 50 percent

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($10/$20), and the taxpayer receives a
margin protection payment of $2, the tax-
payer must reduce the denominator by $4
to maintain a cost complement of 50 per-
cent ($8/$16) under this second alterna-
tive method.

A retail LCM taxpayer must use one of
these three methods (the general method
and the two alternative methods) for com-
puting all of its cost complements. A
change from one to another of these meth-
ods is a change in method of accounting.

The final regulations further facilitate
identifying margin protection payments
and related markdowns by allowing retail
LCM taxpayers to use statistical sampling
in accordance with Rev. Proc. 2011-42
(2011-37 IRB 318), see § 601.601(d), in
conjunction with any of the three meth-
ods. A retail LCM taxpayer using statisti-
cal sampling must use it for all margin
protection payments and related mark-
downs associated with the inventory items
valued by a particular cost complement.
However, a retail LCM taxpayer that cal-
culates more than one cost complement is
not required to use statistical sampling for
all cost complements. A change from us-
ing to not using statistical sampling, or
from not using to using statistical sam-
pling, to identify margin protection pay-
ments and related markdowns is not a
change in method of accounting.

The proposed regulations provided that
a taxpayer may apply the retail inventory
method to a department, a class of goods,
or a stock-keeping unit. A commenter
suggested that the final regulations specify
that a taxpayer may use the retail inven-
tory method to value ending inventory for
a sub-class of goods, style of goods, or
other similar category of goods to avoid
the implication that the scope of the retail
inventory method is limited to those
groupings specifically identified in the
proposed regulations. The categories sug-
gested by the commenter are already en-
compassed by the terms department, class
of goods, or stock-keeping unit. Accord-
ingly, the final regulations do not adopt
this comment.

A commenter suggested that the final
regulations should allow taxpayers to cal-
culate their cost complements using a
measurement period shorter than the en-
tire taxable year and should clarify
whether beginning inventory may or must

be eliminated from the cost complement
of a last-in, first-out (LIFO) taxpayer us-
ing the retail inventory method. These is-
sues were not addressed in the proposed
regulations and therefore are not ad-
dressed in the final regulations. However,
the final regulations do not reflect a
change in established administrative prac-
tice regarding whether LIFO taxpayers us-
ing the retail inventory method may ex-
clude beginning inventory from the cost
complement.

## Effective/Applicability Date

These regulations apply to taxable
years beginning after December 31, 2014.
For taxable years beginning before Janu-
ary 1, 2015, see § 1.471-8 as contained in
26 CFR part 1, revised April 1, 2014.

## Special Analyses

This Treasury decision is not a signif-
icant regulatory action as defined in Ex-
ecutive Order 12866, as supplemented by
Executive Order 13563. Therefore, a reg-
ulatory assessment is not required. Section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these regulations and, because the regula-
tions do not impose a collection of infor-
mation on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, the notice of
proposed rulemaking that preceded these
final regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business. No com-
ments were received from the Small Busi-
ness Administration.

### Drafting Information

The principal author of these regula-
tions is Natasha M. Mulleneaux of the
Office of Associate Chief Counsel (In-
come Tax and Accounting). However,
other personnel from the IRS and the
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 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * *

Par. 2. Section 1.471-8 is revised to
read as follows:

### § 1.471-8 Inventories of retail merchants.

(a) In general. A taxpayer that is a
retail merchant may use the retail inven-
tory method of accounting described in
this section. The retail inventory method
uses a formula to convert the retail selling
price of ending inventory to an approxi-
mation of cost (retail cost method) or an
approximation of lower of cost or market
(retail LCM method). A taxpayer may use
the retail inventory method instead of
valuing inventory at cost under § 1.471-3
or lower of cost or market under
§ 1.471-4.

(b) Computation-(1) In general. A
taxpayer computes the value of ending
inventory under the retail inventory
method by multiplying a cost complement
by the retail selling prices of the goods on
hand at the end of the taxable year.

(2) Cost complement-(i) In general.
The cost complement is a ratio computed
as follows:

(A) The numerator is the value of be-
ginning inventory plus the cost (as deter-
mined under § 1.471-3, except as other-
wise provided in this section) of goods
purchased during the taxable year.

(B) The denominator is the retail sell-
ing prices of beginning inventory plus the
retail selling prices of goods purchased
during the year (that is, the bona fide retail
selling prices of the items at the time
acquired), adjusted for all permanent
markups and markdowns, including
markup and markdown cancellations and
corrections. The denominator is not ad-
justed for temporary markups or mark-
downs.

(ii) Vendor allowances required to re-
duce only cost of goods sold. A taxpayer
may not reduce the numerator of the cost

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complement by the amount of an allow-
ance, discount, or price rebate that is re-
quired under § 1.471-3(e) to reduce only
cost of goods sold.

(3) Additional rules for cost comple-
ment for retail LCM method-(i) In gen-
eral-(A) Margin protection payments. A
taxpayer using the retail LCM method
may not reduce the numerator of the cost
complement by the amount of an allow-
ance, discount, or price rebate that is re-
lated to or intended to compensate for a
permanent reduction in the taxpayer's re-
tail selling price of inventory (a margin
protection payment).

(B) Markdowns. A taxpayer using the
retail LCM method does not adjust the
denominator of the cost complement for
markdowns (and markdown cancellations
or corrections). Markups must be reduced
by the markdowns made to cancel or cor-
rect them.

(ii) Alternative methods for computing
cost complement-(A) In general. In lieu
of the method described in paragraph
(b)(3)(i) of this section, a taxpayer using
the retail LCM method may compute the
cost complement using one of the alterna-
tive methods described in this paragraph
(b)(3)(ii). A taxpayer using an alternative
method under this paragraph (b)(3)(ii)
must use that method for all cost comple-
ments.

(B) Adjust numerator and denomina-
tor. A taxpayer using the retail LCM
method may reduce the numerator of the
cost complement by the amount of all
margin protection payments if the tax-
payer also reduces the denominator of the
cost complement by the amount of the
permanent reduction in retail selling price
to which the margin protection payments
relate (related markdowns).

(C) Deemed adjustment to denomina-
tor. A taxpayer using the retail LCM
method that is able to determine the
amount of all margin protection payments
but cannot determine the amount of the
related markdowns may reduce the nu-
merator of the cost complement by the
amount of all margin protection payments
if the taxpayer also reduces the denomi-
nator by the amount that, in conjunction
with the reduction of the numerator for the
margin protection payments, maintains
what would have been the cost comple-
ment percentage before taking into ac-

count the margin protection payment and
the related markdown. A taxpayer that
can determine the amount of a related
markdown but not the associated margin
protection payments may not use this
method to compute an adjustment to the
numerator.

(iii) Statistical sampling. A taxpayer
using the retail LCM method may use
statistical sampling in accordance with
Rev. Proc. 2011-42 or any successor (see
§ 601.601(d) of this chapter), in conjunc-
tion with any method of computing the
cost complement described in this para-
graph (b)(3), to determine the amount of
margin protection payments and related
markdowns. A taxpayer using statistical
sampling must use it for all margin pro-
tection payments and related markdowns
associated with the inventory items valued
by a particular cost complement, but is not
required to use it for every cost comple-
ment.

(4) Ending inventory retail selling
prices. A taxpayer must include all per-
manent markups and markdowns but may
not include temporary markups or mark-
downs in determining the retail selling
prices of goods on hand at the end of the
taxable year. A taxpayer may not include
a markdown that is not an actual reduction
of retail selling price.

(c) Special rules for LIFO taxpayers. A
taxpayer using the last-in, first-out (LIFO)
inventory method with the retail inventory
method uses the retail cost method. See
§ 1.472-1(k) for additional adjustments
for a taxpayer using the LIFO inventory
method with the retail cost method.

(d) Scope of retail inventory method. A
taxpayer may use the retail inventory
method to value ending inventory for a
department, a class of goods, or a stock-
keeping unit. A taxpayer maintaining
more than one department or dealing in
classes of goods with different percent-
ages of gross profit must compute cost
complements separately for each depart-
ment or class of goods.

(e) Examples. The following examples
illustrate the rules of this section:

Example 1. (i) R, a retail merchant who uses
the retail LCM method and uses a calendar tax-
able year, has no beginning inventory in 2012. R
purchases 40 tables during 2012 for $60 each for
a total of $2,400. R offers the tables for sale at
$100 each for an aggregate retail selling price of
$4,000. R does not sell any tables at a price of

$100, so R permanently marks down the retail
selling price of its tables to $90 each. As a result
of the $10 markdown, R's supplier provides R a
$6 per table margin protection payment. R sells
25 tables during 2012 and has 15 tables in ending
inventory at the end of 2012.

(ii) Under paragraph (b)(2)(i)(A) of this sec-
tion, the numerator of the cost complement is the
aggregate cost of the tables, $2,400. Under para-
graph (b)(3)(i)(A) of this section, R may not re-
duce the numerator of the cost complement by
the amount of the margin protection payment.
Under paragraph (b)(2)(i)(B) of this section, the
denominator of the cost complement is the aggre-
gate of the bona fide retail selling prices of all the
tables at the time acquired, $4,000. Under para-
graph (b)(3)(i)(B) of this section, R does not ad-
just the denominator of the cost complement for
the markdown. Therefore, R's cost complement is
$2,400/$4,000, or 60%.

(iii) Under paragraph (b)(4) of this section,
R includes the permanent markdown in deter-
mining year-end retail selling prices. Therefore,
the aggregate retail selling price of R's ending
table inventory is $1,350 (15 * $90). Approxi-
mating LCM under the retail method, the value
of R's ending table inventory is $810 (60% *
$1,350).

Example 2. (i) The facts are the same as in
Example 1, except that R permanently reduces
the retail selling price of all 40 tables to $50 per
unit and the 15 tables on hand at the end of the
year are marked for sale at that price. The addi-
tional $40 markdown is unrelated to a margin
protection payment or other allowance.

(ii) Under paragraph (b)(3)(i)(B) of this sec-
tion, R does not adjust the denominator of the
cost complement for the markdown. Therefore,
R's cost complement is $2,400/$4,000, or 60%.

(iii) Under paragraph (b)(4) of this section, R
includes the permanent markdowns in determin-
ing year-end retail selling prices. Therefore, the
aggregate retail selling price of R's ending inven-
tory is $750 (15 * $50). Approximating LCM
under the retail method, the value of R's ending
inventory is $450 (60% * $750).

Example 3. (i) The facts are the same as in
Example 1, except that R computes the cost com-
plement using the alternative method under para-
graph (b)(3)(ii)(B) of this section.

(ii) R reduces the numerator of the cost com-
plement by the margin protection payments of
$240 ($6 * 40) and reduces the denominator of the
cost complement by the related markdowns of
$400 ($10 * 40). Therefore, R's cost complement
is $2,160/$3,600, or 60%.

(iii) Under paragraph (b)(4) of this section, R
includes the permanent markdown in determin-
ing year-end retail selling prices. Therefore, the
aggregate retail selling price of R's ending table
inventory is $1,350 (15 * $90). Approximating
LCM under the retail method, the value of R's
ending table inventory is $810 (60% * $1,350).

Example 4. (i) The facts are the same as in
Example 1, except that R cannot determine the
amount of its related markdowns and computes
the cost complement using the alternative method
under paragraph (b)(3)(ii)(C) of this section.

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(ii) R reduces the numerator of the cost com-
plement by the margin protection payments of
$240 ($6 * 40). R reduces the denominator of the
cost complement by the amount that, in conjunc-
tion with the reduction in the numerator, main-
tains the cost complement percentage before tak-
ing into account the margin protection payments
and the related markdowns. R's original cost
complement was 60% ($2,400/$4,000). The nu-
merator of R's new cost complement is $2,160
($2,400 - $240). Therefore, R reduces the denom-
inator by $400, which maintains the cost comple-
ment of 60% ($2,160/$3,600).

(iii) Under paragraph (b)(4) of this section, R
includes the permanent markdowns in determin-
ing year-end retail selling prices. Therefore, the
aggregate retail selling price of R's ending table
inventory is $1,350 (15 * $90). Approximating
LCM under the retail method, the value of R's
ending table inventory is $810 (60% * $1,350).

Example 5. (i) The facts are the same as in
Example 1, except that R uses the LIFO inventory
method. R must value inventories at cost and,
under paragraph (c) of this section, uses the retail
cost method.

(ii) Under paragraph (b)(2)(i)(A) of this sec-
tion, R reduces the numerator of the cost comple-
ment by the amount of the margin protection
payment. Under paragraph (b)(2)(i)(B) of this
section, R includes the permanent markdown in
the denominator of the cost complement. There-
fore, R's cost complement is $2,160/$3,600, or
60%.

(iii) Under paragraph (b)(4) of this section, R
includes the permanent markdown in determin-
ing year-end retail selling prices. Therefore, the
aggregate retail selling price of R's ending inven-
tory is $1,350 (15 * $90). Approximating cost
under the retail method, the value of R's ending
inventory is $810 (60% * $1,350).

(f) Effective/applicability date. This
section applies to taxable years beginning
after December 31, 2014. For taxable
years beginning before January 1, 2015,
see § 1.471-8 as contained in 26 CFR part
1, revised April 1, 2014.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: July 30, 2014

Mark J. Mazur,
Assistant Secretary of the Treasury
(Tax Policy).

(Filed by the Office of the Federal Register on August 14,
2014, 8:45 a.m., and published in the issue of the Federal
Register for August 15, 2014, 79 F.R. 48034)

Section 7623 .- Expenses
of detection of
underpayments and fraud,
etc.

26 CFR 301.7623-1: Rewards and awards for infor-
mation relating to violations of internal revenue
laws

T.D. 9687

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301

## Awards for Information Relating to Detecting Underpayments of Tax or Violations of the Internal Revenue Laws

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: These regulations provide
comprehensive guidance for the award
program authorized under Internal Reve-
nue Code (Code) section 7623. The regu-
lations provide guidance on submitting in-
formation regarding underpayments of tax
or violations of the internal revenue laws
and filing claims for award, as well as on
the administrative proceedings applicable
to claims for award under section 7623.
The regulations also provide guidance on
the determination and payment of awards,
and provide definitions of key terms used
in section 7623. Finally, the regulations
confirm that the Director, officers, and
employees of the Whistleblower Office
are authorized to disclose return informa-
tion to the extent necessary to conduct
whistleblower administrative proceed-
ings. The regulations provide needed
guidance to the general public as well as
officers and employees of the IRS who
review claims under section 7623.

DATES: Effective Date: These regula-
tions are effective on August 12, 2014.

Applicability
Date:
Sections
301.7623-1, 301.7623-2, 301.7623-3,
and 301.6103(h)(4)-1 apply to informa-
tion submitted on or after August 12,

2014, and to claims for award under sec-
tions 7623(a) and 7623(b) that are open as
of August 12, 2014. Section 301.7623-4
applies to information submitted on or
after August 12, 2014, and to claims for
award under section 7623(b) that are open
as of August 12, 2014.

FOR FURTHER INFORMATION
CONTACT: Melissa A. Jarboe at (202)
317-5437 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

### Background

Section 406 of the Tax Relief and
Health Care Act of 2006 (the 2006 Act),
Public Law 109-432 (120 Stat. 2922),
enacted on December 20, 2006, amended
section 7623 of the Code regarding the
payment of awards to certain persons who
provide information to the IRS relating to
the detection of underpayments of tax or
the detection and bringing to trial and
punishment persons guilty of violating the
internal revenue laws or conniving at the
same. In this preamble, the Treasury De-
partment (Treasury) and the IRS use the
phrase "underpayments of tax and viola-
tions of the internal revenue laws" as a
shorthand reference for the range of civil
and criminal matters to which information
and, in turn, awards may relate under the
statute. Section 406 redesignated the ex-
isting statutory authority to pay awards at
the discretion of the Secretary of the Trea-
sury as section 7623(a), and it added a
new provision regarding awards to certain
individuals as section 7623(b). Generally,
section 7623(b) provides that qualifying
whistleblowers will receive an award of at
least 15 percent, but not more than 30
percent, of the collected proceeds result-
ing from the action with which the Secre-
tary proceeded based on the information
provided to the IRS by the whistleblower.
In off-Code provisions, section 406 also
addressed several award program admin-
istrative issues and established a Whistle-
blower Office within the IRS, which oper-
ates at the direction of the Commissioner, to
analyze information received under sec-
tion 7623, assign the investigation to the
appropriate IRS office, and determine the
amount of the award under section
7623(b).

In Notice 2008-4, 2008-1 CB 253 (Jan-
uary 14, 2008) (see § 601.601(d)(2)(ii)(b)),

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Treasury and the IRS provided guidance
on filing claims for award under section
7623. In the notice, Treasury and the IRS
recognized that the award program autho-
rized by section 7623(a) had been previ-
ously implemented through regulations
appearing at § 301.7623-1 of the Proce-
dure and Administration Regulations. The
Internal Revenue Manual (IRM) provided
additional guidance to IRS officers and
employees on the award program autho-
rized by section 7623(a). The notice pro-
vided that the IRS would generally con-
tinue to follow § 301.7623-1 and the IRM
provisions for claims for award within the
scope of section 7623(a), subject to cer-
tain exceptions listed in the notice. The
notice also provided, however, that the
regulations would not apply to the new
award program authorized under section
7623(b). Instead, the notice provided in-
terim guidance applicable to claims for
award submitted under section 7623(b).

On March 25, 2008, Treasury and the
IRS published Temp. Treas. Reg.
§ 301.6103(n)-2T, and corresponding
proposed regulations, describing the cir-
cumstances and process in and by which
officers and employees of the Treasury
may disclose return information to
whistleblowers (and their legal represen-
tatives, if any) in connection with written
contracts for services relating to the de-
tection of violations of the internal reve-
nue laws or related statutes. Whistleblow-
ers and legal representatives that receive
return information pursuant to these reg-
ulations are subject to the civil and crim-
inal penalty provisions of sections 7431,
7213, and 7213A for the unauthorized in-
spection or disclosure of return informa-
tion. Treasury and the IRS finalized the
proposed regulations on March 15, 2011
(the 2011 regulations).

In December 2008, the IRS revised
IRM Part 25.2.2, updating policies and
procedures concerning the handling of in-
formation, processing of claims for
awards, and payment of awards under sec-
tion 7623. The IRS also redelegated the
authority to approve section 7623(a)
awards to the Director of the Whistle-
blower Office, thereby promoting consis-
tency across the full range of award deci-
sions. Delegation Order 25-07 (Rev.1)
(2008). In July 2010, the IRS further re-
vised IRM Part 25.2.2 to provide detailed

instructions to IRS officials and employ-
ees on the computation and payment of
awards under section 7623 and to describe
the administrative procedures applicable
to claims for award under section 7623(b).
The revised IRM introduced many guid-
ance elements that are developed in these
regulations, including definitions of key
terms, the whistleblower administrative
proceedings, the fixed percentage award
framework and criteria for making award
determinations, and rules on handling
multiple and joint claimants.

On January 18, 2011, Treasury and the
IRS published proposed regulations (76
FR 2852) clarifying the definitions of the
terms proceeds of amounts collected and
collected proceeds for purposes of section
7623 and providing that the provisions of
existing § 301.7623-1(a), concerning re-
fund prevention claims, apply to claims
under both section 7623(a) and section
7623(b). The proposed regulations further
provided that the reduction of an overpay-
ment credit balance constitutes proceeds
of amounts collected and collected pro-
ceeds for purposes of section 7623. Trea-
sury and the IRS finalized the proposed
regulations on February 22, 2012 (the
2012 regulations).

On December 28, 2012, Treasury and
the IRS published proposed regulations in
the Federal Register (77 FR 74798) pro-
viding comprehensive guidance with re-
spect to section 7623 (the proposed regu-
lations). The proposed regulations
provided guidance on issues relating to
the award program under section 7623
from the filing of a claim to the payment
of an award, focusing on three major ele-
ments of the program: (i) the submission
of information and filing of claims for
award; (ii) the whistleblower administra-
tive proceedings applicable to claims for
award under section 7623; and (iii) the
computational determination and payment
of awards. The proposed regulations also
provided definitions of key terms under
section 7623 and confirmed that the Di-
rector, officers, and employees of the
Whistleblower Office are authorized to
disclose return information to the extent
necessary to conduct whistleblower ad-
ministrative proceedings. Treasury and
the IRS received 859 comments in re-
sponse to the proposed regulations. Com-
menters requested a public hearing, which

was held on April 10, 2013. At the hear-
ing, Treasury and the IRS received testi-
mony from eight commenters. After con-
sideration of the comments and hearing
testimony, Treasury and the IRS made
some modifications to the proposed regu-
lations, which are discussed in detail later
in this preamble. This Treasury decision
adopts the proposed regulations, as mod-
ified. These final regulations provide com-
prehensive guidance for the award pro-
gram authorized under section 7623.

## Summary of Comments and Explanation of Revisions

Over 70 percent of the 859 written
comments received were identical form
letters. These one-page letters expressed
support for the comments of Senator
Charles Grassley, which were set out in a
January 28, 2013, letter from Senator
Grassley to Acting Treasury Secretary
Neal Wolin, Acting IRS Commissioner
Steven Miller, and Assistant Secretary
(Tax Policy) Mark J. Mazur. Two other
comments incorporated Senator Grass-
ley's January 28, 2013, letter in its en-
tirety, and several comments offered gen-
eral support for Senator Grassley's views
on the IRS Whistleblower Program. In
addition to the comments referencing Sen-
ator Grassley's letter or views on the
Whistleblower Program, Treasury and the
IRS received several substantive com-
ments containing specific recommenda-
tions for the final regulations. Treasury
and the IRS also received over 30 nearly
identical comments expressing concern
that the proposed regulations restricted the
scope of the Whistleblower Program and
awards, prohibited whistleblowers from
collecting awards on technical grounds,
limited the size of whistleblower awards,
and failed to require the IRS to act on
whistleblower claims. The issues raised in
these comments are addressed in greater
detail in the discussion that follows.

Treasury and the IRS also received
over a hundred comments that referred
generally to a need to protect and support
whistleblowers and the IRS's Whistle-
blower Program. These comments offered
no further substantive discussion or spe-
cific recommendations with respect to the
regulations. Treasury and the IRS, how-
ever, considered the general message be-
hind these comments in considering

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whether changes should be made to the
proposed regulations. A few of the com-
ments received suggested that the Chief
Counsel, himself, should not be involved
in the process of finalizing the regulations
due to his professional experience prior to
becoming Chief Counsel. After consider-
ing these comments, Treasury and the IRS
found that the concerns expressed in the
comments were unfounded. Accordingly,
the Chief Counsel did not recuse himself
from the process. Finally, Treasury and
the IRS received a few comments that
were completely unrelated to the proposed
regulations and the IRS Whistleblower
Program. These unrelated comments were
outside the scope of the regulations and
therefore are not discussed further in this
preamble or these final regulations.

### Information Disclosures in Whistleblower Administrative Proceedings-§ 301.6103(h)(4)-1

Under section 6103(a), returns and re-
turn information are confidential, unless
an exception applies. Section 6103(h)(4)
authorizes the disclosure of returns and
return information in administrative or ju-
dicial proceedings pertaining to tax ad-
ministration in certain circumstances. A
whistleblower administrative proceeding
under section 7623 is an administrative
proceeding under section 6103(h)(4). Sec-
tion 301.6103(h)(4)-1 of the proposed
regulations specifically confirmed the au-
thority of the Director, officers, and em-
ployees of the Whistleblower Office to
disclose return information to the extent
necessary to conduct whistleblower ad-
ministrative proceedings. To minimize the
potentially adverse consequences of the
disclosure, and possible redisclosure, of
return information, the proposed regula-
tion provided that the Whistleblower Of-
fice will use confidentiality agreements in
section 7623(b) whistleblower award de-
termination administrative proceedings,
as well as other safeguards, while still
providing meaningful opportunities for
whistleblowers to participate in whistle-
blower administrative proceedings.

In general, the comments received
viewed these provisions favorably. One
commenter recommended that section
6103 and § 301.6103 be amended to per-
mit greater communication between the

IRS and whistleblowers. Treasury and the
IRS lack the authority to amend section
6103. Accordingly, the final regulations
do not adopt this comment. Instead, in the
proposed regulations, Treasury and the
IRS took steps to expand the opportunities
for communication between the IRS and
whistleblowers within the confines of the
IRS's existing authority under section
6103. For example, Treasury and the IRS
provided for whistleblower administrative
proceedings, in part, to increase the IRS's
ability to communicate with whistleblow-
ers. Some comments suggested that
whistleblower administrative proceedings
should begin earlier, and these comments
are more fully addressed in the discussion
of § 301.7623-3. Treasury and the IRS
determined that the proposed regulations
struck an appropriate balance among min-
imizing possible redisclosures of confi-
dential return information, providing
meaningful opportunities for claimants to
participate in the administrative process,
and placing an undue burden on the
Whistleblower Office. After consideration
of the comments, the proposed regulation
under section 6103 is adopted without
substantive change.

### Submitting Information and Filing Claims for Award-§ 301.7623-1

This final regulation provides guidance
on submitting information to the IRS and
filing claims for award with the Whistle-
blower Office. The regulation is intended
to clarify the process whistleblowers
should follow to be eligible to receive
awards under section 7623. The final reg-
ulation, in large part, tracks the rules that
Treasury and the IRS have previously pro-
vided, as set forth in the 2012 regulations,
the proposed regulations, Notice 2008-4,
and the IRM. The comments received and
any changes to proposed § 301.7623-1 are
discussed in the sections that follow.

Terminology for Individuals who Submit
Information and Claim an Award

Under section 7623(a), the Secretary
possesses the discretionary authority to
pay awards for information necessary to
detect underpayments of tax or violations
of the tax laws. Section 7623(b) further
requires the payment of awards to individ-

uals in certain circumstances. The pro-
posed regulations used both the term "in-
dividual" and the term "claimant" in
various respects. Generally, the terminol-
ogy in the proposed regulations was de-
signed to mimic the statute's use of the
term "individual(s)." One commenter sug-
gested that the final regulations should use
the term "claimant" throughout and elim-
inate all references to the term "individ-
ual." The final regulations recognize,
however, that not all individuals who sub-
mit information to the IRS regarding tax
non-compliance become award claimants.
To achieve consistency with Treas. Reg.
§ 301.6103(n)-2 and reduce any confu-
sion caused by the use of several terms,
Treasury and the IRS changed almost all
of the references to "individual" or
"claimant" to "whistleblower" in the final
regulations. In some instances, however,
the final regulations still use the term "in-
dividual" to mimic the statute. These
changes are not intended to be substantive
in nature.

### List of Ineligible Whistleblowers

Section 7623 does not specifically ex-
clude any whistleblower from filing a
claim for award, although awards under
section 7623(b) are limited to individuals.
Moreover, section 7623(b)(3) requires the
Whistleblower Office to deny an award to
a whistleblower convicted of a crime aris-
ing from the whistleblower's role in plan-
ning and initiating the actions that led to
the underpayment of tax or violations of
the internal revenue laws. The regulations
in effect under section 7623 at the time of
the 2006 amendments to the statute, how-
ever, restricted the eligibility of Federal
employees to file claims for award. The
2006 amendments to section 7623 did not
address, and thus did not seek to change,
the rule of Federal employee ineligibility.
In the proposed regulations, the IRS iden-
tified as ineligible certain categories of
individuals that would have access to re-
turn information of third parties by virtue
of their relationship with the Federal Gov-
ernment. These categories were identified
in Notice 2008-4, and their exclusion
was based upon the understanding that
such individuals have a pre-existing legal
or ethical obligation to disclose any vio-
lations of the internal revenue laws. For

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example, section 7214 of the Code re-
quires "[a]ny officer or employee of the
United States acting in connection with
any revenue law of the United States. . .
who, having knowledge or information of
the violation of any revenue law by any
person, or of fraud committed by any
person against the United States under
any revenue law. . . to report, in writing,
such knowledge or information to the
Secretary."

Treasury and the IRS received two
comments suggesting that the list of inel-
igible or excluded claimants included in
the proposed regulations was overbroad,
and one comment recommending that the
proposed regulations should be finalized
without change. One commenter sug-
gested that, with respect to State and local
government employees, only those that
have access to Federal tax return records
related to State and local taxpayers should
be ineligible. The other commenter sug-
gested that the only whistleblowers ex-
cluded from receiving awards under the
statute are those convicted of a crime for
planning and initiating, and thus the IRS
should not identify any ineligible whistle-
blowers. This commenter also expressed
concern that the exclusion of individuals
required to disclose (or to not disclose)
information under Federal law was too
vague and would discourage whistleblow-
ers from submitting information. Finally,
the commenter that suggested the pro-
posed regulations should be adopted with-
out change noted that individuals should
not be eligible to receive awards after
obtaining information in the course of
their employment as a Federal employee.

The final regulations address the con-
cerns raised by commenters that the cate-
gories of ineligible claimants in the pro-
posed regulations were too broad.
Treasury and the IRS agree with the com-
menters that the categories of ineligible
whistleblowers should be narrowly de-
fined. Accordingly, in finalizing the regu-
lations, Treasury and the IRS removed
State and local government employees
and members of a Federal or State body or
commission from the categories of ineli-
gible whistleblowers. Treasury and the
IRS determined that the final regulations
should continue to reflect the longstanding
statutory, regulatory, and contractual re-
quirements that Federal employees and

contractors have a duty to disclose infor-
mation and are prohibited from seeking an
award for the performance of such duty.
Similarly, under the final regulations, an
individual otherwise required to disclose
information or precluded from disclosing
information by Federal law or regulation
is not eligible to claim an award for pro-
viding such information. This reflects
Treasury and the IRS's determination that
section 7623 does not incentivize conduct
that is either already mandated by, or con-
trary to, Federal law.

### Submission of Information

Any individual may submit informa-
tion to the IRS regarding suspected under-
payments of tax or violations of the inter-
nal revenue laws. The proposed
regulations provided that the information
submitted must be specific and credible if
the individual intends to submit a claim
for award based on the information sub-
mitted. In this regard, the proposed regu-
lations provided that a whistleblower sub-
mitting a claim should identify a person
and describe and document the facts sup-
porting the whistleblower's belief that the
person owes taxes or violated the tax laws.

One commenter suggested that the pro-
posed regulations improperly required
whistleblowers to identify a specific tax-
payer in the submission of information.
The proposed regulations did not, how-
ever, require that a whistleblower's infor-
mation identify a taxpayer by name. The
IRS and the Whistleblower Office must be
able to identify a taxpayer in order to
proceed with an action and, ultimately, to
determine an award. The more identifying
information that a whistleblower includes
in the submission, the more likely it is that
the submission will be considered to iden-
tify a taxpayer. Treasury and the IRS de-
termined that the concerns raised in the
comment are adequately addressed by the
language in the proposed regulations. Ac-
cordingly, these regulations retain the rule
from the proposed regulations.

### Penalty of Perjury Requirement

To form the basis for an award under
section 7623(b), section 7623(b)(6)(C) re-
quires that information be submitted un-
der penalty of perjury. The proposed reg-

ulations required any claim for award to
be accompanied by an original signed
declaration under penalty of perjury that
the application is true, correct, and com-
plete to the best of the applicant's knowl-
edge. One commenter suggested that the
final regulations should expressly address
how the penalty of perjury declaration ap-
plies to information submitted by a
whistleblower subsequent to the initial
claim for award. In general, the IRS re-
quires a penalty of perjury declaration
only as part of the initial claim for award.
In most cases, the IRS does not require
that a whistleblower reaffirm the original
penalty of perjury declaration and, in-
stead, the IRS deems the original declara-
tion to cover any subsequent information
submitted by the whistleblower. This is
reflected in the Instructions to the Form
211, "Application for Award for Original
Information," which provide that supple-
mental submissions of information need
not be submitted as a claim for award with
the corresponding penalty of perjury dec-
laration. In some cases, however, the IRS
may ask a whistleblower to reaffirm the
penalty of perjury declaration with respect
to a subsequent information submission.
In those cases, the whistleblower will be
given an opportunity to-and must-reaf-
firm the penalty of perjury declaration for
the information to be considered submit-
ted under penalty of perjury. Treasury and
the IRS anticipate that these cases will be
rare, and additional information submitted
after a claim for award may be addressed
by the IRS on a case-by-case basis. Ac-
cordingly, these regulations retain the rule
from the proposed regulations.

### Request for Assistance

The 2006 Act provided that the IRS
may ask for assistance from whistleblow-
ers. As noted, in the 2011 regulations,
Treasury and the IRS provided final rules
under section 6103(n) describing the cir-
cumstances and process in and by which
officers and employees of the Treasury
may disclose return information to
whistleblowers (and their legal represen-
tatives, if any) in connection with written
contracts for services and assistance. The
proposed regulations clarified that the
Whistleblower Office, the IRS, or the IRS
Office of Chief Counsel may request as-

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sistance from a whistleblower or the
whistleblower's representative. The pro-
posed regulations provided that such as-
sistance shall be at the direction or control
of the Whistleblower Office, the IRS, or
the IRS Office of Chief Counsel. The pro-
posed regulations also referred to Treas.
Reg. § 301.6103(n)-2 for rules regarding
written contracts between the IRS and
whistleblowers or their representatives.

Several commenters suggested that the
regulations should do more to improve
and expand communications between the
IRS and whistleblowers. Many comment-
ers specifically addressed the IRS's use of
section 6103(n) contracts. Commenters
often expressed concern that the IRS does
not effectively utilize section 6103(n)
contracts and suggested that the IRS
should make better use of its section
6103(n) contract authority to facilitate in-
creased communication with, and partici-
pation by, whistleblowers. One com-
menter suggested that the regulations
should clarify when the IRS will use its
contract authority and establish protocols
for its use. This commenter also suggested
that the regulations could do more to clar-
ify when and what type of information can
be shared with the whistleblower so that
he or she may assist the IRS. Another
commenter suggested that the regulations
should require the Whistleblower Office
and the IRS Office of Chief Counsel to
request assistance by conducting a de-
briefing of the whistleblower in all cases.

As noted, returns and return informa-
tion are confidential pursuant to section
6103, unless an exception applies. In a
2012 memorandum to the IRS Operating
Divisions, the IRS stressed the use of
methods of communicating with whistle-
blowers within the framework of section
6103. IRS Whistleblower Program Mem-
orandum (Deputy Commissioner for Ser-
vices and Enforcement Steven T. Miller,
June 20, 2012) (the 2012 memo). The
2012 memo recognized the value of
whistleblower debriefings and stated the
expectation that debriefings will be the
rule, not the exception. The IRS routinely
debriefs whistleblowers to clarify and de-
velop the information provided. Although
not discussed in the 2012 memo, the IRS
has also relied, and will continue to rely,
on section 6103(k)(6) to disclose informa-
tion to whistleblowers when the disclo-

sure is necessary to obtain information
from the whistleblower. These investiga-
tory disclosures are a routine element of
the IRS's enforcement activities. The
2012 memo also noted that section
6103(n) contracts may be used when dis-
closure of taxpayer information is neces-
sary to obtain a whistleblower's expertise
into complex technical or factual issues.
Although the IRS's need for this level of
expertise into complex issues arises less
commonly than the need for section
6103(k)(6) investigative disclosures, the
IRS Operating Divisions will use this tool
as needed. Specific issues regarding the
use of section 6103(n) contracts by the
IRS and whistleblowers are beyond the
scope of these regulations. These regula-
tions do not specifically address section
6103(n) contracts because they are al-
ready provided for in regulations under
section 6103, as appropriately reflected by
the cross reference contained in the pro-
posed regulations and these regulations.
Nevertheless, debriefings, section 6103(k)(6)
disclosures, and section 6103(n) contracts
are not the only methods by which the IRS
communicates with whistleblowers. Later
in the life cycle of the underlying tax
matter, the IRS Office of Chief Counsel
may, under section 6103(h)(4), seek assis-
tance from a whistleblower in litigating a
case. For example, the IRS Office of Chief
Counsel has relied on, and will continue to
rely on, whistleblowers as potential wit-
nesses in Tax Court cases, but only as
needed and only following appropriate
consideration of whistleblower confiden-
tiality concerns, as discussed later in this
preamble. Finally, as discussed both ear-
lier and later in this preamble, these
regulations provide whistleblower ad-
ministrative proceedings that will, in
many cases, enable two-way communi-
cations with whistleblowers before the
IRS makes the award determination.

### Confidentiality of Whistleblowers

Section 7623 does not provide any pro-
tections regarding the identification of
whistleblowers. Treasury and the IRS,
however, are very sensitive to the legitimate
concerns whistleblowers have with protect-
ing their identities. In the Administration's
Fiscal Year 2014 and 2015 Revenue Pro-
posals, Treasury recommended amending

section 7623 to explicitly protect whistle-
blowers from retaliatory actions, consis-
tent with the protections currently avail-
able to whistleblowers under the False
Claims Act. Moreover, existing Treas. Reg.
§ 301.7623-1(e) provides that "[n]o unau-
thorized person will be advised of the
identity of an informant." The proposed
regulations reaffirmed the commitment of
Treasury and the IRS to safeguard the
identity of whistleblowers who submit in-
formation under section 7623. Under the
proposed rules, the IRS reaffirmed that it
will use its best efforts to: (i) prevent the
disclosure of a whistleblower's identity;
and (ii) notify a whistleblower prior to any
disclosure. One commenter suggested that
the final regulations should go further and
require notification to a whistleblower
prior to any disclosure. Another com-
menter suggested that whistleblowers
should be allowed to opt out of the infor-
mant privilege. This commenter sug-
gested that allowing the whistleblower to
opt out of the informant's privilege would
decrease the amount of time for an admin-
istrative action because it would allow the
IRS to use and rely upon documents pro-
vided by the whistleblower, rather than
seeking to independently gather the doc-
uments.

The informant privilege allows the
Government to withhold the identity of a
person that provides information about vi-
olations of law to those charged with en-
forcing the law. The informant privilege is
held by the Government, not the infor-
mant, and is not an absolute privilege.
There may be instances when, after care-
ful deliberation and high-level IRS ap-
proval, the disclosure of the identity of a
whistleblower may be determined to be in
the best interests of the Government.
Nonetheless, in such cases, the IRS first
carefully considers and weighs the poten-
tial risks to the whistleblower and the
Government's need for the disclosure, and
looks for alternative solutions.

The final regulations reflect the deter-
mination of Treasury and the IRS that
preventing the disclosure of whistle-
blower information is of critical impor-
tance not only to whistleblowers, but also
to the IRS's whistleblower program. The
IRS has implemented a multi-level review
process to ensure that the identities of
whistleblowers are disclosed only after

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careful consideration. The IRS will con-
tinue to use its best efforts to prevent
disclosures and to provide notification
prior to any disclosure. The IRS recog-
nizes, however, that despite its best ef-
forts, it may not always be possible to
provide such notification.

In some instances, whistleblowers have
consented to the disclosure of their iden-
tities in the hope that the IRS will proceed
with a tax case more quickly. Even when
a whistleblower consents to disclosure,
however, disclosing the whistleblower's
identity may not be in the Government's
best interest. Moreover, a whistleblower
cannot unilaterally opt out of the infor-
mant privilege because the privilege is
held by the Government. Finally, it is the
longstanding practice of the IRS to justify
tax adjustments through information ob-
tained independently of the whistle-
blower. This enables the IRS to better
defend tax adjustments in court and sup-
ports the IRS's sound administration of
the tax case. As such, the IRS will act on
specific and credible information regard-
ing tax compliance issues when that infor-
mation can be corroborated, as part of a
balanced tax enforcement program, and
will not forgo this process at the whistle-
blower's request to expedite a potential
award. Accordingly, these regulations re-
tain the rule from the proposed regulations.

### Electronic Claim Filing

Section 7623 does not require the sub-
mission of information or claims for an
award to be in a particular format. To
claim an award for information provided
to the IRS, the proposed regulations pro-
vided that a whistleblower must file a for-
mal claim for award by completing and
sending Form 211, "Application for
Award for Original Information," to the
Internal Revenue Service, Whistleblower
Office, at the address provided on the
form, or by complying with other claim
filing procedures as may be prescribed by
the IRS in other published guidance. Cur-
rently, a whistleblower cannot file a Form
211 electronically. The proposed regula-
tions solicited comments on whether elec-
tronic claim filing would be appropriate
and beneficial to whistleblowers, and if
so, what features should be included in an
electronic claim filing system.

Treasury and the IRS received several
comments suggesting that such proce-
dures would be beneficial, but some com-
menters expressed concern with how an
electronic claim filing system would be
implemented. Based upon the varied com-
ments received, Treasury and the IRS
have decided not to include specific guid-
ance on electronic claim filing in the final
regulations. The final regulations adopt
the proposed rule and require whistle-
blowers to file a formal claim for award
by completing and sending a Form 211 to
the IRS. The language in the final regula-
tions does, however, allow for the IRS to
specify an alternative submission method
pursuant to additional guidance. If Trea-
sury and the IRS implement electronic
claim filing, the comments received on the
proposed regulations regarding imple-
mentation will be considered and ad-
dressed in future guidance.

Definitions of Key Terms-§ 301.7623-2

These final regulations define several
key terms for purposes of determining
awards under section 7623 and the corre-
sponding regulations. These terms in-
clude: action, administrative action, judi-
cial action, proceeds based on, related
action, collected proceeds, amount in dis-
pute, and gross income. Two other key
terms, planned and initiated and final de-
termination of tax, are described and de-
fined in § 301.7623-4 of these regula-
tions. The definitions are intended to
facilitate the IRS's administration of the
whistleblower award program in a manner
that is consistent with the statutory lan-
guage. As described later in this preamble,
several of the definitions, including the
definition of the terms proceeds based on,
related action, and collected proceeds,
build on definitions contained in Notice
2008-4, the 2012 regulations, and the
IRM. The comments received and any
changes to the definitions of these terms
are addressed in the sections that follow.

### Administrative Action

The application of section 7623(b)
hinges on whether the IRS proceeds with
an action, and more specifically, an ad-
ministrative or judicial action, against a
taxpayer. Section 7623 does not, however,

define the terms action, judicial action, or
administrative action. The proposed reg-
ulations defined an administrative action
as all, or a portion of, an IRS civil or
criminal proceeding against a person that
may result in collected proceeds. Exam-
ples of an administrative action include an
examination, a collection proceeding, a
status determination proceeding, or a
criminal investigation. And, as noted, un-
der the proposed regulations, an adminis-
trative action can be a discrete portion of
an IRS civil proceeding. For example, the
examination of a single issue, within a
multi-issue examination, can constitute an
administrative action. In such a case, de-
terminations such as whether the IRS pro-
ceeded with the action based on the
whistleblower's information or the extent
of the whistleblower's substantial contri-
bution to the action will be made by ref-
erence to just the discrete and relevant
portion of the examination to which the
information provided relates.

One commenter suggested that an ad-
ministrative action should begin with the
filing of a claim for an award. Although
the commenter made this suggestion in
the context of the definition of "adminis-
trative action," Treasury and the IRS be-
lieve that it relates to the whistleblower
award administrative proceedings dis-
cussed later in this preamble. Some com-
menters suggested that the definition of
the term "administrative action" should be
broader. More specifically, one com-
menter suggested that the list of examples
should include making an assessment and
another commenter suggested that the
term "administrative action" should en-
compass all actions taken by the IRS to
initiate taxpayer compliance by any
means. Finally, commenters expressed
concern that a whistleblower would not be
entitled to an award when the whistle-
blower's information related to an issue
that was already being examined, but re-
sulted in the IRS making a greater assess-
ment than the IRS would have made with-
out the whistleblower's information.
Commenters raised a similar concern in
discussing the proposed regulations' def-
inition of the term proceeds based on.
This concern is addressed in that section
of this preamble.

Off-code provisions of the 2006 Act
explicitly provide that the IRS will ana-

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lyze information received under section
7623 and investigate the matter. Given
that this requirement must be satisfied by
the IRS with respect to all information
provided, it follows that the techniques
and tools used by the IRS to do the anal-
ysis and investigation of the whistleblow-
er's claim cannot in and of themselves
provide a basis-they cannot be the ad-
ministrative action-that supports an
award determination. Nonetheless, if a
whistleblower's information contributes
to the IRS's use of these techniques and
tools, for example, the issuance of a sum-
mons or Information Document Request,
and these intermediate steps result in an
administrative action, as defined in the
regulations, then the IRS will determine
whether it proceeded with that resulting
administrative action based on the infor-
mation, as described further in the discus-
sion of the definition of proceeds based
on. Similarly, an assessment is a book-
keeping entry employed by the IRS to
reflect a determination that results from an
administrative action within the meaning
of section 7623. Because an assessment
merely reflects the determination that re-
sults from an administrative action, it is
not appropriate to include the making of
an assessment in the definition of the term
administrative action. Essentially, the def-
inition of administrative action is broadly
analogous to the definition of judicial ac-
tion, as each term focuses on a case
against a taxpayer that may result in col-
lected proceeds, rather than on any partic-
ular tools or techniques used to conduct
the case. After considering the comments
on the definition of administrative action,
the definition in the proposed regulations
is adopted without change. Treasury and
the IRS did, however, address some of the
concerns raised by the comments on this
definition through changes to the defini-
tion of proceeds based on, as described in
the discussion that follows.

### Proceeds Based On

Section 7623(b) provides that if the
Secretary proceeds with an administrative
or judicial action based on the information
provided by a whistleblower, then the
whistleblower will receive an award from
the collected proceeds resulting from the
action (including any related actions). Un-

der the proposed regulations the IRS pro-
ceeds based on information provided by
an individual only when the IRS: (i) ini-
tiates a new action; (ii) expands the scope
of an ongoing action; or (iii) continues to
pursue an ongoing action, that the IRS
would not have initiated, expanded the
scope of, or continued to pursue, respec-
tively, but for the information provided by
the individual. The IRS does not proceed
based on when the IRS merely analyzes
the information provided by the individual
and investigates the matter.

Commenters to the proposed regula-
tions generally expressed concern that the
regulatory language narrowed the scope
of the statute by limiting the instances in
which the Whistleblower Office will de-
termine that the IRS proceeded based on a
whistleblower's information. Some com-
menters disagreed with the use of the
words "only" and "but for" in the pro-
posed regulations' definition and sug-
gested removing this language. One com-
menter recommended removing the last
sentence in the proposed regulations' def-
inition-"The IRS does not proceed based
on when the IRS merely analyzes the in-
formation provided by the individual and
investigates the matter." Some comment-
ers suggested that the IRS should be con-
sidered to proceed based on information
anytime that the IRS "uses" the informa-
tion, or more specifically, anytime the in-
formation is transmitted by the Whistle-
blower Office to an IRS field office for
further investigation. Some commenters
suggested that the definition needed to
specifically include instances when a
whistleblower's information materially or
substantially assists in or significantly
contributes to the IRS's detection and re-
covery of tax. As noted in the discussion
of the definition of administrative action,
some commenters expressed concern that
a whistleblower would not be entitled to
an award when the whistleblower's infor-
mation related to an issue that was already
being examined or was included in a gen-
eral audit plan, but resulted in the IRS
making a greater assessment than the IRS
would have made without the whistle-
blower's information. Similarly, some
commenters expressed concern that under
the proposed regulations' definition, the
IRS could use a whistleblower's informa-
tion but assert that it would have acted

without the information and therefore de-
termine that the IRS did not proceed based
on the information.

As noted, the off-Code provisions of
the 2006 Act require the IRS to analyze
the information provided by the whistle-
blower (in the Form 211 and otherwise,
such as through debriefs) and investigate
the matter. As a result, it follows that for
the IRS to proceed based on the informa-
tion provided, the IRS must do more than
this analysis or investigation. Therefore,
Treasury and the IRS retained this explan-
atory language in the final regulations.
Treasury and the IRS recognize, however,
that, by listing exclusive actions taken by
the IRS, the proposed regulations created
the appearance that individuals who pro-
vide information that is not only used by
the IRS, but is in fact critical to sustaining
tax adjustments, might not receive
awards. Accordingly, these final regula-
tions adopt a general standard for when
the IRS proceeds based on information
provided-when the information substan-
tially contributes to the action-and the
list of exclusive actions are cited as exam-
ples of when the information provided
may substantially contribute to an action.
In addition, the final regulations remove
the word "only" from the definition. Ac-
cordingly, under the final regulations, the
Whistleblower Office must determine
when the information provided substan-
tially contributed to the underlying action,
and this determination will depend on the
facts and circumstances of each individual
case. Nevertheless, the final regulations
provide additional examples to clarify the
operation of the rule. These examples il-
lustrate that the whistleblower's informa-
tion substantially contributes to the under-
lying action if it leads to an examination,
an expansion of an issue already being
examined, an expansion of the examina-
tion to another year, or an additional ad-
justment. The examples also illustrate that
the whistleblower's information does not
substantially contribute to the underlying
action if that information merely supports
information obtained independently by
the IRS.

### Related Action

Under section 7623(b), when the IRS
proceeds with an action based on a

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whistleblower's information, the whistle-
blower receives an award from the col-
lected proceeds resulting from the action
(including any related actions). Under the
proposed regulations the term related ac-
tion was limited to: (i) a second or subse-
quent action against the person(s) identi-
fied in the information provided and
subject to the original action if, in the
second or subsequent action, the IRS pro-
ceeds based on the specific facts described
and documented in the information pro-
vided; and (ii) an action against a person
other than the person(s) identified in the
information provided and subject to the
original action if: (A) the other, unidenti-
fied person is directly related to the person
identified in the information provided; (B)
the facts relating to the underpayment of
tax or violations of the internal revenue
laws by the other person are substantially
the same as the facts described and docu-
mented in the information provided (with
respect to the person(s) subject to the orig-
inal action); and (C) the IRS proceeds
with the action against the other person
based on the specific facts described and
documented in the information provided.
Under the proposed regulations an un-
identified person was directly related to
the person identified in the information
provided if the IRS can identify the un-
identified person using only the informa-
tion provided (without first having to use
the information provided to identify any
other person or having to independently
obtain additional information).

The definition of the term related ac-
tion contained in the proposed regulations
defined which actions may be included for
purposes of computing collected proceeds
by requiring a clear link between the orig-
inal action and the other, related action(s).
This clear link required: (i) a direct rela-
tionship between the person identified in
the information provided and subject to
the original action and the person(s) sub-
ject to the other action(s); and (ii) a sub-
stantial similarity between the specific
facts contained in the information pro-
vided and the relevant facts of the other
action(s).

In general, comments received on the
definition of related action in the pro-
posed regulations, including the form let-
ters, suggested that the definition was too
restrictive. The commenters suggested

that instead of requiring a direct relation-
ship, the IRS should conduct a proximate
cause analysis, under which related ac-
tions are those actions with which the IRS
proceeds in a natural and continuous se-
quence from the actions first taken in re-
sponse to a whistleblower's information.
One commenter suggested that a direct
relationship or one-step rule is inconsis-
tent with the ordinary meaning given to
the term "related." Another commenter
suggested that a related action should be
any issue that is related to the whistle-
blower's submission with respect to the
tax year, the taxpayer, or the tax issue.
This commenter expressed concern that
the definition of related action would ex-
clude subsequent years of the same tax-
payer for which the same issue exists,
unless the information provided contained
specific facts and documentation from
those subsequent years. Two other com-
menters suggested that the language at
Prop. Reg. § 301.7623-2(c)(i) describes
an original action rather than a related
action. These commenters suggested that
when the IRS initiates a second or subse-
quent action against a person identified in
the information provided by the whistle-
blower based on the specific facts de-
scribed and documented in the informa-
tion provided, then the IRS has proceeded
based on the information and there is
therefore no need to look to the definition
of related action to determine the whistle-
blower's eligibility for an award.

After considering the comments, Trea-
sury and the IRS determined that the con-
cern that whistleblowers would not be
given full credit for the information pro-
vided was partially addressed through the
changes made to the definition of the term
proceeds based on in the final regulations
and described earlier in this preamble.
Moreover, the broadened language of the
definition of the term proceeds based on
in the final regulations encompassed and
made redundant the language in Prop.
Reg. § 301.7623-2(c)(i) that focused on
actions involving subsequent tax years
and, thus, it was removed from the final
regulations. The corresponding example
illustrating the application of the rules to
actions involving subsequent tax years
moved with the rule to the definition of
proceeds based on. Finally, Treasury and
the IRS made several non-substantive re-

visions to the language of the definition of
related action.

The final regulations retain the pro-
posed regulations' requirement of a clear
link between the original action and any
other, related action(s), which requires: (i)
a substantial similarity between the spe-
cific facts contained in the information
provided and the relevant facts of the
other action(s); and (ii) a relationship be-
tween the person identified in the infor-
mation provided and subject to the origi-
nal action and the person(s) subject to the
other action(s). This conjunctive test ex-
cludes from the definition of related action
actions that are merely factually similar to
the original action, for example, actions
against unidentified taxpayers that merely
engaged in substantially similar transac-
tions to the transaction identified in the
information provided. The relationship
test in the second prong thus retains a
one-step rule: the taxpayer subject to the
related action can be no more than one
step removed-in terms of identification by
the IRS-from a taxpayer identified in the
information provided. In addition, the fi-
nal regulations at § 301.7623-1(c)(1) pro-
vide that certain information submissions
relating to pass-through entities and firms
will be considered to have identified cer-
tain persons who were not explicitly iden-
tified in the information provided.

Despite commenters' requests that the
definition should be even broader and
more subjective, Treasury and the IRS
determined that the clear link approach is
a reasonable interpretation and application
of the language contained in section 7623.
Treasury and the IRS determined that the
final regulations' definition of the term
related action finds a reasonable middle
ground between overly narrow and overly
broad interpretations. For example, the
term could be given a narrow application,
encompassing only actions that follow
from the action with which the IRS pro-
ceeded based on the information and ac-
tually produce collected proceeds. Given
that many administrative and judicial ac-
tions produce no collected proceeds, this
interpretation would give effect to the
statutory language in such cases by ensur-
ing that whistleblowers would receive
awards when any related actions produce
collected proceeds. Treasury and the IRS
have concluded that such a definition

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would be too narrow because, under this
interpretation, a related action (such as a
collection action) would be required in
almost every case. At the other end of the
spectrum, the term related action could be
broadly interpreted to include every sim-
ilar fact pattern entered into by any tax-
payer at any time. Such an interpretation
is overly broad and would be impossible
for the IRS to administer because it would
require the IRS to keep whistleblower
claims open and search for similar fact
patterns in perpetuity.

Instead, these final regulations adopt a
definition that finds a reasonable middle
ground. The definition encompasses a fi-
nite group of actions that, while likely
unknown to the whistleblower, are objec-
tively connected to the information pro-
vided. Treasury and the IRS adopt the
one-step approach of the proposed regu-
lations because, by setting a clear standard
for the Whistleblower Office to apply, the
one-step approach is administrable. Tort
law concepts, on the other hand, are rarely
applied to tax, and the appropriate appli-
cation of such concepts is unclear. Finally,
based on the IRS's experience administer-
ing whistleblower claims, Treasury and
the IRS believe that, in most cases, the
results of a proximate cause analysis and a
one-step approach are likely to be the
same. Ultimately, Treasury and the IRS
determined that the definition in the final
regulations provides an administrable, ob-
jective test that strikes an appropriate bal-
ance between the IRS's and the whistle-
blower's substantial contributions.

### Collected Proceeds

Section 7623(a) provides the Secretary
with the authority to pay such sums as he
deems necessary from proceeds of
amounts collected based on information
provided to the Secretary when the infor-
mation relates to the detection of under-
payments of tax or the detection and
bringing to trial and punishment persons
guilty of violating the internal revenue
laws or conniving at the same. Section
7623(b) requires the Secretary to pay
awards to whistleblowers if the Secretary
proceeds with an administrative or judi-
cial action that results in collected pro-
ceeds based on information provided by
the whistleblower. The definition of col-

lected proceeds contained in the proposed
regulations built on the definition con-
tained in the 2012 regulations. The defi-
nition in the proposed regulations restated
the rule from those final regulations that
collected proceeds include: tax, penalties,
interest, additions to tax, and additional
amounts collected because of the informa-
tion provided; amounts collected prior to
receipt of the information provided if the
information results in the denial of a claim
for refund that otherwise would have been
paid; and a reduction of an overpayment
credit balance used to satisfy a tax liability
incurred because of the information pro-
vided. The definition also addressed re-
fund netting, criminal fines that must be
deposited into the Victims of Crime Fund,
and a computational rule for determining
collected proceeds. Finally, consistent
with provisions in the IRM, the proposed
regulations provided that amounts recov-
ered under the provisions of non-Title 26
laws do not constitute collected proceeds,
because the language of section 7623 au-
thorizes awards for detecting underpay-
ments of tax and violations of the internal
revenue laws. Several commenters ad-
dressed various aspects of the definition of
collected proceeds contained in the pro-
posed regulations. The substance of these
comments and the determinations of Trea-
sury and the IRS are set out in detail in the
preamble discussion that follows.

Timing Issues and Treatment of Tax
Attributes Including Net Operating
Losses (NOLs)

Section 7623 provides for the payment
of awards from collected proceeds, but it
does not specifically address the treatment
of claims that involve tax attributes that
do not result in collected proceeds for
many years, if ever. The proposed regula-
tions provided a computational rule that
reflects the discussion contained in the
preamble to the 2012 regulations. There,
Treasury and the IRS noted that tax attri-
butes such as NOLs do not represent
amounts credited to the taxpayer's ac-
count that are directly available to satisfy
current or future tax liabilities or that can
be refunded. Rather, tax attributes such as
NOLs are component elements of a tax-
payer's liability. The disallowance of an
NOL claimed by a taxpayer may affect the

taxpayer's liability and, in the context of a
whistleblower claim, may result in col-
lected proceeds or it may be carried for-
ward 20 years and expire, thus never re-
sulting in collected proceeds. To enable
the IRS to administer the Whistleblower
Program, the proposed regulations' com-
putational rule provided that, after there
has been a final determination of tax, the
IRS would compute the amount of col-
lected proceeds taking into account all
information known with respect to the
taxpayer's account (including all tax attri-
butes such as NOLs). Under the proposed
regulations, any tax attributes that have
been used at the time of the final determi-
nation of tax may affect the award
amount. The proposed regulations re-
flected Treasury and the IRS's attempt to
make an award determination and pay any
resulting award as soon as possible after
proceeds are collected. The proposed reg-
ulations also reflected Treasury and the
IRS's determination that tracking tax at-
tributes into the future after payment of an
award would impose significant costs and
a heavy administrative burden. Thus, the
proposed rule attempted to balance the
whistleblower's interest in receiving a
timely award determination and payout
with the Government's interest in main-
taining an administrable program.

Several commenters suggested that the
proposed regulations did not strike the
appropriate balance and recommended
that tax attributes, specifically NOLs,
should be included in the definition of
collected proceeds. The commenters gen-
erally expressed concern that under the
proposed regulations, a whistleblower
might not receive credit for proceeds col-
lected after the final determination of tax,
as a result of tax attributes being carried
forward to reduce a later liability. Some
commenters suggested that the IRS should
attempt to calculate and apply a present
value to determine an award amount for
any unused tax attributes. Other comment-
ers recommended that, in the final regula-
tions, the IRS should agree to track tax
attributes for a specific period of time, for
example, ten years. One commenter sug-
gested that after the period of time that the
IRS had agreed to track, the whistleblower
and the IRS could enter into a settlement
agreement wherein the whistleblower
could agree to the amounts computed as

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of that date and waive any rights to a
future appeal. Finally, one commenter
recommended that the IRS should allow
whistleblowers to submit a new claim for
award when the whistleblower was aware
of subsequently collected proceeds.

In light of the comments received,
Treasury and the IRS have reconsidered
the approach in the proposed regulations.
These final regulations provide that the
Whistleblower Office will monitor the rel-
evant taxpayer account or accounts until
the IRS receives collected proceeds as a
result of a reduction in the tax attribute, or
the taxpayer's ability to apply the tax at-
tribute expires unused. For example, if a
NOL is reduced as a result of actions
taken based on whistleblower informa-
tion, the Whistleblower Office will peri-
odically review the taxpayer account to
determine whether future year tax pay-
ments are made that would not have been
made if the NOL had not been reduced.
Under the approach in the final regula-
tions, awards will be paid on any such
post-determination collected proceeds. If
the NOL carry-forward period expires be-
fore the reduced NOL results in a tax
payment, no award will be payable.

The decision to monitor future year
activities for impact on the amount of
collected proceeds will apply to all claims,
not just claims involving NOLs. As a re-
sult, in some cases, the Whistleblower Of-
fice may defer action on an award claim.
For example, whistleblower information
may result in IRS action to disallow a
taxpayer's treatment of the purchase of an
asset as an expense in Year 1, because the
asset should be capitalized and depreci-
ated in accordance with the applicable de-
preciation schedule. As a result, taxable
income in Year 1 is increased by the pur-
chase price of the asset, less allowable
Year 1 depreciation. Taxable income in
future years would be reduced by the al-
lowable depreciation for each year, until
the asset is fully depreciated (or sold or
otherwise disposed of). When this occurs,
the Whistleblower Office will monitor the
taxpayer's account to determine whether
future year offsetting reductions in liabil-
ity related to the Year 1 tax liability occur,
and will reduce the amount of collected
proceeds accordingly.

The adoption of a monitoring approach
in the final regulations, however, is only

intended to explicitly enable the IRS to
make an additional award payment when
a tax attribute produces collected proceeds
after an award has been determined, as
described in the preceding paragraphs. It
is not intended to, and does not in any
way, limit the Whistleblower Office's dis-
cretion to aggregate or disaggregate
claims, nor does it provide a basis for, or
enable the IRS to make, mandatory, par-
tial, or ongoing award determinations and
payments every time the IRS collects
some amount of proceeds. In other words,
monitoring does not alter the general rule
that no award will be paid until there has
been a final determination of tax, as de-
fined in the final regulations.

Amounts Collected Under Title 26

Section 7623 of Title 26 provides for
awards for information leading to detec-
tion of underpayments of tax or violations
of the internal revenue laws. The proposed
regulations provided that amounts recov-
ered under the provisions of non-Title 26
laws do not constitute collected proceeds
for award purposes. The majority of com-
ments, including the form letters, sug-
gested that such amounts, specifically
amounts collected under Title 18 and Title
31, should be included in collected pro-
ceeds. Many of the comments suggested
that not including amounts collected un-
der Title 18 and Title 31 eliminates a
whistleblower's incentive to provide in-
formation on violations under those titles
and could reduce the number of whistle-
blowers willing to provide such informa-
tion to the IRS. The comments generally
suggested that collected proceeds should
include any amounts that are collected by
the IRS. A few comments also suggested
that the statutory language "collected pro-
ceeds (including penalties, interest, addi-
tions to tax, and additional amounts)"
means that Congress intended for col-
lected proceeds to be a broad and inclu-
sive concept consisting of any amounts
collected by the IRS and any amounts to
be collected by the IRS in the future.
Similarly, one commenter suggested that
the use of the word "any" throughout the
statute was another reason that the statute
and Congress' intent with respect to the
statute should be interpreted broadly.

Like section 7623, the internal revenue
laws are contained in Title 26 and imple-
menting guidance is issued under that ti-
tle. Although the IRS may collect penal-
ties for violations of Title 31, Money and
Finance, and seize property under Title
18, Crimes and Criminal Procedure, those
penalties and seizures do not relate to "un-
derpayments of tax," may be imposed in-
dependently of whether a tax underpay-
ment occurs, and are not related to
violations of the internal revenue laws un-
der Title 26. Moreover, administrative ac-
tions under Title 26 and Title 31 entail
separate administrative proceedings, and
administrative distinctions persist even
when the actions proceed at the same
time. In some cases, the IRS may collect
penalties for failure to file Form 114, "Re-
port of Foreign Bank and Financial Ac-
counts" (FBAR), which is an information
reporting requirement under Title 31 the
violation of which does not necessarily
result in an underpayment of tax. As a
result, FBAR penalties do not constitute
collected proceeds. Moreover, sections
5323(a) and 9703(a) of Title 31 provide
independent authority, separate and apart
from section 7623, for the payment of
rewards for information relating to certain
violations of Title 31 or Title 18. Finally,
the terms "additions to tax" and "addi-
tional amounts" have long been used to
encompass the penalties under Subchapter
A of Chapter 68 of Subtitle F of the Code
and they are routinely used in forms is-
sued by the IRS pursuant to Title 26 to
refer to those penalties. They do not pro-
vide any support for treating non-Title 26
amounts as collected proceeds. The com-
ments received did not change the view of
Treasury and the IRS that section 7623
only authorizes awards for amounts col-
lected under the internal revenue laws,
which are contained in Title 26, the Inter-
nal Revenue Code. Treasury and the IRS
recognize the commenters' concern that
the statute may reduce the incentive to
provide information to the IRS regarding
non-Title 26 violations. The language of
the statute does not, however, support a
broader, more-inclusive definition of col-
lected proceeds. Treasury and the IRS in-
stead emphasize that when the IRS col-
lects amounts based on information
related to non-Title 26 violations and also
collects related proceeds under Title 26,

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the Title 26 collected proceeds may form
the basis for an award under section 7623.
Moreover, depending on the facts and cir-
cumstances, the non-Title 26 proceeds
may form the basis for an award under a
whistleblower award program other than
the one authorized by section 7623.

### Amounts Deposited in the Victims of Crime Fund

Under the Victims of Crimes Act of
1984, criminal fines that are imposed on a
defendant by a district court shall be de-
posited into the Victims of Crime Fund.
See 42 U.S.C. 10601(b)(1). Although the
Victims of Crime Act does except certain
specified amounts that are payable to
other sources pursuant to other statutory
mandates, amounts payable under section
7623 are not included in the exceptions.
The proposed regulations provided that
criminal fines that must be deposited into
the Victims of Crime Fund do not consti-
tute collected proceeds. One commenter
suggested that such criminal fines are col-
lected proceeds and that the award amount
should be paid before the rest of the pro-
ceeds are transferred to the Victims of
Crime Fund. As noted above, the Victims
of Crime Act of 1984 mandates that the
entire amount of fines imposed in criminal
tax cases be deposited into the Victims of
Crime Fund, meaning that the IRS lacks
the authority to deposit only a portion of
the fines into the Victims of Crime Fund,
and these funds cannot be available to the
Secretary to pay awards under section
7623. As a result, these regulations retain
the rule from the proposed regulations,
reflecting the determination that amounts
deposited in the Victims of Crime Fund
do not constitute collected proceeds.
Criminal restitution, however, may be col-
lected by the IRS as a tax under section
6201(a)(4)(A), and in such instances, the
amounts collected as restitution are in-
cluded in the definition of collected pro-
ceeds.

### Amended Returns

The proposed regulations did not ad-
dress whether amounts collected based on
a taxpayer's future compliance were in-
cluded in collected proceeds. Commenters
requested clarification on whether a

whistleblower could receive an award
based on amounts collected due to
amended returns. Some commenters sug-
gested that the definitions of administra-
tive action or proceeds based on should be
interpreted as providing for an award in
cases when a taxpayer files an amended
return in response to a whistleblower's
information. Similarly, these commenters
suggested that the final regulations should
encourage and reward whistleblowers
who report internally and cause taxpayers
to self-report to the IRS.

In the proposed regulations, Treasury
and the IRS intended to include certain
amounts collected based on amended re-
turns as collected proceeds. The final reg-
ulations are modified to explicitly provide
for this outcome. Section 7623(b) requires
that the IRS proceed with an administra-
tive or judicial action based on the infor-
mation provided. Once the IRS proceeds
with an action, however, the amounts col-
lected based on amended returns may con-
stitute collected proceeds. Specifically, if
a whistleblower files a claim, the IRS be-
gins an administrative or judicial action,
and the taxpayer subsequently files an
amended return, any proceeds collected
based on that amended return, and related
to the information provided, will consti-
tute collected proceeds under the final reg-
ulations' general definition of the term
collected proceeds. But if the IRS does not
proceed with an action, for example if a
taxpayer files amended returns, preemp-
tively self-assessing and paying the liabil-
ity before the IRS initiates any action,
then, consistent with the plain language of
the statute, there can be no collected pro-
ceeds.

While Treasury and the IRS certainly
encourage internal reporting and preemp-
tive action to correct incorrect returns, the
plain language of the statute does not pro-
vide for a determination of awards in such
cases. Moreover, it would be nearly im-
possible for the Service to connect
amended returns to internally-reported
whistleblower claims. Ultimately, if the
amounts paid based on amended returns
can be linked to any action with which the
IRS proceeded based on the whistleblow-
er's information, then the amounts will be
included as collected proceeds. In such
instances, the proceeds can be attributed
to IRS action, as required by section 7623,

and the proceeds collected may be deter-
mined by reference to the difference be-
tween the original amount reported as tax
and the amount of tax assessed and col-
lected based on the amended return. Trea-
sury and the IRS believe that the changes
to the final regulations reflect the statutory
requirement that awards stem from IRS
action and provide an administrable rule
without discouraging whistleblowers from
engaging in internal reporting and taxpay-
ers to self-police.

The final regulations do not incorpo-
rate the comments suggesting that the IRS
should also look to future years in which a
taxpayer is compliant and determine col-
lected proceeds in those years based on
previous noncompliance. Unlike cases in
which the taxpayer has already filed an
original return, in these cases, the IRS
would have no way to determine with any
reasonable certainty what the taxpayer's
reporting position would have been if not
for the underlying action and whether the
taxpayer's compliance was a direct result
of the underlying action. Similarly, the
IRS has no way of knowing whether a
whistleblower's internal reporting of an
issue caused a taxpayer to self-report and
pay taxes.

### Amount in Dispute

Section 7623(b)(5) provides that sub-
section (b) applies only when the tax, pen-
alties, interest, additions to tax, and addi-
tional amounts in dispute in an action
against a taxpayer exceed $2,000,000 (and
in the case of an individual taxpayer,
when the individual's gross income ex-
ceeds $200,000 for any taxable year sub-
ject to the action). The proposed regula-
tions defined amount in dispute as the
maximum total of tax, penalties, interest,
additions to tax, and additional amounts
that could have resulted from the action(s)
with which the IRS proceeded based on
the information provided, if the formal
positions taken by the IRS had been sus-
tained. The proposed regulations further
provided that the IRS would compute the
amount in dispute, for purposes of award
determinations, after the final determina-
tion of tax. Finally, the proposed regula-
tions provided that, for purposes of con-
ducting whistleblower administrative
proceedings, the IRS may rely on the

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whistleblower's description of the amount
owed by the taxpayer(s) or other informa-
tion. These rules were intended to ensure
that administrative proceedings would be
conducted for every claim that could ar-
guably satisfy the requirements of section
7623(b)(5), even before the IRS knows
whether the claim actually does.

Treasury and the IRS did not receive
any comments recommending changes to
the definition of amount in dispute. Nev-
ertheless, Treasury and the IRS recognize
the need to clarify an aspect of the defi-
nition that was not clear and that, without
the clarification, could have led to unin-
tended results. Specifically, the final reg-
ulations delete the reference to "could
have resulted" so as not to suggest that a
hypothetical computation is required. The
final regulations further clarify that the
amount in dispute is the greatest of the
amounts actually determined and amounts
stated in the formal positions actually
taken by the IRS. Treasury and the IRS
also added additional examples to further
clarify the application of the rule adopted
in the final regulations.

The definition will apply, regardless of
whether an award is paid pursuant to sec-
tion 7623(a) or section 7623(b), including
for purposes of Tax Court review. For
purposes of applying the administrative
proceedings provided for under the final
regulations, however, the Whistleblower
Office may rely on the whistleblower's
description of the amount owed if that
amount is higher than the maximum total
amount asserted by the IRS in its formal
position in an administrative or judicial
action.

### Affiliated Claimants

Under section 7623(b)(6)(C), no award
may be made under section 7623(b) based
on information submitted to the Secretary
unless such information is submitted un-
der penalty of perjury. In Notice 2008-4
and the proposed regulations, Treasury
and the IRS provided that this requirement
precludes the filing of a claim for award
by a person serving as a representative of,
or in any way on behalf of, another indi-
vidual as part of implementing the statu-
tory requirement that a claim for award be
filed under penalties of perjury. Nonethe-
less, the proposed regulations provided a

definition of affiliated whistleblowers and
related rules for addressing eligible and
ineligible affiliated whistleblower cases.
Treasury and the IRS have reconsidered
the need for the affiliated whistleblower
rules in light of the statutory penalty of
perjury requirement. Indeed, given that
the final regulations retain the rule prohib-
iting a whistleblower from submitting a
claim on behalf of another, the definition
for affiliated individuals and the cross ref-
erence to the rule for ineligible affiliated
individuals at § 301.7623-1(b)(3) were
removed from the final regulations. The
rule for eligible affiliated whistleblowers
at § 301.7623-4(c)(4) of the proposed
regulations was also removed. The final
regulations retain the rule, however, stat-
ing that the Whistleblower Office will re-
ject claims filed by ineligible affiliated
whistleblowers, to discourage and prevent
whistleblowers from claiming an award in
their own names based on information
obtained from ineligible whistleblowers.
In the final regulations, the rule is relo-
cated and added to the list of ineligible
whistleblowers.

### Whistleblower Administrative Proceedings-§ 301.7623-3

Section 7623 does not require that the
IRS conduct a particular administrative
process prior to making an award deter-
mination, rejection, or denial. Treasury
and the IRS, however, have determined
that such processes will help ensure that
whistleblowers have a meaningful oppor-
tunity to participate in the determination
process, enable the Whistleblower Office
to make award determinations based on
complete information, and ensure a fully-
documented record on appeal to the Tax
Court. This regulation describes the ad-
ministrative proceedings applicable to
claims for award under both section
7623(a) and section 7623(b).

For purposes of applying the whistle-
blower administrative proceedings, the fi-
nal regulations provide that the Whistle-
blower Office may rely on the
whistleblower's description of the amount
owed or on other information. This rule is
intended to ensure that the IRS can pro-
vide whistleblowers the benefits of pro-
ceedings applicable to section 7623(b)

claims even before having made a final
determination of tax.

For awards under section 7623(a), the
proposed regulations provided that the
Whistleblower Office will send a prelim-
inary award recommendation letter to the
whistleblower. Sending this letter marks
the beginning of the whistleblower admin-
istrative proceeding. The whistleblower
will then have 30 days within which to
provide comments to the Whistleblower
Office. This approach is intended to pro-
vide whistleblowers under section 7623(a)
with an opportunity to participate in the
award process, both to add transparency to
the proceeding and to assist the Whistle-
blower Office in considering all poten-
tially relevant information in paying
awards under section 7623(a), even
though those awards are not subject to
Tax Court review. The proposed regula-
tions did not, however, provide prelimi-
nary notice and comment procedures for
rejections or denials of claims for award
that are treated, for administrative pur-
poses, as claims made under section
7623(a), given the large administrative
burden associated with such procedures.

In cases in which the Whistleblower
Office determines and pays an award un-
der section 7623(b), the proposed regula-
tions provided that a whistleblower ad-
ministrative proceeding also begins when
the Whistleblower Office sends out the
preliminary award recommendation letter.
After this letter is sent to the whistle-
blower, the whistleblower (and the
whistleblower's representative, if any)
may participate in the administrative pro-
ceeding under section 7623(b), which will
ultimately culminate in an award determi-
nation letter issued by the Whistleblower
Office. Finally, the proposed regulations
provided that prior to denying or rejecting
a claim under section 7623(b), the
Whistleblower Office will send a prelim-
inary denial letter to the whistleblower,
beginning the administrative proceeding
and after which the whistleblower has 30
days to provide comments to the Whistle-
blower Office. Again, this approach is in-
tended to foster a transparent and accurate
review process.

The final regulations in large part adopt
the proposed regulations. The comments
received and any changes to the proposed

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rules for § 301.7623-3 are discussed in
the sections that follow.

### Beginning of Whistleblower Administrative Proceedings

Under the proposed regulations, in
cases in which the Whistleblower Office
recommends payment of an award under
section 7623(a) or determines and pays an
award under section 7623(b), the Whistle-
blower Office will first send a preliminary
award recommendation letter to the
whistleblower. In these cases, the whistle-
blower administrative proceeding begins
when this letter is sent. In cases in which
the Whistleblower Office rejects or denies
a claim for award under section 7623(b),
the Whistleblower Office will first send a
preliminary denial letter to the whistle-
blower. In these cases, the whistleblower
administrative proceeding begins when
this letter is sent. In cases in which the
Whistleblower Office rejects or denies a
claim for award under section 7623(a),
there will not be a separate administrative
proceeding. (For further information, see
Rejections and Denials, later in this pre-
amble.) The final regulations largely adopt
the proposed regulations. The comments
received and the changes made are dis-
cussed in further detail in this section.

Several commenters suggested that
whistleblower administrative proceedings
should begin earlier. The commenters of-
fered different suggestions for how this
could be accomplished, including begin-
ning whistleblower administrative pro-
ceedings at the time that a claim is sub-
mitted on the Form 211 or when the Form
11369, "Confidential Evaluation Report
on Claim for Award," is transmitted to the
Whistleblower Office by the Operating
Division. One commenter suggested that
the regulations should require the
Whistleblower Office to notify the
whistleblower and begin the administra-
tive proceeding within 90 days of a tax-
payer agreeing to pay any taxes, penalties,
interest or additional amounts, and re-
questing that the whistleblower provide
any information relevant to an award de-
termination within 30 days. This com-
menter suggested that the IRS should then
send another notification to the whistle-
blower within 90 days after the IRS had
collected proceeds.

The proposed regulations provided for
whistleblower administrative proceedings
in an effort to respond to whistleblowers'
concerns regarding the IRS's ability to
communicate with whistleblowers. After
considering the comments received, Trea-
sury and the IRS determined that begin-
ning the administrative proceeding before
the preliminary award determination letter
would not meaningfully increase a
whistleblower's ability to participate in
and provide comments relating to the
award determination. As discussed earlier
in this preamble, the IRS will use several
tools, including debriefings, section
6103(n) contracts, and section 6103(k)(6)
disclosures to communicate with whistle-
blowers following the submission of a
claim. The whistleblower award adminis-
trative proceedings discussed in this sec-
tion of the preamble are intended to facil-
itate communication with whistleblowers
before the IRS makes the award determi-
nation.

### Deadlines for IRS Whistleblower Office Action

The proposed regulations provided no
mandatory deadlines for Whistleblower
Office action. The proposed regulations
instead provided for payment of an award,
when appropriate, as promptly as circum-
stances permit. Recognizing that the
timely and comprehensive evaluation of
information provided by whistleblowers is
essential to the success of the program, the
IRS has articulated goals for Whistle-
blower Office action in other internal
guidance. IRS Whistleblower Program
Memorandum (Deputy Commissioner for
Services and Enforcement Steven T.
Miller, June 20, 2012). This memorandum
established goals for action on whistle-
blower submissions, and demonstrates the
IRS's commitment to timely and compre-
hensive evaluation of whistleblower infor-
mation. The memorandum also recog-
nizes the need for flexibility and
recognizes that there are times when the
established goals will not be met. This
does not detract from the emphasis placed
on timely action, but instead flows from a
recognition of the unique nature of these
claims and a desire to ensure that when
the Whistleblower Office takes action, it

has available all relevant and necessary
information relating to an action.

The form comment letters suggested
that the regulations should adopt and ex-
pand on the guidelines set out in the June
20, 2012, IRS Whistleblower Program
Memorandum. Several commenters sug-
gested that the final regulations should
incorporate mandatory deadlines for ac-
tion by the Whistleblower Office. Two
commenters generally suggested that the
regulations should require that prelimi-
nary award determination letters be sent
by a specified time after proceeds are col-
lected, for example, between 90 and 180
days after the IRS has collected proceeds.
One commenter suggested that the regu-
lations should require the Whistleblower
Office to notify the whistleblower and be-
gin the administrative proceeding within
90 days of a taxpayer agreeing to pay any
taxes, penalties, interest or additional
amounts, and requesting that the whistle-
blower provide any information relevant
to an award determination within 30 days.
This commenter suggested that the IRS
should then send another notification to
the whistleblower 90 days after the IRS
had collected proceeds. This commenter
suggested that these measures should be
implemented to ensure that preliminary
award determination letters are issued
prior to a final determination of tax.

As noted, the June 20, 2012, IRS
Whistleblower Program Memorandum
identified timelines and policy goals for
Whistleblower Office action. Treasury
and the IRS have determined not to adopt
these program goals as regulatory require-
ments to retain flexibility to make changes
to accommodate future developments.
The Whistleblower Office, however, re-
mains committed to taking timely action
on whistleblower submissions from the
date a claim is first submitted through the
date on which an award is determined or
the claim is denied.

Deadlines for Whistleblower Action or
Response

The proposed rules at § 301.7623-3
contained several deadlines for whistle-
blower action. These deadlines are de-
signed to ensure that the administrative
proceedings are conducted in a timely
fashion. In cases in which the Whistle-

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blower Office recommends payment of an
award under section 7623(a), a whistle-
blower has 30 days to submit comments
on the Whistleblower Office's preliminary
award determination. In cases in which
the Whistleblower Office denies an award
under section 7623(b), a whistleblower
has 30 days to submit comments on the
Whistleblower Office's preliminary denial
letter. Finally, in cases in which the
Whistleblower Office determines an
award under section 7623(b), the whistle-
blower has 30 days to respond to the pre-
liminary award recommendation letter;
when applicable, the whistleblower has 30
days to respond after receiving a detailed
report from the Whistleblower Office; and
when applicable, the whistleblower has 30
days to submit comments after receiving
an opportunity to review the documents
supporting the award report recommenda-
tions. Under the proposed regulations, the
time periods for responding in cases in
which the Whistleblower Office deter-
mines an award under section 7623(b)
may be extended at the sole discretion of
the Whistleblower Office.

Several commenters generally sug-
gested that all of the time periods for
whistleblowers to respond or submit com-
ments should be more flexible. One com-
menter requested that different, longer
time periods be applied to whistleblowers
located outside of the United States. An-
other commenter suggested that "good
cause" should be added as a reason why a
whistleblower may take longer than 30
days to respond or submit comments to
the Whistleblower Office. Finally, one
commenter requested clarification on
when the 30-day period to respond to the
detailed report would begin.

After considering the comments, Trea-
sury and the IRS adopt the proposed reg-
ulations without substantive change. The
deadlines for whistleblower action in the
final regulations are intended to allow
whistleblower administrative proceedings
to proceed in a timely and efficient man-
ner. Further, the Whistleblower Office has
the discretion to extend the time periods
and has routinely done so at the request of
whistleblowers or their representatives. In
response to the comments, however, Trea-
sury and the IRS included language in the
final regulations intended to clarify that

the periods begin when the Whistleblower
Office sends the notices.

### Award Consent Forms

A number of comments were received
that expressed frustration with the amount
of time that it takes from when a whistle-
blower submits a claim for award to when
the Whistleblower Office pays the award.
The factors that contribute to this length
of time are largely outside of the control
of whistleblowers and the Whistleblower
Office. The proposed regulations, how-
ever, provided for award consent forms,
which allow the Whistleblower Office to
make an award determination and pay an
award, without providing an award deter-
mination letter and waiting for the
whistleblower's time to appeal such deter-
mination to expire. The purpose of the
award consent form is to expedite the ad-
ministrative process for cases in which the
whistleblower agrees with the Whistle-
blower Office's preliminary award recom-
mendation. A whistleblower may submit
an award consent form to the Whistle-
blower Office at any time during the
whistleblower administrative proceeding.

One commenter suggested that the
award consent form is unfair because it
forces the whistleblower to waive any ap-
peal rights before receiving an award. Un-
der the proposed rules, a whistleblower
can receive an award regardless of
whether an award consent form is submit-
ted. For example, if a whistleblower de-
clines to execute the award consent form,
then after the whistleblower has finished
participating in the whistleblower admin-
istrative proceeding and after a final de-
termination of tax, as defined in
§ 301.7623-4(d)(2), the Whistleblower
Office will provide the whistleblower with
a determination letter, stating the amount
of any award. In such cases, the award
would be payable after all appeals of the
Whistleblower Office's determination
were final. Executing the award consent
and waiving the appeal rights serves to
decrease the time between the determina-
tion and payment of the award. Because
the execution of an award consent form is
at the option of the whistleblower, these
regulations retain the proposed regula-
tions' rules regarding the use of award
consent forms. Under the final regula-

tions, whistleblowers may choose to exe-
cute an award consent form at any time
during the whistleblower's participation
in the administrative proceeding for award
under section 7623(b). If the whistle-
blower signs, dates, and returns the award
consent form, the Whistleblower Office
will pay the award to the whistleblower as
promptly as circumstances permit after
there has been a final determination of tax.
Thus, while there is absolutely no require-
ment that a whistleblower execute the
award consent, doing so provides whistle-
blowers a way to get the benefit of finality
and, assuming there are no other open
issues, a faster award payment.

### Confidentiality Agreements

Treasury and the IRS recognize that,
while detailed administrative claim files
assist the Whistleblower Office in making
fair and accurate award determinations,
safeguards aimed at preventing the poten-
tial redisclosure or misuse of the taxpay-
er's confidential return information con-
tained in those files remain critical.
Section 6103(h)(4) and § 301.6103(h)(4)-1
of the proposed regulations confirmed the
authority to disclose return information in
the course of a whistleblower administra-
tive proceeding, but neither provides re-
disclosure prohibitions or penalties. In the
Administration's Fiscal Year 2014 and
2015 Revenue Proposals, Treasury rec-
ommended amending section 6103 to pro-
vide that the section 6103(p) safeguarding
requirements apply to whistleblowers and
their legal representatives who receive tax
return information in whistleblower ad-
ministrative proceedings. Despite the lack
of statutory redisclosure prohibitions and
penalties, Treasury and the IRS, in the
proposed regulations, sought to balance
whistleblowers' desire for increased com-
munication with protections and safe-
guards for taxpayers' confidential information.
Accordingly, the proposed regulations re-
quired whistleblowers to execute confi-
dentiality agreements before they may re-
ceive a detailed description of the factors
that contributed to the preliminary award
recommendation or view documents that
support the recommendation. A whistle-
blower is not required to execute a confi-
dentiality agreement before appealing an
award determination to the Tax Court, and

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executing an agreement does not prevent a
whistleblower from seeking Tax Court re-
view.

One commenter recommended that ev-
ery whistleblower should be required to
enter into a confidentiality agreement with
the Whistleblower Office at the time that
they submit a claim. This commenter sug-
gested that such agreements would allow
the Whistleblower Office to share infor-
mation with the whistleblower earlier in
the process, prior to any whistleblower
administrative proceeding. Another com-
menter also suggested that confidentiality
agreements should be mandatory in every
case to allow for the disclosure of infor-
mation to whistleblowers and to provide
protection to taxpayers with respect to dis-
closed information.

Although Treasury and the IRS support
the use of confidentiality agreements as a
mechanism for protecting confidential
taxpayer return information disclosed dur-
ing the course of an administrative pro-
ceeding, the agreements do not in them-
selves authorize the IRS or the
Whistleblower Office to disclose such in-
formation. In addition, Treasury and the
IRS have determined that disclosures are
not necessary in every case. Accordingly,
the final regulations do not mandate the
use of confidentiality agreements in every
case. Instead, the final regulations adopt
the rule in the proposed regulations per-
mitting whistleblowers to choose to enter
into confidentiality agreements with the
Whistleblower Office during whistle-
blower administrative proceedings for
awards under section 7623(b). When the
whistleblower signs, dates, and returns the
confidentiality agreement, the Whistle-
blower Office will provide the whistle-
blower with a detailed award report and
an opportunity to review documents sup-
porting the report.

### Opportunity to Review Documents Supporting Award Report Recommendations

Under the proposed regulations, if a
whistleblower signs, dates, and returns the
confidentiality agreement accompanying
the preliminary award determination, then
after reviewing the Whistleblower Of-
fice's detailed report, the whistleblower
can request an appointment to review the

documents supporting the detailed report.
During this appointment, the Whistle-
blower Office will provide for viewing the
pertinent information from the administra-
tive claim file. The Whistleblower Office
will supervise the whistleblower's review
of the documents and the whistleblower
will not be permitted to make copies of
the documents. Thus, while the proposed
regulations provide whistleblowers with
an opportunity to view information in the
administrative claim file that is not pro-
tected from disclosure by one or more
common law or statutory privileges, the
proposed regulations provided rules in-
tended to safeguard the disclosure of in-
formation to a whistleblower.

One commenter suggested that the
whistleblower should be able to review all
non-privileged information in the admin-
istrative claim file, whether or not it is
deemed pertinent. Treasury and the IRS
have determined that the rules applicable
to the document review-including on
site review and no copying-adequately
protect taxpayer information from redis-
closure. Accordingly, in response to this
comment, the final regulations remove the
term "pertinent."

### Administrative Record

Under the proposed regulations, the ad-
ministrative record comprises all informa-
tion contained in the administrative claim
file that is not protected by one or more
statutory privileges that is relevant to the
award determination. One commenter
suggested that the IRS Whistleblower Of-
fice should be required to provide a priv-
ilege log to detail any items that are ex-
cluded from the administrative record.
After considering the comment, Treasury
and the IRS have determined that creating a
privilege log in every administrative pro-
ceeding involving privileged documents
that are withheld by the Whistleblower Of-
fice would offer minimal benefits and pose
an unjustifiable administrative burden. As a
result, no changes were made to the pro-
posed regulations.

### Rejection and Denial Letters

The proposed regulations provided for
rejection and denial letters in cases under
section 7623(a) and 7623(b). In practice, a

rejection is a determination that relates
solely to the whistleblower and the infor-
mation on the face of his or her claim that
pertains to the whistleblower, while a de-
nial often relates to or implicates taxpayer
information (for example, because the IRS
did not proceed based on the information
provided or did not collect any proceeds).
Pursuant to proposed § 301.7623-3(b)(3),
for rejections or denials under section
7623(a), the Whistleblower Office will
provide written notice to claimants of the
rejection or denial of award claims with-
out an administrative proceeding. One
commenter expressed concern with the
amount of information contained in rejec-
tion and denial letters. In these cases, be-
cause there is no whistleblower adminis-
trative proceeding, section 6103 (which
provides that all tax return information is
confidential, unless an exception applies)
operates to limit the amount of taxpayer
information that the Whistleblower Office
can provide. Treasury and the IRS consid-
ered whether to make denials of claims
under section 7623(a) subject to an ad-
ministrative proceeding similar to the de-
nial of claims under section 7623(b).
However, given the nature of claims under
section 7623(a) and the large number of
such claims, Treasury and the IRS deter-
mined that the administrative burden of
providing an administrative proceeding
would significantly outweigh the small
amount of additional information that
would be provided in the denial letters.
We note, however, that the same section
6103 concerns are not present with rejec-
tion letters. Accordingly, in the case of a
rejection under section 7623(a) or (b), the
written notice is not subject to the same
limitations under section 6103 and will
explain the basis for the rejection. Al-
though no substantive changes were
made, to improve clarity, the final regula-
tions separate the rules for rejections un-
der section 7623(b) and denials under sec-
tion 7623(b) into separate provisions and
describe when a claim is rejected or de-
nied.

### Subsequent Determinations

One commenter suggested that the def-
inition of collected proceeds should take
into account circumstances in which a
whistleblower submits a claim for an on-

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going issue and an administrative action is
taken for some, but not all years (appar-
ently because the statute of limitations has
expired). If the taxpayer becomes compli-
ant in future years, the commenter sug-
gested that the whistleblower's award
should be determined based on collected
proceeds for future years determined as
the difference between what is reported
and paid, and what would have been re-
ported and paid, if not for the whistle-
blower's information and the IRS' admin-
istrative action. The commenter suggested
limiting the future years to the number of
years for which the IRS allowed the stat-
ute of limitations to expire with respect to
the whistleblower claim. No changes were
made to the proposed regulations because
the commenter's concern-that the IRS
will not be diligent in preserving the stat-
ute of limitations-is ameliorated by the
fact that the IRS suffers a greater harm
than the whistleblower if the IRS permits
the statute of limitations to expire and,
therefore, the IRS is motivated to preserve
the statute of limitations.

Another commenter suggested that the
final regulations should include proce-
dures for reopening a claim that was ini-
tially denied if the information is later
used by the IRS, for example, by a differ-
ent Operating Division. The proposed reg-
ulations did not provide specific proce-
dures for addressing the use of a
whistleblower's information following a
denial. However, nothing in the proposed
regulations precluded future IRS action
based on a whistleblower's information or
the determination of an award in such
instances. For example, the proposed reg-
ulations did not preclude the Whistle-
blower Office from making a second or
subsequent determination when the IRS
proceeds based on the information after
having already made a determination.
This situation, however, is distinguishable
from timing cases, discussed earlier in this
preamble, in connection with the defini-
tion of collected proceeds, in which the
IRS recomputes and pays an award based
upon information not known with respect
to the taxpayer's account as of the date of
the final determination of tax. These cases
would include, for example, those in
which whistleblower information results
in the elimination of an NOL but does not
result in collected proceeds until after the

final determination. In such cases, there
are no new circumstances, only additional
collected proceeds. A second or subse-
quent determination, however, is appro-
priate when there are new circumstances
that result in collected proceeds. Although
this result was not precluded under the
proposed regulations, Treasury and the
IRS added language to the definition of
final determination of tax at § 301.7623-
4(d)(2) of the final regulations to explic-
itly clarify this point. Because the final
regulations allow for subsequent determi-
nations when proceeds are collected after
an initial determination, and any such sub-
sequent determination will be subject to
all the rules and procedures applicable to
an initial determination, no additional pro-
cedures are needed in these final regula-
tions.

Determining the Amount of Awards and
Paying Awards-§ 301.7623-4

This regulation provides the frame-
work and criteria that the Whistleblower
Office will use in exercising the discretion
granted under section 7623 to make
awards. Under the regulation, based on
the Whistleblower Office's review of the
entire administrative claim file, the
Whistleblower Office will assign a fixed
percentage to claims for award by evalu-
ating the substantial contribution of the
whistleblower to the underlying action(s).
The rules of this section apply to claims
for awards under both section 7623(a) and
section 7623(b). The comments received
and any changes to proposed
§ 301.7623-4 are discussed in the sec-
tions that follow.

### Fixed Percentage Computational Framework

Under section 7623(b), whistleblowers
may receive as an award at least 15 per-
cent but not more than 30 percent of the
collected proceeds resulting from an ac-
tion (including any related actions), as-
suming that there is no reduction in award
pursuant to section 7623(b)(2) or (3). The
proposed regulations adopted a fixed per-
centage approach pursuant to which the
Whistleblower Office will assign claims
for award to one of a number of fixed
percentages within the applicable award

percentage range. Under the proposed reg-
ulations, to compute an award, the
Whistleblower Office will look to the ad-
ministrative claim file to determine
whether there are any positive factors
present that would merit an increased
award of 22 or 30 percent. The Whistle-
blower Office will then determine whether
there are negative factors present that
would merit a decreased award of 15, 18,
22, or 26 percent.

One commenter disagreed with the use
of fixed percentages, suggesting that in-
stead the Whistleblower Office should
have the discretion and flexibility to con-
sider the full range of award percentages
in reaching an award determination. A
number of the comments received, includ-
ing the form comment letters, suggested
that starting the award computation
framework at 15 percent sends the wrong
message to whistleblowers and would dis-
courage whistleblowers by limiting the
size of whistleblower awards. One com-
menter suggested that starting at 15 per-
cent was unnecessarily biased toward the
lower end of the statutorily mandated
range of 15 to 30 percent. This commenter
suggested that this approach would invite
litigation and would limit the upward ef-
fect of positive factors. Instead, this com-
menter recommended that the Whistle-
blower Office should begin its analysis at
22.5 percent. Another commenter sug-
gested that starting at the bottom prevents
the Whistleblower Office from punishing
whistleblowers that have only negative
factors and also suggested that the
Whistleblower Office should begin its
analysis at 22.5 percent. One commenter
suggested that the regulations should also
require payment of a minimum 15-percent
award both when a taxpayer self-reports a
tax liability after a whistleblower submits
information to the IRS and when a
whistleblower provides information and
the IRS subsequently proceeds with an
administrative action without using the
whistleblower's information. Finally, sev-
eral commenters requested that the final
regulations provide additional information
on when a 30-percent award would be
appropriate under the statute. These com-
menters suggested that the regulations
should provide an example of a case in
which the Whistleblower Office would
determine a 30-percent award. To that

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end, one commenter suggested that a max-
imum 30-percent award should be paid
when a whistleblower submits informa-
tion that leads to the collection of addi-
tional amounts in an otherwise nearly
completed audit, provides specific infor-
mation that forms the basis for an assess-
ment of tax, provides nearly all of the
information and documentation needed by
the IRS to conduct an audit, provides as-
sistance or is willing to provide assistance
during the administrative action, testifies
or is willing to testify in a court proceed-
ing, or wears a wire or is willing to wear
a wire to assist in an investigation. Finally
one commenter expressed concern with
the language in the preamble to the pro-
posed regulations that provided that the
Whistleblower Office would determine a
30-percent award only in extraordinary
cases.

Treasury and the IRS continue to be-
lieve that the fixed percentage approach
provides a structure that will promote con-
sistency in the award determination pro-
cess by enabling the Whistleblower Office
to determine awards across the breadth of
the applicable percentage range based on
meaningful distinctions among cases. The
fixed percentage approach also avoids
having to draw fine distinctions that might
seem unfair and arbitrary, given the dif-
ferences among claims for award with re-
spect to both the facts and law of the
underlying actions and the nature and ex-
tent of the substantial contribution of the
whistleblowers. Accordingly, the final
regulations retain the fixed percentage ap-
proach.

Further, Treasury and the IRS deter-
mined that starting the award determina-
tion at 15 percent merely reflects the fact
that the claim has met the threshold re-
quirements for an award under section
7623(b). All awards under section
7623(b)(1) are paid to whistleblowers that
made a substantial contribution to the un-
derlying action(s). Congress, through the
plain language of the statute, provided that
a 15-percent award is appropriate for a
whistleblower that makes a substantial
contribution to the underlying action(s).
Although commenters are correct that this
approach may lead to the same result for
both whistleblowers with no positive fac-
tors and whistleblowers with all negative
factors, Treasury and the IRS do not be-

lieve that whistleblowers who merely sub-
mit a claim that reflects none of the pos-
itive factors and offer nothing beyond the
bare minimum to support an award should
be entitled to an award above the statutory
minimum. A 15-percent award is a signif-
icant financial incentive to whistleblowers
and starting the award proceedings at 15
percent, with the opportunity for a larger
potential award increase, provides the
whistleblower with a greater incentive to
provide better information and assistance
to the IRS than starting at 22.5 percent.
Because the presence of positive factors is
largely within the whistleblower's con-
trol, Treasury and the IRS have adopted
an approach that incentivizes whistle-
blowers to provide high quality submis-
sions that reflect positive factors.

Moreover, the approach taken in the
final regulations-starting at 15 percent
and applying positive and negative fac-
tors, based on the extent of the whistle-
blower's substantial contribution-is con-
sistent with the approach taken by other
government agencies in the regulations
and practices that govern the administra-
tion of their whistleblower award pro-
grams, including the Department of Jus-
tice (in making recommendations in False
Claims Act cases), the Securities and Ex-
change Commission, and Commodity Fu-
tures Trading Commission (in applying
Federal whistleblower statutes). As it has
done since the 2006 amendments to the
statute, the Whistleblower Office will in-
crease the award percentage, based on the
presence of positive factors. The final reg-
ulations provide several positive factors
designed to allow for increased awards
across a broad range of claims, as merited.

Moreover, the concern expressed by
some commenters that the IRS will pay
minimum awards in most cases is not sup-
ported by the evidence. To date, using this
computational approach the IRS has paid
awards totaling approximately $175 mil-
lion on collected proceeds totaling ap-
proximately $700 million, reflecting an
award average of approximately 25 per-
cent-nearer the top than the bottom of
the statutory range. After considering the
concerns raised by these comments, the
final regulations retain the fixed percent-
age approach adopted in the proposed reg-
ulations. Finally, in response to the com-
ments received on 30-percent awards,

Treasury and the IRS revised the example,
extending it to illustrate the full award
percentage range.

Factors Used to Determine Award
Percentage

Pursuant to section 7623(b), the
Whistleblower Office's determination of
an award amount depends on the extent to
which the claimant's information substan-
tially contributed to the underlying ac-
tion(s). Under the proposed regulations,
the Whistleblower Office reviews the ad-
ministrative claim file and applies the pos-
itive factors and negative factors, listed in
§ 301.7623-4(b), to the facts to determine
the fixed percentage applicable to a claim
for award.

Some commenters offered suggestions
for additional positive factors. These sug-
gestions included: i) the whistleblower
provides information on multiple unre-
lated taxpayers; ii) the whistleblower
identifies the target taxpayer; iii) the
whistleblower provides information that
leads to a related party; iv) the IRS would
not have discovered a violation "but for"
the whistleblower's information; and v)
there is a close nexus between related
actions. Some of these suggested factors
are already threshold elements required to
merit any award. For example, identifying
the target taxpayer is required to make a
claim. Others restate the circumstances for
which the proposed regulations already
compensated whistleblowers. For exam-
ple, if a whistleblower provides informa-
tion on multiple unrelated taxpayers or
uncovering a close nexus between related
actions, and the IRS proceeds based on the
information and collects proceeds, then
the whistleblower's contribution to each
action will be evaluated and accounted for
in determining the award. Further, the fi-
nal regulations, like the proposed regula-
tions, provide that the positive factors and
negative factors are non-exclusive. Ac-
cordingly, the final regulations do not in-
corporate any of these suggested factors.
The Whistleblower Office may recognize
and apply additional factors in a particular
case that are appropriate in light of the
particular facts.

One commenter suggested that the pos-
itive factor at § 301.7623-4(b)(1)(ii), re-
garding information that identifies an is-

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sue of a type previously unknown to the
IRS, should apply when the information
provided identifies facts of a type previ-
ously unknown to the IRS, rather than an
issue of a type previously unknown to the
IRS. In response, the final regulations ex-
pand the factor to include a transaction
previously unknown to the IRS.

Several commenters suggested that the
positive factor at § 301.7623-4(b)(1)(v)
should look only to the whistleblower's
willingness to provide assistance, rather
than to assistance offered in response to a
request from the IRS. These comments
expressed concern that whistleblowers
have not been given opportunities to pro-
vide assistance and, therefore, suggested
deleting the language "in response to a
request from the Whistleblower Office,
the IRS or the IRS Office of Chief Coun-
sel." Treasury and the IRS agree that it is
the whistleblower's act of providing ex-
ceptional cooperation and assistance that
should be treated as a positive factor, re-
gardless of whether that cooperation and
assistance was in response to a request. As
a result, the final regulations delete this
language. One commenter suggested that
the regulations should provide more infor-
mation on what would be meaningful
whistleblower participation. Treasury and
the IRS believe that the positive factors in
the final regulations should remain
broadly defined providing the Whistle-
blower Office with the necessary discre-
tion to increase a whistleblower's award
percentage in appropriate cases. Excep-
tional assistance depends on the facts and
circumstances and could evolve in re-
sponse to specific whistleblower claims.
Accordingly, no changes are made in the
final regulations in response to this com-
ment. Nevertheless, the IRS will continue
to provide further explanations to staff, as
appropriate and needed.

One commenter suggested an addi-
tional negative factor-when it is more
likely than not that the IRS would have
discovered the information on its own.
One commenter suggested that the IRS
should consider mitigating factors when
the whistleblower delayed informing the
IRS after learning the relevant facts, par-
ticularly if the delay adversely affected
the IRS's ability to pursue an action or
issue. Treasury and the IRS have decided
not to incorporate any new negative or

mitigating factors into the final regula-
tions, which would serve only to make it
harder for whistleblowers to recover. The
Whistleblower Office will consider all of
the relevant facts and circumstances when
looking to apply the positive and negative
factors identified in the regulations.

One commenter suggested that the
negative factor when the whistleblower
contributed to the underpayment of tax or
tax noncompliance identified is already
addressed by the planned and initiated
test. The inclusion of this factor signifies
that not all situations when a whistle-
blower contributes to the actions that led
to the underpayment will constitute plan-
ning and initiating under the statute and
regulations-as discussed later in this pre-
amble, the threshold for planned and ini-
tiated is higher than being a mere contrib-
utor. In cases when a whistleblower does
not plan and initiate within the meaning of
the statute and regulations, but nonethe-
less contributes to the action(s) that led to
tax noncompliance, the Whistleblower
Office will not apply the threshold planner
and initiator test, but in such a case, it may
still be appropriate to decrease the award
amount because the whistleblower's ac-
tions diminish the extent of the whistle-
blower's substantial contribution to the
action. Thus, the Whistleblower Office
will instead consider the whistleblower's
contribution to the tax noncompliance as a
factor that may justify a decrease within
the 15-to-30 percent award percentage
range. For example, this factor may apply
if a whistleblower engaged in planning or
initiating activities, but not both, that di-
minished the whistleblower's substantial
contribution to the action with which the
IRS proceeded. This factor will not, how-
ever, be applied to reduce an award in
cases in which the Whistleblower Office
determines that the threshold for planned
and initiated has been met. If the threshold
for planned and initiated is met, the
planned and initiated framework will be
applied, and the final regulations have
been clarified accordingly.

### Award for Less Substantial Contribution

Section 7623(b)(2) provides for a re-
duced award when the Whistleblower Of-
fice determines that the action was based
primarily on disclosures of specific alle-

gations resulting from a judicial or admin-
istrative hearing, a governmental report,
hearing, audit, or investigation, or the
news media, unless the whistleblower was
the original source of the information. Un-
der the proposed regulations, if the
Whistleblower Office determined that an
action was based principally on disclo-
sures of specific allegations resulting from
public source information then the
Whistleblower Office will determine an
award of no more than 10 percent of the
collected proceeds resulting from the ac-
tion, unless the whistleblower was the
original source of the information. The
proposed regulations provided that the
Whistleblower Office would make the de-
termination based on the extent to which
the public source information described a
tax violation or facts and circumstances
from which a tax violation could be rea-
sonably inferred. Under the proposed reg-
ulations, public source information in-
cluded a judicial or administrative
hearing, a government report, hearing, au-
dit, or investigation, or the news media.

Treasury and the IRS received two
comments on this proposed rule. One
commenter suggested that public source
information should be limited to the types
of information specified in the statute.
This commenter disagreed with the pro-
posed regulations' use of the word "in-
cluding" and expressed concern that this
language would allow the Whistleblower
Office to expand on the statutory list of
public sources. This commenter also sug-
gested that the regulations should exclude
public source information that is only
available by request. Another commenter
disagreed with the application of the orig-
inal source test in the proposed regula-
tions. This commenter suggested that
rather than looking to whether the whistle-
blower was the original source of the pub-
lic source information, the regulations
should instead look to whether the IRS
takes action based on the information pro-
vided, and if so, should treat the whistle-
blower as the original source of the infor-
mation. Both commenters expressed
concern that the proposed regulations did
not accurately apply the specific allega-
tion requirement from the statute, and one
of the two commenters further suggested
that the regulations should employ an or-
dinary, lay person standard if a "reason-

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able inference" test is retained as a sub-
stitute to the "specific allegation"
requirement in the statute.

In response to the first commenter's
concerns, the final regulations remove the
term "public source information" and the
"including" language and instead rely
solely on the list of statutory sources. In
determining that the final regulations
should rely solely on the statutory list,
Treasury and the IRS also decline to place
additional limitations on the statutory lan-
guage, for example, excluding informa-
tion available only upon request. The final
regulations also clarify the application of
the original source test and the specific
allegation requirement by more clearly
tracking the language of the statute. The
final regulations clarify that the reason-
able inference test does not replace the
specific allegation requirement, but in-
stead provides guidance on how the
Whistleblower Office will apply the stat-
ute's specific allegation requirement.
Changes were also made to the example to
illustrate the operation of the reasonable
inference test.

### Reduction in Award and Denial of Award

Under the proposed regulations, the
Whistleblower Office will make a thresh-
old determination of whether a whistle-
blower planned and initiated the underly-
ing acts, and, if this threshold is met, then
the Whistleblower Office will categorize
and evaluate the extent of the whistle-
blower's planning and initiating of the
underlying acts, based on the application
of factors listed in § 301.7623-4(c)(3)(iv)
to the facts contained in the administrative
claim file, to determine the amount of the
appropriate reduction, if any.

Commenters on this issue generally ex-
pressed concern that the threshold deter-
mination for planned and initiated is too
broad and could discourage potential
whistleblowers from coming forward.
These commenters suggested that the reg-
ulations should adopt the "principal archi-
tect" approach used in evaluating claims
under the False Claims Act. Two of the
commenters expressed concern that the
standard at § 301.7623-4(c)(3)(ii)(C),
which asked whether the whistleblower
knew or had reason to know that there

were tax implications to planning and ini-
tiating the underlying act, was too broad.
One of these commenters suggested that
instead, the standard should be whether
the whistleblower knew or had reason to
know that tax noncompliance could result
from the planning and initiating of the
underlying act. Similarly, one commenter
suggested that the standard should be
whether the individual knew or had reason
to know that there were "unlawful" or
"improper" tax implications. Some com-
menters suggested that the language at
§ 301.7623-4(c)(3)(ii)(C) should specifi-
cally exclude a whistleblower who per-
formed any of the underlying activities at
the direction of a senior employee or man-
ager. One commenter suggested that in-
cluding the word "drafted" in the defini-
tion of "planned" created the possibility
that an employee drafting a document at
the direction of superiors could fall within
the definition. This commenter also sug-
gested that including the term "promoted"
in the definition of "initiated" could in-
clude someone involved well after the
scheme was actually initiated. One com-
menter suggested that the primary, signif-
icant, or moderate categories are not sup-
ported by the statute, and risk being
implemented in a way that a whistle-
blower can be something other than a
principal architect. Finally, two comment-
ers offered suggestions for the examples
in the proposed regulations. The com-
ments on the examples focused on the
application of the planned and initiated
standard rather than on the application of
the computational framework. One com-
ment specifically suggested that the exam-
ples should provide guidance about what
it means to plan and initiate, rather than
guidance on the application of the compu-
tational framework.

The final regulations do not adopt a
"principal architect" approach to the ap-
plication of section 7623(b)(3), based in
part on the statutory language, which does
not require a single planner and initiator
but instead provides for the possibility of
multiple planners and initiators. More
than one individual may plan and initiate
the actions that lead to a tax underpay-
ment or violation, whether as co-planners
or as planners of independent actions that
each led to the underpayment or violation.
However, the terms "plan" and "initiate"

suggest some voluntary action on the part
of the individual. Thus, where an individ-
ual is acting under the direction and con-
trol of a supervisor, he or she should not
be considered as planning or initiating.
For example, the planned and initiated
standard is not intended to apply to a
junior associate acting under the direction
of a partner. Nonetheless, the application
of these rules is dependent on the relevant
facts and circumstances of each case and,
at some point, an associate or other em-
ployee becomes experienced enough to
act sufficiently on his or her own to be
considered a planner and initiator. The
final regulations modify the examples to
clarify the treatment of junior employees.

In addition, in response to the com-
menters' concern that the standard at
§ 301.7623-4(c)(3)(ii)(C) was too broad,
the final regulations change "knew or had
reason to know there were tax implica-
tions" to "knew or had reason to know
that a tax underpayment or a violation of
the internal revenue laws could result, "
consistent with the full range of tax mat-
ters-from underpayments of tax to vio-
lations of the internal revenue laws-de-
scribed in section 7623(a).

As the commenters noted, section
7623(b)(3) does not provide categories for
planned and initiated. It does, however,
provide that after a determination is made
that an individual planned and initiated,
"the Whistleblower Office may appropri-
ately reduce such award." The final regu-
lations retain the primary, significant, or
moderate categories to ensure that any
appropriate reduction is made through the
application of an established framework.
The regulations' use of these categories,
like the use of the fixed percentage and
criteria approach for determining awards
in substantial contribution and less sub-
stantial contribution cases, is intended to
promote consistency, fairness, and trans-
parency in an award determination pro-
cess that is inherently subjective. As with
the positive and negative factors, the IRS
will continue to provide explanations to
staff and examples, as appropriate and
needed. Treasury and the IRS recognize
the value that all whistleblowers, includ-
ing those who participate in the actions
that led to the underpayment, may pro-
vide, and the final regulations balance the
goal of incentivizing whistleblowers with

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the plain language of the statute by pro-
viding for a sliding scale of reductions to
an award for planning and initiating.

### Eligible Affiliated Whistleblowers

As discussed earlier in this preamble,
Treasury and the IRS decided not to in-
corporate the proposed rule for eligible
affiliated whistleblowers at § 301.7623-
4(c)(4) in the final regulations because it
is inconsistent with the rule that prohibits
a whistleblower from submitting a claim
on behalf of another individual.

### Multiple Whistleblowers

Section 7623 does not address whether
multiple whistleblowers may receive an
award from the same collected proceeds.
The proposed regulations provided rules
for determining awards when two or more
independent claims, based on different in-
formation, relate to the same collected
proceeds. In these situations, the proposed
regulations allowed the Whistleblower
Office to determine multiple awards, lim-
ited in aggregate amount to the maximum
amount that could have been awarded to a
single whistleblower, rather than restrict-
ing the determination to a single award
payable to the first whistleblower that files
a claim for award or payable on some
other basis.

Treasury and the IRS received two
comments on this issue. One commenter
suggested that multiple whistleblowers
should not have to share an award. The
other commenter suggested that the first
whistleblower should receive full credit
for their information and that later
whistleblowers should only receive an
award for information that was not pro-
vided by the first whistleblower. After
consideration of the comments, Treasury
and the IRS determined to leave open the
possibility of award payments for multiple
whistleblowers. This determination was
based in part on the recognition that the
tax administration process is a long and
multi-faceted one that may extend over
the course of many years and may involve
multiple substantial contributions from
different sources. Given the unique nature
of the tax administration process, Trea-
sury and the IRS determined that it would
not be fair or appropriate to determine an

award only for the substantial contribution
of whistleblowers who submit their infor-
mation first-in-time. Accordingly, the pro-
posed regulations are adopted without
change.

### Payment of Awards

Section 7623 provides for payment of
an award to the individual that submits
information and makes a claim for award.
Under the proposed regulation, the IRS
will pay any award under section 7623 to
a whistleblower as promptly as circum-
stances permit after there has been a final
determination of tax with respect to the
action(s) and after the Whistleblower Of-
fice has determined the award and all ap-
peals of the determination are final or the
whistleblower has executed an award con-
sent form.

Treasury and the IRS received two
comments on this proposed rule. One
commenter suggested that the final regu-
lations should provide procedures for pay-
ment of an award to attorney trust ac-
counts. Another commenter suggested
that whistleblowers should be allowed to
assign or sell their claim for award. The
issues raised in these comments are be-
yond the scope of the current regulations
and, accordingly, the regulations have
been finalized as proposed.

### Final Determination of Tax

Under the proposed regulations, the
Whistleblower Office can only pay an
award determined pursuant to section
7623 after there is a final determination of
tax. A final determination of tax may be
made after the proceeds resulting from the
action(s) subject to the award determina-
tion have been collected and either the
statutory period for filing a claim for re-
fund has expired or the taxpayer(s) subject
to the action(s) and the IRS have agreed
with finality to the tax or other liabilities
for the period(s) at issue and the taxpay-
er(s) has waived the right to file a claim
for refund.

Comments on this provision generally
suggested that the IRS should make a final
determination of tax as early as possible.
The commenters suggested that the
Whistleblower Office should make multi-
ple partial payments on an award by mak-

ing a final determination of tax with re-
spect to each tax year for each taxpayer.
One commenter suggested that the regu-
lations should require mandatory partial
payments of tax whenever a final determi-
nation is possible. One commenter sug-
gested that it would be inappropriate to
aggregate action(s) for purposes of mak-
ing a final determination of tax because
this could delay awards. Other comment-
ers suggested that awards should be paid
prior to a final determination of tax. One
commenter suggested that the definition
of final determination of tax should be
triggered by each of the following events:
the collection of proceeds by the IRS, the
posting of a bond by a whistleblower, a
determination by the Secretary that pay-
ment is in the best interests of the govern-
ment, and the entering into of a closing
agreement between the IRS and a partner-
ship. Moreover, this commenter suggested
that a taxpayer's right to file a refund suit
should not be relevant to the definition, as
taxpayers only file refund suits in a small
percentage of cases.

Treasury and the IRS understand the
commenters' view that whistleblowers
should receive awards as quickly as pos-
sible. Under the statute, however, an
award cannot be made until there are col-
lected proceeds, and the IRS has not col-
lected proceeds with finality until the tax-
payer no longer has a right to seek a
refund of the amounts that constitute col-
lected proceeds. The general rule set out
in the proposed regulations and adopted in
these final regulations provides that a final
determination can be made when the pro-
ceeds resulting from the action(s) subject
to the award determination have been col-
lected and either the statutory period for
filing a claim for refund has expired or the
taxpayer(s) subject to the action(s) and the
IRS have agreed with finality to the tax or
other liabilities for the period(s) at issue
and the taxpayer(s) have waived the right
to file a claim for refund. This general rule
already includes the commenter's sugges-
tion that, in many cases, a final determi-
nation may occur when the IRS and the
taxpayer enter into a closing agreement
and the taxpayer makes full payment of
the liability. As a result, the regulations
were not revised in light of this comment.
Recognizing that some claims result in
more than one action, the definition pro-

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vides the Whistleblower Office with the
discretion to aggregate or disaggregate ac-
tions arising out of a single claim, mean-
ing that the Whistleblower Office can, in
appropriate cases, make more than one
final determination with respect to a single
claim for an award. For example, the
Whistleblower Office generally will ag-
gregate two actions, for award determina-
tion purposes, when the outcome of one
will have an effect on the amount of col-
lected proceeds that will result from the
other. As discussed earlier in this pream-
ble, the final regulations include new lan-
guage that explicitly allows for subse-
quent determinations when the IRS
proceeds based on the information pro-
vided after having already paid, rejected,
or denied an award. This rule is illustrated
through the addition of a new example.

As noted, Treasury and the IRS de-
clined, however, to provide for manda-
tory, partial or ongoing payments of
awards in the final regulations, based on
the determination that issuing multiple ap-
pealable final determinations as a rule
would impose an unreasonable burden on
the IRS and the Whistleblower Office.
Accordingly, the final regulations' ex-
plicit statement that a final determination
of tax does not preclude a subsequent final
determination of tax is not intended to,
and does not in any way, limit the discre-
tion of the Whistleblower Office to aggre-
gate or disaggregate actions for purposes
of determining awards. The Whistleblower
Office will continue to consider numerous
factors relating to efficient tax administra-
tion in exercising this discretion, including
the factors that it has previously identified in
instructions to staff, instructions which are
available via the IRS's website and that will
be incorporated into the IRM when it is next
updated.

### Deceased Whistleblowers

Existing Treas. Reg. § 301.7623-
1(b)(3) allows an executor, administrator,
or other legal representative to file a claim
for award for a deceased whistleblower, if
evidence is provided to show that the rep-
resentative has legal authority to act on
behalf of the deceased. The proposed reg-
ulations provided that when a whistle-
blower dies before or during a whistle-
blower administrative proceeding, the

Whistleblower Office will substitute an
executor, administrator, or other legal rep-
resentative on behalf of the deceased
whistleblower for purposes of conducting
the whistleblower administrative proceed-
ing. No comments were received on this
provision. Because the proposed regula-
tions' use of the word "will" could be read
to suggest that the regulations require sub-
stitution, Treasury and the IRS changed
this word to "may" in the final regulations.
Consistent with the regulations in effect
under section 7623 at the time of the 2006
amendments to the statute, the Whistle-
blower Office will substitute such parties
for a deceased whistleblower only when a
party can make a proper showing that he
or she is legally authorized to act for the
deceased. The Whistleblower Office has
no obligation to locate or determine a sub-
stitute for a deceased whistleblower. Ac-
cordingly, the final regulations provide
that when a whistleblower dies before or
during a whistleblower administrative
proceeding, the Whistleblower Office
may substitute an executor, administrator,
or other legal representative on behalf of
the deceased whistleblower for purposes
of conducting the whistleblower adminis-
trative proceeding.

### Tax Treatment of Awards

Under the proposed regulations, all
awards are subject to current Federal tax
reporting and withholding requirements.
No comments were received on this pro-
vision. Treasury and the IRS, however,
added language to the final regulations to
clarify that whistleblower awards are in-
cludible in gross income.

### Effective/Applicability Dates

Sections 301.7623-1, 301.7623-2,
301.7623-3, and 301.6103(h)(4)-1 were
proposed to apply to information submit-
ted on or after the date the rules are ad-
opted as final regulations in the Federal
Register, and to claims for award under
sections 7623(a) and 7623(b) that are
open as of that date. Likewise,
§ 301.7623-4 was proposed to apply to
information submitted on or after the date
the rules are adopted as final regulations,
and to claims for award under section
7623(b) that are open as of that date. Sec-

tion 301.7623-4 was not proposed to ap-
ply to claims for award under section
7623(a) that are open as of that date.

Treasury and the IRS received two
comments on the proposed effective dates.
One commenter suggested that the pro-
posed rules at § 301.7623-2 affect sub-
stantive rights of whistleblowers and
should only be applicable to claims filed
after the adoption of the final regulations.
The other commenter similarly suggested
that the regulations should be prospective
and apply only to submissions made after
the regulations have been finalized.

The final regulations do not negatively
affect substantive rights of whistleblowers
because the proposed and final regulations
largely incorporate existing practices ad-
hered to by the Whistleblower Office, and
changes from existing practices are de-
signed to be favorable to whistleblowers.
For example, the regulations provide for
whistleblower administrative proceed-
ings, but as discussed earlier in this pre-
amble, these proceedings are intended to
benefit whistleblowers, providing them
with additional due process and opportu-
nities to participate in a whistleblower
award determination. Finally, applying
two sets of rules to whistleblower pro-
ceedings will be difficult for the Whistle-
blower Office to administer. The effective
dates for the regulations will allow the
Whistleblower Office to administer the
Whistleblower Program in an efficient
manner. Accordingly, after considering
the comments, Treasury and the IRS adopt
the proposed regulations without changes.

## 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
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. It is hereby certified that these reg-
ulations will not have a significant eco-
nomic impact on a substantial number of
small entities. This certification is based
on the fact that these regulations will pri-
marily affect individuals who file whistle-
blower claims under section 7623. Ac-
cordingly, a regulatory flexibility analysis

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under 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 rulemaking preceding these
regulations was submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business, and no com-
ments were received.

### Drafting Information

The principal author of these regula-
tions is Melissa A. Jarboe of the Office of
the Associate Chief Counsel (Procedure
and Administration).

* * * * *

### Adoption of Amendment to the Regulations

Accordingly, 26 CFR part 301 is
amended as follows:

## PART 301-PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for
part 301 is amended by removing the en-
try for § 301.7623-1 and adding entries in
numerical order for §§ 301.6103(h)(4)-1
and 301.7623-1 through 301.7623-4 to
read as follows:

Authority: 26 U.S.C. 7805.
* * * * *

Section 301.6103(h)(4)-1 also issued
under 26 U.S.C. 6103(h)(4) and 26 U.S.C.
6103(q).

* * * * *

Sections
ions 301.7623-1 through
301.7623-4 also issued under 26 U.S.C.
7623.

* * * * *

Par. 2. Section 301.6103(h)(4)-1 is
added to read as follows:

§ 301.6103(h)(4)-1 Disclosure of
returns and return information in
whistleblower administrative
proceedings.

(a) In general. A whistleblower admin-
istrative proceeding (as described in
§ 301.7623-3) is an administrative pro-
ceeding pertaining to tax administration
within the meaning of section 6103(h)(4).
(b) Disclosures in whistleblower ad-
ministrative proceedings. Pursuant to sec-
tion 6103(h)(4) and paragraph (a) of this

section, the Director, officers, and em-
ployees of the Whistleblower Office may
disclose returns and return information (as
defined by section 6103(b)) to a whistle-
blower (or the whistleblower's legal rep-
resentative, if any) to the extent necessary
to conduct a whistleblower administrative
proceeding (as described in § 301.7623-
3), including but not limited to-

(1) By communicating a preliminary
award recommendation or preliminary de-
nial letter to the whistleblower;

(2) By providing the whistleblower
with an award report package;

(3) By conducting a meeting with the
whistleblower to review documents sup-
porting the preliminary award recommen-
dation; and

(4) By sending an award decision let-
ter, award determination letter, or award
denial letter to the whistleblower.

(c) Effective/applicability date. This
rule is effective on August 12, 2014. This
rule applies to information submitted on
or after August 12, 2014, and to claims for
award under sections 7623(a) and 7623(b)
that are open as of August 12, 2014.

Par. 3. Section 301.7623-1 is revised
to read as follows:

§ 301.7623-1 General rules, submitting
information on underpayments of tax or
violations of the internal revenue laws,
and filing claims for award.

(a) In general. In cases in which
awards are not otherwise provided for by
law, the Whistleblower Office may pay an
award under section 7623(a), in a suitable
amount, for information necessary for de-
tecting underpayments of tax or detecting
and bringing to trial and punishment per-
sons guilty of violating the internal reve-
nue laws or conniving at the same. In
cases that satisfy the requirements of sec-
tion 7623(b)(5) and (b)(6) and in which
the Internal Revenue Service (IRS) pro-
ceeds with an administrative or judicial
action based on information provided by
an individual, the Whistleblower Office
must determine and pay an award under
section 7623(b)(1), (2), or (3). The awards
provided for by section 7623 and this
paragraph must be paid from collected
proceeds, as defined in § 301.7623-2(d).

(b) Eligibility to file claim for award.
(1) In general. Any individual, other than

an individual described in paragraph
(b)(2) of this section, is eligible to file a
claim for award and to receive an award
under section 7623 and §§ 301.7623-1
through 301.7623-4.

(2) Ineligible whistleblowers. The
Whistleblower Office will reject any
claim for award filed by an ineligible
whistleblower and will provide written
notice of the rejection to the whistle-
blower. The following individuals are not
eligible to file a claim for award or receive
an award under section 7623 and
§§ 301.7623-1 through 301.7623-4-

(i) An individual who is an employee
of the Department of Treasury or was an
employee of the Department of Treasury
when the individual obtained the informa-
tion on which the claim is based;

(ii) An individual who obtained the
information through the individual's offi-
cial duties as an employee of the Federal
Government, or who is acting within the
scope of those official duties as an em-
ployee of the Federal Government;

(iii) An individual who is or was re-
quired by Federal law or regulation to
disclose the information or who is or was
precluded by Federal law or regulation
from disclosing the information;

(iv) An individual who obtained or had
access to the information based on a con-
tract with the Federal Government; or

(v) An individual who filed a claim for
award based on information obtained
from an ineligible whistleblower for the
purpose of avoiding the rejection of the
claim that would have resulted if the claim
was filed by the ineligible whistleblower.

(c) Submission of information and
claims for award. (1) Submitting informa-
tion. To be eligible to receive an award
under section 7623 and §§ 301.7623-1
through 301.7623-4, a whistleblower
must submit to the IRS specific and cred-
ible information that the whistleblower
believes will lead to collected proceeds
from one or more persons whom the
whistleblower believes have failed to
comply with the internal revenue laws. In
general, a whistleblower's submission
should identify the person(s) believed to
have failed to comply with the internal
revenue laws and should provide substan-
tive information, including all available
documentation, that supports the whistle-
blower's allegations. Information that

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identifies a pass-through entity will be
considered to also identify all persons
with a direct or indirect interest in the
entity. Information that identifies a mem-
ber of a firm who promoted another iden-
tified person's participation in a transac-
tion described and documented in the
information provided will be considered
to also identify the firm and all other
members of the firm. Submissions that
provide speculative information or that do
not provide specific and credible informa-
tion regarding tax underpayments or vio-
lations of internal revenue laws do not
provide a basis for an award. If documents
or supporting evidence are known to the
whistleblower but are not in the whistle-
blower's control, then the whistleblower
should describe the documents or support-
ing evidence and identify their location to
the best of the whistleblower's ability. If
all available information known to the
whistleblower is not provided to the IRS
by the whistleblower, then the whistle-
blower bears the risk that this information
might not be considered by the Whistle-
blower Office for purposes of an award.

(2) Filing claim for award. To claim an
award under section 7623 and §§ 301.7623-1
through 301.7623-4 for information pro-
vided to the IRS, a whistleblower must file
a formal claim for award by completing
and sending Form 211, "Application for
Award for Original Information," to the
Internal Revenue Service, Whistleblower
Office, at the address provided on the
form, or by complying with other claim
filing procedures as may be prescribed by
the IRS in other published guidance. The
Form 211 should be completed in its en-
tirety and should include the following
information-

(i) The date of the claim;

(ii) The whistleblower's name;

(iii) The whistleblower's address and
telephone number;

(iv) The whistleblower's date of birth;

(v) The whistleblower's taxpayer iden-
tification number; and

(vi) An explanation of how the infor-
mation on which the claim is based came
to the attention and into the possession of
the whistleblower, including, as available,
the date(s) on which the whistleblower
acquired the information and a complete
description of the whistleblower's present

or former relationship (if any) to person(s)
identified on the Form 211.

(3) Under penalty of perjury. No award
may be made under section 7623(b) un-
less the information on which the award is
based is submitted to the IRS under pen-
alty of perjury. All claims for award under
section 7623 and §§ 301.7623-1 through
301.7623-4 must be accompanied by an
original signed declaration under penalty
of perjury, as follows: "I declare under
penalty of perjury that I have examined
this application, my accompanying state-
ment, and supporting documentation and
aver that such application is true, correct,
and complete, to the best of my knowl-
edge." This requirement precludes the fil-
ing of a claim for award by a person
serving as a representative of, or in any
way on behalf of, another individual.
Claims filed by more than one whistle-
blower (joint claims) must be signed by
each individual whistleblower under pen-
alty of perjury.

(4) Perfecting claim for award. If a
whistleblower files a claim for award that
does not include information described
under paragraph (c)(2) of this section,
does not contain specific and credible in-
formation as described in paragraph (c)(1)
of this section, or is based on information
that was not submitted under penalty of
perjury as required by paragraph (c)(3) of
this section, the Whistleblower Office
may reject the claim or notify the whistle-
blower of the deficiencies and provide the
whistleblower an opportunity to perfect
the claim for award. If a whistleblower
does not perfect the claim for award
within the time period specified by the
Whistleblower Office, then the Whistle-
blower Office may reject the claim. If the
Whistleblower Office rejects a claim, then
the Whistleblower Office will provide no-
tice of the rejection to the whistleblower
pursuant to the rules of § 301.7623-
3(b)(3) or (c)(7). If the Whistleblower Of-
fice rejects a claim for the reasons de-
scribed in this paragraph, then the
whistleblower may perfect and resubmit
the claim.

(d) Request for assistance. (1) In gen-
eral. The Whistleblower Office, the IRS,
or IRS Office of Chief Counsel may re-
quest the assistance of a whistleblower or
the whistleblower's legal representative.
Any assistance shall be at the direction

and control of the Whistleblower Office,
the IRS, or the IRS Office of Chief Coun-
sel assigned to the matter. See
§ 301.6103(n)-2 for rules regarding writ-
ten contracts among the IRS, whistleblow-
ers, and legal representatives of whistle-
blowers.

(2) No agency relationship. Submitting
information, filing a claim for award, or
responding to a request for assistance does
not create an agency relationship between
a whistleblower and the Federal Govern-
ment, nor does a whistleblower or the
whistleblower's legal representative act in
any way on behalf of the Federal Govern-
ment.

(e) Confidentiality of whistleblowers.
Under the informant's privilege, the IRS
will use its best efforts to protect the iden-
tity of whistleblowers. In some circum-
stances, the IRS may need to reveal a
whistleblower's identity, for example,
when it is determined that it is in the best
interests of the Government to use a
whistleblower as a witness in a judicial
proceeding. In those circumstances, the
IRS will make every effort to notify the
whistleblower before revealing the
whistleblower's identity.

(f) Effective/applicability date. This
rule is effective on August 12, 2014. This
rule applies to information submitted on
or after August 12, 2014, and to claims for
award under sections 7623(a) and 7623(b)
that are open as of August 12, 2014.

Par. 4. Section 301.7623-2 is added to
read as follows:

§ 301.7623-2 Definitions.

(a) Action. (1) In general. For purposes
of section 7623(b) and §§ 301.7623-1
through 301.7623-4, the term action
means an administrative or judicial action.

(2) Administrative action. For purposes
of section 7623(b) and §§ 301.7623-1
through 301.7623-4, the term administra-
tive action means all or a portion of an
Internal Revenue Service (IRS) civil or
criminal proceeding against any person
that may result in collected proceeds, as
defined in paragraph (d) of this section,
including, for example, an examination, a
collection proceeding, a status determina-
tion proceeding, or a criminal investiga-
tion.

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(3) Judicial action. For purposes of
section 7623(b) and §§ 301.7623-1
through 301.7623-4, the term judicial ac-
tion means all or a portion of a proceeding
against any person in any court that may
result in collected proceeds, as defined in
paragraph (d) of this section.

(b) Proceeds based on. (1) In general.
For purposes of section 7623(b) and
§§ 301.7623-1 through 301.7623-4, the
IRS proceeds based on information pro-
vided by a whistleblower when the infor-
mation provided substantially contributes
to an action against a person identified by
the whistleblower. For example, the IRS
proceeds based on the information pro-
vided when the IRS initiates a new action,
expands the scope of an ongoing action, or
continues to pursue an ongoing action,
that the IRS would not have initiated, ex-
panded the scope of, or continued to pur-
sue, but for the information provided. The
IRS does not proceed based on informa-
tion when the IRS analyzes the informa-
tion provided or investigates a matter
raised by the information provided.

(2) Examples. The provisions of para-
graph (b)(1) of this section may be illus-
trated by the following examples:

Example 1. Information provided to the IRS
by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a taxpayer, describes and
documents specific facts relating to the taxpayer's
foreign sales in Country A, and, based on those
facts, alleges that the taxpayer was not entitled to
a foreign tax credit relating to its foreign sales in
Country A. The IRS receives the information
after having already initiated an examination of
the taxpayer. The IRS's audit plan includes for-
eign tax credit issues but focuses on taxpayer's
foreign sales in Country B and does not specifi-
cally address the taxpayer's foreign sales in
Country A. Based on the information provided,
the IRS expands the examination of the foreign
tax credit issue to include consideration of the
amount of foreign tax credit relating to the tax-
payer's foreign sales in Country A. For purposes
of section 7623 and §§ 301.7623-1 through
301.7623-4, the portion of the IRS's examination
of the taxpayer relating to the foreign tax credit
issue with respect to Country A is an administra-
tive action with which the IRS proceeds based on
the information provided by the whistleblower
because the information provided substantially
contributed to the action by causing the expan-
sion of the IRS's examination.

Example 2. Information provided to the IRS
by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a taxpayer, describes and
documents specific facts relating to the taxpayer's
activities, and, based on those facts, alleges that
the taxpayer owed additional taxes in Year 1. The
IRS proceeds with an examination of the tax-

payer for Year 1 based on the information pro-
vided by the whistleblower. The IRS discovers
that the taxpayer engaged in the same activities in
Year 2 and expands the examination to Year 2. In
the course of the examination, the IRS obtains,
through the issuance of Information Document
Requests (IDRs) and summonses, additional facts
that are unrelated to the activities described in
the information provided by the whistleblower.
Based on these additional facts, the IRS expands
the scope of the examination of the taxpayer for
both Year 1 and Year 2. For purposes of section
7623 and §§ 301.7623-1 through 301.7623-4, the
portion of the IRS's examination relating to the
activities described and documented in the infor-
mation provided is an administrative action with
which the IRS proceeds based on information
provided by the whistleblower because the infor-
mation provided substantially contributed to the
action by causing the expansion of the IRS's ex-
amination of Year 1 and Year 2. The portions of
the IRS's examination of the taxpayer in both
Year 1 and Year 2 relating to the additional facts
obtained through the issuance of IDRs and sum-
monses are not actions with which the IRS pro-
ceeds based on the information provided by the
whistleblower because the information provided
did not substantially contribute to the action.

Example 3. Information provided to the IRS
by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a taxpayer, describes and
documents specific facts relating to the taxpayer's
activities, and, based on those facts, alleges that
the taxpayer owed additional taxes in Year 1. The
IRS receives the information after having already
initiated an examination of the taxpayer for Year
1\. During the examination, the information is
provided to the Exam team and the Exam team
uses the information provided to confirm the cor-
rectness of adjustments made based on other in-
formation. Although the whistleblower's infor-
mation confirms the correctness of the IRS's
adjustments, the IRS does not rely on the whistle-
blower's information when it makes the adjust-
ments, nor does the information cause the IRS to
expand the scope of its examination. The whistle-
blower's information merely supports informa-
tion independently obtained by the IRS. For pur-
poses of section 7623 and §§ 301.7623-1 through
301.7623-4, the IRS's examination is not an ad-
ministrative action with which the IRS proceeds
based on information provided by the whistle-
blower because the information provided did not
substantially contribute to the action.

Example 4. Same facts as Example 3. During
the examination, however, the Exam team iden-
tifies inconsistencies between the information
provided by the whistleblower and other infor-
mation already in the Exam team's possession.
The Exam team uses the information provided by
the whistleblower to make additional adjustments
that it would not have made based solely on the
other information. For purposes of section 7623
and §§ 301.7623-1 through 301.7623-4, the por-
tion of the IRS's examination relating to the ad-
ditional adjustments is an administrative action
with which the IRS proceeds based on informa-
tion provided by the whistleblower because the

information provided substantially contributed to
the action.

(c) Related action. (1) In general. For
purposes of section 7623(b) and
§§ 301.7623-1 through 301.7623-4, the
term related action means an action
against a person other than the person(s)
identified in the information provided and
subject to the original action(s), when-

(i) The facts relating to the underpay-
ment of tax or violations of the internal
revenue laws by the other person are sub-
stantially the same as the facts described
and documented in the information pro-
vided (with respect to the person(s) sub-
ject to the original action);

(ii) The IRS proceeds with the action
against the other person based on the spe-
cific facts described and documented in
the information provided; and

(iii) The other, unidentified person is
related to the person identified in the in-
formation provided. For purposes of this
paragraph, an unidentified person is re-
lated to the person identified in the infor-
mation provided if the IRS can identify
the unidentified person using the informa-
tion provided (without first having to use
the information provided to identify any
other person or having to independently
obtain additional information).

(2) Examples. The provisions of para-
graph (c)(1) of this section may be illus-
trated by the following examples:

Example 1. Information provided to the IRS
by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a taxpayer (Taxpayer 1),
describes and documents specific facts relating to
Taxpayer 1's activities, and, based on those facts,
alleges tax underpayments by Taxpayer 1. The
information provided also identifies an accoun-
tant (CPA 1) and describes and documents spe-
cific facts relating to CPA 1's contribution to the
activities of Taxpayer 1 that the whistleblower
alleges resulted in tax underpayments. The IRS
proceeds with an examination of Taxpayer 1
based on the information provided by the whistle-
blower. Using the information provided, the IRS
obtains CPA 1's client list and identifies two tax-
payer/clients of CPA 1 (Taxpayer 2 and Taxpayer
3) that appear to have engaged in activities sim-
ilar to Taxpayer 1. The IRS proceeds with an
examination of Taxpayer 2 and finds that Tax-
payer 2 engaged in the same activities as those
described in the information provided with re-
spect to Taxpayer 1. The IRS proceeds with an
examination of Taxpayer 3 and finds that Tax-
payer 3 engaged in different activities from those
described in the information provided with re-
spect to Taxpayer 1. For purposes of section 7623
and §§ 301.7623-1 through 301.7623-4, the ex-
amination of Taxpayer 2 is a related action be-

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cause it satisfies the conditions of paragraph
(c)(1) of this section. The examination of Tax-
payer 3 is not a related action because the rele-
vant facts are not substantially the same as the
facts relevant to the examination of Taxpayer 1.

Example 2. Same facts as Example 1. Using the
information provided by the whistleblower, the
IRS identifies a co-promoter of CPA 1 (CPA 2)
that appears to have engaged in activities similar
to CPA 1. CPA 2 is not a member of CPA 1's firm.
The IRS subsequently obtains the client list of
CPA 2 and identifies a taxpayer/client of CPA 2
(Taxpayer 4) that appears to have engaged in
activities similar to Taxpayer 1. The IRS proceeds
with an examination of Taxpayer 4 and finds that
Taxpayer 4 engaged in the same activities as those
described in the information provided with re-
spect to Taxpayer 1, and that CPA 2 contributed
to the activities in the same way as described in
the information provided with respect to CPA 1.
The IRS proceeds with an examination of CPA
2's liability for promoter penalties under section
6700 in connection with the activities described in
the information provided with respect to Tax-
payer 1 and CPA 1. For purposes of section 7623
and §§ 301.7623-1 through 301.7623-4, the ex-
amination of CPA 2 is a related action because it
satisfies the conditions of paragraph (c)(1) of this
section. The examination of Taxpayer 4 is not a
related action because Taxpayer 4 was not related
to a person identified in the information provided.
CPA 2 was not identified in the information pro-
vided and the IRS first had to identify CPA 2
before identifying Taxpayer 4 and proceeding
with the examination of Taxpayer 4.

Example 3. Same facts as Example 1. An ac-
countant (CPA 3) is a member of CPA 1's firm.
Using the information provided by the whistle-
blower, the IRS obtains the client list of CPA 3
and identifies a taxpayer/client of CPA 3 (Tax-
payer 5) that appears to have engaged in activities
similar to Taxpayer 1. The IRS proceeds with an
examination of Taxpayer 5 and finds that Tax-
payer 5 engaged in the same activities as those
described in the information provided with re-
spect to Taxpayer 1, and that CPA 3 contributed
to the activities in the same way as described in
the information provided with respect to CPA 1.
For purposes of section 7623 and §§ 301.7623-1
through 301.7623-4, the examination of Tax-
payer 5 is a related action because Taxpayer 5 is
related to CPA 3, a person considered to be iden-
tified in the information provided under
§ 301.7623-1(c)(1), and the facts relating to Tax-
payer 5 are substantially the same as the facts
described and documented in the information
provided. An IRS examination of CPA 3's liabil-
ity for promoter penalties under section 6700,
based on the facts described and documented in
the information provided with respect to Tax-
payer 1 and CPA 1, is an administrative action
based on the information provided.

Example 4. Information provided to the IRS
by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a taxpayer (Taxpayer 1),
describes and documents specific facts relating to
Taxpayer 1's activities, and, in particular, Tax-
payer 1's participation in a transaction. Based on

those facts, the whistleblower alleges that Tax-
payer 1 owed additional taxes. The IRS proceeds
with an examination of Taxpayer 1 based on the
information provided by the whistleblower. The
IRS identifies the other parties to the transaction
described in the information provided (Taxpayer
2 and Taxpayer 3). The IRS proceeds with exam-
inations of Taxpayer 2 and Taxpayer 3 relating to
their participation in the transaction described in
the information provided. For purposes of section
7623 and §§ 301.7623-1 through 301.7623-4, the
IRS's examinations of Taxpayer 2 and Taxpayer
3 relating to the activities described and docu-
mented in the information provided are related
actions because they satisfy the conditions of
paragraph (c)(1) of this section.

(d) Collected proceeds. (1) In general.
For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the
terms proceeds of amounts collected and
collected proceeds (collectively, collected
proceeds) include: tax, penalties, interest,
additions to tax, and additional amounts
collected because of the information pro-
vided; amounts collected prior to receipt
of the information if the information pro-
vided results in the denial of a claim for
refund that otherwise would have been
paid; and a reduction of an overpayment
credit balance used to satisfy a tax liability
incurred because of the information pro-
vided. Collected proceeds are limited to
amounts collected under the provisions of
title 26, United States Code.

(2) Refund netting. (i) In general. If
any portion of a claim for refund that is
substantively unrelated to the information
provided is-

(A) Allowed, and

(B) Used to satisfy a tax liability attrib-
utable to the information provided instead
of refunded to the taxpayer, then the al-
lowed but non-refunded amount consti-
tutes collected proceeds.

(ii) Example. The provisions of para-
graph (d)(2)(i) of this section may be il-
lustrated by the following example:

Example. Information provided to the IRS by
a whistleblower, under section 7623 and
§ 301.7623-1, identifies a corporate taxpayer
(Corporation), describes and documents specific
facts relating to Corporation's activities, and,
based on those facts, alleges that Corporation
owed additional taxes. Based on the information
provided by the whistleblower, the IRS proceeds
with an examination of Corporation and deter-
mines adjustments that would result in an unpaid
tax liability of $500,000. During the examination,
Corporation informally claims a refund of
$400,000 based on adjustments to items of income
and expense that are wholly unrelated to the in-
formation provided by the whistleblower. The

IRS agrees to the unrelated adjustments. The IRS
nets the adjustments and determines a tax defi-
ciency of $100,000. Thereafter, Corporation
makes full payment of the $100,000 deficiency.
For purposes of section 7623 and §§ 301.7623-1
through 301.7623-4, the collected proceeds in-
clude the $400,000 informally claimed as a refund
and netted against the adjustments attributable
to the information provided, as well as the
$100,000 paid by Corporation.

(3) Amended returns. Amounts col-
lected based on amended returns consti-
tute collected proceeds if-

(i) The IRS proceeds based on the in-
formation provided;

(ii) As a result, the person subject to
the action(s) with which the IRS proceeds
files amended returns; and

(iii) The amounts collected based on
the amended returns relate to the activities
or facts described in the information pro-
vided.

(4) Criminal fines. Criminal fines de-
posited into the Victims of Crime Fund
are not collected proceeds and cannot be
used for payment of awards.

(5) Computation of collected proceeds.
(i) In general. Pursuant to § 301.7623-
4(d)(1), the IRS cannot make an award
payment until there has been a final deter-
mination of tax. For purposes of determin-
ing the amount of an award under section
7623 and §§ 301.7623-1 through
301.7623-4, after there has been a final
determination of tax as defined in
§ 301.7623-4(d)(2), the IRS will compute
the amount of collected proceeds based on
all information known with respect to the
taxpayer's account, including with respect
to all tax attributes, as of the date the
computation is made.

(ii) Post-determination proceeds. If,
based on all information known with re-
spect to the taxpayer's account as of the
date of the computation described in para-
graph (d)(5)(i) of this section, there is a
possibility that the IRS may collect addi-
tional proceeds, then the Whistleblower
Office will continue to monitor the case. If
the Whistleblower Office identifies addi-
tional collected proceeds, then the IRS
will compute and pay accordingly.

(iii) Partial collection. If the IRS does
not collect the full amount of taxes, pen-
alties, interest, additions to tax, and addi-
tional amounts assessed against the tax-
payer, then any amounts that the IRS does
collect will constitute collected proceeds
in the same proportion that the adjust-

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ments attributable to the information pro-
vided bear to the total adjustments.

(e) Amount in dispute and gross in-
come. (1) In general. Section 7623(b) ap-
plies with respect to any action against
any taxpayer in which the tax, penalties,
interest, additions to tax, and additional
amounts in dispute exceed $2,000,000
but, if the taxpayer is an individual, then
only if the taxpayer's gross income ex-
ceeds $200,000 in at least one taxable year
subject to the action.

(2) Amount in dispute. (i) In general.
For purposes of section 7623(b)(5) and
§§ 301.7623-1 through 301.7623-4, the
term amount in dispute means the greater
of the maximum total of tax, penalties,
interest, additions to tax, and additional
amounts that resulted from the action(s)
with which the IRS proceeded based on
the information provided, or the maxi-
mum total of such amounts that were
stated in formal positions taken by the IRS
in the action(s). The IRS will compute the
amount in dispute, for purposes of award
determinations described in § 301.7623-
3(c)(6), when there has been a final deter-
mination of tax as defined in § 301.7623-
4(d)(2).

(ii) Examples. The provisions of para-
graph (e)(2)(i) of this section may be il-
lustrated by the following examples:

Example 1. Information provided to the IRS
by a whistleblower, under section 7623 and
§ 301.7623-1, identifies a corporate taxpayer, de-
scribes and documents specific facts relating to
the taxpayer's activities, and, based on those
facts, alleges that the taxpayer owed additional
taxes. The IRS proceeds with an examination of
the taxpayer based on the information provided
by the whistleblower; makes adjustments to items
of income and expense and allows certain credits;
and, ultimately, determines a deficiency against
the taxpayer of $1,900,000 and issues the tax-
payer a statutory notice of deficiency. The tax-
payer petitions the notice to the United States Tax
Court. The Tax Court sustains the IRS's position
resulting in a deficiency of $1,900,000. Following
the final determination of tax, the IRS computes
that the total of tax, penalties, interest, additions
to tax, and additional amounts that resulted from
the action was $2,500,000. For purposes of section
7623 and §§ 301.7623-1 through 301.7623-4, the
amount in dispute is $2,500,000.

Example 2. Same facts as Example 1, except
the IRS determines a deficiency of $1,500,000; the
Tax Court sustains the deficiency of $1,500,000;
and, following the final determination of tax, the
IRS computes that the total of tax, penalties, in-
terest, additions to tax, and additional amounts
that resulted from the action was $1,750,000. For
purposes of section 7623 and §§ 301.7623-1

through 301.7623-4, the amount in dispute is
$1,750,000.

Example 3. Same facts as Example 1, except
the IRS determines a deficiency of $2,100,000; the
Tax Court redetermines a deficiency of
$1,500,000; and, following the final determination
of tax, the IRS computes that the total of tax,
penalties, interest, additions to tax, and additional
amounts that resulted from the action was
$1,750,000. For purposes of section 7623 and
§§ 301.7623-1 through 301.7623-4, the amount in
dispute is $2,100,000.

(3) Gross income. For purposes of sec-
tion 7623(b)(5) and §§ 301.7623-1
through 301.7623-4, the term gross in-
come has the same meaning as provided
under section 61(a). The IRS will compute
the individual taxpayer's gross income,
for purposes of award determinations de-
scribed in § 301.7623-3(c)(6), when there
has been a final determination of tax as
defined in § 301.7623-4(d)(2).

(f) Effective/applicability date. This
rule is effective on August 12, 2014. This
rule applies to information submitted on
or after August 12, 2014, and to claims for
award under sections 7623(a) and 7623(b)
that are open as of August 12, 2014.

Par. 5. Section 301.7623-3 is added to
read as follows:

§ 301.7623-3 Whistleblower
administrative proceedings and appeals
of award determinations.

(a) In general. The Whistleblower Of-
fice will pay awards under section 7623(a)
and determine and pay awards under sec-
tion 7623(b) in whistleblower administra-
tive proceedings pursuant to the rules of
this section. The whistleblower adminis-
trative proceedings described in this sec-
tion are administrative proceedings per-
taining to tax administration for purposes
of section 6103(h)(4). See § 301.6103(h)(4)-1
for additional rules regarding disclosures
of return information in whistleblower ad-
ministrative proceedings. The Whistle-
blower Office may determine awards for
claims involving multiple actions in a sin-
gle whistleblower administrative proceed-
ing. For purposes of the whistleblower
administrative proceedings for rejections
and denials, described in paragraphs
(b)(3), (c)(7), and (c)(8) of this section,
the Internal Revenue Service (IRS) may
rely on the whistleblower's description of
the amount owed by the taxpayer(s). The
IRS may, however, rely on other informa-

tion as necessary (for example, when the
alleged amount in dispute is below the $2
million threshold of section 7623(b)(5)(B),
but the actual amount in dispute is above
the threshold).

(b) Awards under section 7623(a). (1)
Preliminary award recommendation. In
cases in which the Whistleblower Office
recommends payment of an award under
section 7623(a), the Whistleblower Office
will communicate a preliminary award
recommendation under section 7623(a)
and §§ 301.7623-1 through 301.7623-4
to the whistleblower by sending a prelim-
inary award recommendation letter that
states the Whistleblower Office's prelim-
inary computation of the amount of col-
lected proceeds, recommended award per-
centage, recommended award amount
(even in cases when the application of
§ 301.7623-4 results in a reduction of the
recommended award amount to zero), and
a list of the factors that contributed to the
recommended award percentage. The
whistleblower administrative proceeding
described in paragraphs (b)(1) and (2) of
this section begins on the date the
Whistleblower Office sends the prelimi-
nary award recommendation letter. If the
whistleblower believes that the Whistle-
blower Office erred in evaluating the in-
formation provided, the whistleblower has
30 days from the date the Whistleblower
Office sends the preliminary award rec-
ommendation to submit comments to the
Whistleblower Office (this period may be
extended at the sole discretion of the
Whistleblower Office). The Whistle-
blower Office will review all comments
submitted timely by the whistleblower (or
the whistleblower's legal representative, if
any) and pay an award, pursuant to para-
graph (b)(2) of this section.

(2) Decision letter. At the conclusion
of the process described in paragraph
(b)(1) of this section, and when there is a
final determination of tax, as defined in
§ 301.7623-4(d)(2), the Whistleblower
Office will pay an award under section
7623(a) and §§ 301.7623-1 through
301.7623-4. The Whistleblower Office
will communicate the amount of the
award to the whistleblower in a decision
letter.

(3) Rejections and denials. If the
Whistleblower Office rejects a claim for
award under section 7623(a), pursuant to

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§ 301.7623-1(b) or (c), or if the IRS either
did not proceed based on information pro-
vided by the whistleblower, as defined in
§ 301.7623-2(b), or did not collect pro-
ceeds, as defined in § 301.7623-2(d), then
the Whistleblower Office will not apply
the rules of paragraphs (b)(1) or (2) of this
section. The Whistleblower Office will
provide written notice to the whistle-
blower of the rejection or denial of any
award and, in the case of a rejection, the
written notice will state the basis for the
rejection.

(c) Awards under section 7623(b). (1)
Preliminary award recommendation. For
claims under section 7623(b) other than
those described in paragraphs (c)(7) and
(c)(8) of this section (rejections and deni-
als), the Whistleblower Office will pre-
pare a preliminary award recommendation
based on the Whistleblower Office's re-
view of the administrative claim file and
the application of the rules of section 7623
and §§ 301.7623-1 through 301.7623-4
to the facts of the case. See paragraph
(e)(2) of this section for a description of
the administrative claim file. The whistle-
blower administrative proceeding de-
scribed in paragraphs (c)(1) through (6) of
this section begins on the date the
Whistleblower Office sends the prelimi-
nary award recommendation letter. The
preliminary award recommendation is not
a determination letter within the meaning
of paragraph (c)(6) of this section and
cannot be appealed to Tax Court under
section 7623(b)(4) and paragraph (d) of
this section. The preliminary award rec-
ommendation will notify the whistle-
blower that the IRS cannot determine or
pay any award until there is a final deter-
mination of tax, as defined in § 301.7623-
4(d)(2).

(2) Contents of preliminary award rec-
ommendation. The Whistleblower Office
will communicate the preliminary award
recommendation under section 7623(b) to
the whistleblower by sending-

(i) A preliminary award recommenda-
tion letter that describes the whistleblow-
er's options for responding to the prelim-
inary award recommendation;

(ii) A summary report that states a pre-
liminary computation of the amount of
collected proceeds, the recommended
award percentage, the recommended
award amount (even in cases when the

application of section 7623(b)(2) or sec-
tion 7623(b)(3) results in a reduction of
the recommended award amount to zero),
and a list of the factors that contributed to
the recommended award percentage;

(iii) An award consent form; and

(iv) A confidentiality agreement.

(3) Opportunity to respond to prelimi-
nary award recommendation. The
whistleblower will have 30 days (this pe-
riod may be extended at the sole discre-
tion of the Whistleblower Office) from the
date the Whistleblower Office sends the
preliminary award recommendation letter
to respond to the preliminary award rec-
ommendation in one of the following
ways-

(i) If the whistleblower takes no action,
then the Whistleblower Office will make
an award determination, pursuant to para-
graph (c)(6) of this section;

(ii) If the whistleblower signs, dates,
and returns the award consent form agree-
ing to the preliminary award recommen-
dation and waiving any and all adminis-
trative and judicial appeal rights, then the
Whistleblower Office will make an award
determination, pursuant to paragraph
(c)(6) of this section;

(iii) If the whistleblower signs, dates,
and returns the confidentiality agreement,
then the Whistleblower Office will pro-
vide the whistleblower with a detailed
award report, and an opportunity to re-
view documents supporting the report
pursuant to paragraphs (c)(4) and (5) of
this section, and any comments submitted
by the whistleblower will be added to the
administrative claim file; or

(iv) If the whistleblower submits com-
ments on the preliminary award recom-
mendation to the Whistleblower Office,
but does not sign, date, and return the
confidentiality agreement, then the com-
ments will be added to the administrative
claim file and reviewed by the Whistle-
blower Office in making an award deter-
mination, pursuant to paragraph (c)(6) of
this section.

(4) Detailed report. (i) Contents of de-
tailed report. If the whistleblower signs,
dates, and returns the confidentiality
agreement accompanying the preliminary
award recommendation under section
7623(b), pursuant to paragraph (c)(3) of
this section, then the Whistleblower Of-
fice will send the whistleblower-

(A) A detailed report that states a pre-
liminary computation of the amount of
collected proceeds, the recommended
award percentage, and the recommended
award amount, and provides a full expla-
nation of the factors that contributed to the
recommended award percentage;

(B) Instructions for scheduling an ap-
pointment for the whistleblower (and the
whistleblower's legal representative, if
any) to review information in the admin-
istrative claim file that is not protected by
one or more common law or statutory
privileges; and

(C) An award consent form.

(ii) Opportunity to respond to detailed
report. The whistleblower will have 30
days (this period may be extended at the
sole discretion of the Whistleblower Of-
fice) from the date the Whistleblower Of-
fice sends the detailed report to respond in
one of the following ways-

(A) If the whistleblower takes no ac-
tion, then the Whistleblower Office will
make an award determination, pursuant to
paragraph (c)(6) of this section;

(B) If the whistleblower requests an
appointment to review information from
the administrative claim file that is not
protected from disclosure by one or more
common law or statutory privileges, then
a meeting will be arranged pursuant to
paragraph (c)(5) of this section;

(C) If the whistleblower does not re-
quest an appointment but does submit
comments on the detailed report to the
Whistleblower Office, then the comments
will be added to the administrative claim
file and reviewed by the Whistleblower
Office in making an award determination
pursuant to paragraph (c)(6) of this sec-
tion; or

(D) If the whistleblower signs, dates,
and returns the award consent form agree-
ing to the preliminary award recommen-
dation and waiving any and all adminis-
trative and judicial appeal rights, then the
Whistleblower Office will make an award
determination, pursuant to paragraph
(c)(6) of this section.

(iii) Additional rules. The detailed re-
port is not a determination letter within
the meaning of paragraph (c)(6) of this
section and cannot be appealed to Tax
Court under section 7623(b)(4) and para-
graph (d) of this section. The detailed
report will notify the whistleblower that

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the IRS cannot determine or pay any
award until there is a final determination
of tax, as defined in § 301.7623-4(d)(2).

(5) Opportunity to review documents
supporting award report recommenda-
tions. Appointments for the whistleblower
(and the whistleblower's legal representa-
tive, if any) to review information from the
administrative claim file that is not protected
from disclosure by one or more common
law or statutory privileges will be held at the
Whistleblower Office in Washington, D.C.,
unless the Whistleblower Office, in its sole
discretion, decides to hold the meeting at
another location. At the appointment, the
Whistleblower Office will provide for view-
ing the information from the administrative
claim file. The Whistleblower Office will
supervise the whistleblower's review of the
information and the whistleblower will not
be permitted to make copies of any docu-
ments or other information. The whistle-
blower will have 30 days (this period may
be extended at the sole discretion of the
Whistleblower Office) from the date of the
appointment to submit comments on the de-
tailed report and the documents reviewed at
the appointment to the Whistleblower Of-
fice. All comments will be added to the
administrative claim file and reviewed by
the Whistleblower Office in making an
award determination, pursuant to paragraph
(c)(6) of this section.

(6) Determination letter. After the
whistleblower's participation in the
whistleblower administrative proceeding,
pursuant to paragraph (c) of this section,
has concluded, and there is a final deter-
mination of tax, as defined in § 301.7623-
4(d)(2), a Whistleblower Office official
will determine the amount of the award
under section 7623(b)(1), (2), or (3), and
§§ 301.7623-1 through 301.7623-4,
based on the official's review of the ad-
ministrative claim file. The Whistleblower
Office will communicate the award to the
whistleblower in a determination letter,
stating the amount of the award. If, how-
ever, the whistleblower has executed an
award consent form agreeing to the
amount of the award and waiving the
whistleblower's right to appeal the award
determination, pursuant to section
7623(b)(4) and paragraph (d) of this sec-
tion, then the Whistleblower Office will
not send the whistleblower a determina-
tion letter and will make payment of the

award as promptly as circumstances per-
mit.

(7) Rejections. A rejection is a deter-
mination that relates solely to the whistle-
blower and the information on the face of
the claim that pertains to the whistle-
blower. If the Whistleblower Office re-
jects a claim for award under section
7623(b), pursuant to § 301.7623-1(b) or
(c), then the Whistleblower Office will not
apply the rules of paragraphs (c)(1)
through (6) of this section. The Whistle-
blower Office will send to the whistle-
blower a preliminary rejection letter that
states the basis for the rejection of the
claim. The whistleblower administrative
proceeding described in this paragraph be-
gins on the date the Whistleblower Office
sends the preliminary rejection letter. If
the whistleblower believes that the
Whistleblower Office erred in evaluating
the information provided, the whistle-
blower has 30 days from the date the
Whistleblower Office sends the prelimi-
nary rejection letter to submit comments
to the Whistleblower Office (this period
may be extended at the sole discretion of
the Whistleblower Office). The Whistle-
blower Office will review all comments
submitted timely by the whistleblower (or
the whistleblower's legal representative, if
any) and, following that review, the
Whistleblower Office will either provide
written notice to the whistleblower of the
rejection of the claim, including the basis
for the rejection, or apply the rules of
paragraphs (c)(1) through (c)(6) of this
section.

(8) Denials. A denial is a determination
that relates to or implicates taxpayer in-
formation. If, with respect to a claim for
award under section 7623(b), the IRS ei-
ther did not proceed based on the infor-
mation provided by the whistleblower, as
defined in § 301.7623-2(b), or did not col-
lect proceeds, as defined in § 301.7623-
2(d), then the Whistleblower Office will
not apply the rules of paragraphs (c)(1)
through (6) of this section. The Whistle-
blower Office will send to the whistle-
blower a preliminary denial letter that
states the basis for the denial of the claim.
The whistleblower administrative pro-
ceeding described in this paragraph begins
on the date the Whistleblower Office
sends the preliminary denial letter. If the
whistleblower believes that the Whistle-

blower Office erred in evaluating the in-
formation provided, the whistleblower has
30 days from the date the Whistleblower
Office sends the preliminary denial letter
to submit comments to the Whistleblower
Office (this period may be extended at the
sole discretion of the Whistleblower Of-
fice). The Whistleblower Office will re-
view all comments submitted timely by
the whistleblower (or the whistleblower's
legal representative, if any) and, following
that review, the Whistleblower Office will
either provide written notice to the
whistleblower of the denial of any award,
including the basis for the denial, or apply
the rules of paragraphs (c)(1) through
(c)(6) of this section.

(d) Appeal of award determination.
Any determination regarding an award
under section 7623(b)(1), (2), or (3) may,
within 30 days of such determination, be
appealed to the Tax Court.

(e) Administrative record. (1) In gen-
eral. The administrative record comprises
all information contained in the adminis-
trative claim file that is relevant to the
award determination and not protected by
one or more common law or statutory
privileges.

(2) Administrative claim file. The ad-
ministrative claim file will include the fol-
lowing materials relating to the action(s)
to which the determination relates-

(i) The Form 211, "Application for
Award for Original Information," filed by
the whistleblower and all information pro-
vided by the whistleblower (whether pro-
vided with the whistleblower's original
submission or through a subsequent con-
tact with the IRS).

(ii) Copies of all debriefing notes and
recorded interviews held with the whistle-
blower (and the whistleblower's legal rep-
resentative, if any).

(iii) Form(s) 11369, "Confidential
Evaluation Report on Claim for Award,"
including narratives prepared by the rele-
vant IRS office(s), explaining the whistle-
blower's contributions to the actions and
documenting the actions taken by the IRS
in the case(s). The Form 11369 will refer
to and incorporate additional documents
relating to the issues raised by the claim,
as appropriate, including, for example,
relevant portions of revenue agent reports,
copies of agreements entered into with the

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taxpayer(s), tax returns, and activity re-
cords.

(iv) Copies of all contracts entered into
among the IRS, the whistleblower, and the
whistleblower's legal representative (if
any), and an explanation of the coopera-
tion provided by the whistleblower (or the
whistleblower's legal representative, if
any) under the contract.

(v) Any information that reflects ac-
tions by the whistleblower that may have
had a negative impact on the IRS's ability
to examine the taxpayer(s).

(vi) All correspondence and documents
sent by the Whistleblower Office to the
whistleblower.

(vii) All notes, memoranda, and other
documents made by officers and employ-
ees of the Whistleblower Office and con-
sidered by the official making the award
determination.

(viii) All correspondence and docu-
ments received by the Whistleblower Of-
fice from the whistleblower (and the
whistleblower's legal representative, if
any) in the course of the whistleblower
administrative proceeding.

(ix) All other information considered
by the official making the award determi-
nation.

(f) Effective/applicability date. This
rule is effective on August 12, 2014. This
rule applies to information submitted on
or after August 12, 2014, and to claims for
award under sections 7623(a) and 7623(b)
that are open as of August 12, 2014.

Par. 6. Section 301.7623-4 is added to
read as follows:

§ 301.7623-4 Amount and payment of
award.

(a) In general. The Whistleblower Of-
fice will pay all awards under section
7623(a) and determine and pay all awards
under section 7623(b). For all awards un-
der section 7623 and §§ 301.7623-1
through 301.7623-4, the Whistleblower
Office will-

(1) Analyze the claim by applying the
rules provided in paragraph (c) of this
section to the information contained in the
administrative claim file to determine an
award percentage; and

(2) Multiply the award percentage by
the amount of collected proceeds. If the
award determination arises out of a single

whistleblower administrative proceeding
involving multiple actions, the Whistle-
blower Office may determine separate
award percentages on an action-by-action
basis and apply the separate award per-
centages to the collected proceeds attrib-
utable to the corresponding actions. The
Internal Revenue Service (IRS) will pay
all awards in accordance with the rules
provided in paragraph (d) of this section.
All relevant factors will be taken into ac-
count by the Whistleblower Office in de-
termining whether an award will be paid
and, if so, the amount of the award. No
person is authorized under this section to
make any offer or promise or otherwise
bind the Whistleblower Office with re-
spect to the amount or payment of an
award.

(b) Factors used to determine award
percentage. (1) Positive factors. The ap-
plication of the following non-exclusive
factors may support increasing an award
percentage under paragraphs (c)(1) or (2)
of this section-

(i) The whistleblower acted promptly
to inform the IRS or the taxpayer of the
tax noncompliance.

(ii) The information provided identi-
fied an issue or transaction of a type pre-
viously unknown to the IRS.

(iii) The information provided identi-
fied taxpayer behavior that the IRS was
unlikely to identify or that was particu-
larly difficult to detect through the IRS's
exercise of reasonable diligence.

(iv) The information provided thor-
oughly presented the factual details of tax
noncompliance in a clear and organized
manner, particularly if the manner of the
presentation saved the IRS work and re-
sources.

(v) The whistleblower (or the whistle-
blower's legal representative, if any) pro-
vided exceptional cooperation and assis-
tance during the pendency of the action(s).

(vi) The information provided identi-
fied assets of the taxpayer that could be
used to pay liabilities, particularly if the
assets were not otherwise known to the
IRS.

(vii) The information provided identi-
fied connections between transactions, or
parties to transactions, that enabled the
IRS to understand tax implications that
might not otherwise have been understood
by the IRS.

(viii) The information provided had an
impact on the behavior of the taxpayer, for
example by causing the taxpayer to
promptly correct a previously-reported
improper position.

(2) Negative factors. The application of
the following non-exclusive factors may
support decreasing an award percentage
under paragraphs (c)(1) or (2) of this sec-
tion-

(i) The whistleblower delayed inform-
ing the IRS after learning the relevant
facts, particularly if the delay adversely
affected the IRS's ability to pursue an
action or issue.

(ii) The whistleblower contributed to
the underpayment of tax or tax noncom-
pliance identified.

(iii) The whistleblower directly or in-
directly profited from the underpayment
of tax or tax noncompliance identified, but
did not plan and initiate the actions that
led to the underpayment of tax or actions
described in section 7623(a)(2).

(iv) The whistleblower (or the whistle-
blower's legal representative, if any) neg-
atively affected the IRS's ability to pursue
the action(s), for example by disclosing
the existence or scope of an enforcement
activity.

(v) The whistleblower (or the whistle-
blower's legal representative, if any) vio-
lated instructions provided by the IRS,
particularly if the violation caused the IRS
to expend additional resources.

(vi) The whistleblower (or the whistle-
blower's legal representative, if any) vio-
lated the terms of the confidentiality
agreement described in § 301.7623-
3(c)(2)(iv).

(vii) The whistleblower (or the whistle-
blower's legal representative, if any) vio-
lated the terms of a contract entered into
with the IRS pursuant to § 301.6103(n)-2.

(viii) The whistleblower provided false
or misleading information or otherwise
violated the requirements of section
7623(b)(6)(C) or § 301.7623-1(c)(3).

(c) Amount of award percentage. (1)
Award for substantial contribution. (i) In
general. If the IRS proceeds with any
administrative or judicial action based on
information brought to the IRS's attention
by a whistleblower, such whistleblower
shall, subject to paragraphs (c)(2) and (3)
of this section, receive as an award at least
15 percent but not more than 30 percent of

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the collected proceeds resulting from the
action (including any related actions) or
from any settlement in response to such
action. The amount of any award under
this paragraph depends on the extent of
the whistleblower's substantial contribu-
tion to the action(s). See paragraph (c)(4)
of this section for rules regarding multiple
whistleblowers.

(ii) Computational framework. Starting
the analysis at 15 percent, the Whistle-
blower Office will analyze the administra-
tive claim file using the factors listed in
paragraph (b)(1) of this section to deter-
mine whether the whistleblower merits an
increased award percentage of 22 percent
or 30 percent. The Whistleblower Office
may increase the award percentage based
on the presence and significance of posi-
tive factors. The Whistleblower Office
will then analyze the contents of the ad-
ministrative claim file using the factors
listed in paragraph (b)(2) of this section to
determine whether the whistleblower mer-
its a decreased award percentage of 15
percent, 18 percent, 22 percent, or 26 per-
cent. The Whistleblower Office may de-
crease the award percentage based on the
presence and significance of negative fac-
tors. Although the factors listed in para-
graphs (b)(1) and (2) of this section are
described as positive and negative factors,
the Whistleblower Office's analysis can-
not be reduced to a mathematical equa-
tion. The factors are not exclusive and are
not weighted and, in a particular case, one
factor may override several others. The
presence and significance of positive fac-
tors may offset the presence and signifi-
cance of negative factors. But the absence
of negative factors does not constitute a
positive factor.

(iii) Examples. The operation of the
provisions of paragraph (c)(1)(ii) of this
section may be illustrated by the follow-
ing examples. The examples are intended
to illustrate the operation of the computa-
tional framework. The examples provide
simplified descriptions of the facts relat-
ing to the claims for award, the informa-
tion provided, and the facts relating to the
underlying tax cases. The application of
section 7623(b)(1) and paragraph
(c)(1)(ii) of this section will depend on the
specific facts of each case.

Example 1. Facts. Whistleblower A, an em-
ployee in Corporation's sales department, sub-

mitted to the IRS a claim for award under section
7623 and information indicating that Corpora-
tion improperly claimed a credit in tax year 2006.
Whistleblower A's information consisted of nu-
merous non-privileged documents relevant to
Corporation's eligibility for the credit. Whistle-
blower A's original submission also included an
analysis of the documents, as well as information
about meetings in which the claim for credit was
discussed. When interviewed by the IRS, Whistle-
blower A clarified ambiguities in the original sub-
mission, answered questions about Corporation's
business and accounting practices, and identified
potential sources to corroborate the information.

Some of the documents provided by Whistle-
blower A were not included in Corporation's gen-
eral record-keeping system and their existence
may not have been easily uncovered through nor-
mal IRS examination procedures. Corporation
initially denied the facts revealed in the informa-
tion provided by Whistleblower A, which were
essential to establishing the impropriety of the
claim for credit. IRS examination of Corpora-
tion's return confirmed that the credit was im-
properly claimed by Corporation in tax year
2006, as alleged by Whistleblower A. Corporation
agreed to the ensuing assessments of tax and in-
terest and paid the liabilities in full.

Analysis. In this case, Whistleblower A pro-
vided specific and credible information that
formed the basis for action by the IRS. Whistle-
blower A provided information that was difficult
to detect, provided useful assistance to the IRS,
and helped the IRS sustain the assessment. Based
on the presence and significance of these positive
factors, viewed against all the specific facts rele-
vant to Corporation's 2006 tax year, the Whistle-
blower Office could increase the award percent-
age to 22 percent of collected proceeds. If,
however, Whistleblower A's claim reflected neg-
ative factors, for example Whistleblower A vio-
lated instructions provided by the IRS and the
violation caused the IRS to expend additional
resources, then the Whistleblower Office could,
based on this negative factor, reduce the award
percentage to 18 or 15 percent (but not to lower
than 15 percent of collected proceeds).

Example 2. Facts. Whistleblower B, an em-
ployee of Financial Advisory Firm 1 (Firm 1),
submitted to the IRS a claim for award under
section 7623 and information indicating that
Firm 1 helped clients engage in activities that
were intended to, and did, result in substantial
tax underpayments. The activities were designed
to avoid detection by the IRS, and prior IRS
audits of several clients of Firm 1 had failed to
detect underpayments of tax. Whistleblower B
learned of the activities after being reassigned to
a new position with Firm 1. Whistleblower B
provided the information to the IRS soon after he
understood the scope, nature and impact of the
activities. The information provided consisted of
numerous documents containing client profiles
and marketing strategies, as well as descriptions
of the transactions and structures used by Firm 1
and its clients to obscure the clients' identities
and to generate the substantial tax underpay-
ments. Whistleblower B also provided an analysis

of the documents, as well as information about
meetings in which the transactions and structures
were discussed. When interviewed by the IRS,
Whistleblower B clarified ambiguities in the orig-
inal submission, answered questions about Firm
1's execution of specific client transactions, and
identified potential sources to corroborate the in-
formation provided. Whistleblower B also noti-
fied the IRS of steps taken by Firm 1 to limit the
disclosure of information requested by the IRS,
enabling the IRS to obtain full disclosure of the
information through the targeted use of sum-
monses.

Analysis. Ultimately, the IRS collected tax,
penalties, and interest from Firm 1 and multiple
clients. In addition, Treasury and the IRS issued
a notice identifying the impropriety of the trans-
actions and structures employed by Firm 1 and
its clients. Whistleblower B provided specific and
credible information that formed the basis for
action by the IRS. The information provided
identified transactions that were difficult to de-
tect. Whistleblower B acted promptly after he
understood the activities at issue and he provided
useful assistance to the IRS. Whistleblower B's
assistance, and the information he provided,
helped the IRS overcome the efforts made to
obscure the activities and the clients' identities.
And the information provided by Whistleblower
B contributed to the decision to issue the notice,
which may have a positive effect on client behav-
ior and save IRS resources. Based on the presence
and significance of these positive factors, the
Whistleblower Office could increase the award
percentage to 30 percent of collected proceeds. If
Whistleblower B directly or indirectly profited
from Firm 1's and the clients' activities resulting
in the tax underpayments, then the Whistle-
blower Office could, based on this negative factor,
reduce the award percentage to 26, 22, 18 percent
or 15 percent (but not to lower than 15 percent of
collected proceeds).

(2) Award for less substantial contri-
bution. (i) In general. If the Whistle-
blower Office determines that the action
described in paragraph (c)(1) of this sec-
tion is based principally on disclosures of
specific allegations resulting from a judi-
cial or administrative hearing; a govern-
ment report, hearing, audit, or investiga-
tion; or the news media, then the
Whistleblower Office will determine an
award of no more than 10 percent of the
collected proceeds resulting from the ac-
tion (including any related actions) or
from any settlement in response to such
action. If the whistleblower is the original
source of the information from which the
disclosures of specific allegations re-
sulted, however, then the award percent-
age will be determined under paragraph
(c)(1) of this section.

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(ii) Computational framework. The
Whistleblower Office will analyze the ad-
ministrative claim file to determine-

(A) Whether the claim involves spe-
cific allegations regarding a tax underpay-
ment or a violation of the internal revenue
laws that reasonably may be inferred to
have resulted from a judicial or adminis-
trative hearing; a government report, hear-
ing, audit, or investigation; or the news
media;

(B) Whether the action described in
paragraph (c)(1) of this section was based
principally on the disclosure of the spe-
cific allegations; and

(C) Whether the whistleblower was the
original source of the information that
gave rise to the specific allegations. If the
Whistleblower Office determines that the
action was based principally on disclo-
sures of specific allegations, as stated in
paragraph (c)(2)(ii)(B) of this section, and
that the whistleblower was not the original
source of the information, then, starting at
1 percent, the Whistleblower Office will
analyze the administrative claim file using
the factors listed in paragraph (b)(1) of
this section to determine whether the
whistleblower merits an increased award
percentage of 4 percent, 7 percent, or 10
percent. The Whistleblower Office will
then determine whether the whistleblower
merits a decreased award percentage of
zero, 1 percent, 4 percent, or 7 percent
using the factors listed in paragraph (b)(2)
of this section. The Whistleblower Office
may increase the award percentage based
on the presence and significance of posi-
tive factors and may decrease (to zero) the
award percentage based on the presence
and significance of negative factors. Like
the analysis described in paragraph
(c)(1)(ii) of this section, the Whistle-
blower Office's analysis cannot be re-
duced to a mathematical equation. The
factors are not exclusive and are not
weighted and, in a particular case, one
factor may override several others. The
presence and significance of positive fac-
tors may offset the presence and signifi-
cance of negative factors. But the absence
of negative factors does not constitute a
positive factor.

(iii) Example. The operation of the pro-
visions of paragraph (c)(2)(ii) of this sec-
tion may be illustrated by the following
example. The example is intended to il-

lustrate the operation of the computational
framework. The example provides a sim-
plified description of the facts relating to
the claim for award, the information pro-
vided, and the facts relating to the under-
lying tax case(s). The application of sec-
tion 7623(b)(2) and paragraph (c)(2)(ii) of
this section will depend on the specific
facts of each case.

Example. Facts. Whistleblower A submitted to
the IRS a claim for award under section 7623 and
information indicating that Taxpayer B was the
defendant in a criminal prosecution for embez-
zlement. Whistleblower A's information further
indicated that evidence presented at Taxpayer
B's trial revealed Taxpayer B's efforts to conceal
the embezzled funds by depositing them in bank
accounts of entities controlled by Taxpayer B.
Taxpayer B's failure to pay tax on the embezzled
funds was not explicitly stated during the judicial
hearing, but could be reasonably inferred from
the facts and circumstances, including Taxpayer
B's efforts to conceal the funds.

Analysis. In this case, Whistleblower A's in-
formation is based principally on disclosures of
specific allegations resulting from a judicial hear-
ing. Absent information demonstrating that the
investigation leading to the embezzlement charge
was based on information provided by Whistle-
blower A, section 7623(b)(2) and paragraph (c)(2)
of this section apply to the determination of
Whistleblower A's award. In this case, there is no
reason for the Whistleblower Office to increase
the applicable award percentage above 1 percent,
the starting point for its analysis, given the ab-
sence of positive factors. Accordingly, Whistle-
blower A may receive an award of 1 percent of
collected proceeds.

(3) Reduction in award and denial of
award. (i) In general. If the Whistle-
blower Office determines that a claim for
award is brought by a whistleblower who
planned and initiated the actions, transac-
tion, or events (underlying acts) that led to
the underpayment of tax or actions de-
scribed in section 7623(a)(2), then the
Whistleblower Office may appropriately
reduce the amount of the award percent-
age that would otherwise result under sec-
tion 7623(b)(1) and paragraph (c)(1) of
this section or section 7623(b)(2) and
paragraph (c)(2) of this section, as appli-
cable. The Whistleblower Office will deny
an award if the whistleblower is convicted
of criminal conduct arising from his or her
role in planning and initiating the under-
lying acts.

(ii) Threshold determination. A
whistleblower planned and initiated the
underlying acts if the whistleblower-

(A) Designed, structured, drafted, ar-
ranged, formed the plan leading to, or
otherwise planned, an underlying act,

(B) Took steps to start, introduce, orig-
inate, set into motion, promote or other-
wise initiate an underlying act, and

(C) Knew or had reason to know that
an underpayment of tax or actions de-
scribed in section 7623(a)(2) could result
from planning and initiating the underly-
ing act.

(D) The whistleblower need not have
been the sole person involved in planning
and initiating the underlying acts. A
whistleblower who merely furnishes typ-
ing, reproducing, or other mechanical as-
sistance in implementing one or more un-
derlying acts will not be treated as
initiating any underlying act. A whistle-
blower who is a junior employee acting at
the direction, and under the control, of a
senior employee will not be treated as
initiating any underlying act.

(E) If the Whistleblower Office deter-
mines that a whistleblower has satisfied
this initial threshold of planning and ini-
tiating, the Whistleblower Office will then
reduce the award amount based on the
extent of the whistleblower's planning
and initiating, pursuant to paragraph
(c)(3)(iii) of this section.

(iii) Computational framework. After
determining the award percentage that
would otherwise result from the applica-
tion of section 7623(b)(1) and paragraph
(c)(1) of this section or section 7623(b)(2)
and paragraph (c)(2) of this section, as
applicable, the Whistleblower Office will
analyze the administrative claim file to
make the threshold determination de-
scribed in paragraph (c)(3)(ii) of this sec-
tion. If the whistleblower is determined to
have planned and initiated the underlying
acts, then the Whistleblower Office will
reduce the award based on the extent of
the whistleblower's planning and initiat-
ing. The Whistleblower Office's analysis
and the amount of the appropriate reduc-
tion determined in a particular case cannot
be reduced to a mathematical equation. To
determine the appropriate award reduc-
tion, the Whistleblower Office will-

(A) Categorize the whistleblower's
role as a planner and initiator as primary,
significant, or moderate; and

(B) Appropriately reduce the award
percentage that would otherwise result

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from the application of section 7623(b)(1)
and paragraph (c)(1) of this section or
section 7623(b)(2) and paragraph (c)(2) of
this section, as applicable, by 67 percent
to 100 percent in the case of a primary
planner and initiator, by 34 percent to 66
percent in the case of a significant planner
and initiator, or by 0 percent to 33 percent
in the case of a moderate planner and
initiator. If the whistleblower is convicted
of criminal conduct arising from his or her
role in planning and initiating the under-
lying acts, then the Whistleblower Office
will deny an award without regard to
whether the Whistleblower Office catego-
rized the whistleblower's role as a planner
and initiator as primary, significant, or
moderate.

(iv) Factors demonstrating the extent
of a whistleblower's planning and initiat-
ing. The application of the following non-
exclusive factors may support a determi-
nation of the extent of a whistleblower's
planning and initiating of the underlying
acts-

(A) The whistleblower's role as a plan-
ner and initiator. Was the whistleblower
the sole decision-maker or one of several
contributing planners and initiators? To
what extent was the whistleblower acting
under the direction and control of a super-
visor?

(B) The nature of the whistleblower's
planning and initiating activities. Was the
whistleblower involved in legitimate tax
planning activities? Did the whistleblower
take steps to hide the actions at the plan-
ning stage? Did the whistleblower commit
any identifiable misconduct (legal, ethical,
etc.)?

(C) The extent to which the whistle-
blower knew or should have known that
tax noncompliance could result from the
course of conduct.

(D) The extent to which the whistle-
blower acted in furtherance of the non-
compliance, including, for example, ef-
forts to conceal or disguise the
transaction.

(E) The whistleblower's role in identi-
fying and soliciting others to participate in
the actions reported, whether as parties to
a common transaction or as parties to sep-
arate transactions.

(v) Examples. The operation of the pro-
visions of paragraphs (c)(3)(ii) and (iii) of
this section may be illustrated by the fol-

lowing examples. These examples are in-
tended to illustrate the operation of the
computational framework. The examples
provide simplified descriptions of the
facts relating to the claim for award, the
information provided, and the facts relat-
ing to the underlying tax case. The appli-
cation of section 7623(b)(3) and para-
graph (c)(3) of this section will depend on
the specific facts of each case.

Example 1. Facts. Whistleblower A is em-
ployed as a junior associate in a law firm and is
responsible for performing research and drafting
activities for, and under the direction and control
of, partners of the law firm. Whistleblower A
performed research on financial products for
Partner B that Partner B used in advising a client
(Corporation 1) on a financial strategy. After
Corporation 1 executed the strategy, Whistle-
blower A submitted a claim for award under
section 7623 along with information about the
strategy to the IRS. The IRS initiated an exami-
nation of Corporation 1 based on Whistleblower
A's information, determined deficiencies in tax
and penalties, and ultimately assessed and col-
lected the tax and penalties as determined.

Analysis. Whistleblower A did nothing to de-
sign or set into motion Corporation 1's activities.
Whistleblower A did not know or have reason to
know that an underpayment of tax or actions
described in section 7623(a)(2) could result from
the research and drafting activities. Accordingly,
as a threshold matter, Whistleblower A was not a
planner and initiator of Corporation 1's strategy,
and the award that would otherwise be deter-
mined based on the application of section
7623(b)(1) and paragraph (c)(1) of this section is
not subject to reduction under section 7623(b)(3)
and paragraph (c)(3) of this section.

Example 2. Facts. Whistleblower C is em-
ployed in the human resources department of a
corporation (Corporation 2). Corporation 2
tasked Whistleblower C with hiring a large num-
ber of temporary employees to meet Corporation
2's seasonal business demands. Whistleblower C
organized, scheduled, and conducted job fairs
and job interviews to hire the seasonal employees.
Whistleblower C was not responsible for, had no
knowledge of, and played no part in, classifying
the seasonal employees for Federal income tax
purposes. Whistleblower C later discovered, how-
ever, that Corporation 2 classified the seasonal
employees as independent contractors. After dis-
covering the misclassification, Whistleblower C
submitted a claim for award under section 7623
along with non-privileged information describing
the employee misclassification to the IRS. The
IRS initiated an examination of Corporation 2
based on Whistleblower C's information, deter-
mined deficiencies in tax and penalties, and ulti-
mately assessed and collected the tax and penal-
ties as determined.

Analysis. The award that would otherwise be
determined based on the application of section
7623(b)(1) and paragraph (c)(1) of this section
would not be subject to a reduction under section

7623(b)(3) and paragraph (c)(3) of this section
because Whistleblower C did not satisfy the re-
quirements of the threshold determination of a
planner and initiator. Whistleblower C did not
know and had no reason to know that her actions
could result in an underpayment of tax or actions
described in section 7623(a)(2) or that Corpora-
tion 2 would misclassify the employees as inde-
pendent contractors.

Example 3. Facts. Whistleblower D is em-
ployed as a supervisor in the finance department
of a corporation (Corporation 3) and is responsi-
ble for planning Corporation 3's overall financial
strategy. Pursuant to the overall financial strat-
egy, Whistleblower D and others at Corporation
3, in good faith but incorrectly, planned tax-
advantaged transactions. Whistleblower D and
others at Corporation 3 prepared documents
needed to execute the transactions. After Corpo-
ration 3 executed the transactions, Whistleblower
D reached the conclusion that the tax conse-
quences claimed were incorrect and Whistle-
blower D submitted a claim for award under
section 7623 along with non-privileged informa-
tion about the transactions to the IRS. The IRS
initiated an examination of Corporation 3 based
on Whistleblower D's information, determined
deficiencies in tax and penalties, and ultimately
assessed and collected the tax and penalties as
determined.

Analysis. The award that would otherwise be
determined based on the application of section
7623(b)(1) and paragraph (c)(1) of this section
would be subject to an appropriate reduction
under section 7623(b)(3) and paragraph (c)(3) of
this section because Whistleblower D satisfies the
requirements of the threshold determination of a
planner and initiator. Whistleblower D planned
the transactions, prepared the necessary docu-
ments, and knew that an underpayment of tax
could result from the transactions. Whistleblower
D was not the sole planner and initiator of Cor-
poration 3's transactions. Whistleblower D did
nothing to conceal Corporation 3's activities.
Corporation 3 had a good faith basis for claiming
the disallowed tax benefits. On the basis of those
facts, Whistleblower D was a moderate-level
planner and initiator. Accordingly, the Whistle-
blower Office will exercise its discretion to reduce
Whistleblower D's award by 0 to 33 percent.

Example 4. Facts. Same facts as Example 3,
except that Whistleblower D independently
planned a high-risk tax avoidance transaction
and prepared draft documents to execute the
transaction. Whistleblower D presented the
transaction, along with the draft documents, to
Corporation 3's Chief Financial Officer. Without
the further involvement of Whistleblower D, Cor-
poration 3's Chief Financial Officer, Chief Exec-
utive Officer, and Board of Directors subse-
quently approved the execution of the
transaction. After Corporation 3 executed the
transaction, Whistleblower D submitted a claim
for award under section 7623 along with non-
privileged information about the transaction to
the IRS. The IRS initiated an examination of
Corporation 3 based on Whistleblower D's infor-
mation, determined deficiencies in tax and penal-

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ties, and ultimately assessed and collected the tax
and penalties as determined.

Analysis. The award that would otherwise be
determined based on the application of section
7623(b)(1) and paragraph (c)(1) of this section
would be subject to an appropriate reduction
under section 7623(b)(3) and paragraph (c)(3) of
this section because Whistleblower D satisfies the
requirements of the threshold determination of a
planner and initiator. Whistleblower D planned
the transaction, prepared the necessary docu-
ments, and knew that an underpayment of tax or
actions described in section 7623(a)(2) could re-
sult from the transaction. Working indepen-
dently, Whistleblower D designed and took steps
to effectuate the transaction while knowing that
the planning and initiating of the transaction was
likely to result in tax noncompliance. Whistle-
blower D, however, did not approve the execution
of the transaction by Corporation 3 and, there-
fore, was not a decision-maker. On the basis of
these facts, Whistleblower D was a significant-
level planner and initiator. Accordingly, the
Whistleblower Office will exercise its discretion to
reduce Whistleblower D's award by 34 to 66 per-
cent.

Example 5. Facts. Whistleblower E is a finan-
cial planner. Whistleblower E designed a finan-
cial product that the IRS identified as an abusive
tax avoidance transaction. Whistleblower E mar-
keted the transaction to taxpayers, facilitated
their participation in the transaction, and, ini-
tially, took steps to disguise the transaction. After
several taxpayers had participated in the trans-
action, Whistleblower E submitted a claim for
award under section 7623 along with non-
privileged information to the IRS about the trans-
action and the participating taxpayers. The IRS
initiated an examination of the identified taxpay-
ers based on Whistleblower E's information, de-
termined deficiencies in tax and penalties, and
ultimately assessed and collected the tax and pen-
alties as determined. Whistleblower E was not
criminally prosecuted.

Analysis. The award that would otherwise be
determined based on the application of section
7623(b)(1) and paragraph (c)(1) of this section
would be subject to an appropriate reduction
under section 7623(b)(3) and paragraph (c)(3) of
this section because Whistleblower E satisfies the
requirements of the threshold determination of a
planner and initiator. Whistleblower E designed
the financial product, marketed and facilitated its
use by taxpayers, and knew that an underpay-
ment of tax or actions described in section
7623(a)(2) could result from the transaction.
Whistleblower E was the sole designer of the
transaction, solicited clients to participate in the
transaction, and facilitated and attempted to con-
ceal their participation in the transaction.
Whistleblower E knew that the planning and ini-
tiating of the taxpayers' participation in the
transaction was likely to result in an underpay-
ment of tax or actions described in section
7623(a)(2). On the basis of these facts, Whistle-
blower E was a primary-level planner and initi-
ator. Accordingly, the Whistleblower Office will

exercise its discretion to reduce Whistleblower
E's award by 67 to 100 percent.

(4) Multiple whistleblowers. If two or
more independent claims relate to the
same collected proceeds, then the
Whistleblower Office may evaluate the
contribution of each whistleblower to the
action(s) that resulted in collected pro-
ceeds. The Whistleblower Office will de-
termine whether the information submit-
ted by each whistleblower would have
been obtained by the IRS as a result of the
information previously submitted by any
other whistleblower. If the Whistleblower
Office determines that multiple whistle-
blowers submitted information that would
not have been obtained based on a prior
submission, then the Whistleblower Of-
fice will determine the amount of each
whistleblower's award based on the extent
to which each whistleblower contributed
to the action(s). The aggregate award
amount in cases involving two or more
independent claims that relate to the same
collected proceeds will not exceed the
maximum award amount that could have
resulted under section 7623(b)(1) or sec-
tion 7623(b)(2), as applicable, subject to
the award reduction provisions of section
7623(b)(3), if a single claim had been
submitted.

(d) Payment of Award. (1) In general.
The IRS will pay any award determined
under section 7623 and §§ 301.7623-1
through 301.7623-4 to the whistleblow-
er(s) that filed the corresponding claim for
award. Payment of an award will be made
as promptly as the circumstances permit,
but not until there has been a final deter-
mination of tax with respect to the ac-
tion(s), as defined in paragraph (d)(2) of
this section, the Whistleblower Office has
determined the award, and all appeals of
the Whistleblower Office's determination
are final or the whistleblower has exe-
cuted an award consent form agreeing to
the amount of the award and waiving the
whistleblower's right to appeal the deter-
mination.

(2) Final determination of tax. (i) In
general. For purposes of §§ 301.7623-1
through 301.7623-4, a final determina-
tion of tax means that the proceeds result-
ing from the action(s) subject to the award
determination have been collected and ei-
ther the statutory period for filing a claim
for refund has expired or the taxpayer(s)

subject to the action(s) and the IRS have
agreed with finality to the tax or other
liabilities for the period(s) at issue and the
taxpayer(s) have waived the right to file a
claim for refund. A final determination of
tax does not preclude a subsequent final
determination of tax if the IRS proceeds
based on the information provided follow-
ing the payment, denial, or rejection of an
award.

(ii) Example. The provisions of para-
graph (d)(2)(i) of this section, regarding
subsequent final determination of tax, may
be illustrated by the following example:

Example. Information provided to the IRS by
a whistleblower, under section 7623 and
§ 301.7623-1, identifies a taxpayer (Corporation
1), describes and documents specific facts relating
to Corporation 1's activities, and, based on those
facts, alleges that Corporation 1 owed additional
taxes in Year 1. The Whistleblower Office pro-
cesses the incoming claim and provides the infor-
mation to an IRS Operating Division (Operating
Division 1). Operating Division 1 reviews the
claim and the allegations and ultimately decides
not to proceed with an action against Corporation
1\. Operating Division 1 conveys its determination
not to proceed with an action against Corporation
1 to the Whistleblower Office on a Form 11369
along with all of the relevant supporting docu-
ments. The Whistleblower Office provides written
notice to the whistleblower, denying any award
pursuant to § 301.7623-3(c)(8), and the whistle-
blower does not appeal the notice to Tax Court
within 30 days.

Two months after the Whistleblower Office
denies the award, the Whistleblower Office rec-
ognizes a potential connection between the infor-
mation provided and a recently-initiated, ongo-
ing, examination of a second taxpayer by a second
IRS Operating Division (Operating Division 2).
The Whistleblower Office provides the informa-
tion to Operating Division 2. Operating Division 2
evaluates the information and proceeds with an
action against Taxpayer 2 based on the informa-
tion provided. Ultimately, Operating Division 2
assesses and collects taxes resulting from the ac-
tion and totaling $3 million. Following the con-
clusion of the whistleblower's participation in a
whistleblower administrative proceeding de-
scribed in § 301.7623-3(c) and the expiration of
the statutory period for filing a claim for refund
by Taxpayer 2, the Whistleblower Office deter-
mines the amount of the award and communi-
cates the award to the whistleblower in a deter-
mination letter. The whistleblower may appeal
the notice to the Tax Court within 30 days.

(3) Joint Whistleblowers. If multiple
whistleblowers jointly submit a claim for
award, the IRS will pay any award in
equal shares to the joint whistleblowers
unless the joint whistleblowers specify a
different allocation in a written agree-
ment, signed by all the joint whistleblow-

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ers and notarized, and submitted with the
claim for award. The aggregate award
payment in cases involving joint whistle-
blowers will be within the award percent-
age range of section 7623(b)(1) or section
7623(b)(2), as applicable, and subject to
the award reduction provisions of section
7623(b)(3).

(4) Deceased Whistleblower. If a
whistleblower dies before or during the
whistleblower administrative proceeding,
the Whistleblower Office may substitute
an executor, administrator, or other legal

representative on behalf of the deceased
whistleblower for purposes of conducting
the whistleblower administrative proceeding.

(5) Tax treatment of award. All awards
are includible in gross income and subject
to current Federal tax reporting and with-
holding requirements.

(e) Effective/applicability date. This
rule is effective on August 12, 2014. This
rule applies to information submitted on
or after August 12, 2014, and to claims for
award under section 7623(b) that are open
as of August 12, 2014.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: July 20, 2014

Mark J. Mazur,
Assistant Secretary of the Treasury
(Tax Policy).

(Filed by the Office of the Federal Register on August 7,
2014, 11:15 a.m., and published in the issue of the Federal
Register for August 12, 2014, 79 F.R. 47246)

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## Part III. Administrative, Procedural, and Miscellaneous

Clarification and Modification
of Notice 2013-29 and
Notice 2013-60

Notice 2014-46

### SECTION 1. PURPOSE

On January 2, 2013, the American
Taxpayer Relief Act of 2012, Pub. L. No.
112-240, 126 Stat. 2313 (ATRA), modi-
fied the definition of certain qualified fa-
cilities under section 45(d) of the Internal
Revenue Code (the Code) by replacing the
placed in service requirement with a be-
ginning of construction requirement. Ac-
cordingly, a taxpayer will be eligible to
receive the renewable electricity produc-
tion tax credit (PTC) under section 45, or
the energy investment tax credit (ITC)
under section 48 in lieu of the PTC, with
respect to such a facility if construction of
such facility began before January 1,
2014.

Notice 2013-29, 2013-1 C.B. 1085,
provides two methods to determine when
construction has begun on a qualified fa-
cility: (i) a "physical work" test and (ii) a
five percent safe harbor. Notice 2013-60,
2013-2 C.B. 431, clarifies Notice
2013-29 regarding (i) the determination
of whether a taxpayer satisfies either the
continuous construction requirement or
the continuous efforts requirement of
those methods with respect to a facility,
(ii) the applicability of the "master con-
tract" provision, and (iii) the ability to
transfer a facility after construction has
begun. This notice further clarifies No-
tices 2013-29 and 2013-60 regarding (i)
how to satisfy the physical work test and
(ii) the effect of various types of transfers
with respect to a facility after construction
has begun. In addition, this notice modi-
fies the application of the five percent safe
harbor.

The guidance provided in this notice
applies the rules of sections 45 and 48 as
in effect on January 1, 2014. The Internal
Revenue Service (Service) will not issue
private letter rulings to taxpayers regard-
ing the application of this notice or the
application of the beginning of construc-
tion requirement under sections 45(d) and

48(a)(5) as provided in Notice 2013-29
and Notice 2013-60.

### SECTION 2. BACKGROUND

A taxpayer may establish the begin-
ning of construction by beginning physi-
cal work of a significant nature as de-
scribed in section 4 of Notice 2013-29
(Physical Work Test). Alternatively, a
taxpayer may establish the beginning of
construction by meeting the safe harbor
provided in section 5 of Notice 2013-29
(Safe Harbor). A taxpayer can satisfy the
Safe Harbor with respect to a facility by
demonstrating, after the facility is placed
in service, that five percent or more of the
total cost of the facility was paid or in-
curred before January 1, 2014. Both meth-
ods require that a taxpayer make continu-
ous progress towards completion once
construction has begun (as set forth in
section 4.06 (Continuous Construction
Test) and section 5.02 (Continuous Efforts
Test) of Notice 2013-29, respectively).

In response to a significant number of
questions received after the publication of
Notice 2013-29, the Treasury Department
and the Service issued Notice 2013-60,
which in part clarifies that the transfer of a
facility after construction has begun will
not necessarily prevent a facility from
qualifying for the PTC or the ITC. Addi-
tionally, section 3.02 of Notice 2013-60
provides a method for taxpayers to satisfy
either the Continuous Construction Test
or the Continuous Efforts Test. If a tax-
payer places a facility in service before
January 1, 2016, the facility will be con-
sidered to satisfy the Continuous Con-
struction Test (for purposes of satisfying
the Physical Work Test) or the Continu-
ous Efforts Test (for purposes of satisfy-
ing the Safe Harbor), regardless of the
amount of physical work performed or the
amount of costs paid or incurred with re-
spect to the facility between December 31,
2013, and January 1, 2016.

After the publication of Notice 2013-
60, the Treasury Department and the Ser-
vice received requests for further clarifi-
cation regarding how to satisfy the
Physical Work Test as well as questions
regarding the effect of various types of
transfers with respect to a facility after

construction has begun. This notice clari-
fies the application of the Physical Work
Test and the effect that certain transfers
with respect to a facility after construction
has begun will have on a taxpayer's abil-
ity to qualify for the PTC or the ITC. In
addition, this notice modifies the applica-
tion of the Safe Harbor for certain facili-
ties with respect to which a taxpayer paid
or incurred less than five percent, but at
least three percent, of the total cost of the
facility before January 1, 2014.

## SECTION 3. PHYSICAL WORK TEST

The Physical Work Test requires that a
taxpayer begin physical work of a signif-
icant nature (as defined in section 4.02 of
Notice 2013-29) prior to January 1, 2014.
This test focuses on the nature of the work
performed, not the amount or cost. Notice
2013-29 describes several activities that
constitute physical work of a significant
nature. These activities are merely exam-
ples and not an exclusive list of the activ-
ities that will satisfy the Physical Work
Test. For example, section 4.02 of Notice
2013-29 provides:

In the case of a facility for the production of
electricity from a wind turbine, on-site physical
work of a significant nature begins with the
beginning of the excavation for the foundation,
the setting of anchor bolts into the ground, or
the pouring of the concrete pads of the foun-
dation.

Section 4.05(1) of Notice 2013-29 provides:
Physical work on a custom-designed trans-
former that steps up the voltage of electricity
produced at the facility to the voltage needed
for transmission is physical work of a signifi-
cant nature with respect to the facility because
power conditioning equipment is an integral
part of the activity performed by the facility.
Section 4.05(2) of Notice 2013-29 provides:
Roads that are integral to the facility are inte-
gral to the activity performed by the facility;
these include onsite roads that are used for
moving materials to be processed (for example,
biomass) and roads for equipment to operate
and maintain the qualified facility. Starting
construction on these roads constitutes physical
work of a significant nature with respect to the
facility.

Beginning work on any one of the ac-
tivities described above will constitute
physical work of a significant nature.

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Section 4.04(3) of Notice 2013-29 pro-
vides an example in which X, a developer
of a 50 turbine wind farm, is found to
satisfy the beginning of construction re-
quirement in part based on the stated fact
that, in 2013, for 10 of the 50 turbines, X
excavates the site for the foundations of
the wind turbines and pours concrete for
the supporting pads. This example illus-
trates the "single project" concept set
forth in section 4.04(2) of Notice 2013-29
and is not intended to indicate that there is
a 20% threshold or minimum amount of
work required to satisfy the Physical
Work Test.

Assuming the work performed is of a
significant nature, there is no fixed mini-
mum amount of work or monetary or per-
centage threshold required to satisfy the
Physical Work Test.

As provided in section 4.01 of Notice
2013-29 the Service will closely scruti-
nize a facility, and may determine that
construction has not begun on a facility
before January 1, 2014, if a taxpayer does
not maintain a continuous program of
construction as determined under section
4.06 of Notice 2013-29 and section 3.02
of Notice 2013-60.

## SECTION 4. TRANSFERS WITH RESPECT TO A FACILITY

.01 In general. Certain of the defini-
tions of a qualified facility provided in
section 45(d) require that the construction
of the facility begin before January 1,
2014. There is no statutory requirement
that the taxpayer that places the facility in
service also be the taxpayer that begins
construction of the facility. See Notice
2013-60, section 5.01. Moreover, section
48(a)(5)(D) defines "qualified property"
(which may be eligible for the ITC in lieu
of the PTC) as certain property that is
"constructed, reconstructed, erected, or

acquired by the taxpayer." (Emphasis
added.) Thus, except as provided in sec-
tion 4.03 of this notice, a fully or partially
developed facility may be transferred
without losing its qualification under the
Physical Work Test or the Safe Harbor for
purposes of the PTC or the ITC. For ex-
ample, a taxpayer may acquire a facility
(that consists of more than just tangible
personal property) from an unrelated de-
veloper that had begun construction of the
facility prior to January 1, 2014, and

thereafter the taxpayer may complete the
development of that facility and place it in
service. The work performed or amount
paid or incurred prior to January 1, 2014,
by the unrelated transferor developer may
be taken into account for purposes of de-
termining whether the facility satisfies the
Physical Work Test or Safe Harbor.

.02 Relocation of equipment by a tax-
payer. A taxpayer also may begin con-
struction of a facility in 2013 with the
intent to develop the facility at a certain
site, but thereafter transfer equipment and
other components of the facility to a dif-
ferent site, complete its development, and
place it in service. The work performed or
amount paid or incurred prior to January
1, 2014, by such a taxpayer may be taken
into account for purposes of determining
whether the facility satisfies the Physical
Work Test or the Safe Harbor.

.03 Transfers of equipment between
unrelated parties. In the case of a transfer
consisting solely of tangible personal
property (including contractual rights to
such property under a binding written
contract) to a transferee not related (de-
fined for these purposes by reference to
section 197(f)(9)(C)) to the transferor, any
work performed or amount paid or in-
curred by the transferor with respect to
such property so transferred will not be
taken into account with respect to the
transferee for purposes of the Physical
Work Test or the Safe Harbor.

Example. Developer D intends to develop and
operate Facility K at a location to be determined.
Prior to January 1, 2014, Developer D pays or incurs
$60,000 to have tangible personal property integral
to Facility K manufactured off-site pursuant to a
binding written contract. Thereafter Developer D
incurs no further development costs and engages in
no further development activity with respect to Fa-
cility K. In January 2014, Developer D sells the
tangible personal property to Developer E, a party
unrelated to Developer D. Developer E is developing
and intends to operate Facility L, a facility located on
a parcel of land owned by Developer E. Developer E
incorporates the tangible personal property acquired
from Developer D into Facility L. In October 2015,
Developer E places Facility L in service on the
parcel of land. The total cost of Facility L is
$1,000,000.

Amounts paid or incurred by Developer D prior
to January 1, 2014, for the tangible personal property
will not be taken into account for purposes of satis-
fying the Safe Harbor with respect to Facility L.
However, if without regard to these components,
Developer E has otherwise satisfied the Physical
Work Test or the Safe Harbor with respect to Facility
L, Developer E will be eligible to claim the PTC

with respect to electricity generated by Facility L
and sold to an unrelated party. In such a case, De-
veloper E may alternatively elect to claim the ITC in
lieu of the PTC.

## SECTION 5. SAFE HARBOR

.01 Single project. If the amount a tax-
payer paid or incurred before January 1,
2014, with respect to the total cost of a
facility that is a single project comprised
of multiple facilities (as described in sec-
tion 4.04(2) of Notice 2013-29) is less
than five percent of the total cost of the
facility at the time the facility is placed in
service, the Safe Harbor is not fully satis-
fied. However, if a taxpayer paid or in-
curred at least three percent of the total
cost of such a facility before January 1,
2014, the Safe Harbor may be satisfied
and the PTC or ITC may be claimed with
respect to some, but not all, of the indi-
vidual facilities (as described in section
4.04(1) of Notice 2013-29) comprising
the project. In this situation, a taxpayer
may claim the PTC or ITC on any number
of individual facilities as long as the total
aggregate cost of those individual facili-
ties at the time the project is placed in
service is not greater than twenty times
the amount the taxpayer paid or incurred
before January 1, 2014. The Continuous
Efforts Test of section 5.02 of Notice
2013-29 must also be met to qualify for
the Safe Harbor.

.02 Single facility. If the amount a tax-
payer actually paid or incurred before Jan-
uary 1, 2014, with respect to the total cost
of a single facility that is not a single
project comprised of multiple individual
facilities (as described in section 4.04(2)
of Notice 2013-29), and that cannot be
separated into individual facilities, is less
than five percent of the total cost of the
facility at the time the facility is placed in
service, then the taxpayer will not satisfy
the Safe Harbor with respect to any por-
tion of the facility.

.03 Examples - (a) Example 1. Developer incurs
$30,000 in costs prior to January 1, 2014, to con-
struct Project M, a five-turbine wind farm, that will
be operated as a single project (as described in
section 4.04(2) of Notice 2013-29). In October
2015, Developer places Project M in service. The
total cost of Project M is $800,000, with each turbine
costing $160,000. Although Developer did not pay
or incur five percent of the total cost of Project M
before January 1, 2014, Developer did pay or incur
at least three percent of the total cost of Project M
before January 1, 2014. In addition, because Devel-

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oper placed Project M in service before January 1,
2016, Developer is deemed to satisfy the Contin-
uous Efforts Test pursuant to section 3.02 of No-
tice 2013-60. Accordingly, Developer will be
treated as satisfying the Safe Harbor with respect
to three of the turbines of Project M, as their total
aggregate cost of $480,000 is not greater than
twenty times the $30,000 in costs incurred by
Developer prior to January 1, 2014. Thus, Devel-
oper may claim the PTC on electricity produced
from three of the turbines of Project M or the ITC
based on $480,000, the cost of three of the tur-
bines of Project M.

(b) Example 2. Developer incurs $25,000 in costs
prior to January 1, 2014, to construct Facility N, an
open-loop biomass facility, partly comprised of one
boiler and one turbine generator that are functionally
interdependent. In October 2015, Developer places
Facility N in service. The total cost of Facility N is
$600,000. Because Developer did not pay or incur
five percent of the actual total cost of Facility N
before January 1, 2014, and because the boiler and
turbine generator are integral parts of a single facility
that is not a single project comprised of multiple
facilities (as described in section 4.04(2) of Notice
2013-29), Developer will not satisfy the Safe Har-
bor. However, if physical work of a significant na-
ture began (within the meaning of section 4.01 of
Notice 2013-29, as clarified by section 3 of this
notice) before January 1, 2014, Developer may be
able to claim the PTC or the ITC with respect to
Facility N.

## SECTION 6. EFFECT ON OTHER DOCUMENTS

Notice 2013-29, 2013-1 C.B. 1085,
and Notice 2013-60, 2013-2 C.B. 431,
are clarified and modified.

## SECTION 7. DRAFTING INFORMATION

The principal author of this notice is
Jennifer C. Bernardini of the Office of
Associate Chief Counsel (Passthroughs &
Special Industries). For further informa-
tion regarding this notice contact Ms. Ber-
nardini on (202) 317-6853 (not a toll-free
number).

## Health Insurance Providers Fee Notice 2014-47

Section 1. PURPOSE

This notice provides guidance for the
2014 fee year on how the Internal Reve-
nue Service (IRS) and the Department of
Treasury (Treasury) will administer the
definition of a covered entity for purposes

of the fee imposed by § 9010 of the Pa-
tient Protection and Affordable Care Act
(PPACA), Public Law 111-148 (124 Stat.
119 (2010)), as amended by § 10905 of
PPACA, and as further amended by
§ 1406 of the Health Care and Education
Reconciliation Act of 2010, Public Law
111-152 (124 Stat. 1029 (2010)) (collec-
tively, the ACA). This notice applies only
to the 2014 fee year. All references to
§ 9010 are references to § 9010 of the
ACA.

Specifically, this notice resolves confu-
sion as to the scope of the exclusions in
§ 9010(c)(2) from the general definition of
the term covered entity. Additionally, this
notice clarifies that a controlled group
does not have to report for a controlled
group member who would not qualify as a
covered entity in the 2014 fee year if it
were a single-person covered entity.

## Section 2. BACKGROUND

Section 9010(c)(1) defines the term
"covered entity" to mean any entity that
provides health insurance for any United
States health risk during the calendar year
in which the fee is due (the fee year).

Generally, § 9010(c)(2) excludes from
the definition of covered entity- (A) self-
insured employers; (B) governmental en-
tities; (C) certain nonprofit corporations;
and (D) non-employer established
§ 501(c)(9) entities.

Section 9010(c)(3) provides that for
purposes of § 9010(c), all persons treated
as a single employer under subsection (a)
or (b) of § 52 of the Internal Revenue
Code (Code), or subsection (m) or (o) of
§ 414 shall be treated as a single covered
entity (or employer for purposes of
§ 9010(c)(2)).

Section 57.2(c)(1) of the Health Insur-
ance Providers Fee Regulations (Regula-
tions) defines the term "controlled group"
to mean a group of two or more persons,
including at least one person that is a
covered entity, that is treated as a single
employer under § 52(a), 52(b), 414(m), or
414(o) of the Code.

Section 57.2(c)(2) of the Regulations
treats a controlled group (as defined in
§ 57.2(c)(1)) as a single covered entity for
purposes of the health insurance providers
fee.

Section 57.2(d) defines the term data
year to mean the calendar year immedi-
ately before the fee year.

Section 57.2(g) defines the term fee
year to mean the calendar year in which
the fee must be paid to the government.

## Section 3. DISCUSSION

For the 2014 fee year, the IRS and
Treasury will not treat any entity as a
covered entity if it is excluded from the
definition of a covered entity because it
qualifies for one of the exclusions under
§ 9010(c)(2) for the entire 2013 data year
or qualifies for one of the exclusions un-
der § 9010(c)(2) for the entire 2014 fee
year, which began on January 1, 2014.
Since the IRS and Treasury will not treat
such an entity as a covered entity, it
should not report its net premiums written
for the 2013 data year.

In addition, for the 2014 fee year, a
controlled group must report net premi-
ums written only for those persons who
are controlled group members at the end
of the day on December 31 of the 2013
data year and who would qualify as a
covered entity in the fee year if it were a
single-person covered entity. A controlled
group should not report net premiums
written for any controlled group member
who would not qualify as a covered entity
in the 2014 fee year if it were a single-
person covered entity.

Such entity will be treated as a member
of the controlled group for other purposes,
however, such as joint and several liability
for the fee amount allocated to the con-
trolled group. Additional guidance will be
issued in the future regarding the scope of
the exclusions in § 9010(c)(2) from the
general definition of the term covered en-
tity for fee years after the 2014 fee year.

## Section 4. CORRECTIVE ACTIONS/ APPLICABILITY

Any entity that needs to correct a pre-
viously submitted Form 8963, "Report of
Health Insurance Provider Information,"
due to the clarification provided in this
notice must do so by faxing the corrected
Form 8963 to 877-797-0235 (a toll-free
number) no later than Monday, August
18, 2014. The IRS cannot process a Form
8963 received after this date. This notice
applies only to the 2014 fee year.

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The IRS and Treasury recognize that en-
tities will not know whether they qualify for
one of the exclusions under § 9010(c)(2) for
the entire 2014 fee year until the end of
2014. Entities that reasonably project that
they will qualify for an exclusion under
§ 9010(c)(2) for the entire 2014 fee year
may submit a corrected Form 8963 on or
before August 18, 2014, even though the
2014 fee year is not yet over.

## Section 5. DRAFTING INFORMATION

The principal author of this notice is
Natalie Payne of the Office of the Asso-
ciate Chief Counsel (Passthroughs & Spe-
cial Industries). For further information re-
garding this notice please contact Ms. Payne
at (202) 317-6855 (not a toll-free number).

# Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates

## Notice 2014-48

This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used un-
der § 417(e)(3), and the 24-month average
segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the interest
rate on 30-year Treasury securities under
§ 417(e)(3)(A)(ii)(II) as in effect for plan
years beginning before 2008 and the 30-
year Treasury weighted average rate un-
der § 431(c)(6)(E)(ii)(I). The rates in this
notice reflect the application of
§ 430(h)(2)(C)(iv), which was added by
the Moving Ahead for Progress in the 21st
Century Act, Public Law 112-141 (MAP-

21\) and amended by section 2003 of the
Highway and Transportation Funding Act
of 2014 (HATFA).

## YIELD CURVE AND SEGMENT RATES

Generally, except for certain plans under
sections 104 and 105 of the Pension Protec-
tion Act of 2006 and CSEC plans under
§ 414(y), § 430 of the Code specifies the
minimum funding requirements that apply
to single-employer plans pursuant to § 412.
Section 430(h)(2) specifies the interest rates
that must be used to determine a plan's
target normal cost and funding target. Under
this provision, present value is generally de-
termined using three 24-month average in-
terest rates ("segment rates"), each of which
applies to cash flows during specified peri-
ods. To the extent provided under
§ 430(h)(2)(C)(iv), these segment rates are
adjusted by the applicable percentage of the
25-year average segment rates for the period
ending September 30 of the year preceding
the calendar year in which the plan year
begins. However, an election may be made
under § 430(h)(2)(D)(ii) to use the monthly
yield curve in place of the segment rates.

Notice 2007-81, 2007-44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and
the 24-month average corporate bond seg-
ment rates used to compute the target nor-
mal cost and the funding target. In accor-
dance with the methodology specified in
Notice 2007-81, the monthly corporate
bond yield curve derived from July 2014
data is in Table I at the end of this notice.
The spot first, second, and third segment
rates for the month of July 2014 are, re-
spectively, 1.26, 3.94, and 5.02.

The 24-month average segment rates
determined under § 430(h)(2)(C)(i)
through (iii) must be adjusted pursuant to

§ 430(h)(2)(C)(iv) by the applicable per-
centage of the corresponding 25-year av-
erage segment rates. Section 2003(a) of
HATFA amended the applicable percent-
ages under § 430(h)(2)(C)(iv). This
change generally applies to plan years be-
ginning on or after January 1, 2013. How-
ever, pursuant to section 2003(e)(2) of
HATFA, a plan sponsor can elect not to
have the amendments made to the appli-
cable percentages by section 2003 of
HATFA apply to any plan year beginning
in 2013. These elections can be made ei-
ther for all purposes or, alternatively, for
purposes of determining the adjusted
funding target attainment percentage un-
der § 436. The 25-year average segment
rates for plan years beginning in 2012,
2013, and 2014 were published in Notice
2012-55, 2012-36 I.R.B. 332, Notice
2013-11, 2013-11 I.R.B. 610, and Notice
2013-58, 2013-40 I.R.B. 294, respectively.

For plan years beginning in years 2012
through 2017, pursuant to the changes
made by HATFA, the applicable mini-
mum percentage is 90% and the applica-
ble maximum percentage is 110%. These
applicable percentages are referred to as
HATFA applicable percentages. As de-
scribed in the preceding paragraph, a spe-
cial election is available for any plan year
beginning in 2013 under which this
change made by HATFA can be disre-
garded for all purposes or for limited pur-
poses. To the extent such an election is
made, the applicable minimum percentage
for a plan year beginning in 2013 is 85%
and the applicable maximum percentage
for that plan year is 115%. These applica-
ble percentages are referred to as
MAP-21 applicable percentages.

The 25-year segment rates and permis-
sible corridors for plan years beginning in
2013 are as follows:

First Segment

Second Segment

Third Segment

25-year average rates

5.81

7.23

7.95

Min

5.23

6.51

7.16

HATFA Permissible corridors

to

to

to

Max

6.39

7.95

8.75

Min

4.94

6.15

6.76

MAP-21 Permissible corridors for electing plans

to

to

to

Max

6.68

8.31

9.14

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The 25-year segment rates and HATFA permissible corridors for plan years beginning in 2014 are as follows:

First Segment

Second Segment

Third Segment

25-year average rates

5.54

7.02

7.77

Min

4.99

6.32

6.99

HATFA Permissible corridors

to

to

to

Max

6.09

7.72

8.55

The three 24-month average corporate bond segment rates applicable for August 2014 without adjustment for the 25-year average
segment rate limits are as follows:

Applicable Month

First Segment

Second Segment

Third Segment

August 2014

1.15

4.06

5.14

Based on § 430(h)(2)(C)(iv) as in effect prior to amendment by section 2003 of HATFA, the three 24-month averages applicable
for August 2014 adjusted for the MAP-21 applicable percentages of the corresponding 25-year average segment rates, for plan years
beginning in 2013, are as follows:

For Plan Years Beginning In

Adjusted 24-Month Average Segment Rates, Based on Applicable Percentage of 25-Year Average Rates

Applicable Month

First Segment

Second Segment

Third Segment

2013

August 2014

4.94

6.15

6.76

Based on § 430(h)(2)(C)(iv) as amended by section 2003 of HATFA, the 24-month averages applicable for August 2014 adjusted
for the HATFA applicable percentages of the corresponding 25-year average segment rates, are as follows:

For Plan Years Beginning In

Adjusted 24-Month Average Segment Rates, Based on the HATFA Applicable Percentage of 25-Year Average Rates

Applicable Month

First Segment

Second Segment

Third Segment

2013

August

2014

5.23

6.51

7.16

2013

August

2014

4.99

6.32

6.99

For all prior applicable months with
respect to plan years beginning in 20131,
and for all prior applicable months with
respect to plan years beginning in 2014,
the unadjusted 24-month average segment
rates have been lower than the minimum
permissible values under the applicable

percentages as modified by HATFA.
Therefore, with respect to plan years be-
ginning in 2013, for applicable months
September 2012 through July 2014, the
first, second, and third adjusted 24-month
average segment rates determined under
the applicable percentages as modified by

HATFA are equal to the adjusted segment
rates for the August 2014 applicable
month that are listed in the table immedi-
ately above for plan years beginning in
2013. Similarly, with respect to plan years
beginning in 2014, for applicable months
September 2013 through July 2014, the

1As provided under § 430(h)(2)(E), for purposes of determining interest rates for a plan year, the applicable month with respect to plan years beginning in 2013 may be as early as September
2012.

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first, second, and third adjusted 24-month
average segment rates determined under
the applicable percentages as modified by
HATFA are equal to the adjusted segment
rates for the August 2014 applicable
month that are listed in the table immedi-
ately above for plan years beginning in
2014. The adjusted segment rates pub-
lished in prior notices for these applicable
months for plan years beginning in 2014
do not apply, and the adjusted segment
rates published in prior notices for these
applicable months for plan years begin-
ning in 2013 apply only to the extent
applicable under an election, pursuant to
section 2003(e)(2) of HATFA, to apply
the MAP-21 segment rates rather than the

HATFA segment rates. For a list of af-
fected notices, see the section entitled Ef-
fect On Other Documents, below.

## 30-YEAR TREASURY SECURITIES INTEREST RATES

Generally, for plan years beginning af-
ter 2007, § 431 specifies the minimum
funding requirements that apply to mul-
tiemployer plans pursuant to § 412. Sec-
tion 431(c)(6)(B) specifies a minimum
amount for the full-funding limitation de-
scribed in section 431(c)(6)(A), based on
the plan's current liability. Section
431(c)(6)(E)(ii)(I) provides that the inter-
est rate used to calculate current liability

for this purpose must be no more than 5
percent above and no more than 10 per-
cent below the weighted average of the
rates of interest on 30-year Treasury se-
curities during the four-year period end-
ing on the last day before the beginning of
the plan year. Notice 88-73, 1988-2 C.B.
383, provides guidelines for determining
the weighted average interest rate. The
rate of interest on 30-year Treasury secu-
rities for July 2014 is 3.33 percent. The
Service has determined this rate as the
average of the daily determinations of
yield on the 30-year Treasury bond ma-
turing in May 2044. The following rates
were determined for plan years beginning
in the month shown below.

For Plan Years Beginning in

30-Year Treasury Weighted Average

Permissible Range 90% to 105%

Month

Year

August

2014

3.41

3.07

3.58

# MINIMUM PRESENT VALUE SEGMENT RATES

In general, the applicable interest rates
under § 417(e)(3) are segment rates com-

puted without regard to a 24-month aver-
age or adjustments based on a 25-year
average. Notice 2007-81 provides guide-
lines for determining the minimum pres-
ent value segment rates. Pursuant to that

notice, the minimum present value seg-
ment rates determined for July 2014 are as
follows:

First Segment

Second Segment

Third Segment

1.26

3.94

5.02

## FUTURE GUIDANCE

The Treasury and the Service intend to
issue additional guidance in the near fu-
ture on other issues relating to the appli-
cation of HATFA, including guidance re-
lating to benefit restrictions, elections, and
transition issues.

## EFFECT ON OTHER DOCUMENTS

The following Notices are modified:
Notice 2013-11, 2013-11 I.R.B. 610,
Notice 2013-23, 2013-16 I.R.B. 906,
Notice 2013-28, 2013-19 I.R.B. 1039,
Notice 2013-32, 2013-22 I.R.B. 1137,
Notice 2013-37, 2013-26 I.R.B. 1269,

Notice 2013-46, 2013-31 I.R.B. 117,
Notice 2013-52, 2013-35 I.R.B. 159,
Notice 2013-58, 2013-40 I.R.B. 294,
Notice 2013-66, 2013-46 I.R.B. 498,
Notice 2013-75, 2013-49 I.R.B. 599,
Notice 2013-85, 2013-52 I.R.B. 827,
Notice 2014-8, 2014-5 I.R.B. 452,
Notice 2014-13, 2014-10 I.R.B. 616,
Notice 2014-16, 2014-14 I.R.B. 920,
Notice 2014-27, 2014-18 I.R.B. 987,
Notice 2014-34, 2014-23 I.R.B.
1069,

Notice 2014-41, 2014-27 I.R.B. 97,
Notice 2014-43, 2014-31 I.R.B. 249.

# DRAFTING INFORMATION

The principal author of this notice is
Tony Montanaro of the Employee Plans,
Tax Exempt and Government Entities Di-
vision. However, other personnel from the
Internal Revenue Service and the Treasury
Department participated in preparing this no-
tice. Mr. Montanaro may be e-mailed at
RetirementPlanQuestions@irs.gov.

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# Table I Monthly Yield Curve for July 2014 Derived from July 2014 Data

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

0.5

0.18

20.5

4.67

40.5

5.06

60.5

5.19

80.5

5.26

1.0

0.43

21.0

4.69

41.0

5.06

61.0

5.19

81.0

5.26

1.5

0.68

21.5

4.71

41.5

5.07

61.5

5.19

81.5

5.26

2.0

0.93

22.0

4.73

42.0

5.07

62.0

5.20

82.0

5.26

2.5

1.17

22.5

4.74

42.5

5.08

62.5

5.20

82.5

5.26

3.0

1.41

23.0

4.76

43.0

5.08

63.0

5.20

83.0

5.26

3.5

1.64

23.5

4.77

43.5

5.08

63.5

5.20

83.5

5.26

4.0

1.86

24.0

4.78

44.0

5.09

64.0

5.20

84.0

5.27

4.5

2.07

24.5

4.80

44.5

5.09

64.5

5.21

84.5

5.27

5.0

2.27

25.0

4.81

45.0

5.10

65.0

5.21

85.0

5.27

5.5

2.46

25.5

4.82

45.5

5.10

65.5

5.21

85.5

5.27

6.0

2.64

26.0

4.83

46.0

5.11

66.0

5.21

86.0

5.27

6.5

2.81

26.5

4.85

46.5

5.11

66.5

5.21

86.5

5.27

7.0

2.96

27.0

4.86

47.0

5.11

67.0

5.22

87.0

5.27

7.5

3.11

27.5

4.87

47.5

5.12

67.5

5.22

87.5

5.27

8.0

3.25

28.0

4.88

48.0

5.12

68.0

5.22

88.0

5.27

8.5

3.38

28.5

4.89

48.5

5.12

68.5

5.22

88.5

5.28

9.0

3.50

29.0

4.90

49.0

5.13

69.0

5.22

89.0

5.28

9.5

3.61

29.5

4.91

49.5

5.13

69.5

5.22

89.5

5.28

10.0

3.71

30.0

4.92

50.0

5.13

70.0

5.23

90.0

5.28

10.5

3.81

30.5

4.93

50.5

5.14

70.5

5.23

90.5

5.28

11.0

3.90

31.0

4.93

51.0

5.14

71.0

5.23

91.0

5.28

11.5

3.98

31.5

4.94

51.5

5.14

71.5

5.23

91.5

5.28

12.0

4.05

32.0

4.95

52.0

5.15

72.0

5.23

92.0

5.28

12.5

4.12

32.5

4.96

52.5

5.15

72.5

5.23

92.5

5.28

13.0

4.18

33.0

4.97

53.0

5.15

73.0

5.24

93.0

5.28

13.5

4.23

33.5

4.97

53.5

5.15

73.5

5.24

93.5

5.28

14.0

4.29

34.0

4.98

54.0

5.16

74.0

5.24

94.0

5.29

14.5

4.33

34.5

4.99

54.5

5.16

74.5

5.24

94.5

5.29

15.0

4.38

35.0

4.99

55.0

5.16

75.0

5.24

95.0

5.29

15.5

4.41

35.5

5.00

55.5

5.17

75.5

5.24

95.5

5.29

16.0

4.45

36.0

5.01

56.0

5.17

76.0

5.24

96.0

5.29

16.5

4.48

36.5

5.01

56.5

5.17

76.5

5.25

96.5

5.29

17.0

4.51

37.0

5.02

57.0

5.17

77.0

5.25

97.0

5.29

17.5

4.54

37.5

5.02

57.5

5.18

77.5

5.25

97.5

5.29

18.0

4.57

38.0

5.03

58.0

5.18

78.0

5.25

98.0

5.29

18.5

4.59

38.5

5.04

58.5

5.18

78.5

5.25

98.5

5.29

19.0

4.61

39.0

5.04

59.0

5.18

79.0

5.25

99.0

5.29

19.5

4.64

39.5

5.05

59.5

5.19

79.5

5.25

99.5

5.30

20.0

4.66

40.0

5.05

60.0

5.19

80.0

5.26

100.0

5.30

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26 CFR 601.204:Changes in accounting periods and
in methods of accounting.
(Also Part I, §§ 446, 471, 481)

# Rev. Proc. 2014-48

## SECTION 1. PURPOSE

This revenue procedure provides the
exclusive procedures by which a taxpayer
obtains the consent of the Commissioner
under § 446(e) of the Internal Revenue
Code to make certain changes within the
retail inventory method to comply with
final regulations under § 1.471-8 of the
Income Tax Regulations.

## SECTION 2. BACKGROUND

.01 Under § 1.471-8, a taxpayer may
use the retail inventory method to com-
pute the value of ending inventory at ap-
proximate cost (retail cost) or approxi-
mate lower of cost or market (retail
LCM), by multiplying the retail selling
prices of goods on hand at the end of the
taxable year by a cost complement ratio.
The cost complement is the value of be-
ginning inventory plus the cost of pur-
chases divided by the retail selling prices
of beginning inventory and purchases. On
August 15, 2014, the Internal Revenue
Service (IRS) and Treasury Department
published final regulations under
§ 1.471-8 (TD 9688) clarifying a taxpay-
er's treatment of certain sales-based ven-
dor allowances, margin protection pay-
ments, permanent markups and
markdowns, and temporary markups and
markdowns when determining the cost
complement. The final regulations apply
to taxable years beginning after December
31, 2014.

.02 The final regulations clarify that a
taxpayer using the retail inventory method
may not reduce the numerator of the cost
complement by the amount of an allow-
ance, discount, or price rebate that, under
§ 1.471-3(e), must reduce only cost of
goods sold.

.03 The final regulations provide that a
taxpayer using retail LCM generally may
not reduce the numerator of the cost com-
plement by the amount of an allowance,
discount, or price rebate that is related to
or intended to compensate for a reduction
in the taxpayer's retail selling price of
inventory (a margin protection payment).

.04 The final regulations clarify that a
taxpayer using the retail inventory method
generally must adjust the denominator of
the cost complement for all permanent
markups and markdowns, but may not
reduce the denominator for temporary
markups or markdowns. A taxpayer using
retail LCM, however, generally does not
adjust the denominator of the cost com-
plement for markdowns.

.05 The final regulations provide an
alternative method for a taxpayer using
retail LCM to compute the cost comple-
ment by reducing the numerator by the
amount of margin protection payments if
the taxpayer also reduces the denominator
of the cost complement by the amount of
the reductions in retail selling price to
which the margin protection payments re-
late (related markdowns).

.06 The final regulations provide a sec-
ond alternative method for a taxpayer us-
ing retail LCM to account for margin pro-
tection payments when computing the
cost complement. Under this method, a
taxpayer that is able to determine the
amount of its margin protection payments
but cannot determine the amount of the
related markdowns may compute the cost
complement by reducing the numerator by
the amount of margin protection payments
and adjusting the denominator by the
amount that, in conjunction with the re-
duction of the numerator, maintains what
would have been the cost complement
percentage before taking into account the
margin protection payments and related
markdowns.

.07 A taxpayer using one of the alter-
native methods described in sections 2.05
and 2.06 above must use that method for
all cost complements.

.08 Sections 446(e) and 1.446-1(e)(2)
state that, except as otherwise provided, a
taxpayer must secure the consent of the
Commissioner before changing a method
of accounting for federal income tax pur-
poses. Section 1.446-1(e)(3)(ii) autho-
rizes the Commissioner to prescribe ad-
ministrative procedures providing the
limitations, terms, and conditions neces-
sary to permit a taxpayer to obtain consent
to change a method of accounting in ac-
cordance with § 446(e).

.09 Rev. Proc. 2011-14, 2011-1 C.B.
330, provides procedures for a taxpayer to
obtain automatic consent of the Commis-

sioner to change to a method of account-
ing described in the Appendix.

.10 Section 481(a) requires the adjust-
ments necessary to prevent amounts from
being duplicated or omitted when a tax-
payer's taxable income is determined un-
der a method of accounting different from
the method used to determine taxable in-
come for the preceding taxable year. See
section 2.05(1) of Rev. Proc. 2011-14.

.11 When a change in method of ac-
counting is made on a cut-off basis, in
general, only the items arising on or after
the beginning of the year of change are
accounted for under the new method of
accounting. See section 2.06 of Rev. Proc.
2011-14.

## SECTION 3. SCOPE

This revenue procedure applies to a
taxpayer using the retail inventory method
that wants to change its method of ac-
counting to comply with the final regula-
tions under § 1.471-8.

## SECTION 4. CHANGES IN METHOD OF ACCOUNTING

Rev. Proc. 2011-14 is modified to add
new section 21.16 of the APPENDIX, to
read as follows:

.16 Retail inventory method.

(1) Description of change. This change
applies to a taxpayer using the retail in-
ventory method that wants to make one of
the following changes-

(a) From adjusting to not adjusting the
numerator of the cost complement by the
amount of an allowance, discount, or price
rebate that is required under § 1.471-3(e)
to reduce only cost of goods sold;

(b) From adjusting to not adjusting the
denominator of the cost complement for
temporary markups and markdowns;

(c) In the case of a retail LCM tax-
payer:

(i) From adjusting to not adjusting the
numerator of the cost complement by the
amount of a margin protection payment;

(ii) From adjusting to not adjusting the
denominator of the cost complement for
permanent markdowns;

(iii) From using one method for com-
puting the cost complement described in
§ 1.471-8(b)(3) to using a different
method described in § 1.471-8(b)(3);

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(d) In the case of a retail cost taxpayer,
from not adjusting to adjusting the de-
nominator of the cost complement for per-
manent markups and markdowns;

(2) Certain scope limitations tempo-
rarily inapplicable. The scope limitations
in section 4.02 (1) through (4) and (7) of
this revenue procedure do not apply for a
taxpayer's first or second taxable years
beginning after December 31, 2014.

(3) Multiple changes. A taxpayer that
wants to make multiple changes under this
section 21.16 of the APPENDIX for the
same year of change should file a single
Form 3115.

(4) Manner of making change. A tax-
payer making a change under this section
21.16 of the APPENDIX for its first or
second taxable year beginning after De-
cember 31, 2014 may use either a § 481(a)
adjustment as provided in sections 5.03
and 5.04 of this revenue procedure or im-
plement the change on a cut-off basis. If a
cut-off basis is used, the change applies
only to the computation of ending inven-
tories after the beginning of the year of
change. See section 2.06 of this revenue

procedure for more information regarding
a cut-off basis. A § 481(a) adjustment is
neither permitted nor required if a change
is made on a cut-off basis.

(5) Designated automatic accounting
method change number. The designated
automatic accounting method change
number for changes in methods of ac-
counting under section 21.16 of this AP-
PENDIX is "204." See section 6.02(4) of
this revenue procedure.

(6) Ogden copy of Form 3115 required
in lieu of national office copy. A taxpayer
changing its method of accounting under
this section 21.16 of the APPENDIX must
file a signed copy of its completed Form
3115 with the IRS in Ogden, UT, in lieu
of filing the national office copy, no ear-
lier than the first day of the year of change
and no later than the date the taxpayer
files the original Form 3115 with its fed-
eral income tax return for the year of
change. See sections 6.02(3)(a)(ii)(B)
(providing the general rules) and
6.02(7)(b) (providing the mailing address)
of this revenue procedure.

(7) Contact information. For further in-
formation regarding a change under this
section, contact Natasha M. Mulleneaux
at 202-317-7007 (not a toll-free call).

## SECTION 5. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2011-14 is modified to add
new section 21.16 to the APPENDIX.

## SECTION 6. EFFECTIVE DATE

This revenue procedure is effective for
taxable years beginning after December
31, 2014.

## SECTION 7. DRAFTING INFORMATION

The principal author of this revenue
procedure is Natasha M. Mulleneaux of
the Office of Associate Chief Counsel (In-
come Tax and Accounting). For further
information regarding this revenue proce-
dure, contact Christopher Call at (202)
317-7007 (not a toll-free number).

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# 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
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the 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 with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is 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
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used 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.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes 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
published ruling is first modified and then,
as modified, is superseded.

Supplemented is 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
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is 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 following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

GP-General Partner.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

TT-Trustee.

D Decedent.

LP-Limited Partner.

LR-Lessor.

DE-Donee.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO Possession of the U.S.

PR-Partner.

PRS Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

BK-Bank.

B.T.A .- Board of Tax Appeals.

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

U.S.C .- United States Code.

DC-Dummy Corporation.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.

DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

X-Corporation.

Y-Corporation.

Z-Corporation.

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Numerical Finding List1

Treasury Decisions-Continued:

Bulletins 2014-27 through 2014-36

9669, 2014-28 I.R.B. 103

9670, 2014-29 I.R.B. 121

Announcements:

9671, 2014-29 I.R.B. 124

9672, 2014-30 I.R.B. 196

2014-2, 2014-28 I.R.B. 120

9673, 2014-30 I.R.B. 212

2014-28, 2014-34 I.R.B. 391

9674, 2014-30 I.R.B. 225

2014-29, 2014-35 I.R.B. 452

9675, 2014-31 I.R.B. 242

9676, 2014-32 I.R.B. 260

Notices:

9677, 2014-31 I.R.B. 241

9678, 2014-32 I.R.B. 262

2014-40, 2014-27 I.R.B. 100

9679, 2014-32 I.R.B. 267

2014-41, 2014-27 I.R.B. 97

9680, 2014-32 I.R.B. 254

2014-42, 2014-34 I.R.B. 387

9681, 2014-33 I.R.B. 340

2014-43, 2014-31 I.R.B. 249

9682, 2014-33 I.R.B. 342

2014-44, 2014-32 I.R.B. 270

9683, 2014-33 I.R.B. 330

2014-45, 2014-34 I.R.B. 388

9684, 2014-33 I.R.B. 345

2014-46, 2014-36 I.R.B. 520

9685, 2014-34 I.R.B. 379

2014-47, 2014-36 I.R.B. 522

9686, 2014-34 I.R.B. 382

2014-48, 2014-36 I.R.B. 523

9687, 2014-36 I.R.B. 486

Proposed Regulations:

9688, 2014-36 I.R.B. 482 9689, 2014-36 I.R.B. 456

REG-104579-13, 2014-33

I.R.B. 370

REG-120756-13, 2014-31

I.R.B. 252

REG-105067-14, 2014-34

I.R.B. 391

REG-110948-14, 2014-30

I.R.B. 239

REG-121542-14, 2014-28

I.R.B. 119

REG-107012-14, 2014-33

I.R.B. 371

REG-123286-14, 2014-33

I.R.B. 377

REG-209459-78, 2014-31

I.R.B. 253

## Revenue Procedures:

2014-26, 2014-27 I.R.B. 26
2014-27, 2014-27 I.R.B. 41

2014-29, 2014-28 I.R.B. 105
2014-37, 2014-33 I.R.B. 363
2014-38, 2014-29 I.R.B. 132
2014-39, 2014-29 I.R.B. 151
2014-40, 2014-30 I.R.B. 229
2014-41, 2014-33 I.R.B. 364
2014-42, 2014-29 I.R.B. 193
2014-43, 2014-32 I.R.B. 273
2014-44, 2014-32 I.R.B. 274
2014-45, 2014-34 I.R.B. 388
2014-46, 2014-33 I.R.B. 367
2014-47, 2014-35 I.R.B. 393
2014-48, 2014-36 I.R.B. 527

## Revenue Rulings:

2014-14, 2014-27 I.R.B. 12
2014-19, 2014-32 I.R.B. 266
2014-20, 2014-28 I.R.B. 101
2014-21, 2014-34 I.R.B. 381

## Treasury Decisions:

9664, 2014-32 I.R.B. 254
9668, 2014-27 I.R.B. 1

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2014-01 through 2014-26 is in Internal Revenue Bulletin
2014-26, dated June 30, 2014.

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### Finding List of Current Actions on Previously Published Items1

Bulletins 2014-27 through 2014-36

#### Announcements:

2012-11
Supplemented by
Ann. 2014-2, 2014-28 I.R.B. 120

2013-11
Supplemented by
Ann. 2014-2, 2014-28 I.R.B. 120

2010-41
Obsoleted by
Rev. Proc. 2014-43, 2014-32 I.R.B. 273

## Revenue Procedures:

1981-38
Superseded by
Rev. Proc. 2014-42, 2014-29 I.R.B. 193

93-37
Modified and Superseded by
Rev. Proc. 2014-43, 2014-32 I.R.B. 273

1981-38
Modified by
Rev. Proc. 2014-42, 2014-29 I.R.B. 193

2000-12
Superseded by
Rev. Proc. 2014-39, 2014-29 I.R.B. 151

2002-55
Revoked by
Rev. Proc. 2014-39, 2014-29 I.R.B. 151

2003-64
Superseded by
Rev. Proc. 2014-47, 2014-35 I.R.B. 393

2004-21
Superseded by
Rev. Proc. 2014-47, 2014-35 I.R.B. 393

2005-77
Superseded by
Rev. Proc. 2014-47, 2014-35 I.R.B. 393

2011-14
Modified by
Rev. Proc. 2014-48, 2014-36 I.R.B. 527

2012-38
Superseded by
Rev. Proc. 2014-27, 2014-27 I.R.B. 26

Revenue Procedures-Continued:

2012-46
Superseded by
Rev. Proc. 2014-26, 2014-27 I.R.B. 41

2014-4
Amplified by
Rev. Proc. 2014-40, 2014-30 I.R.B. 229

2014-5
Amplified by
Rev. Proc. 2014-40, 2014-30 I.R.B. 229

2014-8
Amplified by
Rev. Proc. 2014-40, 2014-30 I.R.B. 229

2014-9
Amplified by
Rev. Proc. 2014-40, 2014-30 I.R.B. 229

2014-10
Amplified by
Rev. Proc. 2014-40, 2014-30 I.R.B. 229

2014-13
Modified by
Rev. Proc. 2014-38, 2014-29 I.R.B. 132

2014-13
Superseded by
Rev. Proc. 2014-38, 2014-29 I.R.B. 132

Notices:

2013-11
Modified by
Notice 2014-48, 2014-36 I.R.B. 523

2013-23
Modified by
Notice 2014-48, 2014-36 I.R.B. 523

2013-28
Modified by
Notice 2014-48, 2014-36 I.R.B. 523

2013-29
Modified by
Notice 2014-46, 2014-36 I.R.B. 520

2013-29
Clarified by
Notice 2014-46, 2014-36 I.R.B. 520

2013-32
Modified by
Notice 2014-48, 2014-36 I.R.B. 523

2013-37
Modified by
Notice 2014-48, 2014-36 I.R.B. 523

Notices-Continued:

2013-51
Obsoleted by
Notice 2014-42, 2014-34 I.R.B. 387

2013-60
Modified by
Notice 2014-46, 2014-36 I.R.B. 520

2013-60
Clarified by
Notice 2014-46, 2014-36 I.R.B. 520

2014-44
Supplemented by
Notice 2014-45, 2014-34 I.R.B. 388

Treasury Decisions:

2005-47
Obsoleted by
T.D. 9668 2014-27 I.R.B. 1

2010-51
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

2010-71
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

2011-6
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

2011-9
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2014-01 through 2014-26 is in Internal Revenue Bulletin 2014-26, dated June 30, 2014.

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INDEX
Internal Revenue Bulletins 2014-27 through
2014-36

The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parentheses refer to the Internal Revenue Bulletin in which the item
may be found and the page number on which it appears.

Key to Abbreviations:

Ann
Announcement

CD
Court Decision

DO
Delegation Order

EO
Executive Order

PL
Public Law

PTE
Prohibited Transaction Exemption

RP
Revenue Procedure

RR
Revenue Ruling

SPR
Statement of Procedural Rules

TC
Tax Convention

TD
Treasury Decision

TDO
Treasury Department Order

# ADMINISTRATIVE

AJCA-Section 6707 and the Penalty for Failure to Furnish
Information Regarding Reportable Transactions by Material
Advisors (TD 9686) 34, 382

Announcement to Discontinue the Internal Revenue Bulletin
Index (Ann 27) 28, 120

Annual Filing Season Program (RP 42) 29, 193

Disclosure to Census Bureau (REG-120756-13) 31, 252

Disclosure to Census Bureau (TD 9677) 31, 241

Information reporting by passport applicants (TD 9679) 32, 267
Procedures to void backup withholding (RP 43) 32, 273
Proposed Regulations:

26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (REG-
120756-13) 31, 252

Regulations Governing Practice Before the Internal Revenue
Service (REG-138367-06) (TD 9668) 27, 1
Regulations:

31 CFR 10.1, revised; 10.3, revised; 10.22, revised; 10.31, revised;
10.35, revised; 10.36, revised; 10.37, revised; 10.52, revised;
10.81, revised; 10.82, revised; 10.91, revised. (TD 9668) 27, 1

26 CFR 301.6109-4, added; 1.6042-4, amended; 1.6043-4,
amended; 1.6044-5, amended; 1.6045-2, amended; 1.6045-3,
amended; 1.6045-4, amended; 1.6045-5, amended; 1.6049-6,
amended; 1.6050A-1, amended; 1.6050E-1, amended;
1.6050N-1, amended; 1.6050P-1, amended; 1.6050S-1, amend-
ed; 1.6050S-3, amended (TD 9675) 31, 242

26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (TD 9677) 31, 241
26 CFR part 301, amended; 26 CFR 301.6039E-1 added (TD
9679) 32, 267

26 CFR 301.6707-1, added; 301.6707-1T, removed; Rev.
Proc. 2007-21, sections 4.04, 4.05, and 4.06 superseded;
material advisor penalty for failure to furnish information
regarding reportable transactions (TD 9686) 34, 382

# ADMINISTRATIVE-Cont.

Substitute Forms Preparation for Certain Information Returns
(RP 27) 27, 41

Substitute Forms Preparation for Certain Information Returns
(RP 44) 32, 274

Truncated Taxpayer Identification Numbers (TD 9675) 31, 242

# EMPLOYEE PLANS

Individual Retirement Account Rollover Limitations (REG-
209459-78) 31, 253

Longevity Annuity Contracts (TD 9673) 30, 212

Proposed Regulations:

26 CFR 408, Individual Retirement Accounts (REG-209459-
78) 31, 253

Regulations:

26 CFR 54.9815-2708, as amended (TD 9671) 29, 174

26 CFR 1.401(a)(9)-5, amended; 1.401(a)(9)-6, amended;
1.403(b)-6, amended; 1.408-8, amended; 1.408A-6,
amended; 1.6047-2, added (TD 9673) 30, 212

Rules relating to 90 day waiting period limitation (TD 9671) 29, 124
Weighted average interest rates
Segment rates for June 2014 (Notice 41) 27, 97

Segment rates for July 2014 (Notice 43) 31, 249

Segment rates for August 2014 (Notice 48) 36, 523

# EMPLOYMENT TAX

Extending religious and family member FICA and FUTA excep-
tions to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD 9670)
29, 121

Method of accounting for gains and losses on shares in certain
money market funds; broker returns with respect to sales of
shares in money market funds (REG-107012-14) 33, 371
Publications:

1223, General Rules and Specifications for Substitute Forms
W-2c and W-3c (RP29) 28, 105

4436, General Rules and Specifications for Substitute Form 941
and Schedule B (Form 941), and Schedule R (RP 26) 27, 26
Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Regulations:

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews. (TD 9669) 28, 103

26 CFR 1.1361-4, amended; 1.1361-4T, removed;
31.3121(b)(3)-1, amended; 31.3121(b)(3)-1T, removed;
31.3127-1, added; 31.3127-1T, removed; 31.3306(c)(5)-1,
amended; 31.3306(c)(5)-1T, removed; 301.7701-2, amended;
301.7701-2T, removed; extending religious and family member
FICA and FUTA exceptions to disregarded entities; regulations
regarding the indoor tanning services excise tax and disregarded
entities (TD 9670) 29, 121

26 CFR 1.446-7 added; 1.6045-1 amended; method of ac-
counting for gains and losses on shares in certain money
market funds; broker returns with respect to sales of shares
in money market funds (REG-107012-14) 33, 371

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# ESTATE TAX

Section 2032A .- Valuation of Certain Farm, Etc., Real Property
(RR 21) 34, 381

Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Regulations:

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews. (TD 9669) 28, 103

# EXCISE TAX

Branded Prescription Drug Fee (REG-123286-14) 33, 377

Branded Prescription Drug Fee (TD 9684) 33, 345

Branded Prescription Drug Fee (Notice 42) 34, 387

Extending religious and family member FICA and FUTA exceptions to
disregarded entities; regulations regarding the indoor tanning services
excise tax and disregarded entities (TD 9670) 29, 121

Section 9010 of the ACA; health insurance providers fee (Notice
47) 36, 522

Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Regulations:

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews. (TD 9669) 28, 103

26 CFR 1.1361-4, amended; 1.1361-4T, removed;
31.3121(b)(3)-1, amended; 31.3121(b)(3)-1T, removed;
31.3127-1, added; 31.3127-1T, removed;
31.3306(c)(5)-1, amended; 31.3306(c)(5)-1T, removed;
301.7701-2, amended; 301.7701-2T, removed; extending
religious and family member FICA and FUTA exceptions
to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD
9670) 29, 121

26 CFR 54.9815-2708, as amended (TD 9671) 29, 121

26 CFR 51.2(e)(3), amended; (REG-123286-14) 33, 377
Rules relating to 90 day waiting period limitation (TD 9671) 29, 121

## EXEMPT ORGANIZATIONS

Streamlined Application for Recognition of Exemption Under
Section 501(c)(3) (RP 2014-40) 30, 229

Streamlined process for 501(c)(3) recognition (REG-110948-
14) 30, 239

Streamlined process for 501(c)(3) recognition (TD 9674) 30, 225
Regulations:

26 CFR 1.501(c)-1 amended 1. 501(a)-1T added;
1.501(c)(3)-1 amended, 1.501(c)(3)-1T added; and
1.508-1 amended, 1.508-1T added (REG-110948-
14)(TD 9674) 30, 225

# GIFT TAX

Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Regulations:

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews (REG-121542-14) (TD
9669) 28, 103

# INCOME TAX

Accounting method change, retail inventory method (RP 48) 36,
527

AJCA-Section 6707 and the Penalty for Failure to Furnish
Information Regarding Reportable Transactions by Material
Advisors (TD 9686) 34, 382

Allocation and Apportionment of Interest Expense (TD 9676)
32, 260

Awards for Information Relating to Detecting Underpayments of
Tax or Violations of the Internal Revenue Laws (TD 9687) 36,
486

Basis of indebtedness of S corporations to their shareholders (TD
9682) 33, 342

Credit for carbon dioxide Sequestration (Notice 40) 27, 100
Disciplinary actions involving attorneys, certified public accoun-
tants, enrolled agents, and enrolled actuaries, enrolled retire-
ment plan agents, and appraisers (Ann 29) 35, 452

Disclosure to Census Bureau (REG-120756-13) 31, 252
Disclosure to Census Bureau (TD 9677) 31, 241

Dispositions of property subject to depreciation under section
168 (TD 9689) 36, 456

FFI Agreement for Participating FFI and Reporting Model 2 FFI
(RP 38) 29, 132

Foreign Earned Income Exclusion (Ann 28) 34, 391

Foreign tax credit guidance under section 901 (m) (Notice 44)
32, 270

Foreign tax credit guidance under section 901 (m) (Notice 45)
34, 388

Information reporting by passport applicants (TD 9679) 32, 267
Interest:

Investment:

Federal short-term, mid-term, and long-term rates for: July
2014 (RR 2014-20) 28, 101

Federal short-term, mid-term, and long-term rates for: Au-
gust 2014 (RR 19) 32, 266

Money market funds and the wash sale rules (RP 45) 34, 388

Premium Tax Credit (REG-104579-13) 33, 370

Premium Tax Credit (RP 37) 33, 363

Premium Tax Credit (RP 41) 33, 364

Premium Tax Credit (TD 9683) 33, 330

Production Tax Credit, Investment Tax Credit, Beginning of
Construction (Notice 46) 36, 520

Proposed Regulations:

26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (REG-
120756-13) 31, 252

26 C.F.R. 1.382-3(j)(17), modified; 1.382-3T(j)(17), added,
segregation rules for public groups of shareholders (REG-
105067-14) 34, 391

Publications:

1223, General Rules and Specifications for Substitute Forms
W-2c and W-3c (RP 29) 28, 105

4436, General Rules and Specifications for Substitute Form
941 and Schedule B (Form 941), and Schedule R (RP 26)
27, 26

Qualified Intermediary (QI) Agreement (RP 39) 29, 151

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# INCOME TAX-Cont.

Regulations:

31 CFR 10.1, revised; 10.3, revised; 10.22, revised; 10.31,
revised; 10.35, revised; 10.36, revised; 10.37, revised;
10.52, revised; 10.81, revised; 10.82, revised; 10.91, re-
vised (TD 9668) 27, 1

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews (REG-121542-14) (TD
9669) 28, 103

26 CFR 1.45R-0, added; 1.45R-1, added; 1.45R-2, added;
1.45R-3, added; 1.45R-4, added; 1.45R-5, added; tax
credit for employee health insurance expenses of small
employers (TD 9672) 30, 196

26 CFR 301.6109-4, added; 1.6042-4, amended; 1.6043-4,
amended; 1.6044-5, amended; 1.6045-2, amended;
1.6045-3, amended; 1.6045-4, amended; 1.6045-5, amend-
ed; 1.6049-6, amended; 1.6050A-1, amended; 1.6050E-1,
amended; 1.6050N-1, amended; 1.6050P-1, amended;
1.6050S-1, amended; 1.6050S-3, amended (TD 9675) 31, 242
26 CFR 1.67-4, amended (TD 9667) 32, 254

26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (TD 9677) 31, 241

26 CFR 1.861-9 amended, 1.861-11 amended; (TD 9676) 32, 260

26 CFR 1.1092(b)-6, added; 1.1092(b)-6T, removed;
1.1092(b)-3T, amended; (TD 9678) 32, 262

26 CFR part 301, amended; 26 CFR 301.6039E-1 added (TD
9679) 32, 267

26 CFR 1.174-2 amended; (TD 9680) 32, 254

26 CFR 1.36B-2T, 26 CFR 1.36B-3T, 1.36B-4T, added; 26
CFR 1.36B-2, 26 CFR 1.36B-3\\, 1.36B-4, amended; 26
CFR 1.162(1)-1 and 26 CFR 1.162(1)-1T, added. (REG-
104579-13) 33, 370

26 CFR 1.195-2, added; 26 CFR 1.708-1, amended; 26 CFR
1.709-1, amended. (TD 9681) 33, 340

26 CFR 1.1366-2(a), added new paragraph (a)(2) and moved
current (a)(2) through (a)(6) to (a)(3) through (a)(7), re-
spectively; basis of indebtedness of S corporations to their
shareholders (TD 9682) 33, 342

26 CFR 1.36B-2T, 26 CFR 1.36B-3T, 1.36B-4T added, 26
CFR 1.36B-2, 26 CFR 1.36B-3\\, 1.36B-4, amended, 26
CFR 1.162(1)-1 and 26 CFR 1.162(1)-1T added, (TD
9683) 33, 330

26 C.F.R. 1.382-3(j)(17), modified; 1.382-3T(j)(17), added,
segregation rules for public groups of shareholders (TD
9685) 34, 379

26 CFR 301.6707-1, added; 301.6707-1T, removed; Rev.
Proc. 2007-21, sections 4.04, 4.05, and 4.06 superseded;
material advisor penalty for failure to furnish information
regarding reportable transactions (TD 9686) 34, 382

26 CFR 301.7623-1, revised; 26 CFR 301.7623-4, added; 26
CFR 301.7623-2, added; 26 CFR 301.6103(h)(4)-1, added
26 CFR 301.7623-3, added; (TD 9687) 36, 486

26 CFR 1.471-8 amended (TD 9688) 36, 482

26 CFR 1.168(i)-8 added; 1.165-2, 1.168(i)-0, 1.168(i)-1,
1.168(i)-7, 1.263(a)-3, 1.1016-3 amended; 1.168(i)-0T,
1.168(i)-1T, 1.168(i)-8T removed; dispositions of property
subject to depreciation under section 168 (TD 9689) 36, 456

# INCOME TAX-Cont.

Regulations Governing Practice Before the Internal Revenue
Service (REG-138367-06) (TD 9668) 27, 1

Research and experimental expenditures (TD 9680) 32, 254
Retail inventory method (TD 9688) 36, 482

Tax Credit for Employee Health Insurance Expenses of Small
Employers (TD 9672) 30, 196

Truncated Taxpayer Identification Numbers (TD 9675) 31, 242
Section 67 Limitations on Estates or Trusts; Change of Effective
Date (TD 9664) 32, 254

Section 5000A national average premium for a bronze level of
coverage (RP 46) 33, 367

Segregation rules for public groups of shareholders, (REG-
105067-14) 34, 391

Segregation rules for public groups of shareholders, (TD 9685)
34, 379

Substitute Forms Preparation for Certain Information Returns
(RP 27) 27, 41

Substitute Forms Preparation for Certain Information Returns
(RP 44) 32, 274

Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Unamortized organization and syndication expenses following a
partnership technical termination (TD 9681) 33, 340

Underpayment and overpayments, quarter beginning: July 1,
2014 (RR 14) 27, 12

Unrealized gain or loss treatment upon establishment of an
identified mixed straddle (TD 9678) 32, 262

Withholding Foreign Partnership and Trust Agreements (RP 47)
35, 393

# SELF-EMPLOYMENT TAX

Extending religious and family member FICA and FUTA excep-
tions to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD 9670)
29, 121

Regulations:

26 CFR 1.1361-4, amended; 1.1361-4T, removed;
31.3121(b)(3)-1, amended; 31.3121(b)(3)-1T, removed;
31.3127-1, added; 31.3127-1T, removed;
31.3306(c)(5)-1, amended; 31.3306(c)(5)-1T, removed;
301.7701-2, amended; 301.7701-2T, removed; extending
religious and family member FICA and FUTA exceptions
to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD
9670) 29, 121

# SPECIAL ANNOUNCEMENT

Annual Filing Season Program (RP 42) 29, 193
Procedures to Avoid Backup Withholding (RP 43) 32, 273

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Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# CUMULATIVE BULLETINS

The contents of the weekly Bulletins were consolidated semiannually into permanent, indexed, Cumulative Bulletins through the
2008-2 edition.

# INTERNAL REVENUE BULLETINS ON CD-ROM

Internal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD-ROM). The CD-ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
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