Internal Revenue Bulletin 2009-49 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 200
9-49
December 7, 2009
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
Rev. Rul. 2009–38, page 736.
Federal rates; adjusted federal rates; adjusted federal
long-termrateandthelong-termexemptrate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for December 2009.
T.D. 9470, page 738.
Final regulations under section 6039 of the Code require cor-
porations to file an information return with the IRS and furnish
a written statement to each employee regarding: (i) the corpo-
ration’s transfer of stock pursuant to the employee’s exercise
of an incentive stock option described in section 422(b); and
(ii) transfers of stock by the employee where the stock was
acquired pursuant to the exercise of an option described in
section 423(c). The time and manner for filing a return and
furnishing statements to employees, as well as the information
to be contained in the return and furnished to employees, are
addressed in these final regulations.
T.D. 9471, page 722.
Finalregulationsundersection423oftheCodeprovidethere-
quirements that must be satisfied in order for a plan to meet
the definition of an employee stock purchase plan. Section 423
also addresses the individual income tax treatment of stock ac-
quired pursuant to an option granted under an employee stock
purchase plan. The regulations update the existing regulations
and provide additional guidance in certain areas.
REG–139255–08, page 747.
Proposed regulations under section 6050W of the Code relate
to information reporting requirements, information reporting
penalties, and backup withholding requirements for payment
card and third party network transactions. A public hearing is
scheduled for February 10, 2010.
Rev. Proc. 2009–52, page 744.
This procedure provides guidance to taxpayers on electing the
3, 4, or 5 year carryback of net operating losses or losses from
operations under section 13 of the Worker, Homeownership,
and Business Assistance Act of 2009.
EMPLOYEE PLANS
T.D. 9470, page 738.
Final regulations under section 6039 of the Code require cor-
porations to file an information return with the IRS and furnish
a written statement to each employee regarding: (i) the corpo-
ration’s transfer of stock pursuant to the employee’s exercise
of an incentive stock option described in section 422(b); and
(ii) transfers of stock by the employee where the stock was
acquired pursuant to the exercise of an option described in
section 423(c). The time and manner for filing a return and
furnishing statements to employees, as well as the information
to be contained in the return and furnished to employees, are
addressed in these final regulations.
T.D. 9471, page 722.
Final regulations under section 423 of the Code provide the re-
quirements that must be satisfied in order for a plan to meet
the definition of an employee stock purchase plan. Section 423
also addresses the individual income tax treatment of stock ac-
quired pursuant to an option granted under an employee stock
purchase plan. The regulations update the existing regulations
and provide additional guidance in certain areas.
(Continued on the next page)
Finding Lists begin on page ii.

EXEMPT ORGANIZATIONS
Announcement 2009–86, page 759.
The IRS has revoked its determination that the Gehrig and
Margaret White Charitable Foundation of Charlotte, NC; and the
Downs Family Foundation of Detroit, MI, qualify as organizations
described in sections 501(c)(3) and 170(c)(2) of the Code.
EMPLOYMENT TAX
Rev. Proc. 2009–53, page 746.
This procedure extends the sunset date of the Attributed
Tip Income Program (ATIP) for two additional years until
December 31, 2011. With the exception of this extension,
requirements for ATIP as set forth in Rev. Proc. 2006–30,
2006–2 C.B. 110, remain unchanged. Rev. Proc. 2006–30
modified.
ADMINISTRATIVE
REG–139255–08, page 747.
Proposed regulations under section 6050W of the Code relate
to information reporting requirements, information reporting
penalties, and backup withholding requirements for payment
card and third party network transactions. A public hearing is
scheduled for February 10, 2010.
December 7, 20092009–49 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax 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 and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2009–49 I.R.B.December 7, 2009

December 7, 20092009–49 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 42.—L
ow-Income
Housing Credi
t
The adjusted a
pplicable federal short-term, mid-
term, and long
-term rates are set forth for the month
of December 20
09. See Rev. Rul. 2009-38, page
736.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of December 2009. See
Rev. Rul. 2009-38, page 736.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In
Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of December 2009. See Rev.
Rul. 2009-38, page 736.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2009. See Rev. Rul. 2009-38, page
736.
Section 421.—General
Rules
Final regulations clarify the requirements for es-
tablishing the date of grant for an option granted pur-
suant to an employee stock purchase plan under sec-
tion 423. See T.D. 9471, page 722.
Section 422.—Incentive
Stock Options
Final regulations clarify the shareholder approval
requirements related to incentive stock options under
section 422. See T.D. 9471, page 722.
Section 423.—Employee
Stock Purchase Plans
Final regulations provide guidance to assist tax-
payers in complying with the rules under section 423
regarding opt
ions granted under an employee stock
purchase plan
. See T.D. 9471, page 722.
26 CFR 1.423–2: Employee stock purchase plan de-
fined.
T.D. 9471
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR part 1
Employee Stock Purchase
Plans Under Internal Revenue
Code Section 423
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
the final regulations relating to options
granted under an employee stock purchase
plan as defined in section 423 of the In-
ternal Revenue Code (Code). These final
regulations affect certain taxpayers who
participate in the transfer of stock pursuant
to the exercise of options granted under an
employee stock purchase plan. These final
regulations provide guidance to assist tax-
payers in complying with section 423 in
addition to clarifyingcertain rules regard-
ing options granted under an employee
stock purchase plan. This document also
contains final regulations under sections
421, 422 and 424 of the Code.
DATES:Effective Date:These regulations
are effective on November 17, 2009.
Applicability Date:These regulations
apply as of January 1, 2010.
FOR FURTHER INFORMATION
CONTACT: Thomas Scholz or
Ilya Enkishev at (202) 622–6030 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final amend-
ments to the Income Tax Regulations
(26 CFR part 1)
under sections 421, 422,
423 and 424 of t
he Code.
Section 423 wa
s added to the Code by
section 221(a
) of the Revenue Act of 1964,
Public Law 88–
272 (78 Stat. 63 (1964)).
Changes to th
e applicable law concern-
ing section 4
23 were made by sections
1402(b)(1)(
C) and 1402(b)(2) of the Tax
Reform Act of
1976, Public Law 94–455
(90 Stat. 17
31 and 1732–1733 (1976));
section 100
1(b)(5) of the Deficit Reduc-
tion Act of 1
984, Public Law 98–369
(98 Stat. 10
11 (1984)); section 1114
of the Tax R
eform Act of 1986, Public
Law 99–514
(100 Stat. 2451 (1986));
and sectio
ns 11801(c)(9)(D)(i), (ii) and
11801(c)(
9)(E) of the Omnibus Budget
Reconcili
ation Act of 1990, Public Law
101–508 (
104 Stat. 1388–525 (1990)).
Regulati
ons under section 423 were
publishe
dintheFederal Registeron
June 23, 1
966 (T.D. 6887, 1966–2 C.B.
129). The
se regulations were amended on
Septembe
r 27, 1979 (T.D. 7645, 1979–2
C.B. 198)
, October 31, 1980 (T.D. 7728,
1980–2 C
.B. 236), and December 1, 1988
(T.D. 82
35, 1989–1 C.B. 117). In Notice
2004–55
, 2004–2 C.B. 319 (August 23,
2004)) (
see §601.601(d)(2)(ii)(b)), the IRS
and the
Treasury Department requested
commen
ts concerning whether the exist-
ing reg
ulations under section 423 should
be amen
ded, and if so, what issues should
be addr
essed.
On July
29, 2008, the Treasury De-
partme
nt published a notice of proposed
rulem
aking (REG–106251–08, 2008–39
I.R.B
.774)intheFederal Register(73 FR
43875
) under section 423. A public hear-
ing on
the proposed regulations was held
on Jan
uary 15, 2009. Written and elec-
tron
ic comments responding to the notice
of pr
oposed rulemaking were received.
Afte
r consideration of these comments,
the T
reasury Department adopts the pro-
pose
d regulations as final regulations, with
the m
odifications set forth in this Treasury
dec
ision. The significant revisions are
dis
cussed in this preamble.
In g
eneral, the income tax treatment of
the
grant of an option to purchase stock
in c
onnection with the performance of ser-
vic
es and of the transfer of stock pursuant
2009–49 I.R.B.722December 7, 2009

to the exercise of the option is determined
under section 83 and the regulations there-
under. However, section 421 provides spe-
cial rules for determining the income tax
treatment of the transfer of shares of stock
pursuant to the exercise of an option if the
requirements of sections 422(a) or 423(a),
as applicable, are met. Section 422 ap-
plies to incentive stock options and sec-
tion 423 applies to options granted under
an employee stock purchase plan (collec-
tively, statutory options).
Under section 421, if a share of stock
is transferred to an individual pursuant to
the exercise of a statutory option, there is
no income at the time of exercise of the
option with respect to the transfer and no
deduction under section 162 is allowed to
the employer corporation with respect to
the transfer.
Section 423(a) provides that section
421appliestothetransferofstocktoan
individual pursuant to the exercise of an
option granted under an employee stock
purchase plan if: (i) no disposition of the
stock is made within two years from the
date of grant of the option or within one
year from the date of transfer of the share,
and (ii) at all times during the period be-
ginning on the date of grant and ending on
the day three months before the exercise
of the option, the individual is an em-
ployee of either the corporation granting
the option or a parent or subsidiary of such
corporation, or a corporation (or a parent
or subsidiary of such corporation) issuing
or assuming a stock option in a transaction
to which section 424(a) applies. Section
423(b) sets forth several requirements that
mustbemetforaplantoqualifyasan
employee stock purchase plan. Section
423(c) provides a special rule that is ap-
plicable where the option exercise price
is between 85 and 100 percent of the fair
market value of the stock at the time the
option was granted.
Explanation of Provisions
These final regulations provide a com-
prehensive set of rulesgoverning stock op-
tions issued under an employee stock pur-
chase plan and incorporate substantially all
of the rules contained in the existing reg-
ulations under section 423. These final
regulations are comprised of two sections:
Section 1.423–1, applicability of section
421(a); and §1.423–2, employee stock pur-
chase plan defined. The modifications to
the proposed regulations that are included
in these final regulations reflect considera-
tion of the comments submitted by taxpay-
ers.
1. General requirements
The proposed regulations provide that
an employee stock purchase plan must
meet the requirements of paragraphs (i)
through (ix) of §1.423–2(a)(2) to qualify
as an employee stock purchase plan under
section 423(b). The proposed regulations
also provide that the requirements of para-
graphs (iii) through (ix) of §1.423–2(a)(2)
may be satisfied by the terms of the plan
or an offering made under the plan. The
final regulations adopt these requirements
of the proposed regulations, although the
numerical designation of the requirements
is modified. To emphasize that the re-
quirements of paragraphs (iii) through (ix)
of §1.423–2(a)(2) of the proposed regula-
tions may be satisfied by the terms of the
plan or an offering made under the plan,
these final regulations separately list these
requirements in §1.423–2(a)(3).
Commenters requested clarification of
whether options with terms that are incon-
sistent with the terms of the plan will be
eligible for the special tax treatment of sec-
tion 421. As provided in §1.423–2(a)(3) of
the proposed regulations, §1.423–2(a)(4)
of these final regulations provides that, if
the terms of an option are inconsistent with
the terms of the employee stock purchase
plan or an offering under the plan, then
the option will not be treated as granted
under an employee stock purchase plan.
However, an option may still qualify for
the special tax treatment of section 421,
even if the terms of the plan are incon-
sistent with any of the requirements in
§1.423–2(a)(3) of these final regulations,
if the option is granted under an offering
with terms that comply with the require-
ments of §1.423–2(a)(3).Example 2of
§1.423–2(e)(6) of these final regulations
illustrates this principle.
2. Offerings under an employee stock
purchase plan
These final regulations provide further
guidance for employee stock purchase
plans under which more than one offering
is made. As set forth in §1.423–2(a)(1)
of these final regulations, one or more
offerings may be made under a plan and
the offerings may be consecutive or over-
lapping. Further, pursuant to section
423(b) and its flush language, the terms
of each offering need not be identical.
Although the terms of each offering need
not be identical, the terms of the plan and
each offering together must satisfy the
requirements of §1.423–2(a)(2) and (3)
of these final regulations. For example,
if overlapping offerings are made under
an employee stock purchase plan, then
each offering may contain different terms,
provided that the terms of each offering
(together with the plan) satisfy the re-
quirements of §1.423–2(a)(3) of these
final regulations. Furthermore, when a
parent corporation adopts an employee
stock purchase plan, it may establish sep-
arate offerings with different terms under
the plan and designate which subsidiary
corporations of the parent corporation
may participate in a particular offering,
provided that the terms of each offering
(together with the plan) satisfy the re-
quirements of §1.423–2(a)(3). The terms
“parent corporation” and “subsidiary cor-
poration” are defined in §1.424–1(f) of the
regulations.
a. Employees covered by the plan
Paragraphs (i) through (iv) of
§1.423–2(e)(1) of the proposed regula-
tions and these final regulations set forth
the categories of employees that may be
excluded from coverage under an em-
ployee stock purchase plan or an offering
under the plan. The proposed regulations
provide that the exclusions for various
categories of employees must be applied
in an identical manner to all employees
of every corporation whose employees
are granted options under the plan. Com-
menters noted that the requirement of
identical exclusions for all offerings under
a plan constrains the ability to make future
and overlapping offerings that are more
(or less) inclusive than prior offerings un-
der the plan. Commenters suggested that
the final regulations should permit multi-
ple offerings under a plan with different
exclusions applicable to the one or more
corporations whose employees participate
in the particular offering under the plan.
These final regulations generally adopt
the approach suggested by the com-
December 7, 20097232009–49 I.R.B.

menters. Pursuant to these final reg-
ulations, whether the terms of a plan
and offering satisfy the requirements of
§1.423–2(e) is made on an offering-by-of-
fering basis. The terms of each offering
under a plan may be different, provided
the plan and offering together satisfy the
requirements of §1.423–2(a)(2) and (3) of
these final regulations. With respect to sat-
isfying the requirements of §1.423–2(e),
the terms of each offering may provide
different exclusions of employees, as per-
mitted and within the limitations described
in §1.423–2(e)(1), (2) and (3) of these
final regulations. The exclusions estab-
lished with respect to a particular offering
must be applied in an identical manner to
all employees of every corporation whose
employees are granted options under that
particular offering.Examples 7and8of
§1.423–2(e)(6) of these final regulations
illustrate these principles.
Some commenters suggested that the
final regulations permit employers to ex-
clude from plan participation employees
who are nonresident aliens and who re-
ceive no earned income that constitutes
income from sources within the United
States. Other commenters suggested that
the final regulations permit employers to
exclude from plan participation employ-
ees under a specified age. The IRS and
the Treasury Department are aware of the
complexities often associated with partici-
pation in an employee stock purchase plan
by nonresident aliens and employees under
a specified age, such as the age of majority.
However, section 423 does not provide ex-
clusions for nonresident aliens or employ-
ees under a specified age. Accordingly, the
IRS and the Treasury Department are con-
strained by statutory authority from pro-
viding a general exclusion from plan par-
ticipation for employees who are nonresi-
dent aliens or employees under a specified
age.
One commenter suggested that the final
regulations provide additional flexibility
by permitting employers to exclude from
plan participation highly compensated
employees (HCEs) (within the meaning
of section 414(q)) on any basis. Section
1.423–2(e)(2)(ii) of the proposed regula-
tions provides that the terms of an em-
ployee stock purchase plan may exclude
HCEs: (a) with compensation above a cer-
tain level, or (b) who are officers or subject
to the disclosure requirements of section
16(a) of the Securities Exchange Act of
1934, provided the exclusion is applied in
an identical manner to all HCEs of every
corporation whose employees are granted
options under the plan. These final reg-
ulations do not adopt the suggestion that
HCEs may be excluded from participation
in an employee stock purchase plan on
any basis. Instead, these final regulations
offer some additional flexibility by pro-
viding that, with respect to the exclusion
of HCEs, the terms of each offering made
under a plan need not be identical with
respect to the HCEs, provided the HCEs
are excluded as permitted and within the
limitations described in §1.423–2(e)(2)(ii)
of these final regulations.
b. Equal rights and privileges
Commenters further suggested that the
final regulations provide flexibility by
permitting employers to make multiple
offerings with different rights and priv-
ileges applicable to the participants of
each offering under a plan. These final
regulations generally adopt the approach
suggested by the commenters. Pursuant
to these final regulations, the determina-
tion of whether the terms of an offering
satisfy the requirements of §1.423–2(f)
is made on an offering-by-offering ba-
sis. The terms of each offering under a
plan may be different, provided the plan
and offering together satisfy the require-
ments of §1.423–2(a)(2) and (3) of these
final regulations. However, the rights and
privileges established with respect to a
particular offering must be applied in an
identical manner to all employees of every
corporation whose employees are granted
options under that particular offering.Ex-
amples 4and5of §1.423–2(f)(7) of these
final regulations illustrate these principles.
3. Maximum number of shares that may
be purchased by an employee
Commenters asked whether the desig-
nation of a maximum number of shares
that may be purchased by an employee dur-
ing the offering is necessary in order for
the first day of the offering period to be
the date of grant. Consistent with the pro-
posed regulations, §1.423–2(h)(3) of these
final regulations provides that the date of
grant will be the first day of an offering
period if the terms of an employee stock
purchase plan or offering designate a max-
imum number of shares that may be pur-
chased by each employee during the offer-
ing. Similarly, the date of grant will be the
first day of an offering if the terms of the
plan or offering require the application of a
formula to establish, on the first day of the
offering, the maximum number of shares
that may be purchased by each employee
during the offering.
However, §1.423–2(h)(3) of these final
regulations does not require that an em-
ployee stock purchase plan or offering des-
ignate a maximum number of shares that
may be purchased by each employee dur-
ing the offering or incorporate a formula
to establish a maximum number of shares
that may be purchased by each employee
during the offering. If the maximum num-
ber of shares that can be purchased under
an option is not fixed or determinable un-
til the date the option is exercised, then the
date of exercise will be the date of grant of
the option. As discussed in the preamble to
the proposed regulations, the $25,000 limit
under section 423(b)(8) and the limit on
the aggregate number of shares that may be
issued under an employee stock purchase
plan are not sufficient to establish the max-
imum number of shares that can be pur-
chased by an employee under an option so
that the date of grant will be the first day
of the offering.Examples 1, 2, 3and4
in §1.423–2(h)(4) of these final regulations
illustrate these principles.
Commenters also asked whether any
particular number of shares is necessary
to satisfy the requirement to designate a
maximum number of shares that may be
purchased during the offering in order for
the first day of the offering period to be
the date of grant. No particular number
of shares is necessary to satisfy this re-
quirement and establish the first day of
the offering period as the date of grant
for the option. These final regulations
adopt §1.423–2(h)(3) of the proposed reg-
ulations to provide that the designation of
any maximum number of shares is suffi-
cient to establish the first day of the offer-
ing period as the date of grant for the op-
tion.
4. Annual $25,000 limitation
Section 423(b)(8) provides that an em-
ployee stock purchase plan must, by its
terms, provide that no employee may be
2009–49 I.R.B.724December 7, 2009

permitted to accrue the right to purchase
stock under all the employee stock pur-
chase plans of his or her employer cor-
poration and its related corporations at a
rate which exceeds $25,000 in fair market
value of the stock (determined on the date
of grant) for each calendar year in which
an option granted to the employee is out-
standing. Section 423(b)(8)(A) provides
that the right to purchase stock under an
option accrues when the option first be-
comes exercisable.
In drafting the proposed regulations,
the Treasury Department and the IRS were
aware that taxpayers were interpreting the
$25,000 limitation inconsistently. Certain
taxpayers interpreted section 423(b)(8) to
mean that the limit increases by $25,000
for each calendar year during which the
option is outstanding and exercisable;
other taxpayers interpreted the sections to
mean that such limit increases for each
calendar year during which the option
is simply outstanding. Consistent with
comments received by the Treasury De-
partment and the IRS in response to Notice
2004–55, 2004–2 C.B. 319 (August 23,
2004)), (see §601.601(d)(2)(ii)(b)), the
proposed regulations adopted an approach
that was generally consistent with the
$100,000 limitationfor incentive stock
options and interpreted section 423(b)(8)
to mean that the limit increases by $25,000
for each calendar year during which the
option is outstanding and exercisable.
In response to the proposed regulations,
several commenters suggested that the
Treasury Department and the IRS recon-
sider the calculation of the $25,000 limi-
tation in section 423(b)(8). Commenters
suggested that the regulations adopt an ap-
proach that permits an option to accrue at a
rate of $25,000 for each calendar year that
the option is simply outstanding. Specif-
ically, even though section 423(b)(8)(A)
provides that the right to purchase stock
actually accrues when the option first be-
comes exercisable during a calendar year,
the first sentence of section 423(b)(8) pro-
vides that the limit on accruals is $25,000
“for each year in which such option is out-
standing.” Upon further consideration and
in response to the foregoing comments,
these final regulations modify §1.423–2(i)
of the proposed regulations to provide that
the limit increases by $25,000 for each
calendar year that an option is outstanding.
Example 5in §1.423–2(i)(5) of these final
regulations has been modified to illustrate
this principle.
5. Stockholder approval requirements
To qualify as an employee stock pur-
chase plan, section 423(b)(2) requires that
the plan be approved by the stockhold-
ers of the granting corporation within 12
months before or after the date the plan
is adopted. These final regulations clar-
ify that new stockholder approval is re-
quired if there is a change in the shares
with respect to which options are issued
or a change in the granting corporation.
In particular, these final regulations clarify
that the stockholders of a subsidiary corpo-
ration include the parent corporation and
any other stockholders of the subsidiary.
Accordingly, these final regulations adopt
Example 1(iii)in §1.423–2(c)(5) andEx-
ample 1(iii)in §1.422–2(b)(6) of the pro-
posed regulations.
One commenter to the proposed reg-
ulations suggested that a conforming
change be made toExample 9(iii)in
§1.424–1(a)(10) which addresses the
substitution of options in the context
of an acquisition.Example 9(iii)in
§1.424–1(a)(10), as previously set forth in
the regulations, requires the stockholders
of an acquiring company to approve an
amendment of the option plan of an ac-
quired corporate subsidiary to issue parent
stock instead of subsidiary stock. The
commenter proposed that the example be
amended to require the acquiring company
(instead of its stockholders) to approve
the amendment of the option plan to issue
parent stock instead of subsidiary stock.
This amendment is consistent withExam-
ple 1(iii)in §1.423–2(c)(5) andExample
1(iii)in §1.422–2(b)(6) of these final reg-
ulations. Accordingly,Example 9(iii)in
§1.424–1(a)(10) of these final regulations
has been modified toreflect the adoption
of the commenter’s suggestion.
Effective/Applicability Date
These regulations apply as of January 1,
2010, and will apply to any statutory
option granted on or after that date.
Taxpayersmayrelyonthesefinal
regulations for the treatment of any
statutory option granted prior to January 1,
2010.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations and
because the regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Code, the notice of pro-
posed rulemaking preceding these regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal authors of these
regulations are Thomas Scholz and
Ilya Enkishev, Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities).
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 1.421–1, paragraphs
(c)(1) and (j)(1) are revised to read as fol-
lows:
§1.421–1 Meaning and use of certain
terms.
*****
(c)Time and date of granting op-
tion. (1) For purposes of this section and
§§1.421–2 through 1.424–1, the language
“the date of the granting of the option”
and “the time such option is granted,” and
similar phrases refer to the date or time
when the granting corporation completes
the corporate action constituting an offer
December 7, 20097252009–49 I.R.B.

of stock for sale to an individual under the
terms and conditions of a statutory option.
Except as set forth in §1.423–2(h)(2), a
corporate action constituting an offer of
stock for sale is not considered complete
until the date on which the maximum
number of shares that can be purchased
under the option and the minimum option
price are fixed or determinable.
*****
(j)Effective/applicability date—(1)In
general. Except for paragraph (c)(1) of
this section, the regulations under this sec-
tion are effective on August 3, 2004. Para-
graph (c)(1) of this section is effective on
November 17, 2009. Paragraph (c)(1) of
this section applies to statutory options
granted on or after January 1, 2010.
*****
Par. 3. Section 1.422–2, paragraph
(b)(6),Example 1(iii) is revised to read as
follows:
§1.422–2 Incentive stock options defined.
*****
(b) * * *
(6) * * *
Example 1. ***
(iii) Assume the same facts as in paragraph (i) of
thisExample 1, except that the plan was adopted on
January 1, 2010. Assume further that the plan was
approved by the stockholders of S (in this case, P)
on March 1, 2010. On January 1, 2012, S changes
the plan to provide that incentive stock options for P
stock will be granted to S employees under the plan.
Because there is a change in the stock available for
grant under the plan, the change is considered the
adoption of a new plan that must be approved by the
stockholder of S (in this case, P) within 12 months
before or after January 1, 2012.
*****
Par. 4. Section 1.422–5, paragraph
(f)(1) is revised to read as follows:
§1.422–5 Permissible provisions.
*****
(f)Effective/applicability date—(1)In
general. Except for §1.422–2(b)(6)Exam-
ple 1(iii), the regulations under this sec-
tion are effective on August 3, 2004. Sec-
tion 1.422–2(b)(6)Example 1(iii) is ef-
fective on November 17, 2009. Section
1.422–2(b)(6)Example 1(iii) applies to
statutory options granted on or after Jan-
uary 1, 2010.
*****
Par. 5. Section 1.423–1 is revised to
read as follows:
§1.423–1 Applicability of section 421(a).
(a)General rule. Subject to the provi-
sions of section 423(c) and §1.423–2(k),
the special rules of income tax treatment
provided in section 421(a) apply with re-
spect to the transfer of a share of stock to
an individual pursuant to the individual’s
exercise of an option granted under an em-
ployee stock purchase plan, as defined in
§1.423–2, if the following conditions are
satisfied—
(1) The individual makes no disposition
of such share before the later of the expi-
ration of the two-year period from the date
of the grant of the option pursuant to which
such share was transferred or the expira-
tion of the one-year period from the date
of transfer of such share to the individual;
and
(2) At all times during the period begin-
ning on the date of the grant of the option
and ending on the day three months before
the date of exercise, the individual was an
employee of the corporation granting the
option, a related corporation, or a corpora-
tion (or a related corporation) substituting
or assuming the stock option in a transac-
tion to which section 424(a) applies.
(b)Cross-references. For rules relat-
ing to the requisite employment relation-
ship, see §1.421–1(h). For rules relating
to the effect of a disqualifying disposition,
see section 421(b) and §1.421–2(b). For
the definition of the term “disposition,”
see section 424(c) and §1.424–1(c). For
the definition of the term “related corpo-
ration,” see §1.421–1(i).
(c)Effective/applicability date.The
regulations under this section are effective
on November 17, 2009. The regulations
under this section apply to options granted
under an employee stock purchase plan on
or after January 1, 2010.
Par. 6. Section 1.423–2 is revised to
read as follows:
§1.423–2 Employee stock purchase plan
defined.
(a)In general—(1) The term “em-
ployee stock purchase plan” means a plan
that meets the requirements of paragraphs
(a)(2) and (a)(3) of this section. If the
terms of the plan do not satisfy the require-
ments of paragraph (a)(3) of this section,
then such requirements may be satisfied
by the terms of an offering made under the
plan. However, where the requirements
of paragraph (a)(3) of this section are sat-
isfied by the terms of an offering, such
requirements will be treated as satisfied
only with respect to options exercised un-
der that offering. One or more offerings
may be made under an employee stock
purchase plan. Offerings may be consecu-
tive or overlapping, and the terms of each
offering need not be identical provided the
terms of the plan and the offering together
satisfy the requirements of paragraphs
(a)(2) and (a)(3) of this section. The plan
andthetermsofanofferingmustbein
writing or electronic form, provided that
such writing or electronic form is adequate
to establish the terms of the plan or offer-
ing, as applicable.
(2) To satisfy the requirements of this
paragraph (a)(2) and §1.423–1, the plan
must meet both of the following require-
ments—
(i) The plan must provide that options
can be granted only to employees of the
employer corporation or of a related cor-
poration (as defined in paragraph (i) of
§1.421–1) to purchase stock in any such
corporation (see paragraph (b) of this sec-
tion); and
(ii) The plan must be approved by the
stockholders of the granting corporation
within 12 months before or after the date
the plan is adopted (see paragraph (c) of
this section).
(3) To satisfy the requirements of this
paragraph (a)(3) and §1.423–1, the terms
of the plan or offering must meet all of the
following requirements—
(i) An employee cannot be granted an
option if, immediately after the option is
granted, the employee owns stock possess-
ing 5 percent or more of the total com-
bined voting power or value of all classes
of stock of the employer corporation or of
a related corporation (see paragraph (d) of
this section);
(ii) Options must be granted to all em-
ployees of any corporation whose employ-
ees are granted any options by reason of
their employment by the corporation (see
paragraph (e) of this section);
(iii) All employees granted options
must have the same rights and privileges
(see paragraph (f) of this section);
(iv) The option price cannot be less than
the lesser of—
2009–49 I.R.B.726December 7, 2009

(A) An amount equal to 85 percent of
the fair market value of the stock at the
time the option is granted, or
(B) An amount not less than 85 percent
of the fair market value of the stock at the
time the option is exercised (see paragraph
(g)ofthissection).
(v) Options cannot be exercised after
the expiration of—
(A) Five years from the date the option
is granted if, under the terms of such plan,
the option price cannot be less than 85 per-
cent of the fair market value of the stock at
the time the option is exercised, or
(B) Twenty-seven months from the date
the option is granted, if the option price is
not determined in the manner described in
paragraph (a)(3)(v)(A) of this section (see
paragraph (h) of this section).
(vi) No employee may be granted an op-
tion that permits the employee’s rights to
purchase stock under all employee stock
purchase plans of the employer corpora-
tion and its related corporations to accrue
at a rate that exceeds $25,000 of fair mar-
ket value of the stock (determined at the
time the option is granted) for each calen-
dar year in which the option is outstanding
at any time (see paragraph (i) of this sec-
tion); and
(vii) Options are nottransferable by the
optionee other than by will or the laws of
descent and distribution, and are exercis-
able, during the lifetime of the optionee,
only by the optionee (see paragraph (j) of
this section).
(4) The determination of whether a par-
ticular option is an option granted under an
employee stock purchase plan is made at
the time the option is granted. If the terms
of an option are inconsistent with the terms
of the employee stock purchase plan or the
offering under the plan pursuant to which
the option is granted, the option will not be
treated as granted under an employee stock
purchase plan. If an option with terms that
are inconsistent with the terms of the plan
or an offering under the plan is granted to
an employee who is entitled to the grant of
an option under the terms of the plan or of-
fering, and the employee is not granted an
option under the offering that qualifies as
an option granted under an employee stock
purchase plan, the offering will not meet
the requirements of paragraph (e) of this
section. Accordingly, none of the options
granted under the offering will be eligible
for the special tax treatment of section 421.
However, if an option with terms that are
inconsistent with the terms of the plan or
an offering under the plan is granted to an
individual who is not entitled to the grant
of an option under the terms of the plan
or offering, the option will not be treated
as an option granted under an employee
stock purchase plan but the grant of the op-
tion will not disqualify the options granted
under the plan or offering. If, at the time
of grant, an option qualifies as an option
granted under an employee stock purchase
plan, but after the time of grant one or more
of the requirements of paragraph (a)(3) of
this section is not satisfied with respect to
the option, the option will not be treated
as granted under an employee stock pur-
chase plan but this failure to comply with
the terms of the option will not disqualify
the other options granted under the plan or
offering.
(5)Examples. The following examples
illustrate the principles of paragraph (a):
Example 1. Corporation A operates an employee
stock purchase plan under which options for A stock
are granted to employees of A. The terms of an of-
fering provide that the option price will be 90 per-
cent of the fair market value of A stock on the date
of exercise. A grants an option under the offering to
Employee Z, an employee of A. The terms of the op-
tion provide that the option price will be 85 percent of
the fair market value of A stock on the date of exer-
cise. Because the terms of Z’s option are inconsistent
with the terms of the offering, the option granted to
Z will not be treated as an option granted under the
employee stock purchase plan. Further, unless Z is
granted an option under the offering that qualifies as
an option granted under the employee stock purchase
plan, the offering will not meet the requirements of
paragraph (e) of this section and none of the options
granted under the offering will be eligible for the spe-
cial tax treatment of section 421.
Example 2. Corporation B operates an employee
stock purchase plan that provides that options for B
stock may only be granted to employees of B. Under
the terms of the plan, options may not be granted to
consultants and other non-employees. B grants an op-
tion to Consultant Y, a consultant of B. Because Y is
ineligible to receive anoption under the plan because
Y is not an employee, the grant of the option to Y is
inconsistent with the terms of the plan and the option
granted to Y will not be treated as an option granted
under the employee stock purchase plan. However,
the grant of the option to Y will not disqualify the op-
tions granted under the plan or any offering because
Y was not entitled to the grant of an option under the
plan.
Example 3. Corporation C operates an employee
stock purchase plan under which options for C stock
are granted to employees of C. C grants an option
pursuanttoanofferingundertheplantoEmployee
X, an employee of C who is a highly compensated
employee. The terms of the employee stock pur-
chase plan exclude highly compensated employees
from participation in theplan. Because X is ineligible
to receive an option under the plan by reason of X’s
exclusion from participation in the plan, the option
granted to X will not be treated as an option granted
under the employee stock purchase plan. However,
the grant of the option to X will not disqualify the
options granted under the plan or offering because X
was not entitled to the grant of an option under the
plan.
Example 4. Corporation D operates an employee
stock purchase plan under which options for D stock
are granted to employees of D. D grants an option
pursuant to an offering under the plan to Employee
W, an employee of D. The terms of the option provide
that the option price will be 90 percent of the fair
market value of D stock on the date of exercise. On
the date of exercise, W pays only 85 percent of the
fair market value of D stock. Because the terms of
W’s option are not satisfied, the option granted to
W will not be treated as an option granted under the
employee stock purchase plan. However, the failure
to comply with the terms of the option granted to W
will not disqualify the options granted under the plan
or offering.
(b)Options restricted to employees.An
employee stock purchase plan must pro-
vide that options can be granted only to
employees of the employer corporation (or
employees of its related corporations) to
purchase stock in the employer corpora-
tion (or one of its related corporations).
If such a provision is not included in the
terms of the plan, the plan will not be an
employee stock purchase plan and options
granted under the plan will not qualify for
the special tax treatment of section 421.
For rules relating to the employment re-
quirement, see §1.421–1(h).
(c)Stockholder approval—(1) An em-
ployee stock purchase plan must be ap-
proved by the stockholders of the grant-
ing corporation within 12 months before
or after the date such plan is adopted. The
approval of the stockholders must comply
with all applicable provisions of the corpo-
rate charter and bylaws and of applicable
State law prescribing the method and de-
gree of stockholder approval required for
the issuance of corporate stock or options.
If the applicable State law does not pre-
scribe a method and degree of stockholder
approval, then an employee stock purchase
plan must be approved—
(i) By a majority of the votes cast at a
duly held stockholder’s meeting at which a
quorum representing a majority of all out-
standing voting stock is, either in person or
by proxy, present and voting on the plan; or
(ii) By a method and in a degree that
would be treated as adequate under appli-
cable State law in the case of an action re-
quiring stockholder approval (such as, an
December 7, 20097272009–49 I.R.B.

action on which stockholders would be en-
titled to vote if the action were taken at a
duly held stockholders’ meeting).
(2) For purposes of the stockholder
approval required by this paragraph (c),
ordinarily, a plan is adopted when it is ap-
proved by the granting corporation’s board
of directors, and the date of the board’s
action is the reference point for determin-
ing whether stockholder approval occurs
within the applicable 24-month period.
However, if the board’s action is subject to
a condition (such as stockholder approval)
or the happening of a particular event, the
plan is adopted on the date the condition is
met or the event occurs, unless the board’s
resolution fixes the date of adoption as the
date of the board’s action.
(3) An employee stock purchase plan,
as adopted and approved, must designate
the maximum aggregate number of shares
that may be issued under the plan, and
the corporations or class of corporations
whose employees may be offered options
under the plan. A plan that merely pro-
vides that the number of shares that may
be issued under the plan may not exceed
a stated percentage of the shares outstand-
ing at the time of each offering or grant un-
der the plan does not satisfy the require-
ments of this paragraph (c)(3). However,
the maximum aggregate number of shares
that may be issued under the plan may
be stated in terms of a percentage of the
authorized, issued, or outstanding shares
on the date of the adoption of the plan.
The plan may specify that the maximum
aggregate number of shares available for
grants under the plan may increase annu-
ally by a specified percentage of the au-
thorized, issued, or outstanding shares on
the date of the adoption of the plan. A
plan that provides that the maximum ag-
gregate number of shares that may be is-
sued as options under the plan may change
based on any other specific circumstances
satisfies the requirements of this paragraph
only if the stockholders approve an imme-
diately determinable maximum number of
shares that may be issued under the plan in
any event. If there is more than one em-
ployee stock purchase plan under which
options may be granted and stockholders
of the granting corporation merely approve
a maximum aggregate number of shares
that are available for issuance under the
plans, the stockholder approval require-
ments described in paragraph (c)(1) of this
section are not satisfied. A separate maxi-
mum aggregate number of shares available
for issuance pursuant to options must be
specified and approved for each plan.
(4) Once an employee stock purchase
plan is approved by the stockholders of
the granting corporation, the plan need
not be reapproved by the stockholders of
the granting corporation unless the plan is
amended or changed in a manner that is
considered the adoption of a new plan, in
which case the plan must be reapproved
within the prescribed 24-month period.
Any increase in the aggregate number of
shares that may be issued under the plan
(other than an increase merely reflecting
a change in the number of outstanding
shares, such as a stock dividend or stock
split) will be considered the adoption of a
new plan requiring stockholder approval
within the prescribed 24-month period.
Similarly, a change in the designation of
corporations whose employees may be
offered options under the plan will be
considered the adoption of a new plan
requiring stockholder approval within the
prescribed 24-month period unless the
plan provides that designations of partic-
ipating corporations may be made from
time to time from among a group consist-
ing of the granting corporation and its re-
lated corporations. The group from among
which such changes and designations are
permitted without additional stockholder
approval may include corporations hav-
ing become parents or subsidiaries of the
granting corporation after the adoption and
approval of the plan. In addition, a change
in the granting corporation or the stock
available for purchase under the plan will
be considered the adoption of a new plan
requiring stockholder approval within the
prescribed 24-month period. Any other
changes in the terms of an employee stock
purchase plan are not considered the adop-
tion of a new plan and, thus, do not require
stockholder approval.
(5)Examples. The following examples
illustrate the principles of this paragraph
(c):
Example 1. (i) Corporation E is a subsidiary of
Corporation F, a publicly traded corporation. On Jan-
uary 1, 2010, E adopts an employee stock purchase
plan under which options for E stock are granted to E
employees.
(ii) To meet the requirements of paragraph (c)(1)
of this section, the plan must be approved by the
stockholders of E (in this case, F) within 12 months
before or after January 1, 2010.
(iii) Assume the same facts as in paragraph (i) of
thisExample 1, except that the plan was approved
by the stockholders of E (in this case, F) on March
1, 2010. On January 1, 2012, E changes the plan
to provide that options for F stock will be granted
to E employees under the plan. Because there is a
change in the stock available for grant under the plan,
under paragraph (c)(4) of this section, the change is
considered the adoption of a new plan that must be
approved by the stockholders of E (in this case, F)
within 12 months before or after January 1, 2012.
Example 2. (i) Assume the same facts as in
paragraph (i) ofExample 1, except that on March
15, 2011, F completely disposes of its interest in E.
Thereafter, E continues to grant options for E stock
to E employees under the plan.
(ii) The new E options are granted under a plan
that meets the stockholder approval requirements
of paragraph (c)(1) of this section without regard
to whether E seeks approval of the plan from the
stockholders of E after F disposes of its interest in E.
(iii) Assume the same facts as in paragraph (i) of
thisExample 2, except that under the plan as adopted
on January 1, 2010, only options for F stock are
granted to E employees. Assume further that, after
F disposes of its interest in E, E changes the plan
to provide for the grant of options for E stock to E
employees. Because there is a change in the stock
available for purchase or grant under the plan, under
paragraph (c)(4) of this section, the stockholders of
E must approve the plan within 12 months before or
after the change to the plan to meet the stockholder
approval requirements of paragraph (c) of this sec-
tion.
Example 3. (i) Corporation G maintains an em-
ployee stock purchase plan providing options for G
stock. Corporation H does not maintain an employee
stock purchase plan. On May 15, 2010, G and H con-
solidate under State law to form one corporation. The
new corporation is named Corporation H. The con-
solidation agreement describes the G plan, including
the maximum aggregate number of shares available
for issuance under the plan after the consolidation.
Additionally, the consolidation agreement states that
the plan will be continued by H after the consolida-
tion. The consolidation agreement is approved by the
stockholders of G and H on May 1, 2010. H assumes
the plan formerly maintained by G and continues to
grant options under the plan to all eligible employees,
but the options are for H stock.
(ii) Because there is a change in the granting cor-
poration (from G to H) and the stock available for
purchase, under paragraph (c)(4) of this section, H is
considered to have adopted a new plan. Because the
plan is fully described in the consolidation agreement,
including the maximum aggregate number of shares
available for issuance under the plan, the approval
of the consolidation agreement by the stockholders
constitutes approval of the plan. Thus, the stock-
holder approval of the consolidation agreement sat-
isfies the stockholder approval requirements of para-
graph (c)(1) of this section, and the plan is considered
to be adopted by H and approved by its stockholders
on May 1, 2010.
Example 4. Corporation I adopts an employee
stockpurchaseplanonNovember1,2010. Onthat
date, there are two million shares of I stock outstand-
ing. The plan provides that the maximum aggregate
number of shares that may be issued under the plan
2009–49 I.R.B.728December 7, 2009

may not exceed 15 percent of the number of shares of
I stock outstanding on November 1, 2010. Because
the maximum aggregate number of shares that may
be issued under the plan is designated in the plan, the
requirements of paragraph (c)(3) of this section are
met.
Example 5. (i) Corporation J adopts an employee
stock purchase plan on March 15, 2010. The plan pro-
vides that the maximum aggregate number of shares
of J stock available for issuance under the plan is
50,000, increased on each anniversary date of the
adoption of the plan by 5 percent of the then outstand-
ing shares. Because the maximum aggregate number
of shares is not designated under the plan, the require-
ments of paragraph (c)(3) of this section are not met.
(ii) Assume the same facts as in paragraph (i) of
thisExample 5, except that the plan provides that
the maximum aggregate number of shares available
under the plan is the lesser of (a) 50,000 shares, in-
creased each anniversary date of the adoption of the
plan by 5 percent of the then-outstanding shares, or
(b) 200,000 shares. Because the maximum aggregate
number of shares that may be issued under the plan is
designated as the lesser of two numbers, one of which
provides an immediately determinable maximum ag-
gregate number of shares that may be issued under
the plan in any event, the requirements of paragraph
(c)(3) of this section are met.
(d)Options granted to certain share-
holders—(1) An employee stock purchase
plan or offering must, by its terms, provide
that an employee cannot be granted an op-
tion if the employee, immediately after the
option is granted, owns stock possessing 5
percent or more of the total combined vot-
ing power or value of all classes of stock of
the employer corporation or a related cor-
poration. In determining whether the stock
ownership of an employee equals or ex-
ceeds this 5 percent limit, the rules of sec-
tion 424(d) (relating to attribution of stock
ownership) shall apply, and stock that the
employee may purchase under outstanding
options (whether or not the options qual-
ify for the special tax treatment afforded
by section 421(a)) shall be treated as stock
owned by the employee. An option is out-
standing for purposes of this paragraph (d)
although under its terms it may be exer-
cised only in installments or after the ex-
piration of a fixed period of time. If an op-
tion is granted to an employee whose stock
ownership (as determined under this para-
graph (d)) exceeds the limitation set forth
in this paragraph (d), no portion of the op-
tion will be treated as having been granted
under an employee stock purchase plan.
(2) The determination of the percent-
age of the total combined voting power
or value of all classes of stock of the em-
ployer corporation (or a related corpora-
tion) that is owned by the employee is
made by comparing the voting power or
value of the shares owned (or treated as
owned) by the employee to the aggregate
voting power or value of all shares actually
issued and outstanding immediately after
the grant of the option to the employee.
The aggregate voting power or value of all
shares actually issued and outstanding im-
mediately after the grant of the option does
not include the voting power or value of
treasury shares or shares authorized for is-
sue under outstanding options held by the
employee or any other person.
(3)Examples. The following examples
illustrate the principles of this paragraph
(d):
Example 1. Employee V, an employee of Cor-
poration K, owns 6,000 shares of K common stock,
the only class of K stock outstanding. K has 100,000
shares of its common stockoutstanding. Because
V owns 6 percent of the combined voting power or
value of all classes of K stock, K cannot grant an op-
tion to V under K’s employee stock purchase plan.
If V’s father and brother each owned 3,000 shares
of K stock and V did not own any K stock, then
the result would be the same because, under section
424(d), an individual is treated as owning stock held
by the person’s father and brother. Similarly, the re-
sult would be the same if, instead of actually own-
ing 6,000 shares, V merely held an option on 6,000
shares of K stock, irrespective of whether the transfer
of stock under the option could qualify for the special
tax treatment of section 421, because this paragraph
(d) provides that stock the employee may purchase
under outstanding options is treated as stock owned
by such employee.
Example 2. Assume the same facts as inExample
1, except that K is a 50 percent subsidiary corporation
of Corporation L. Irrespective of whether V owns any
L stock, V cannot receive an option from L under
L’s employee stock purchase plan because he owns
5 percent of the total combined voting power of all
classes of stock of a subsidiary of L, in this example,
K. An employee who owns (or is treated as owning)
stock in excess of the limitation of this paragraph (d),
in any corporation in a group of related corporations,
consisting of a parent and its subsidiary corporations,
cannot receive an option under an employee stock
purchase plan from any corporation in the group.
Example 3. Employee U is an employee of Cor-
poration M. M has only one class of stock, of which
100,000 shares are issued and outstanding. Assum-
ing U does not own (and is not treated as owning)
any stock in M or in any related corporation of M, M
may grant an option to U under its employee stock
purchase plan for 4,999 shares, because immediately
after the grant of the option, U would not own 5 per-
cent or more of the combined voting power or value
of all classes of M stock actually issued and outstand-
ing at such time. The 4,999 shares that U would be
treated as owning under this paragraph (d) would not
be added to the 100,000 shares actually issued and
outstanding immediately after the grant for purposes
of determining whether U’s stock ownership exceeds
the limitation of this paragraph (d).
Example 4.AssumethesamefactsasinExample
3but instead of an option for 4,999 shares, M grants U
an option, purportedly under its employee stock pur-
chase plan, for 5,000 shares. No portion of this option
will be treated as granted under an employee stock
purchase plan because U’s stock ownership exceeds
the limitation of this paragraph (d).
(e)Employees covered by plan—(1)
Subject to the provisions of this paragraph
(e) and the limitations of paragraphs (d),
(f) and (i) of this section, an employee
stock purchase plan or offering must, by
its terms, provide that options are to be
granted to all employees of any corpo-
ration whose employees are granted any
of such options by reason of their em-
ployment by that corporation, except that
one or more of the following categories
of employees may be excluded from the
coverage of the plan or offering—
(i) Employees who have been employed
less than two years;
(ii) Employees whose customary em-
ployment is 20 hours or less per week;
(iii) Employees whose customary em-
ployment is for not more than five months
in any calendar year; and
(iv) Highly compensated employees
(within the meaning of section 414(q)).
(2) A plan or offering does not fail to
satisfy the coverage provision of para-
graph (e)(1) of this section in the following
circumstances—
(i) The plan or offering excludes em-
ployees who have completed a shorter pe-
riod of service or whose customary em-
ployment is for fewer hours per week or
fewer months in a calendar year than is
specified in paragraphs (e)(1)(i), (ii) and
(iii) of this section, provided the exclusion
is applied in an identical manner to all em-
ployees of every corporation whose em-
ployees are granted options under the plan
or offering.
(ii) The plan or offering excludes highly
compensated employees (within the mean-
ing of section 414(q)) with compensation
above a certain level or who are officers
or subject to the disclosure requirements
of section 16(a) of the Securities Exchange
Act of 1934, provided the exclusion is ap-
plied in an identical manner to all highly
compensated employees of every corpora-
tion whose employees are granted options
under the plan or offering.
(3) Notwithstanding paragraph (e)(1) of
this section, employees who are citizens or
residents of a foreign jurisdiction (without
regard to whether they are also citizens of
December 7, 20097292009–49 I.R.B.

the United States or resident aliens (within
the meaning of section 7701(b)(1)(A)))
may be excluded from the coverage of an
employee stock purchase plan or offering
under the following circumstances—
(i) The grant of an option under the plan
or offering to a citizen or resident of the
foreign jurisdiction is prohibited under the
laws of such jurisdiction; or
(ii) Compliance with the laws of the
foreign jurisdiction would cause the plan
or offering to violate the requirements of
section 423.
(4) No option granted under a plan or
offering that excludes from participation
any employees, other than those who may
be excluded under this paragraph (e), and
those barred from participation by reason
of paragraphs (d), (f) and (i) of this section,
can be regarded as having been granted un-
der an employee stock purchase plan. If
an option is not granted to any employee
who is entitled to the grant of an option un-
der the terms of the plan or offering, none
of the options granted under such offer-
ing will be treated as having been granted
under an employee stock purchase plan.
However, a plan that, by its terms, per-
mits all eligible employees to elect to par-
ticipate in an offering will not violate the
requirements of this paragraph solely be-
cause eligible employees who elect not to
participate in the offering are not granted
options pursuant to such offering.
(5) For purposes of this paragraph (e),
the existence of the employment relation-
ship between an individual and the corpo-
ration participating under the plan will be
determined under §1.421–1(h).
(6)Examples. The following examples
illustrate the principles of this paragraph
(e):
Example 1. Corporation N has a stock purchase
plan that meets all the requirements of paragraphs
(a)(2) and (a)(3) of this section except that options
are not required to be granted to employees whose
weekly rate of pay is less than $1,000. As a matter of
corporate practice, however, N grants options under
its plan to all employees, irrespective of their weekly
rate of pay. Even though N’s plan is operated in com-
pliance with the requirements of this paragraph (e),
N’s plan is not an employee stock purchase plan be-
cause the terms of the plan exclude a category of em-
ployees that is not permitted under this paragraph (e).
Example 2. Assume the same facts as inExample
1, except that the first offering under N’s plan pro-
vides that options will be granted to all employees of
N. The terms of the first offering will be treated as
part of the terms of N’s plan, but only for purposes
of the first offering. Because the terms of the first of-
fering satisfy the requirements of this paragraph (e),
stock transferred pursuant to options exercised under
the first offering will be treated as stock transferred
pursuant to the exercise ofoptions granted under an
employee stock purchase plan for purposes of section
421.
Example 3. Corporation O has a stock purchase
plan that excludes from participation all employees
who have been employed less than one year. As-
suming all other requirements of paragraphs (a)(2)
and (a)(3) of this section are satisfied, O’s plan quali-
fies as an employee stock purchase plan under section
423.
Example 4. Corporation P has a stock purchase
plan that excludes from participation clerical employ-
ees who have been employed less than two years.
However, non-clerical employees with less than two
years of service are permitted to participate in the
plan. P’s plan is not an employee stock purchase plan
because the exclusion of employees who have been
employed less than two years applies only to certain
employees of P and is not applied in an identical man-
ner to all employees of P. If, instead, P’s plan excludes
from participation all employees (both clerical and
non-clerical) who have been employed less than two
years, then P’s plan would qualify as an employee
stock purchase plan under section 423 assuming all
other requirements of paragraphs (a)(2) and (a)(3) of
this section are satisfied.
Example 5. Corporation Q has a stock purchase
plan that excludes from participation all officers who
are highly compensated employees (within the mean-
ing of section 414(q)). Assuming all other require-
ments of paragraphs (a)(2) and (a)(3) of this section
are satisfied, Q’s plan qualifies as an employee stock
purchase plan under section 423.
Example 6. Corporation R maintains an em-
ployee stock purchase plan that excludes from
participation all highly compensated employees
(within the meaning of section 414(q)), except highly
compensated employees who are officers of R. R’s
plan is not an employee stock purchase plan because
the exclusion of all highly compensated employ-
ees except highly compensated employees who are
officers of R is not a permissible exclusion under
paragraph (e)(2)(ii) of this section.
Example 7. Corporation S is the parent corpora-
tion of Subsidiary YY and Subsidiary ZZ. S main-
tains an employee stock purchase plan with both YY
and ZZ participating in the same offering under the
plan. Under the terms of the offering under the plan,
all employees of YY and ZZ are permitted to partic-
ipate in the plan with the exception of ZZ’s highly
compensated employees with annual compensation
greater than $300,000. None of the options granted
under the offering will be considered granted under
an employee stock purchase plan because the exclu-
sion of highly compensated employees with annual
compensation greater than$300,000 is not applied in
an identical manner to all employees of YY and ZZ
granted options in the same offering.
Example 8. Assume the same facts as inExam-
ple 7, except that Corporation S establishes separate
offerings under the plan for YY and ZZ. Under the
terms of the separate offering for YY, all employees
of YY are permitted to participate in the plan. Un-
der the terms of the separate offering established for
ZZ, all employees of ZZ are permitted to participate
in the plan with the exception of ZZ’s highly compen-
sated employees with annual compensation greater
than $300,000. The options granted under the sepa-
rate offering for YY will be considered granted under
an employee stock purchase plan. Further, the op-
tions granted under the separate offering for ZZ will
be considered granted under an employee stock pur-
chase plan because the exclusion of highly compen-
sated employees with annual compensation greater
than $300,000 is applied in an identical manner to all
employees of ZZ granted options in the same offer-
ing.
Example 9. The laws of Country A require
that options granted to residents of Country A be
transferable during the lifetime of the option recip-
ient. Corporation T has a stock purchase plan that
excludes residents of Country A from participation
in the plan. Because compliance with the laws of
Country A would cause options granted to residents
of Country A to violate paragraph (j) of this section,
T may exclude residents of Country A from partici-
pation in the plan. Assuming all other requirements
of paragraph (a)(2) of this section are satisfied, T’s
plan qualifies as an employee stock purchase plan
under section 423.
(f)Equal rights and privileges—(1)
Except as otherwise provided in para-
graphs (f)(2) through (f)(6) of this section,
an employee stock purchase plan or of-
fering must, by its terms, provide that all
employees granted options under the plan
or offering shall have the same rights and
privileges. Thus, the provisions applying
to one option under an offering (such as
the provisions relating to the method of
payment for the stock and the determina-
tion of the purchase price per share) must
apply to all other options under the offer-
ing in the same manner. If all the options
granted under a plan or offering do not, by
their terms, give the respective optionees
the same rights and privileges, none of
the options will be treated as having been
granted under an employee stock purchase
plan for purposes of section 421.
(2) The requirements of this paragraph
(f) do not prevent the maximum amount of
stock that an employee may purchase from
being determined on the basis of a uniform
relationship to the total compensation, or
the basic or regular rate of compensation,
of all employees.
(3) A plan or offering will not fail to
satisfy the requirements of this paragraph
(f) because the plan or offering provides
that no employee may purchase more than
a maximum amount of stock fixed under
the plan or offering.
(4) A plan or offering will not fail to
satisfy the requirements of this paragraph
(f) if, in order to comply with the laws of
a foreign jurisdiction, the terms of an op-
tion granted under a plan or offering to cit-
2009–49 I.R.B.730December 7, 2009

izens or residents of such foreign jurisdic-
tion (without regard to whether they are
also citizens of the United States or resi-
dent aliens (within the meaning of section
7701(b)(1)(A))) are less favorable than the
terms of options granted under the same
plan or offering to employees resident in
the United States.
(5)(i) Except as provided in this para-
graph and paragraph (f)(5)(ii) of this sec-
tion, a plan or offering permitting one or
more employees to carry forward amounts
that were withheld but not applied toward
the purchase of stock under an earlier plan
or offering and apply the amounts towards
the purchase of additional stock under a
subsequent plan or offering will be a viola-
tion of the equal rights and privileges un-
der paragraph (f)(1) of this section. How-
ever, the carry forward of amounts with-
held but not applied toward the purchase of
stock under an earlier plan or offering will
not violate the equal rights and privileges
requirement of paragraph (f)(1) of this sec-
tion, if all other employees participating in
the current plan or offering are permitted to
make direct payments toward the purchase
of shares under a subsequent plan or offer-
ing in an amount equal to the excess of the
greatest amount which any employee is al-
lowed to carry forward from an earlier plan
or offering over the amount, if any, the em-
ployee will carry forward from an earlier
plan or offering.
(ii) A plan or offering will not fail to sat-
isfy the requirements of this section merely
because employees are permitted to carry
forward amounts representing a fractional
share, that were withheld but not applied
toward the purchase of stock under an ear-
lier plan or offering and apply the amounts
toward the purchase of additional stock un-
der a subsequent plan or offering.
(6) Paragraph (f) does not prohibit
the delaying of the grant of an option to
any employee who is barred from being
grantedanoptionsolelybyreasonofthe
employee’s failing to meet a minimum
service requirement set forth in paragraph
(e)(1) of this section until the employee
meets such requirement.
(7)Examples. The following examples
illustrate the principles of this paragraph
(f):
Example 1. Corporation U has an employee
stock purchase plan that provides that the maximum
amount of stock that each employee may purchase
under the offering is one share for each $100 of
annual gross pay. The plan meets the requirements
of this paragraph (f).
Example 2. Corporation V has an employee
stock purchase plan that provides that the maximum
amount of stock that each employee may purchase
under the offering is one share for each $100 of an-
nual gross pay up to and including $10,000, and two
shares for each $100 of annual gross pay in excess of
$10,000. The plan will not meet the requirements of
this paragraph (f) because the amount of stock that
may be purchased under the plan is not based on a
uniform relationship to the total compensation of all
employees.
Example 3. Corporation W has an employee
stock purchase plan that provides that options to
purchase stock in an amount equal to ten percent of
an employee’s annual salary at a price equal to 85
percent of the fair market value on the first day of the
offering will be granted to all employees other than
those who have been employed less than 18 months.
In addition, the plan provides that employees who
have not yet met the minimum service requirements
on the first day of the offering will be granted similar
options on the date the 18 month service requirement
has been attained. The plan meets the requirements
of this paragraph (f).
Example 4. Corporation X is the parent corpora-
tion of Subsidiary AA, Subsidiary BB and Subsidiary
CC. X maintains an employee stock purchase plan
with AA, BB and CC participating in the same offer-
ing under the plan. Under the terms of the offering un-
der the plan, options to purchase stock at a price equal
to 90 percent of the fair market value at the time the
option is exercised will be granted to all employees.
Certain employees of AA are residents of Country B.
The laws of Country B provide that options granted to
employees who are residents of Country B must have
a purchase price not less than 95 percent of the fair
market value at the time the option is exercised. The
plan will not fail to satisfy the requirements of this
paragraph (f) merely because the residents of Coun-
try B are granted options under the plan to purchase
stock at a price equal to 95 percent of the fair market
value at the time the option is exercised.
Example 5. Assume the same facts as inExample
4, except that Corporation X establishes two separate
offerings under the plan: a separate offering for the
employees of AA and a separate offering for the em-
ployees of BB and CC. Under the separate offering
for the employees of BB and CC, options are granted
to all employees with an exercise price equal to 90
percent of the fair market value at the time the option
is exercised. Under the separate offering for the em-
ployees of AA, options are granted to all employees
with an exercise price equal to 95 percent of the fair
market value at the time the option is exercised. The
plan does not violate the equal rights and privileges
requirement of this paragraph (f) merely because the
exercise price of options granted under one offering
is less than the exercise price of options granted un-
der a separate offering.
Example 6. Corporation Y maintains an em-
ployee stock purchase plan. Employee T is employed
by Y. T is granted an option under the current offering
to purchase a maximum of 100 shares of Y stock at
an option price equal to 85 percent of the fair market
value of the stock at exercise. The plan permits the
carry forward of withheld but unused amounts from
an earlier offering. Prior to the exercise date, $2000
of T’s salary has been withheld and is available to
be applied toward the purchase of Y stock. On the
exercise date, the fair market value of Y stock is
$20 per share. T is able to purchase 100 shares of
Y stock at $17 per share foran aggregate purchase
price of $1700. T can carry forward $300 to the sub-
sequent offering. Each employee in the subsequent
offering other than T will be permitted to make direct
payments toward the purchase of shares under the
subsequent offering in a maximum amount of $300
less any amount the employee has carried forward
from an earlier offering. The plan does not violate
the equal rights and privileges requirement of this
paragraph (f).
(g)Option price—(1) An employee
stock purchase plan or offering must, by
its terms, provide that the option price will
not be less than the lesser of—
(i) An amount equal to 85 percent of the
fair market value of the stock at the time
the option is granted, or
(ii) An amount that under the terms of
the option may not be less than 85 percent
of the fair market value of the stock at the
time the option is exercised.
(2) For purposes of determining the
option price, the fair market value of the
stock may be determined in any reasonable
manner, including the valuation methods
permitted under §20.2031–2. However,
the option price must meet the minimum
pricing requirements of this paragraph
(g). For general rules relating to the op-
tion price, see §1.421–1(e). For rules
relating to the determination of when an
option is granted, see §§1.421–1(c) and
1.423–2(h)(2). Any option that does not
meet the minimum pricing requirements
of this paragraph (g) will not be treated as
an option granted under an employee stock
purchase plan irrespective of whether the
plan or offering satisfies those require-
ments. If an option that does not meet the
minimum pricing requirements is granted
to an employee who is entitled to the grant
of an option under the terms of the plan or
offering, and the employee is not granted
an option under such offering that qualifies
as an option granted under an employee
stock purchase plan, the offering will not
meet the requirements of paragraph (e)
of this section. Accordingly, none of the
options granted under the offering will be
eligible for the special tax treatment of
section 421.
(3) The option price may be stated ei-
ther as a percentage or as a dollar amount.
If the option price is stated as a dollar
amount, then the requirement of this para-
graph (g) can only be met by a plan or of-
December 7, 20097312009–49 I.R.B.

fering in which the price is fixed at not less
than 85 percent of the fair market value of
the stock at the time the option is granted.
If the fixed price is less than 85 percent of
the fair market value of the stock at grant,
then the option cannot meet the require-
ment of this paragraph (g) even if a decline
in the fair market value of the stock results
in such fixed price being not less than 85
percent of the fair market value of the stock
at the time the option is exercised, because
that result was not certain to occur under
the terms of the option.
(4)Examples. The following examples
illustrate the principles of this paragraph
(g):
Example 1. Corporation Z has an employee stock
purchase plan that provides that the option price will
be 85 percent of the fair market value of the stock
on the first day of the offering (which is the date of
grant in this case), or 85 percent of the fair market
value of the stock at exercise, whichever amount is
the lesser. Upon the exercise of an option issued un-
der Z’s plan, Z agrees to accept an option price that
is less than the minimum amount allowable under the
terms of such plan. Notwithstanding that the option
was issued under an employee stock purchase plan,
the transfer of stock pursuant to the exercise of such
option does not satisfy the requirement of this para-
graph (g) and cannot qualify for the special tax treat-
ment of section 421.
Example 2. Corporation AA has an employee
stock purchase plan that provides that the option price
is set at 85 percent of the fair market value of AA
stock at exercise, but not less than $80 per share. On
the first day of the offering (which is the date of grant
in this case), the fair market value of AA stock is $100
per share. The option satisfies the requirement of this
paragraph (g), and can qualify for the special tax treat-
ment of section 421.
Example 3. Assume the same facts as inExample
2, except that the option price is set at 85 percent of
the fair market value of AA stock at exercise, but not
more than $80 per share. This option cannot satisfy
the requirement of this paragraph (g) irrespective of
whether, at the time the option is exercised, 85 per-
cent of the fair market value of AA stock is $80 or
less.
(h)Option period—(1) An employee
stock purchase plan or offering must, by
its terms, provide that options granted un-
der the plan cannot be exercised after the
expiration of 27 months from the date of
grant unless, under the terms of the plan or
offering, the option price is not less than
85 percent of the fair market value of the
stock at the time of the exercise of the op-
tion. If the option price is not less than 85
percent of the fair market value of the stock
at the time the option is exercised, then
the option period provided under the plan
must not exceed five years from the date
of grant. If the requirements of this para-
graph (h) are not met by the terms of the
plan or offering, then options issued under
such plan or offering will not be treated as
options granted under an employee stock
purchase plan irrespective of whether the
options, by their terms, are exercisable be-
yond the period allowable under this para-
graph (h). An option that provides that
the option price is not less than 85 per-
cent of the fair market value of the stock
at exercise may have an option period of 5
years irrespective of whether the fair mar-
ket value of the stock at exercise is more or
less than the fair market value of the stock
at grant. However, if the option provides
that the option price is 85 percent of the
fair market value of the stock at exercise,
but not more than some other fixed amount
determined in accordance with the provi-
sions of paragraph (g) of this section, then
irrespective of the price paid on exercise,
the option period must not be more than 27
months.
(2) Section 1.421–1(c) provides that,
for purposes of §§1.421–1 through
1.424–1, the language “the date of the
granting of the option” and the “time such
option is granted,” and similar phrases
refer to the date or time when the grant-
ing corporation completes the corporate
action constituting an offer of stock for
sale to an individual under the terms and
conditions of a statutory option. With
respect to options granted under an em-
ployee stock purchase plan, the principles
of §1.421–1(c) shall be applied without re-
gard to the requirement that the minimum
option price must be fixed or determinable
in order for the corporate action consti-
tuting an offer of stock to be considered
complete.
(3) The date of grant will be the first
dayofanofferingifthetermsofanem-
ployee stock purchase plan or offering des-
ignate a maximum number of shares that
may be purchased by each employee dur-
ing the offering. Similarly, the date of
grant will be the first day of an offering
if the terms of the plan or offering require
the application of a formula to establish,
on the first day of the offering, the max-
imum number of shares that may be pur-
chased by each employee during the offer-
ing. It is not required that an employee
stock purchase plan or offering designate
a maximum number of shares that may be
purchased by each employee during the of-
fering or incorporate a formula to establish
a maximum number of shares that may be
purchased by each employee during the of-
fering. If the maximum number of shares
that can be purchased under an option is
not fixed or determinable until the date the
option is exercised, then the date of exer-
cise will be the date of grant of the option.
(4)Examples. The following examples
illustrate the principles of this paragraph
(h):
Example 1. (i) Corporation BB has an employee
stock purchase plan that provides that the option price
will be the lesser of 85 percent of the fair market
value of the stock on the first day of an offering or
85 percent of the fair market value of the stock on the
last day of the offering. Options are exercised on the
last day of the offering. One million shares of BB
stock are reserved for issuance under the plan. The
plan provides that no employee may be permitted to
purchase stock under the plan at a rate that exceeds
$25,000 in fair market value of the BB stock (deter-
mined on the date of grant) for each calendar year dur-
ing which an option granted to the employee is out-
standing. The terms of each option granted under an
offering provide that a maximum of 500 shares may
be purchased by the option recipient during the of-
fering. Because the maximum number of shares that
can be purchased under the option is fixed and deter-
minable on the first day of the offering, the date of
grant for the option is the first day of the offering.
(ii) Assume the same facts as in paragraph (i)
ofExample 1, except that BB’s plan excludes all
employees who have been employed less than 18
months. The plan provides that employees who have
not yet met the minimum service requirements on
the first day of an offering will be granted an option
on the date the 18–month service requirement has
been attained. With respect to those employees who
have been employed less than 18 months on the first
day of an offering, the date of grant for the option is
the date the 18–month service requirement has been
attained.
Example 2. Assume the same facts as in para-
graph (i) ofExample 1, except that the terms of each
option granted do not provide that a maximum of 500
shares may be purchased by the option recipient dur-
ing the offering. Notwithstanding the fixed number
of shares reserved for issuance under the plan and the
$25,000 limitation set forth in the plan, the maximum
number of shares that can be purchased under the op-
tion is not fixed or determinable until the last day of
the offering when the option is exercised. Therefore
the date of grant for the option is the last day of the
offering when the option is exercised.
Example 3. Corporation CC has an employee
stock purchase plan that provides that the option price
will be 85 percent of the fair market value of the stock
on the last day of the offering. Options are exercised
on the last day of the offering. Each offering under
the plan begins on January 1 and ends on December
31 of the same calendar year. The terms of each op-
tion granted under an offering provide that the maxi-
mum number of shares that may be purchased by any
employee during the offering equals $25,000 divided
by the fair market value of the stock on the first day
of the offering. The maximum number of shares that
can be purchased under the option is fixed and deter-
2009–49 I.R.B.732December 7, 2009

minable on the first day of the offering and therefore
the date of grant for the option is the first day of the
offering.
Example 4. Assume the same facts as inExam-
ple 3except that the terms ofeach option granted un-
der an offering provide that the maximum number of
shares that may be purchased by any employee dur-
ing the offering equals 10 percent of the employee’s
annual salary (determinedas of January 1 of the year
in which the offering commences) divided by the fair
market value of the stock on the first day of the of-
fering. The maximum number of shares that can be
purchased under the option is fixed and determinable
on the first day of the offering and therefore the date
of grant for the option is the first day of the offering.
(i)Annual $25,000 limitation—(1) An
employee stock purchase plan or offer-
ing must, by its terms, provide that no
employee may be permitted to purchase
stock under all the employee stock pur-
chase plans of the employer corporation
and its related corporations at a rate that
exceeds $25,000 in fair market value of the
stock (determined at the time the option is
granted) for each calendar year in which
any option granted to the employee is out-
standing at any time. In applying the fore-
going limitation—
(i) The right to purchase stock under
an option accrues when the option (or any
portion thereof) first becomes exercisable
during the calendar year;
(ii) The right to purchase stock under an
option accrues at the rate provided in the
option, but in no case may such rate ex-
ceed $25,000 of fair market value of such
stock (determined at the time such option
is granted) for any one calendar year; and
(iii) A right to purchase stock that has
accrued under one option granted pursuant
to the plan may not be carried over to any
other option.
(2)Ifanoptionisgrantedunderanem-
ployee stock purchase plan that satisfies
the requirement of this paragraph (i), but
the option gives the optionee the right to
buy stock in excess of the maximum rate
allowable under this paragraph (i), then no
portion of the option will be treated as hav-
ing been granted under an employee stock
purchase plan. Furthermore, if the option
was granted to an employee entitled to the
grant of an option under the terms of the
plan or offering, and the employee is not
granted an option under the offering that
qualifies as an option granted under an em-
ployee stock purchase plan, then the of-
fering will not meet the requirements of
paragraph (e) of this section. Accordingly,
none of the options granted under the of-
fering will be eligible for the special tax
treatment of section 421.
(3) The limitation of this paragraph (i)
applies only to options granted under em-
ployee stock purchase plans and does not
limit the amount of stock that an employee
may purchase under incentive stock op-
tions (as defined in section 422(b)) or any
other stock options except those to which
section 423 applies. Stock purchased un-
der options to which section 423 does not
apply will not limit the amount that an em-
ployee may purchase under an employee
stock purchase plan, except for purposes of
the 5–percent stock ownership provision
of paragraph (d) of this section.
(4) Under the limitation of this para-
graph (i), an employee may purchase up
to $25,000 of stock (based on the fair mar-
ket value of the stock at the time the option
was granted) in each calendar year during
which an option granted to the employee
under an employee stock purchase plan is
outstanding. Alternatively, an employee
may purchase more than $25,000 of stock
(based on the fair market value of such
stock at the time the option was granted) in
a calendar year, so long as the total amount
of stock that the employee purchases does
not exceed $25,000 in fair market value of
the stock (determined at the time the op-
tion was granted) for each calendar year in
which any option was outstanding. If, in
any calendar year, the employee holds two
or more outstanding options granted un-
der employee stock purchase plans of the
employer corporation, or a related corpo-
ration, then the employee’s purchases of
stock attributable to that year under all op-
tions granted under employee stock pur-
chase plans must not exceed $25,000 in
fair market value of the stock (determined
at the time the options were granted). Un-
der an employee stock purchase plan, an
employee may not purchase stock in an-
ticipation that the option will be outstand-
inginsomefutureyear. Thus,theem-
ployee may purchase only the amount of
stock that does not exceed the limitation
of this paragraph (i) for the year of the
purchase and for preceding years during
which the option was outstanding. Thus,
the amount of stock that may be purchased
under an option depends on the number of
years in which the option is actually out-
standing. The amount of stock that may
be purchased under an employee stock pur-
chase plan may not be increased by reason
of the failure to grant an option in an earlier
year under such plan, or by reason of the
failure to exercise an earlier option. For
example, if an option is granted to an in-
dividual and expires without having been
exercised at all, then the failure to exercise
the option does not increase the amount of
stock which such individual may be per-
mitted to purchase under an option granted
in a year following the year of such expi-
ration. If an option granted under an em-
ployee stock purchase plan is outstanding
in more than one calendar year, then stock
purchased pursuant to the exercise of such
an option will be applied first, to the extent
allowable under this paragraph (i), against
the $25,000 limitation for the earliest year
in which the option was outstanding, then,
against the $25,000 limitation for each suc-
ceeding year, in order.
(5)Examples. The following examples
illustrate the principles of this paragraph
(i):
Example 1. Assume that Corporation DD main-
tains an employee stock purchase plan and that Em-
ployee S is employed by DD. On June 1, 2010, DD
grants S an option under the plan to purchase a total of
750 shares of DD stock at $85 per share. On that date,
the fair market value of DD stock is $100 per share.
The option provides that it may be exercised at any
time but cannot be exercised after May 31, 2012. Un-
der this paragraph (i), the option must not permit S to
purchase more than 250 shares of DD stock during the
calendar year 2010, because 250 shares are equal to
$25,000 in fair market value of DD stock determined
at the time of grant. During the calendar year 2011,
S may purchase under the option an amount of DD
stock equal to the difference between $50,000 in fair
market value of DD stock (determined at the time the
option was granted) and the fair market value of DD
stock (determined at the time of grant of the option)
purchased during the year 2010. During the calendar
year 2012, S may purchase an amount of DD stock
equal to the difference between $75,000 in fair mar-
ket value of the stock (determined at the time of grant
of the option) and the total amount of the fair market
value of the stock (determined at the time of grant of
the option) purchased under the option during the cal-
endar years 2010 and 2011. S may purchase $25,000
of stock for the year 2010, and $25,000 of stock for
the year 2012, although the option was outstanding
for only a part of each of such years. However, S
may not be granted another option under an employee
stock purchase plan of DD or a related corporation to
purchase stock of DD or a related corporation during
the calendar years 2010, 2011, and 2012, so long as
the option granted June 1, 2010, is outstanding.
Example 2.AssumethesamefactsasinExample
1, except that the option granted to S in 2010 is termi-
nated in 2011 without any part of the option having
been exercised, and that subsequent to the termina-
tion and during 2011, S is granted another option un-
der DD’s employee stock purchase plan. Under that
option, S may be permitted to purchase $25,000 of
stock for 2011. The failure of S to exercise the option
December 7, 20097332009–49 I.R.B.

granted to S in 2010, does not increase the amount of
stock that S may be permitted to purchase under the
option granted to S in 2011.
Example 3. Assume the same facts as inExample
1, except that, on May 31, 2012, S exercised the op-
tion granted to S in 2010, and purchased 600 shares
of DD stock. Five hundred shares, the maximum
amount of stock that could have been purchased in
2011, under the option, are treated as having been pur-
chased for the years 2010 and 2011. Only 100 shares
of the stock are treated as having been purchased for
2012. After S’s exercise of the option on May 31,
2012, S is granted another option under DD’s em-
ployee stock purchase plan. S may be permitted un-
der the new option to purchase for 2012 stock having
a fair market value of no more than $15,000 at the
time the new option is granted.
Example 4. Corporation EE maintains an em-
ployee stock purchase plan and Employee R is em-
ployed by EE. On August 1, 2010, EE grants R an
option under the plan to purchase 150 shares of EE
stock at $85 per share during each of the calendar
years 2010, 2011, and 2012. On that date, the fair
market value of EE stock is $100 per share. The op-
tion provides that it may be exercised at any time dur-
ing years 2010, 2011, and 2012. Because this option
permits R to purchase only $15,000 of EE’s stock
for each year the option is outstanding, R could be
granted another option by EE, or by a related corpo-
ration, in year 2010, permitting R to purchase an ad-
ditional $10,000 of stock during each of the calendar
years 2010, 2011, and 2012.
Example 5. Corporation FF maintains an em-
ployee stock purchase plan and Employee Q is em-
ployed by FF. On September 1, 2010, FF grants Q
an option under the plan that will be automatically
exercised on August 31, 2011, and August 31, 2012.
The terms of the option provide that no more than 150
shares may be purchased on each date that the option
is automatically exercised. On August 31, 2011, Q
may purchase under the option an amount of FF stock
equal to $50,000 in fair market value of FF stock (de-
termined at the time the option was granted). On Au-
gust 31, 2012, Q may purchase under the option an
amount of FF stock equal to the difference between
$75,000 in fair market value of FF stock (determined
at the time the option was granted) and the fair mar-
ket value of FF stock (determined at the time of grant
of the option) purchased during year 2011.
(j)Restriction on transferability.An
employee stock purchase plan or offering
must, by its terms, provide that options
granted under the plan are not transferable
by the optionee other than by will or the
laws of descent and distribution, and must
be exercisable, during the optionee’s life-
time, only by the optionee. For general
rulesrelatingtotherestrictionontransfer-
ability required by this paragraph (j), see
§1.421–1(b)(2). For alimited exception to
the requirement of this paragraph (j), see
section 424(h)(3).
(k)Special rule where option price is
between 85 percent and 100 percent of
value of stock—(1)(i) If all the conditions
necessary for the application of section
421(a) exist, this paragraph (k) provides
additional rules that are applicable in cases
where, at the time the option is granted,
the option price per share is less than 100
percent (but not less than 85 percent) of
the fair market value of the share. In that
case, upon the disposition of the share by
the employee after the expiration of the
two-year and the one-year holding periods,
or upon the employee’s death while own-
ing the share (whether occurring before or
after the expiration of such periods), there
shall be included in the employee’s gross
income as compensation (and not as gain
upon the sale or exchange of a capital as-
set) the lesser of—
(a) The amount, if any, by which the
price paid under the option was exceeded
by the fair market value of the share at the
time the option was granted, or
(b) The amount, if any, by which the
price paid under the option was exceeded
by the fair market value of the share at the
time of such disposition or death.
(ii) For purposes of applying the rules
of this paragraph (k), if the option price is
not fixed or determinable at the time the
option is granted, the option price will be
computed as if the option had been exer-
cised at such time. The amount of compen-
sation resulting from the application of this
paragraph (k) shall be included in the em-
ployee’s gross income for the taxable year
in which the disposition occurs, or for the
taxable year closing with the employee’s
death, whichever event results in the ap-
plication of this paragraph (k).
(iii) The application of the special rules
provided in this paragraph (k) shall not af-
fect the rules provided in section 421(a)
with respect to the employee exercising the
option, the employer corporation, or a re-
lated corporation. Thus, notwithstanding
the inclusion of an amount as compensa-
tion in the gross income of an employee,
as provided in this paragraph (k), no in-
come results to the employee at the time
the stock is transferred to the employee,
and no deduction under section 162 is al-
lowable at any time to the employer corpo-
ration or a related corporation with respect
to such amount.
(iv) If, during the employee’s lifetime,
the employee exercises an option granted
under an employee stock purchase plan,
but the employee dies before the stock is
transferred to the employee pursuant to the
exercise of the option, then for the purpose
of sections 421 and 423, on the employee’s
death, the stock is deemed to be transferred
immediately to the employee, and imme-
diately thereafter, the employee is deemed
tohavetransferredthestocktotheem-
ployee’s executor, administrator, trustee,
beneficiary by operation of law, heir, or
legatee, as the case may be.
(2) If the special rules provided in this
paragraph (k) are applicable to the dis-
position of a share of stock by an em-
ployee, then the basis of the share in the
employee’s hands at the time of the dis-
position, determined under section 1011,
shall be increased by an amount equal to
the amount includible as compensation in
the employee’s gross income under this
paragraph (k). However, the basis of a
share of stock acquired after the death of
an employee by the exercise of an op-
tion granted to the employee under an em-
ployee stock purchase plan shall be deter-
mined in accordance with the rules of sec-
tion 421(c) and §1.421–2(c). If the special
rules provided in this paragraph (k) are ap-
plicable to a share of stock upon the death
of an employee, then the basis of the share
in the hands of the estate or the person re-
ceiving the stock by bequest or inheritance
shall be determined under section 1014,
and shall not be increased by reason of the
inclusion upon the decedent’s death of any
amount in the decedent’s gross income un-
der this paragraph (k). SeeExample (9)of
this paragraph (k) with respect to the deter-
mination of basis of the share in the hands
of a surviving joint owner.
(3)Examples. The following examples
illustrate the principles of this paragraph
(k):
Example 1. On June 1, 2010, Corporation GG
grants to Employee P, an employee of GG, an op-
tion under GG’s employee stock purchase plan to pur-
chase a share of GG stock for $85. The fair market
value of GG stock on such date is $100 per share. On
June 1, 2011, P exercises the option and on that date
GG transfers the share of stock to P. On January 1,
2013, P sells the share for $150, its fair market value
on that date. P’s income tax return is filed on the basis
of the calendar year. The income tax consequences to
P and GG are as follows—
(i) Compensation in the amount of $15 is includi-
ble in P’s gross income for the year 2013, the year
of the disposition of the share. The $15 represents
the difference between the option price ($85) and the
fair market value of the share on the date the option
was granted ($100), because the value is less than the
fair market value of the share on the date of disposi-
tion ($150). For the purpose of computing P’s gain or
loss on the sale of the share, P’s cost basis of $85 is
increased by $15, the amount includible in P’s gross
2009–49 I.R.B.734December 7, 2009

income as compensation. Thus, P’s basis for the share
is $100. Because the share was sold for $150, P real-
izes a gain of $50, which is treated as long-term cap-
ital gain; and
(ii) GG is not entitled to any deduction under sec-
tion 162 at any time with respect to the share trans-
ferred to P.
Example 2. Assume the same facts as inExample
1, except that P sells the share of GG stock on Jan-
uary 1, 2014, for $75, its fair market value on that
date. Because $75 is less than the option price ($85),
no amount in respect of the sale is includible as com-
pensation in P’s gross income for the year 2014. P’s
basis for determining gain or loss on the sale is $85.
Because P sold the share for $75, P realized a loss of
$10 on the sale that is treated as a long-term capital
loss.
Example 3. Assume the same facts as inExam-
ple 1, except that the option provides that the option
price shall be 90 percent of the fair market value of
the stock on the day the option is exercised. On June
1, 2011, when the option is exercised, the fair mar-
ket value of the stock is $120 per share so that P pays
$108 for the share of the stock. Compensation in the
amount of $10 is includible in P’s gross income for
the year 2013, the year of the disposition of the share.
This is determined in the following manner: the ex-
cess of the fair market value of the stock at the time of
the disposition ($150) over the price paid for the share
($108) is $42; and the excess of the fair market value
of the stock at the time the option was granted ($100)
over the option price, computed as if the option had
been exercised at such time ($90), is $10. Accord-
ingly, $10, the lesser, is includible in gross income.
In this situation, P’s cost basis of $108 is increased
by $10, the amount includible in P’s gross income as
compensation. Thus, P’s basis for the share is $118.
Because the share was sold for $150, P realizes a gain
of $32 that is treated as long-term capital gain.
Example 4. Assume the same facts as inExam-
ple 1, except that the option provides that the option
price shall be the lesser of 95 percent of the fair mar-
ket value of the stock on the first day of the offering
period and 95 percent of the fair market value of the
stock on the day the option is exercised. On June 1,
2011, when the option is exercised, the fair market
value of the stock is $120 per share. P pays $95 for
the share of the stock. Compensation in the amount
of $5 is includible in P’s gross income for the year
2013, the year of the disposition of the share. This is
determined in the following manner: the excess of the
fair market value of the stock at the time of the dispo-
sition ($150) over the price paid for the share ($95)
is $55; and the excess of the fair market value of the
stock at the time the option was granted ($100) over
the option price, computed as if the option had been
exercised at such time ($95), is $5. Accordingly, $5,
the lesser, is includible in gross income. In this sit-
uation, P’s cost basis of $95 is increased by $5, the
amount includible in P’s gross income as compensa-
tion. Thus, P’s basis for the share is $100. Because
the share was sold for $150, P realizes a gain of $50
that is treated as long-term capital gain.
Example 5. Assume the same facts as inExample
1, except that instead of selling the share on January 1,
2013, P makes a gift of the share on that day. In that
case $15 is includible as compensation in P’s gross
income for 2013. P’s cost basis of $85 is increased
by $15, the amount includible in P’s gross income as
compensation. Thus, P’s basis for the share is $100,
which becomes the donee’s basis, as of the time of the
gift, for determining gain or loss.
Example 6. Assume the same facts as inExample
2, except that instead of selling the share on January
1, 2014, P makes a gift of the share on that date. Be-
causethefairmarketvalueoftheshareonthatday
($75) is less than the option price ($85), no amount
in respect of the disposition by way of gift is includi-
ble as compensation in P’s gross income for 2014. P’s
basis for the share is $85, which becomes the donee’s
basis, as of the time of the gift, for the purpose of de-
termining gain. The donee’s basis for the purpose of
determining loss, determined under section 1015(a),
is $75 (fair market value of the share at the date of
gift).
Example 7. Assume the same facts as inExam-
ple 1, except that after acquiring the share of stock on
June 1, 2011, P dies on August 1, 2012, at which time
the share has a fair market value of $150. Compensa-
tion in the amount of $15 is includible in P’s gross in-
come for the taxable year closing with P’s death, $15
being the difference between the option price ($85)
and the fair market value of the share when the op-
tion was granted ($100), because such value is less
than the fair market value at date of death ($150). The
basis of the share in the hands of P’s estate is deter-
mined under section 1014 without regard to the $15
includible in the decedent’s gross income.
Example 8. Assume the same facts as inExample
7, except that P dies on August 1, 2011, at which time
the share has a fair market value of $150. Although
P’s death occurred within one year after the transfer
of the share to P, the income tax consequences are the
same as inExample 7
.
Example 9. Assume the same facts as inExam-
ple 1, except that the share of stock was issued in the
names of P and P’s spouse jointly with right of sur-
vivorship, and that P and P’s spouse sold the share on
June 15, 2012, for $150, its fair market value on that
date. Compensation in the amount of $15 is includi-
ble in P’s gross income for the year 2012, the year of
the disposition of the share. The basis of the share in
the hands of P and P’s spouse for the purpose of de-
termining gain or loss on the sale is $100, that is, the
cost of $85 increased by the amount of $15 includi-
ble as compensation in P’s gross income. The gain
of $50 on the sale is treated as long-term capital gain,
and is divided equally between P and P’s spouse.
Example 10. Assume the same facts as inExam-
ple 1, except that the share of stock was issued in the
names of P and P’s spouse jointly with right of sur-
vivorship, and that P predeceased P’s spouse on Au-
gust 1, 2012, at which time the share had a fair mar-
ket value of $150. Compensation in the amount of
$15 is includible in P’s gross income for the taxable
year closing with his death. SeeExample 7. The basis
of the share in the hands of P’s spouse as survivor is
determined under section 1014 without regard to the
$15 includible in the decedent’s gross income.
Example 11. Assume the same facts as inExam-
ple 10, except that P’s spouse predeceased P on July
1, 2012. Section 423(c) does not apply in respect of
the death of P’s spouse. Upon the subsequent death
of P on August 1, 2012, the income tax consequences
in respect of P’s taxable year closing with the date of
P’s death, and in respect of the basis of the share in
the hands of P’s estate, are the same as inExample
7. If P had sold the share on July 15, 2012 (after the
death of P’s spouse), for $150, its fair market value at
that time, the income tax consequences would be the
same as inExample 1.
(l)Effective/applicability date.The
regulations under this section are effective
on November 17, 2009. These regula-
tions apply to options granted under an
employee stock purchase plan on or after
January 1, 2010.
Par. 6. Section 1.424–1, paragraphs
(a)(10)Example 9(iii) and (g)(1) are re-
vised to read as follows:
§1.424–1 Definition and special rules
applicable to statutory options.
(a)***(10)***
Example 9. ***
(iii) Assume the same facts as in paragraphs (i)
and (ii) of thisExample 9. Assume further that as part
of the acquisition, X amends its plan to allow future
grants under the plan to be grants to acquire Y stock.
Because the amendment of the plan to allow options
on a different stock is considered the adoption of a
new plan under §1.422–2(b)(2)(iii), the stockholders
of X (in this case, Y) must approve the plan within
12 months before or after the date of the amendment
of the plan. If the stockholders of X (in this case, Y)
timely approve the plan, the future grants to acquire
Y stock will be incentive stock options (assuming the
other requirements of §1.422–2 have been met).
*****
(g)Effective/applicability date—
(1)In
general. Except for §1.424–1(a)(1
0)Ex-
ample 9(iii), the regulations unde
r this sec-
tion are effective on August 3, 200
4. Sec-
tion 1.424–1(a)(10)Example 9(ii
i) is ef-
fective on November 17, 2009. Sect
ion
1.424–1(a)(10)Example 9(iii) ap
plies to
statutory options granted on or af
ter Jan-
uary 1, 2010.
*****
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved November 9, 2009.
Michael F. Mundaca,
Acting Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on November 16,
2009, 8:45 a.m., and published in the issue of the Federal
Register for November 17, 2009, 74 F.R. 59074)
December 7, 20097352009–49 I.R.B.

Section 424.—Definitions
and Special Rules
Final regulations clarify the shareholder approval
requirements related to incentive stock options under
section 422. See T.D. 9471, page 722.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2009. See Rev. Rul. 2009-38, page
736.
Section 468.—Special
Rules for Mi
ning and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2009. See Rev. Rul. 2009-38, page
736.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of December 2009. See
Rev. Rul. 2009-38, page 736.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2009. See Rev. Rul. 2009-38, page
736.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of December 2009. See
Rev. Rul. 2009-38, page 736.
Section 807.—
Rules for
Certain Rese
rves
The adjusted
federal short-term, mid-term, and
long-term ra
tes are set forth for the month of Decem-
ber 2009. See
Rev. Rul. 2009-38, page 736.
Section 810.—Operations
Loss Deduction
Guidance is provided for taxpayers to elect a 4 or
5 year carryback of losses from operations under sec-
tion13oftheWorker,Homeownership,andBusiness
Assistance Act of 2009. See Rev. Proc. 2009-52,
page 744.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2009. See Rev. Rul. 2009-38, page
736.
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for December 2009.
Rev. Rul. 2009–38
This revenue ruling provides various
prescribed rates for federal income tax
purposes for December 2009 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(1) for buildings placed in
service during the current month. How-
ever, under section 42(b)(2), the applicable
percentage for non-federally subsidized
new buildings placed in service after July
30, 2008, and before December 31, 2013,
shall not be less than 9%. Table 5 contains
the federal rate for determining the present
value of an annuity, an interest for life or
for a term of years, or a remainder or a re-
versionary interest for purposes of section
7520. Finally, Table 6 contains the 2010
interest rate for sections 846 and 807.
2009–49 I.R.B.736December 7, 2009

REV. RUL. 2009–38 TABLE 1
Applicable Federal Rates (AFR) for December 2009
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR.69%.69%.69%.69%
110% AFR.76%.76%.76%.76%
120% AFR.83%.83%.83%.83%
130% AFR.90%.90%.90%.90%
Mid-term
AFR2.64%2.62%2.61%2.61%
110% AFR2.90%2.88%2.87%2.86%
120% AFR3.16%3.14%3.13%3.12%
130% AFR3.44%3.41%3.40%3.39%
150% AFR
3.97%3.93%3.91%3.90%
175% AFR
4.64%
4.59%4.56%4.55%
Long-term
AFR4.17%4.13%4.11%4.09%
110% AFR
4.59%4.54%4.51%4.50%
120% AFR
5.02%
4.96%4.93%4.91%
130% AFR
5.44%5.37%5.33%5.31%
REV. RUL. 2009–38 TABLE 2
Adjusted AFR for December 2009
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
.86%.86%.86%.86%
Mid-term adjusted AFR
2.25%
2.24%2.23%2.23%
Long-term adjusted
AFR
4.14%4.10%4.08%4.07%
REV. RUL. 2009–38 TABLE 3
Rates Under Section 382 for December 2009
Adjusted federal long-term rate for the current month4.14%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)4.16%
REV. RUL. 2009–38 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for December 2009
Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July
30, 2008, and before December 31, 2013, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit7.79%
Appropriate percentage for the 30% present value low-income housing credit3.34%
December 7, 20097372009–49 I.R.B.

REV. RUL. 2009–38 TABLE 5
Rate Under Section 7520 for December 2009
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest3.2%
REV. RUL. 2009–38 TABLE 6
Rates Under Sections 846 and 807
Applicable rate of interest for 2010 for purposes of sections 846 and 8073.81%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2009. See Rev. Rul. 2009-38, page
736.
Section 6039.—Returns
Required in Connection
With Certain Options
Final regulations provide guidance to assist corpo-
rations that issue statutory stock options in comply-
ing with the return and information statement require-
ments under section 6039. See T.D. 9470, page 738.
26 CFR 1.6039–1: Returns required in connection
with certain options.
T.D. 9470
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR part 1
Information Reporting
Requirements Under Internal
Revenue Code Section 6039
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains the
final regulations relating to the return and
information statement requirements under
section 6039 of the Internal Revenue Code
(Code). These regulations reflect changes
to section 6039 made by section 403 of the
Tax Relief and Health Care Act of 2006.
These regulations affect corporations that
issue statutory stock options and provide
guidance to assist corporations in comply-
ing with the return and information state-
ment requirements under section 6039.
DATES:Effective Date:These regulations
are effective on November 17, 2009.
Applicability Date:For dates of
applicability,see§§1.6039–1(f) and
1.6039–2(e).
FOR FURTHER INFORMATION
CONTACT: Thomas Scholz or
Ilya Enkishev at (202) 622–6030 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in these regulations has been reviewed
and approved by theOffice of Manage-
ment and Budgetin accordance with
the Paperwork Reduction Act of 1995
(44 U.S.C. 3507 (d)) under control number
1545–2129. Responses to this collection
of information are required to assist
taxpayers with the completion of their
income tax returns for the taxable year
in which a disposition of stock acquired
under a statutory option occurs.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number assigned by the Office of
Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
Section 403 of the Tax Relief and
Health Care Act of 2006 (Act) amended
the information reporting requirements of
section 6039. Prior to its amendment, sec-
tion 6039 required corporations to furnish
a written statement to each employee, in
a manner prescribed by the Secretary in
the regulations, regarding: (i) the corpo-
ration’s transfer of stock pursuant to the
employee’s exercise of an incentive stock
option described in section 422(b); and
(ii) the transfer of stock by the employee
where the stock was acquired pursuant
to the exercise of an option described in
section 423(c). Corporations must furnish
employees with the information state-
ments required by section 6039 on or
beforeJanuary31oftheyearfollowingthe
year for which the statement is required.
Prior to the amendment of section 6039
made by the Act, the regulations under
section 6039 were last updated in 2004.
See T.D. 9144, 2004–2 C.B. 413 (69 FR
46401).
As amended by the Act, section 6039
requires corporations to file an informa-
tion return with the IRS, in addition to
providing employees with an information
statement, following a stock transfer. Sec-
tion 6039, as amended by the Act, ap-
plies to stock transfers occurring on or af-
ter January 1, 2007. However, in Notice
2008–8, 2008–3 I.R.B. 276 (December 19,
2007) (see §601.601(d)(2)(ii)(b)), the IRS
waived the obligation to file an informa-
tion return for 2007 stock transfers gov-
erned by section 6039.
On July 17, 2008, the Department
of Treasury published a notice of pro-
posed rulemaking (REG–103146–08,
2009–49 I.R.B.738December 7, 2009

2008–37 I.R.B. 701) in theFederal
Register(73 FR 40999) under section
6039. In addition to describing the return
and information reporting requirements
pursuant to section 6039, the notice
of proposed rulemaking waived the
obligation to file an information return
for 2008 stock transfers governed by
section 6039. A public hearing on
the proposed regulations was held on
October 30, 2008. Written and electronic
comments responding to the notice of
proposed rulemaking were received.
After consideration of these comments,
the Department of Treasury adopts the
proposed regulations as final regulations,
with the modifications set forth in this
Treasury decision.The significant
revisions are discussed in this preamble.
Explanation of Provisions
1. Overview
These final regulations describe the in-
formation that is required in the return filed
with the IRS and the information statement
furnished to employees pursuant to section
6039. There are two sections under these
final regulations: §1.6039–1, Returns re-
quired in connection with certain options;
and §1.6039–2, Statements to persons with
respect to whom information is reported.
A principal objective of these final reg-
ulations is to require corporations to fur-
nish employees with sufficient information
to enable them to calculate their tax obli-
gations upon disposition of the shares ac-
quired by the exercise of a statutory op-
tion. As discussed further in this pream-
ble, the IRS will issue two forms (with
accompanying instructions) that corpora-
tions must use to satisfy the return and
information statement requirements under
section 6039.
Comments received in response to the
proposed regulations were generally fa-
vorable. Commenters observed that the
proposed regulations improved the exist-
ing regulations by requiring corporations
to provide additional information useful to
employees for purposes of computing tax
liability with respect to the disposition of
shares acquired pursuant to the exercise of
a statutory option. These final regulations
are generally similar to the proposed reg-
ulations with the modifications described
below in response to the comments sub-
mitted by taxpayers.
2. Return and information statement
requirements for stock acquired pursuant
to incentive stock options
With respect to the transfer of stock pur-
suant to the exercise of an incentive stock
option, the information required in the re-
turn and the information statement pur-
suant to §1.6039–1(a) and §1.6039–2(a) of
these final regulations is the same infor-
mation that is required pursuant to the pro-
posed regulations.
3. Return and information statement
requirements for stock acquired under
employee stock purchase plans
a. Transfers of legal title for stock
acquired under an employee stock
purchase plan
Section 6039(a)(2) requires every cor-
poration which records (or has by its agent
recorded) a transfer of the legal title of a
share of stock acquired by the employee
where the stock was acquired pursuant to
the exercise of an option described in sec-
tion 423(c) to file a return with respect
to each transfer made during a particu-
lar year. Section 6039(c)(2) provides that
the return under section 6039(a)(2) is re-
quired only with respect to the first trans-
fer of such stock by the person who ex-
ercised the option. Section 6039(b) re-
quires every corporation filing a return un-
der section 6039(a)(2) to furnish to each
employee named in such return a written
statement with respect to the transfer or
transfers made by the employee during a
particular year.
Several commenters noted that it has
become common practice for employers
to maintain a system in which shares ac-
quired by employees under an employee
stock purchase plan are deposited directly
into a brokerage account established on be-
half of the employee. In the typical ar-
rangement, a contractual agreement exists
with a recognized broker or financial in-
stitution, and employees who elect to par-
ticipate in the employee stock purchase
plan direct that all shares acquired upon
the exercise of the option be immediately
deposited into a brokerage account estab-
lished on behalf of the employee. The le-
gal title of the shares deposited into the
brokerage account is typically held by an-
other entity acting as a securities deposi-
tory, which holds the shares in the street
name of the broker. The employee has a
beneficial interest in the shares, but the se-
curities depository holds legal title of the
shares.
The final regulations modify
§1.6039–1(b)(3) of the proposed regula-
tions to provide that a transfer of legal
title to a recognized broker or financial
institution immediately following the ex-
ercise of an option is treated as the first
transfer of legal title for purposes of the
section 6039(a)(2) filing requirement.
Accordingly, if an employer operates an
employee stock purchase plan pursuant to
which shares acquired upon exercise of
the option will be immediately deposited
into a brokerage account established on
behalf of the employee, then the deposit of
shares by the employee into the brokerage
account following the exercise of the op-
tion is the first transfer of legal title of the
shares acquired by the employee and the
corporation is only required to file a return
relating to such transfer of legal title.
For employees whose shares are imme-
diately deposited into a brokerage account
following the exercise of an option, the ex-
ercise of the option and the first transfer
of legal title occur on the same date. In
such a case, the dates to be provided under
§§1.6039–1(b)(1)(vii) (the date the option
was exercised) and (ix) (the date legal title
was first transferred) will be the same.
If, instead of establishing a brokerage
arrangement, an employer either issues a
stock certificate directly to an employee
who purchases stock pursuant to an em-
ployee stock purchase plan, or registers the
shares in the employee’s name on the em-
ployer’s record books and the employer
or its transfer agent holds the shares for
the employee in book-entry form, then, for
purposes of section 6039(a)(2) and (c)(2),
the issuance of the stock certificate or the
registration of the stock ownership on the
record books is not considered the first
transfer of legal title of the stock acquired
by the employee. Accordingly, the em-
ployer is not required to file a return and
furnish an information statement to the
employee (pursuant to section 6039(a)(2)
and (b)) with respect to such transfer of the
stock to the employee. Instead, the em-
ployer is required to file a return and fur-
nish an information statement to the em-
December 7, 20097392009–49 I.R.B.

ployee with respect to the first transfer
of the legal title of the stock acquired by
the employee (for example, when the em-
ployee sells the stock or transfers the stock
to a brokerage account established on be-
half of the employee). Consequently, if
a stock certificate is issued or the owner-
ship of the shares is registered on the em-
ployer’s record books following the exer-
cise of an option, the exercise of the option
and the first transfer of legal title occur on
different dates, unless the shares are imme-
diately sold or otherwise transferred. Ac-
cordingly, in such a case, the dates to be
provided under §§1.6039–1(b)(1)(vii) (the
date the option was exercised) and (ix) (the
date legal title was first transferred) will be
different.
b. Reporting of information with respect
to the special tax rule under section 423(c)
Acknowledging that one of the primary
purposes of these regulations is to provide
information to employees for purposes of
computing their tax liability with respect
to the disposition of shares acquired pur-
suant to statutory options, commenters
suggested that the return and information
statement provided with respect to options
granted under an employee stock pur-
chase plan contain additional information
necessary to calculatethe tax liability in
the case of a qualifying disposition of the
stock. Under section 423(a), a qualifying
disposition occurs ifthe stock acquired
under an employee stock purchase plan is
disposed of no earlier than two years after
the date of grant of the option and one year
after the date of exercise of the option.
Section 423(c) provides a special rule
for calculating the timing and amount of
compensation income that must be recog-
nized in the event of a qualifying dispo-
sition when the exercise price is less than
100 percent of the value of a share on the
date of grant. Generally, the compensation
income recognized is the lesser of: (a) the
excess of the fair market value of the share
on the date of grant over the exercise price,
and (b) the excess of the fair market value
of a share at the time of disposition (or
death) over the price paid per share. The
flush language of section 423(c) provides
that if the exercise price is not known on
the date of grant, the exercise price shall
be determined as if the option were exer-
cisedonthedateofgrant.
There are various circumstances under
which the exercise price will not be known
on the date of grant. For example, the ex-
ercise price will not be known on the date
of grant if the exercise price is equal to
the lesser of 85 percent of the fair mar-
ket value of the stock on the date of grant
or 85 percent of the fair market value of
the stock on the date of exercise. In addi-
tion, the exercise price will not be known
on the date of grant if the exercise price
is calculated based on a certain percentage
(not less than 85 percent) of the fair market
value of the stock on the date of exercise.
In order to compute the tax liability re-
sulting from a qualifying disposition of the
stock acquired using either of the forego-
ing pricing formulas, the employee needs
to know the exercise price determined as
if the option were exercised on the date of
grant of the option.
In response to the comments, these final
regulations modify the proposed regula-
tions by adding §1.6039–1(b)(vi) to these
final regulations. If the exercise price per
share of an option is not fixed or deter-
minable on the date the option was granted
to the employee, §1.6039–1(b)(vi) of these
final regulations requires corporations to
include in the return and information state-
ment the exercise price per share deter-
mined as if the option were exercised on
thedateofgrant.
c. Requirement of return and information
statement under section 6039(a)(2) and
(b)
Commenters asked for clarification
regarding whether the return and infor-
mation statement requirements of section
6039(a)(2) and (b) apply only to the trans-
fer of shares pursuant to a qualifying
disposition. Section6039(a)(2) requires
that an information return be filed by ev-
ery corporation which in any calendar
year records (or has by its agent recorded)
a transfer of the legal title of a share of
stock acquired by the transferor pursuant
to his or her exercise of an option de-
scribedinsection423(c). TheIRSand
the Treasury Department have concluded
that the reference in section 6039(a)(2)
to an option described in section 423(c)
relates to the exercise price of the op-
tion (as evidenced by the parenthetical
phrase in section 6039(a)(2) following the
reference to section 423(c)) rather than
whether or not the shares are disposed
of in a qualifying disposition as also de-
scribedinsection423(c). Furthermore,
section 6039(c)(2) provides that the return
and information statement requirements
of section 6039(a)(2) and (b) are triggered
by the first transfer of the legal title of the
shares. This provision would be unneces-
sary if section 6039(a)(2) only applied to
qualifying dispositions. Therefore, these
final regulations provide that the return
and information statement requirements
are not dependent upon whether such
transfer of legal title is a qualifying or
disqualifying disposition.
Commenters also asked for clarifica-
tion regarding whether the return and in-
formation statement requirements of sec-
tion 6039(a)(2) and (b) only apply to the
transfer of shares acquired pursuant to an
option described in section 423(c) where
the exercise price is less than 100 percent
of the value of a share on the date of grant.
These final regulations provide that the
return and information statement require-
mentsofsection6039(a)(2)and(b)also
apply to the transfer of shares acquired pur-
suant to an option where the exercise price
is not fixed or determinable on the date of
grant, as well as to the transfer of shares
acquired pursuant to an option described in
section 423(c) where the exercise price is
less than 100 percent of the value of a share
onthedateofgrant.
4. Nonresident aliens
Several commenters suggested that the
return and information statement require-
ments of section 6039 should not apply
to nonresident aliens (as defined in sec-
tion 7701(b)) who perform services out-
side the United States. These commenters
point out that the reported information may
not be useful to nonresident aliens because
they likely will not have any U.S. tax lia-
bility.
In response to comments, these final
regulations modify the proposed regula-
tions by adding §1.6039–1(e) which pro-
vides an exception to the return require-
ments of section 6039(a) for certain non-
resident aliens. With respect to incentive
stock options, the return requirement of
section 6039(a)(1) is not applicable to the
exercise of an incentive stock option by an
employee who is a nonresident alien and
to whom the corporation is not required
2009–49 I.R.B.740December 7, 2009

to provide a Form W–2,Wage and Tax
Statement(or its designated successor) for
any calendar year within the time period
beginning with the first day of the calen-
dar year in which the option was granted
to the employee and ending on the last
day of the calendar year in which the em-
ployee exercised the incentive stock op-
tion. With respect to employee stock pur-
chase plans, the return requirement of sec-
tion 6039(a)(2) is not applicable to the
first transfer of legal title of a share of
stock by an employee who is a nonresi-
dent alien and to whom the corporation is
not required to provide a Form W–2 for
any calendar year within the time period
beginning with the first day of the calen-
dar year in which the option was granted
to the employee and ending on the last
day of the calendar year in which the em-
ployee first transferred legal title to shares
acquired under the option. For purposes
of §1.6039–1(e) of these final regulations,
the termcorporationis defined in section
7701(a) and includes, but is not limited to,
the corporation issuing the stock, a related
corporation of the corporation, any agent
of the corporation, any party distributing
shares of stock or other payments in con-
nection with the plan(for example, a bro-
kerage firm), and any party in control of
the payment of remuneration for employ-
ment to the employee.
5. Forms to satisfy the return and
information statement requirements
Returns required by §1.6039–1(a) of
these final regulations and information
statements required by §1.6039–2(a) of
these final regulations must be made using
Form 3921,Exercise of an Incentive Stock
Option Under Section 422(b)(or its des-
ignated successor) and filed in the manner
provided in the instructions thereto. Re-
turns required by §1.6039–1(b) of these
final regulations and information state-
ments required by §1.6039–2(b) of these
final regulations must be made using Form
3922,Transfer of Stock Acquired Through
an Employee Stock Purchase Plan Under
Section 423(c)(or its designated succes-
sor) and filed in the manner provided in the
instructions thereto. Section 1.6039–1(c)
of the proposed regulations provided that
Forms 3921 and 3922 must be filed on or
before January 31 of the year following
the year for which the return and state-
ment are required. Section 1.6039–1(c) of
these final regulations has been revised to
provide that Forms 3921 and 3922 must
be filed in accordance with the guidelines
and procedures set forth in the instructions
to Forms 3921 and 3922. The IRS expects
to release Forms 3921 and 3922 in the near
future.
Several commenters suggested that
taxpayers be allowed to satisfy the in-
formation statement requirements of
§1.6039–2(a) and (b) of these final regu-
lations by delivering a substitute form that
includes all of the information required to
be included on the Forms 3921 or 3922,
as applicable. Taxpayers may satisfy the
return requirements of §1.6039–1(a) and
(b) as well as the information statement
requirements of §1.6039–2(a) and (b) by
submitting substitute Forms 3921 and
3922 in accordance with the guidelines set
forth in Publication 1179 (or its designated
successor). For example, it would be per-
missible for a taxpayer to satisfy the return
requirements of §1.6039–1(a) and (b) by
submitting Forms 3921 and 3922 to the
IRS, and satisfy the information statement
requirements of §1.6039–2(a) and (b) by
delivering substitute Forms 3921 and 3922
to the appropriate recipients in accordance
with the guidelines set forth in Publication
1179 (or its designated successor).
Effective/Applicability Date
These final regulations will apply as
of January 1, 2007. However, taxpay-
ersarenotrequiredtocomplywiththe
return requirements of §1.6039–1(a) and
(b) of these final regulations for stock
transfers that occur during the 2007, 2008
and 2009 calendar years. Notwithstand-
ing the waiver of the return requirements
for 2007, 2008 and 2009 stock trans-
fers, taxpayers must furnish information
statements to employees for such stock
transfers. For purposes of furnishing
information statements for stock trans-
fers that occur during the 2007 or 2008
calendar years, taxpayers may rely on
§1.6039–1 of the 2004 final regulations
((69 FR 46401) or §1.6039–2 of the 2008
proposed regulations (REG–103146–08))
(73 FR 40999). For purposes of furnishing
information statements for stock transfers
that occur during the2009 calendar year,
taxpayers may rely on §1.6039–1 of the
2004 final regulations (69 FR 46401),
§1.6039–2 of the 2008 proposed regula-
tions (REG–103146–08) (73 FR 40999),
or these final regulations.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It is hereby certi-
fied that the regulations will not have a
significant economic impact on a substan-
tial number of small entities. This certi-
fication is based on the fact that the fil-
ing of a return with the IRS and the provi-
sion of employee statements required un-
der this Treasury decision will impose a
minimal administrative burden on small
entities. It is estimated that it will take
approximately 30 minutes to prepare and
provide the information required by these
regulations. Further, the information to be
provided is readily available. Therefore,
an analysis under the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, the notice of proposed
rulemaking that preceded these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
Drafting Information
The principal authors of these
regulations are Thomas Scholz and
Ilya Enkishev, Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6039–1 is revised to
read as follows:
December 7, 20097412009–49 I.R.B.

§1.6039–1 Returns required in connection
with certain options.
(a)Requirement of return with respect
to incentive stock options under section
6039(a)(1). (1) Every corporation which
in any calendar year transfers to any per-
son a share of stock pursuant to such per-
son’s exercise of an incentive stock option
shall, for such calendar year, file a return
with respect to each transfer made during
such year. This return must include the fol-
lowing information—
(i) The name, address, and employer
identification number of the corporation
transferring the stock;
(ii) If other than the corporation identi-
fied in paragraph (a)(1)(i) of this section,
the name, address and employer identifi-
cation number of the corporation whose
stock is being transferred;
(iii) The name, address, and identifying
number of the person to whom the share or
shares of stock were transferred pursuant
to the exercise of the option;
(iv) The date the option was granted to
the person;
(v) The exercise price per share;
(vi) The date the option was exercised
by the person;
(vii) The fair market value of a share of
stock on the date the option was exercised
by the person; and
(viii)Thenumberofsharesofstock
transferred to the person pursuant to the
exercise of the option.
(2) Each return required by this para-
graph (a) shall be made on Form 3921,Ex-
ercise of an Incentive Stock Option Under
Section 422(b)(or its designated succes-
sor)andshallbefiledinsuchmanneras
provided in the instructions thereto.
(b)Requirement of return with re-
spect to stock purchased under an em-
ployee stock purchase plan under section
6039(a)(2). (1) Every corporation which
in any calendar year records, or has by
its agent recorded, a transfer of the le-
gal title of a share of stock acquired by
the transferor (person who acquires the
shares pursuant to the exercise of the op-
tion) pursuant to the transferor’s exercise
of an option granted under an employee
stock purchase plan as described in sec-
tion 423(c) and where the exercise price
is less than 100 percent of the value of
the stock on date of grant or is not fixed
or determinable on the date of the grant,
shall, for such calendar year, file a return
with respect each transfer made during
such year. This return must include the
following information—
(i) The name, address, and identifying
number of the transferor;
(ii) The name, address and employer
identification number of the corporation
whose stock is being transferred;
(iii) The date the option was granted to
the transferor;
(iv) The fair market value of the stock
on the date the option was granted;
(v) The actual exercise price paid per
share;
(vi) The exercise price per share deter-
mined as if the option were exercised on
the date the option was granted to the trans-
feror (to be provided only if the exercise
price per share is not fixed or determinable
on the date the option was granted);
(vii) The date the option was exercised
by the transferor;
(viii) The fair market value of the stock
on the date the option was exercised by the
transferor;
(ix)Thedatethelegaltitleoftheshares
was transferred by the transferor (see para-
graph (b)(3) of this section); and
(x) The number of shares to which legal
title was transferred by the transferor.
(2) Each return required by this para-
graph (b) shall be made on Form 3922,
Transfer of Stock Acquired Through an
Employee Stock Purchase Plan Under Sec-
tion 423(c)(or its designated successor)
and shall be filed in such manner as pro-
vided in the instructions thereto.
(3) A return is required by reason of
a transfer described in section 6039(a)(2)
only with respect to the first transfer of le-
gal title of the shares by the transferor, in-
cluding the first transfer of legal title to
a recognized broker or financial institu-
tion. If a contractual agreement exists or
is entered into with a recognized broker
or financial institution pursuant to which
shares acquired upon exercise of the op-
tion will be immediately deposited into a
brokerage account established on behalf of
the transferor, then the deposit of shares by
the transferor into the brokerage account
following the exercise of the option is the
first transfer of legal title of the shares ac-
quired by the transferor, and the corpora-
tion is only required to file a return relating
to such transfer of legal title.
(4) Every corporation that transfers any
share of stock pursuant to the exercise of
an option described in this paragraph shall
identify such stock in a manner sufficient
to enable the accurate reporting of the
transfer of legal title to such shares. Such
identification may be accomplished by
assigningtothecertificates of stock issued
pursuant to the exercise of such options a
special serial number or color.
(c)Time for filing returns. Each return
required by this section for a calendar year
must be filed in accordance with the guide-
lines and procedures set forth in the in-
structions to Form 3921 and Form 3922.
(d)Penalty. For provisions relating to
the penalty applicableto the failure to file a
return under this section, see section 6721.
(e)Exception to return requirements
of section 6039(a) for certain nonresident
aliens—(1)Return requirement under sec-
tion 6039(a)(1). The return requirement of
section 6039(a)(1) is not applicable to the
exercise of an incentive stock option by an
employee who is a nonresident alien (as
definedinsection7701(b))andtowhom
the corporation is not required to provide
aFormW–2,Wage and Tax Statement(or
its designated successor) for any calendar
year within the time period beginning with
the first day of the calendar year in which
the option was granted to the employee
and ending on the last day of the calendar
year in which the employee exercised the
option.
(2)Return requirement under section
6039(a)(2).The return requirement of sec-
tion 6039(a)(2) is not applicable to the first
transfer of legal title of a share of stock by
an employee who is a nonresident alien (as
definedinsection7701(b))andtowhom
the corporation is not required to provide
a Form W–2 for any calendar year within
the time period beginning with the first
day of the calendar year in which the op-
tion was granted to the employee and end-
ing on the last day of the calendar year in
which the employee first transferred legal
title to shares acquired under the option as
described in paragraph (b)(3) of this sec-
tion.
(3) For purposes of this paragraph (e),
the term
corporationis defined in section
7701(a) and includes, but is not limited to,
the corporation issuing the stock, a related
corporation of the corporation, any agent
of the corporation, any party distributing
shares of stock or other payments in con-
2009–49 I.R.B.742December 7, 2009

nection with the plan(for example, a bro-
kerage firm), and any party in control of
the payment of remuneration for employ-
ment to the employee.
(f)Effective/applicability date—(1)
In general. This section is effective on
November 17, 2009. This section will
apply as of January 1, 2007.
(2)Transition period. Taxpayers are
notrequiredtocomplywiththereturnre-
quirements of paragraphs (a) and (b) of
this section for stock transfers that occur
during the 2007, 2008 and 2009 calendar
years.
Par. 3. A new §1.6039–2 is added to
read as follows:
§1.6039–2 Statements to persons with
respect to whom information is reported.
(a)Requirement of statement with re-
spect to incentive stock options under sec-
tion 6039(b). (1) Every corporation fil-
ing a return under §1.6039–1(a) shall fur-
nish to each person whose name is set forth
in such return a written statement with
respect to the transfer or transfers made
to such person during such year. This
statement must include the information de-
scribed in §1.6039–1(a)(1).
(2) Each statement required by this
paragraph (a) to be furnished to any per-
son must be furnished to such person on
Form 3921,Exercise of an Incentive Stock
Option Under Section 422(b)(or its desig-
nated successor) and be delivered at such
timeandinsuchmannerasprovidedin
the instructions thereto.
(b)Requirement of statement with
respect to stock purchased under an em-
ployee stock purchase plan under section
6039(b). (1) Every corporation filing a
return under §1.6039–1(b) shall furnish
to each person whose name is set forth
in such return a written statement with
respect to the transfer or transfers made
by such person during such year. This
statement must include the information
described in §1.6039–1(b)(1).
(2) Each statement required by this
paragraph (b) to be furnished to any person
must be furnished to such person on Form
3922,Transfer of Stock Acquired Through
an Employee Stock Purchase Plan Under
Section 423(c)(or its designated succes-
sor) and be delivered at such time and in
such manner as provided in the instruc-
tions thereto.
(3) If the statement required by this
paragraph is made by the authorized trans-
fer agent of the corporation, it is deemed
to have been made by the corporation. The
termtransfer agent, as used in this section,
means any designee authorized to keep the
stock ownership records of a corporation
and to record a transfer of title of the stock
of such corporation on behalf of such cor-
poration.
(c)Time for furnishing statements—(1)
In general. Each statement required by this
section to be furnished to any person for
a calendar year must be furnished to such
person on or before January 31 of the year
following the year for which the statement
is required.
(2)Extension of time. An extension of
time to furnish statements required by this
section may be granted in accordance with
the guidelines and procedures set forth in
the instructions to Form 3921 and Form
3922.
(d)Penalty. For provisions relating to
the penalty applicable to the failure to fur-
nish a statement under this section, see sec-
tion 6722.
(e)Effective/applicability date—(1)
In general. This section is effective on
November 17, 2009. This section will
apply as of January 1, 2007.
(2)Reliance and transition period.
Notwithstanding §1.6039–1(f), corpora-
tions must furnish information statements
to employees in accordance with this
section for stock transfers that are sub-
ject to §1.6039–1(a) and (b), and occur
during the 2007, 2008 and 2009 calen-
dar years. For purposes of furnishing
information statements for stock trans-
fers that occur during the 2007 or 2008
calendar years, taxpayers may rely on
§1.6039–1 of the 2004 final regulations
(69 FR 46401) or §1.6039–2 of the 2008
proposed regulations (REG–103146–08)
(73 FR 40999). For purposes of furnishing
information statements for stock transfers
that occur during the 2009 calendar year,
taxpayers may rely on §1.6039–1 of the
2004 final regulations (69 FR 46401),
§1.6039–2 of the 2008 proposed regula-
tions (REG–103146–08) (73 FR 40999),
or this section.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved November 9, 2009.
Michael F. Mundaca,
Acting Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on November 16,
2009, 8:45 a.m., and published in the issue of the Federal
Register for November 17, 2009, 74 F.R. 59087)
Section 6411.—Tentative
Carryback and Refund
Adjustments
Guidance is provided for taxpayers to elect the 3,
4, or 5 year carryback of net operating losses or losses
from operations under section 13 of the Worker,
Homeownership, and Business Assistance Act of
2009 by filing Form 1045,Application for Tentative
Refund, or Form 1139,Corporation Application for
Tentative Refund. See Rev. Proc. 2009-52, page 744.
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2009. See Rev. Rul. 2009-38, page
736.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2009. See Rev. Rul. 2009-38, page
736.
December 7, 20097432009–49 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of cor-
rect tax liability.
(Also Part I, §§ 172, 6411.)
Rev. Proc. 2009–52
SECTION 1. PURPOSE
.01 This revenue procedure provides
guidance under § 13 of the Worker, Home-
ownership, and Business Assistance Act
of 2009, Pub. L. No. 111–92, 123 Stat.
2984 (November 6, 2009) (the Act). Sec-
tion 13 of the Act amends §§ 172(b)(1)(H)
and 810(b) of the Internal Revenue Code
to allow taxpayers to elect to carry back an
applicable net operating loss (NOL) for a
period of 3, 4, or 5 years, or a loss from op-
erations for 4 or 5 years, to offset taxable
income in those preceding taxable years.
This revenue procedure applies to losses
from operations of a life insurance com-
pany under § 810 in the same manner as
to NOLs under § 172.
.02 This revenue procedure pre-
scribes when and how to elect under
§ 172(b)(1)(H) to carry back an applica-
ble NOL for a period of 3, 4, or 5 years
for (1) taxpayers that have not claimed
a deduction for an applicable NOL; (2)
taxpayers that previously claimed a de-
duction for an applicable NOL; and (3)
taxpayers that previously filed an election
under §§ 172(b)(3) or 810(b)(3) to forgo
the NOL carryback period.
SECTION 2. BACKGROUND
.01 Section 172(a) allows a deduction
equal to the aggregate of the NOL carry-
overs and carrybacks to the taxable year.
Section 172(b)(1)(A)(i) provides that an
NOL for any taxable year generally must
be carried back to each of the 2 years
preceding the taxable year of the NOL.
Section 172(b)(3) provides that any tax-
payer entitled to a carryback period under
§ 172(b)(1) may make an irrevocable elec-
tion to relinquish the carryback period for
an NOL for any taxable year.
.02 Section 810(b)(1)(A) provides that
life insurance companies may carry back
an NOL for any taxable year to each of the
3 years preceding the taxable year of the
loss. Section 810(b)(3) provides that any
taxpayer entitled to a carryback period un-
der § 810(b)(1) may make an irrevocable
election to relinquish the carryback period
for a loss from operations for any taxable
year.
.03 Section 6411(a) provides that a tax-
payer may file an application for a tenta-
tive carryback adjustment of the tax for
the prior taxable year affected by an NOL
carryback from any taxable year. Sec-
tion 6411(a) also provides that the appli-
cation must be filed on or after the date
of filing for the return for the taxable year
of the NOL from which the carryback re-
sults and within a period of 12 months af-
ter that taxable year or, for any portion of
a business credit carryback attributable to
an NOL from a subsequent taxable year,
within a period of 12 months from the end
of the subsequent taxable year. Section
6411(b) provides a 90-day period during
which the Internal Revenue Service will
make a limited examination of the appli-
cation to discover omissions and errors of
computation and determine the amount of
the decrease in tax attributable to the car-
ryback. The Service may disallow, with-
out further action, any application that con-
tains errors of computation that cannot be
corrected within the 90-day period or that
contains material omissions. The decrease
in tax attributable to the carryback is ap-
plied against unpaid amounts of tax. Any
remainder of the decrease is credited or re-
funded within the 90-day period.
.04 Section 1211 of the American Re-
covery and Reinvestment Tax Act of 2009,
Div. B of Pub. L. No. 111–5, 123 Stat. 115
(February 17, 2009) (ARRA), amended
§ 172(b)(1)(H) to allow an eligible small
business (ESB) to elect to carry back a
2008 applicable NOL for a period of 3, 4,
or 5 years (the ARRA election). Unlike
the § 172(b)(1)(H) election under the Act
(referredtointhisrevenue procedure as
the § 172(b)(1)(H) election), the ARRA
election is applicable only to an NOL at-
tributable to an ESB. The ARRA election
is irrevocable and may be made for only
one taxable year. Rev. Proc. 2009–26,
2009–19 I.R.B. 935 (April 25, 2009),
modifying and superseding Rev. Proc.
2009–19, 2009–14 I.R.B. 747 (March 16,
2009), advises taxpayers how to make the
ARRA election.
.05 Section 172(b)(1)(H)(i), as
amended by the Act, permits a taxpayer
to elect to carry back its applicable NOL
to 3, 4, or 5 years preceding the taxable
year of the applicable NOL. This elec-
tion is not limited to an ESB. Section
172(b)(1)(H)(ii) provides that the term
“applicable net operating loss” means the
taxpayer’s NOL for a taxable year ending
after December 31, 2007, and beginning
before January 1, 2010.
.06 Section 172(b)(1)(H)(iii) provides
that the election under § 172(b)(1)(H) is re-
quired to be made in a manner prescribed
by the Secretary, and must be made by
the due date (including extensions) for fil-
ing the return for the taxpayer’s last tax-
able year beginning in 2009. The elec-
tion is irrevocable and, in general, may be
made for only one taxable year. However,
§ 172(b)(1)(H)(v) allows a taxpayer that
made or makes an ARRA election also to
make an election under § 172(b)(1)(H) for
another taxable year.
.07 Section 172(b)(1)(H)(iv) limits the
amount of an NOL that a taxpayer elects
under § 172(b)(1)(H)(i) to carry back to the
5
th
taxable year preceding the taxable year
of the loss to 50 percent of the taxpayer’s
taxable income for the carryback taxable
year. The taxable income for the carryback
taxable year is computed without regard to
the NOL for the lossyear or any taxable
year thereafter. The excess of the amount
of the loss over 50 percent of the taxable
income, as determined under § 172(b)(2),
for the carryback taxable year is carried to
later taxable years. For the carryback of an
alternative tax NOL to the 5
th
taxable year
preceding the taxable year of the loss, the
50 percent limitation is applied separately
based on the alternative minimum taxable
income. The § 172(b)(1)(H)(iv) limitation
does not apply to an NOL carryback under
the ARRA election.
.08 Section 13(e)(4) of the Act pro-
vides that a taxpayer that has elected un-
der §§ 172(b)(3) or 810(b)(3) to forgo a
carryback for a lossfor a taxable year
ending before the date of enactment of
the Act (November 6, 2009) may revoke
that election before the due date (includ-
ing extensions) for filing the return for the
taxpayer’s last taxable year beginning in
2009. An application under § 6411(a) for
2009–49 I.R.B.744December 7, 2009

the applicable NOL is treated as timely if
filed before that due date.
.09 Section 13(c) of the Act amends
§ 810(b) to allow life insurance companies
to elect to carry backan applicable loss
from operations for 4 or 5 taxable years.
An applicable loss fromoperations is a loss
from operations for a taxable year ending
after December 31, 2007, and beginning
before January 1, 2010.
.10 Section 13(f) of the Act provides
that § 172(b)(1)(H) does not apply to
any taxpayer that received certain ben-
efits (whether or not repaid) under the
Emergency Economic Stabilization Act
of 2008, Title I of Div. A of Pub. L. No.
110–343, 122 Stat. 3765 (TARP recip-
ients), or to members of the taxpayer’s
affiliated group.
SECTION 3. SCOPE
Except as provided in § 13(f) of the Act,
this revenue procedure applies to taxpay-
ers that incurred an applicable NOL or an
applicable loss fromoperations for a tax-
able year ending after December 31, 2007,
and beginning before January 1, 2010.
SECTION 4. APPLICATION
.01Time and manner of making the
election under § 172(b)(1)(H).
(1)In general. A taxpayer within
the scope of this revenue procedure may
make the election under § 172(b)(1)(H) or
§ 810(b)(4) by following the procedure de-
scribed in either section 4.01(3) or section
4.01(4) of this revenue procedure. The
procedures under this revenue procedure
that apply to NOLs and the election under
§ 172(b)(1)(H) also apply to a loss from
operations of a life insurance company
and the election under § 810(b)(4).
(2)Affiliated groups. For purposes
of this revenue procedure, “taxpayer”
includes an affiliated group filing a consol-
idated return, “applicable NOL” includes
a consolidated net operating loss (CNOL),
and the common parent of the group
makes the § 172(b)(1)(H) election. See
§ 1.1502–21(b); § 1.1502–77(a). How-
ever, nothing in this revenue procedure
permits a consolidated return group to
otherwise make or revoke a carryback
waiver election for the CNOL attributable
to a member acquired from another group,
described in § 1.1502–21(b)(3)(ii)(B). The
conditions under which this election may
be permitted will be the subject of separate
guidance.
(3)Electing on a federal income tax re-
turn for the taxable year of the applicable
NOL.
(a)What to file. A taxpayer may make
the election under § 172(b)(1)(H) by at-
taching a statement to the taxpayer’s fed-
eral income tax return for the taxable year
in which the applicable NOL arises. A tax-
payer that filed its federal income tax re-
turn for the taxable year of the applicable
NOL may make the election by attaching
a statement to an amended return for the
taxable year of the applicable NOL. The
election statement must state that the tax-
payer is electing to apply § 172(b)(1)(H)
or § 810(b)(4) under Rev. Proc. 2009–52,
and that the taxpayer is not a TARP recip-
ient nor, in 2008 or 2009, an affiliate of a
TARP recipient. The statement must spec-
ify the length of the NOL carryback period
the taxpayer elects (3, 4, or 5 years).
(b)When to file. A taxpayer must file
the election statement with the taxpayer’s
original or amended federal income tax re-
turn for the taxable year of the applicable
NOL on or before the due date (includ-
ing extensions) for filing the return for the
taxpayer’s last taxable year beginning in
2009.
(c)Carryback applications or re-
fund claims. A taxpayer that makes the
§ 172(b)(1)(H) election under this section
4.01(3) must attach a copy of the election
statement to the taxpayer’s claim for ten-
tative carryback adjustment (Form 1045,
Application for Tentative Refund;orForm
1139,Corporation Application for Tenta-
tive Refund) or amended return applying
the applicable NOL to the carryback year.
The due date for timely filing a claim for
tentative carryback adjustment on Form
1045 or 1139 for a taxpayer that makes the
§ 172(b)(1)(H) election is extended to the
due date (including extensions) for filing
the return for the taxpayer’s last taxable
year beginning in 2009.
(4)Electing on an appropriate form.In
lieu of the procedures described in section
4.01(3) of this revenue procedure, a tax-
payer may make the § 172(b)(1)(H) elec-
tion on an appropriate form under this sec-
tion 4.01(4).
(a)What to file.
(i) A taxpayer may make the
§ 172(b)(1)(H) election by attaching an
election statement to the appropriate form
the taxpayer files applying the NOL car-
ryback period the taxpayer elects. The
election statement must state that the tax-
payer is electing to apply § 172(b)(1)(H)
or § 810(b)(4) under Rev. Proc. 2009–52,
and that the taxpayer is not a TARP recip-
ient nor, in 2008 or 2009, an affiliate of a
TARP recipient. The statement must spec-
ify the length of the NOL carryback period
the taxpayer elects (3, 4, or 5 years). The
appropriate form is—
(A) For corporations, Form 1139 or
Form 1120X,Amended U.S. Corporation
Income Tax Return;
(B) For individuals, Form 1045 or Form
1040X,Amended U.S. Individual Income
Tax Return;
(C) For estates or trusts, Form 1045 or
amended Form 1041,U.S. Income Tax Re-
turn for Estates and Trusts.
(D) For tax exempt organizations with
unrelated business income, Form 1139 or
amended Form 990–T,Exempt Organi-
zation Business Income Tax Return (and
proxy tax under section 6033(e)).
(b)When to file. When using an ap-
propriate form to make the election under
this paragraph 4.01(4), the taxpayer must
filetheformonorbeforetheduedate(in-
cluding extensions) for filing the return for
the taxpayer’s last taxable year beginning
in 2009. The taxpayer’s time for claiming
a tentative carrybackadjustment on Form
1045 or 1139 also is extended to this date.
.02Taxpayers that previously filed a
carryback application or claim.
(1)In general. A taxpayer that previ-
ously filed an application for a tentative
carryback adjustment (whether or not the
Service has acted upon the application) or
an amended return (except to the extent
that the application or claim was for an
applicable NOL for which an ESB made
an ARRA election) may make the election
under § 172(b)(1)(H) by following the pro-
cedures under section 4.01(3) or (4) of this
revenue procedure. The taxpayer’s elec-
tion statement must state that the election
amends a previous carryback application
or claim.
(2)Additional rules. A taxpayer’s
amendment of a carryback application or
claim also applies to a carryback of any
alternative tax NOL for the same taxable
year. In the case of an amended applica-
tion for a tentative carryback adjustment,
the 90-day period described in § 6411(b)
December 7, 20097452009–49 I.R.B.

begins on the date the taxpayer files the
amended application.
.03Revocation of the election to waive
NOL carryback period. A taxpayer within
the scope of this revenue procedure that
previously elected under § 172(b)(3) or
§ 810(b)(3) to forgo the carryback period
for an applicable NOL for a taxable year
ending before November 6, 2009, may re-
voke that election and make the election
under § 172(b)(1)(H). Any revocation of
the election to forgo the NOL carryback
period also will apply to a carryback of
any alternative tax NOL for the same tax-
able year. The taxpayer may make the
revocation and the election by following
the procedures under section 4.01(3) or
(4) of this revenue procedure. The elec-
tion statement must state that the taxpayer
is revoking an NOL (or loss from oper-
ations) carryback waiver and electing to
apply § 172(b)(1)(H) or § 810(b)(4) un-
der Rev. Proc. 2009–52, and that the
taxpayer is not a TARP recipient nor, in
2008 or 2009, an affiliate of a TARP recip-
ient. The statement must specify the length
of the NOL carryback period the taxpayer
elects (3, 4, or 5 years). The taxpayer must
file the revocation and the election under
§ 172(b)(1)(H) before the due date (includ-
ing extensions) for filing the return for the
taxpayer’s last taxable year beginning in
2009.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for
NOLs arising in taxable years ending after
December 31, 2007.
SECTION 6. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under the following
control numbers: 1545–0074 Form 1040
(U.S. Individual Income Tax Return)and
Form 1040X (Amended U.S. Individual
Income Tax Return); 1545–0123 Form
1120 (U.S. Corporation Income Tax
Return); 1545–0132 Form 1120X
(Amended U.S. Corporation Income
Tax Return); 1545–0128 Form 1120–L
(U.S. Life Insurance Company Income
Tax Return); 1545–0092 Form 1041
(U.S. Income Tax Return for Estates and
Trusts); 1545–0687 Form 990–T (Exempt
Organization Business Income Tax Return
(and proxy tax under section 6033(e)));
1545–0098 Form 1045 (Application for
Tentative Refund); 1545–0582 Form 1139
(Corporation Application for Tentative
Refund). For further information, please
refer to the Paperwork Reduction Act
statements accompanying these forms.
DRAFTING INFORMATION
The principal authors of this rev-
enue procedure are Seoyeon Park and
Forest Boone of the Office of the
Associate Chief Counsel (Income Tax
and Accounting). For further information
regarding this notice, contact Ms. Park
or Mr. Boone at (202) 622–4960 (not a
toll-free call).
26 CFR 31.6053–1: Report of tips by employee to
employer.
Rev. Proc. 2009–53
SECTION 1. PURPOSE
The purpose of this revenue procedure
is to extend the Attributed Tip Income Pro-
gram (ATIP) for two additional years. The
requirements for participating in ATIP are
set forth in Rev. Proc. 2006–30, 2006–2
C.B. 110.
SECTION 2. BACKGROUND
.01 ATIP is a reporting alternative for
employers in the food and beverage in-
dustry designed to promote compliance by
employers and employees with the provi-
sions of the Internal Revenue Code gov-
erning tip income, to reduce disputes on
audit, and to reduce filing and recordkeep-
ing burdens.
02. Rev. Proc. 2006–30 established
ATIP as a pilot program available for the
three calendar years beginning on or after
January 1, 2007. The Service has deter-
mined that the ATIP pilot program should
be extended.
SECTION 3. EXTENSION OF ATIP
Section 11.02 of Rev. Proc. 2006–30
provides that ATIP will sunset on Decem-
ber 31, 2009. This revenue procedure ex-
tends ATIP for two additional years. ATIP
will now terminate on December 31, 2011,
unless the Service issues further guidance
extending the term. Notwithstanding the
foregoing, the Commissioner of Internal
Revenue may terminate ATIP at any time.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 200
6–30 is modified to ex-
tend ATIP for t
wo additional years. With
the exception
of this extension, require-
ments for ATIP
as set forth in Rev. Proc.
2006–30 rema
in unchanged.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective im-
mediately.
SECTION 6. PAPERWORK
REDUCTION ACT
An agency may not conduct or spon-
sor, and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number. This revenue pro-
cedure does not impose any new informa-
tion collection. The Office of Manage-
ment and Budget (OMB) previously ap-
proved the information collection require-
ments contained in Rev. Proc. 2006–30
under control number 1545–2005.
The collection of information is in Rev.
Proc. 2006–30, section 4, titled Employer
Participation in ATIP. This information is
required to evaluate the suitability of the
Reporting Program for the particular tax-
payer. The collection of information is re-
quired to obtain the benefits described in
Rev. Proc. 2006–30. The likely respon-
dents are businesses or other for-profit in-
stitutions.
SECTION 7. CONTACT
INFORMATION
The principal author of this revenue
procedure is Linda L. Conway of the Of-
fice of the Division Counsel/Associate
Chief Counsel (Tax Exempt & Govern-
ment Entities). For further information
regarding ATIP, contact the IRS Business
and Specialty Tax Line at (800) 829–4933
or e-mailTip.Program@irs.gov.
2009–49 I.R.B.746December 7, 2009

Part IV. Items o
fGeneralInterest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Information Reporting for
Payments Made in Settlement
of Payment Card and Third
Party Network Transactions
REG–139255–08
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations relating to information
reporting requirements, information re-
porting penalties, andbackup withholding
requirements for payment card and third
party network transactions. The proposed
regulations reflect the enactment of sec-
tion 6050W and related changes in the law
made by the Housing Assistance Tax Act
of 2008 that require payment settlement
organizations to report payments in set-
tlement of payment card and third party
network transactions for each calendar
year. The proposed regulations in this
document will affect persons that make
payment in settlement of payment card
and third party network transactions and
the payees of these transactions. The
proposed regulations provide guidance
to assist persons who will be required
to make returns reporting payment card
and third party network transactions and
to the payees of those transactions. This
document also provides notice of a public
hearing on these proposed amendments to
the regulations.
DATES: Written or electronic comments
must be received by January 25, 2010.
Outlines of topics to be discussed at the
public hearing scheduled for February 10,
2010 at 10 am must be received by January
27, 2010.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–139255–08), room
5205, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to CC:PA:LPD:PR (REG–139255–08),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC, or sent electronically
via the Federal eRulemaking Portal
athttp://www.regulations.gov/(IRS
REG–139255–08).
FOR FURTHER INFORMATION
CONTACT: Concerning these pro-
posed regulations, Barbara Pettoni,
(202) 622–4910; concerning submis-
sions of comments or the public hearing,
Regina Johnson, (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR Part 1 relating to
information reporting under sections 6041,
6050W, and 6051 of the Internal Revenue
Code (Code). This document also contains
proposed amendments to 26 CFR Part 31
relating to backup withholding under
section3406,andto26CFRPart301
relating to information reporting penalties
under sections 6721 and 6722.
A new reporting requirement, section
6050W, was added to the Code by sec-
tion 3091(a) of the Housing Assistance Tax
Act of 2008, Div. C of Public Law No.
110–289, 122 Stat. 2654 (the Act), enacted
on July 30, 2008. Section 6050W requires
merchant acquiring entities and third party
settlement organizations to file an infor-
mation return for each calendar year re-
porting all payment card transactions and
third party network transactions with par-
ticipating payees occurring in that calendar
year. This requirement to file information
returns applies to returns for calendar years
beginning after December 31, 2010. This
section also requires statements to be fur-
nished to participating payees on or before
January 31st of the year following the year
for which the return is required.
The Act also amended section
3406(b)(3) to provide that amounts re-
portable under section 6050W are subject
to backup withholding requirements. Sec-
tion 3406(a)(1) requires certain payors to
perform backup withholding by deduct-
ing and withholding income tax from a
reportable payment (as defined in section
3406(b)(1)) if the payee fails to furnish
the payee’s taxpayer identification number
(TIN) to the payor on a required return,
or if the Secretary notifies the payor that
the TIN furnished by the payee is incor-
rect. Backup withholding for amounts
reportable under section 6050W applies to
amounts paid after December 31, 2011.
Priortomakinganinformationreturn,a
payor may check the TIN furnished by the
payee against the name/TIN combination
contained in the IRS’s database main-
tained for the program, and the IRS will
inform the participant whether or not the
name/TIN combination furnished by the
payee matches a name/TIN combination
in the database. The matching informa-
tion provided to participants will help
avoid TIN errors and reduce the number of
backup withholding notices required un-
der section 3406(a)(1)(B) of the Code. A
verified TIN/name match will also provide
participants with reasonable cause relief
from penalties under section 6724(a). The
Act further provides that, solely for pur-
poses of carrying out TIN matching under
section 3406, section 6050W is effective
on the date of enactment, July 30, 2008.
The TIN matching program described in
Rev. Proc. 2003–9, 2003–1 C.B. 516,
permits program participants to verify the
payee TINs required to be reported on
information returns and payee statements.
On February 6, 2009, the IRS announced
that persons who will be required to make
returns under section 6050W may match
TINs under the procedures established by
Rev. Proc. 2003–9. See Announcement
2009–6, “Taxpayer Identification Number
(“TIN”) Matching Program is Available
to Persons Required to Make Returns Un-
der New Section 6050W of the Internal
Revenue Code” (Announcement 2009–6,
2009–9 I.R.B. 643 (March 2, 2009)). See
§601.601(d)(2)(ii)(b).
The Act also amended section 6724(d)
by adding returns required by section
6050W to the definition of information re-
turn for purposes of penalties for failure to
comply with certain information reporting
requirements. The amendments to section
December 7, 20097472009–49 I.R.B.

6724(d) apply to returns for calendar years
beginning after December 31, 2010.
Notice 2009–19 invited public com-
ments regarding guidance under section
6050W. See Notice 2009–19, “Infor-
mation Reporting of Payments Made in
Settlement of Payment Card and Third
Party Network Transactions” (Notice
2009–19, 2009–10 I.R.B. 660 (March 9,
2009)). In particular, Notice 2009–19 re-
quested comments on the interpretation
of the statutory definitions of terms used
in section 6050W, how to administer the
reporting requirements so as to prevent re-
porting of the same transaction more than
once, and whether the “gross amount” of
the reportable payment transaction should
be defined as “gross receipts or sales”
or whether adjustments should be made
for credits, cash equivalents, discounts,
fees, refunds, or other amounts. Notice
2009–19 also requested comments on
how to address differences between sec-
tion 6050W reporting and payee reporting
on Form 1040,“U.S. Individual Income
Tax Return,”Form 1065,“U.S. Return
of Partnership Income,”or Form 1120,
“U.S. Corporation Income Tax Return,”
and whether the time, form and manner
of reporting should conform to existing
practices for information reporting to the
IRS under other provisions of the Code.
Comments were received in response to
Notice 2009–19, and the comments were
taken into consideration in developing
these proposed regulations. The IRS and
the Treasury Department invite any addi-
tional comments on the issues discussed in
this preamble or on other issues relating to
section 6050W. See §601.601(d)(2)(ii)(b).
Explanation of Provisions
In general
The proposed regulations provide guid-
ance to interpret the definitions used in
the statute and examples to illustrate the
rules in the proposed regulations. The
new law requires any payment settlement
entity making payment to a participating
payee in settlement of reportable payment
transactions to make an annual return for
each calendar year reporting the gross
amount of the reportable transactions, and
the name, address, and TIN of the par-
ticipating payee. See section 6050W(a).
The law also requires payment settlement
entities to furnish written statements to
persons with respect to whom such a return
is required showing the name, address,
and telephone number of the information
contact of the person required to make
the return and the gross amount of the
reportable payment transactions with re-
spect to the person required to be shown
on the return. See section 6050W(f).
Section 6050W(b) provides that the
termpayment settlement entitymeans, in
the case of a payment card transaction, a
merchant acquiring entity; and in the case
of a third party network transaction, a third
party settlement organization. Section
6050W(b)(2) definesmerchant acquiring
entityas the bank or other organization
with the contractual obligation to make
payment to participating payees in settle-
ment of payment card transactions, and
section 6050W(b)(3) definesthird party
settlement organizationas the central
organization that has the contractual obli-
gation to make payment to participating
payees of third party network transactions.
The proposed regulations clarify that a
“payment settlement entity” may be a do-
mestic or foreign entity.
Areportable payment transactionis
any transaction in which a payment card is
accepted as payment and any transaction
that is settled through a third party pay-
ment network. See section 6050W(c). The
proposed regulations provide guidance
to interpret the meaning of this term in
the context of both payment card transac-
tions and third party network transactions,
and to determine the gross amount of the
transaction to be reported. Many com-
menters suggested meanings for the term
“gross amount.” Some commenters sug-
gested defining “gross amount” as the total
amount of the transaction reduced by the
fees deducted by the merchant acquiring
entity. Other commenters suggested defin-
ing “gross amount” as the total amount of
the transaction reduced by not only fees
but also chargebacks and refunds. Com-
menters did not suggest, however, that re-
porting a gross amount with no reductions
for any amounts would be burdensome for
payment settlement entities. The proposed
regulations provide thatgross amount
means the total dollar amount of aggregate
reportable payment transactions for each
participating payee without regard to any
adjustments for credits, cash equivalents,
discount amounts, fees, refunded amounts,
or any other amounts.
The proposed regulations require re-
porting, with respectto each participating
payee, of the gross amount of the aggre-
gate reportable payment transactions for
the calendar year and the gross amount of
the aggregate reportable payment transac-
tions for each month of the calendar year.
The inclusion of monthly amounts on the
return filed with the IRS and on the state-
ment furnished to the payee will aid in
reconciling payment card and third party
network transaction receipts for fiscal year
payees.
Section 6050W(e) provides an excep-
tion forde minimispayments by third party
settlement organizations to certain partic-
ipating payees. Underthe proposed reg-
ulations, a third party settlement organ-
ization must report payments made to a
participating payee only if its aggregate
payments to that payee from third party
network transactions exceed $20,000 and
the aggregate number of those transactions
with the payee exceeds 200. Several com-
menters requested that the exception forde
minimispayments be extended to include
payments in settlement of payment card
transactions. The proposed regulations do
not adopt this suggestion. Further com-
ments are requested on the application of
thede minimisrule exception, including
whether the exception should be manda-
tory or voluntary.
Section 6050W(d)(1)(A) provides that
participating payeemeans: (i) in the case
of a payment card transaction, any person
who accepts a payment card as payment;
and (ii) in the case of a third party net-
work transaction,any person who accepts
payment from a third party settlement
organization in settlement of such trans-
action. Under section 6050W(d)(1)(B),
the termparticipating payeeexcludes any
person with a foreign address, except as
the Secretary may provide. The proposed
regulations provide that a payment set-
tlement entity that is a person described
as a U.S. payor or U.S. middleman in
§1.6049–5(c)(5) is not required to report
payments to participating payees with a
foreign address as long as, prior to pay-
ment, the payee has provided the payment
settlement entity with documentation
upon which the payment settlement entity
may rely to treat the payment as made
to a foreign person in accordance with
2009–49 I.R.B.748December 7, 2009

§1.1441–1(e)(1)(ii). By contrast, a pay-
ment settlement entity that is not a person
described as a U.S. payor or U.S. middle-
man in §1.6049–5(c)(5) is not required to
report payments to participating payees
that do not have a United States address
as long as the payment settlement entity
neither knows nor has reason to know that
the participating payee is a United States
person. For purposes of this section,for-
eign addressmeans any address that is
not within the United States, as defined
in section 7701(a)(9) (the States and the
District of Columbia).United States ad-
dressmeans any address that is within
the United States. The IRS and the Trea-
sury Department request comments on the
treatment of payment settlement entities
that are not U.S. payors or U.S. middlemen
within the meaning of §1.6049–5(c)(5).
Under section 6050W(d)(1)(C), the
term “participating payee” includes any
governmental unit and any agency or in-
strumentality thereof. Accordingly, the
proposed regulations do not provide for
any exceptions to reporting for payments
made to governmental units. Payments to
governmental units that are made using
transit cards and electronic toll collection
systems are included within the scope of
section 6050W if such payments meet
the other requirements of section 6050W.
Comments were not received from gov-
ernmental units regarding these issues.
Therefore, the IRS and the Treasury De-
partment request comments from govern-
mental units and other interested parties
regarding the impact of these proposed
regulations on governmental units that
accept payments made using transit cards,
electronic toll collection systems, and sim-
ilar electronic payment mechanisms.
Payment Card Transactions
Apayment card transactionis any
transaction in which a payment card
is accepted as payment. See sec-
tion 6050W(c)(2).Under section
6050W(d)(2), apayment cardis a card
issued pursuant to an agreement or ar-
rangement that provides for: (1) one or
more issuers of such cards; (2) a network
of persons unrelated to each other, and to
the issuer, who agree to accept the cards
as payment; and (3) standards and mecha-
nisms for settling the transactions between
the merchant acquiring entities and the
persons who agree to accept the cards as
payment.
Funds generally do not pass directly
from the cardholder to the provider of
goods or services for purchases made with
a payment card. For example, in the case
of a credit card transaction, a credit card
organization may direct the transfer of
fundsfromanissuingbank(thebankthat
issued the credit card) through the debit
of the funds on account at an acceptable
institution (such as a Federal Reserve
Bank) and a credit of those funds to the
merchant’s bank (the merchant acquiring
bank), which in turn pays the provider of
goods or services. The cardholder fre-
quently does not pay the issuing bank until
after receipt of the payment card monthly
billing statement. Thus, the merchant ac-
quiring bank makes the payment to the
provider of goods or services to settle the
transaction, and the cardholder, who is the
ultimate payor, generally does not make
payment until after the transaction occurs.
The information reporting requirements
under section 6050W reflect that the mer-
chant acquiring bank is in the best position
to file the information return reporting
the payment to the provider of goods or
services.
Commenters suggested adopting
the definition of “payment card” in
§31.3406(g)–1(f)(2)(i) for purposes of
section 6050W. However, the definition of
“payment card” in section 6050W(d)(2)
is broader than in §31.3406(g)–1(f)(2)(i),
which definespayment cardas a card is-
sued by a payment card organization (for
example, a credit card organization). The
proposed regulations reflect the broader
statutory definition of “payment card”
under section 6050W. Accordingly, a pay-
ment card is a card, issued to a cardholder,
that a network of unrelated persons has
agreed to accept as payment under an
agreement that provides standards and
mechanisms for settling the transactions
between a merchant acquiring bank or
similar entity and theproviders who accept
the cards. Under the proposed regulations,
a payment card includes, but is not lim-
ited to, all credit cards, debit cards, and
stored-value cards (including gift cards),
and also includes the acceptance as pay-
ment of any account number or other
indicia associated with a payment card.
Cards Issued in Connection with a
Flexible Spending Account or a Health
Reimbursement Arrangement
Several commenters requested that the
definition ofpayment cardbe interpreted
to exclude cards issued in connection with
flexible spending arrangements (FSAs)
(as defined in section 106(c)(2)) or health
reimbursement arrangements (HRAs) that
are treated as employer-provided cover-
age under an accident or health plan for
purposes of section 106. The commenters
expressed concern that section 6050W
may be interpreted tooverride the excep-
tion to information reporting under section
6041(f) for payments made for medical
care (as defined in section 213(d)) un-
der FSAs and HRAs. Other commenters
indicated that it would be difficult for mer-
chant acquiring entities to identify FSA
and HRA card transactions and segregate
them from other payment card transac-
tions. In general, FSA and HRA cards
have the imprint of a credit card associa-
tion and function like credit or debit cards.
Therefore, merchant acquiring entities
may have difficulty distinguishing these
transactions from typical credit or debit
card transactions. In keeping with the
broad interpretation of the definition of
“payment card,” the proposed regulations
do not except payments for medical care
usinganFSAorHRAcardfromreporting
under section 6050W. Therefore, under
the proposed regulations, the definition of
payment card encompasses a card issued
in connection with an FSA or HRA. Pay-
ments made for medical care under FSAs
or HRAs will continue to be exempt from
reporting under section 6041.
Stored-Value Cards and Gift Cards
The proposed regulations provide that
the term “stored-value card” means any
card with a prepaid value, including any
gift card. Under the proposed regulations,
a stored-value card is not a payment card
within the meaning of section 6050W
when the card is accepted as payment by
apersonwhoisrelatedtotheissuerof
the card. Under these circumstances, the
transaction is not a payment card transac-
tion within the meaning of section 6050W
and thus not a reportable transaction.
However, if the stored-value card itself is
purchased with a payment card issued by
December 7, 20097492009–49 I.R.B.

an unrelated entity, that purchase transac-
tion is reportable under section 6050W.
In contrast, a stored-value card that a
network of persons unrelated to the issuer
has agreed to accept as payment (such as a
stored-value card issued by a college that
may be used at various local merchants un-
related to the college) is a payment card
when it is accepted as payment in a trans-
action with an unrelated person. Under
these circumstances, the transaction is a
payment card transaction within the mean-
ing of section 6050W that is reportable by
the payment settlement entity. Use of a
stored-value card within a network of both
related persons and unrelated persons is a
reportable transaction only when it is ac-
cepted as payment by an unrelated per-
son. For purposes of this section,unre-
latedmeans any person who is not re-
lated within the meaning of section 267(b)
(providing a list of relationships), includ-
ing the application of section 267(c) and
(e)(3) (providing rules relating to construc-
tive ownership), or section 707(b)(1) (rela-
tionships with partnerships).
Third Party Network Transactions
Section 6050W(c)(3) provides that a
third party network transactionmeans
any transaction that is settled through a
third party payment network. Section
6050W(d)(3) provides thatthird party
payment networkmeans any agreement
or arrangement that: (A) involves the
establishment of accounts with a central
organization by a substantial number of
persons who (i) are unrelated to such or-
ganization, (ii) provide goods or services,
and (iii) have agreed to settle transac-
tions for the provision of such goods or
services pursuant to such agreement or ar-
rangement; (B) provides for standards and
mechanisms for settlingsuch transactions;
and (C) guarantees persons providing
goods or services pursuant to such agree-
ment or arrangement that those persons
will be paid for providing such goods or
services. Section 6050W(d)(3) provides
that a third party payment network does
not include any agreement or arrangement
that provides for the issuance of payment
cards.
The Joint Committee on Taxation (JCT)
technical explanation of section 6050W
explains that, in thecase of a third party
network transaction, the payment settle-
ment entity is the third party settlement
organization, defined as a central organ-
ization with the contractual obligation to
make payment to participating payees of
third party payment networks. According
to the technical explanation, the central or-
ganization is a payment settlement entity
required to report under section 6050W
if it provides “a network enabling buyers
to transfer funds to sellers who have es-
tablished accounts with the organization
and have a contractual obligation to ac-
cept payments through the network.” See
“Technical Explanation of Division C of
H.R. 3221, the ’Housing Assistance Act of
2008’ as Scheduled for Consideration by
the House of Representatives on July 23,
2008” (JCX–63–08),Joint Committee on
Taxation, at 61 (July 23, 2008) (JCT Tech-
nical Explanation). Consistent with this
explanation, the proposed regulations pro-
vide that the central organization of a third
party settlement organization must provide
a third party payment network that enables
purchasers to transfer funds to providers of
goods and services.
The JCT Technical Explanation also
gives an example of “substantial number
of persons” as that phrase is used in the
definition of “third party payment net-
work” in section 6050W(d)(3). The JCT
Technical Explanation describes a “third
party payment network” as any agree-
ment or arrangement that, among other
requirements, involves the establishment
of accounts with a central organization
by “a substantial number of persons (e.g.,
more than 50).” JCT Technical Explana-
tion at 61. Comments are requested on the
interpretation of “substantial number of
persons” as used in the definition of “third
party payment network.”
Many comments were received request-
ing clarification on the meaning of third
party payment network, in particular with
respect to healthcare networks, accounts
payable departments and “shared-service”
organizations, and organizations that settle
payment transactions on behalf of others.
Healthcare Networks
Several commenters expressed con-
cern that the broad definition of third
party payment network will include health
carriers that have contracts with a net-
work of providers who provide services
to covered persons under both insured
and administrative service contract health-
care arrangements. A typical healthcare
network (sometimes referred to as a “man-
aged care” network) may include “covered
persons” (policyholders, subscribers, en-
rollees or other individuals participating
in a health benefit plan), a “health care
provider” or “participating provider” (a
healthcare professional or a facility that
agrees under contract with a health carrier
to provide services to covered persons
with the expectation of receiving payment
directly from the health carrier), and a
“health carrier” (an entity that enters into
an agreement to provide, deliver, arrange
for, pay for, or reimburse any of the cost of
health care services). Each of these parties
may be a primary party with respect to its
agreements with the other parties in the
network.
Under the proposed regulations, health
carriers operating a healthcare network are
outside the scope of section 6050W be-
cause a healthcare network does not en-
able the transfer of funds from buyers to
sellers. Health carriers do not facilitate
thetransferofpaymentsfromacovered
person to a healthcare provider: the pay-
ments by covered persons to health car-
riers and the payments by health carri-
ers to healthcare providers are separate
and distinct. Health carriers collect pre-
miums from covered persons pursuant to
a plan agreement between the health car-
rier and the covered person for the cost
of participation in the healthcare network.
Separately, health carriers pay healthcare
providers to compensate providers for ser-
vices rendered to covered persons pursuant
to provider agreements. Accordingly, be-
cause the purpose of a healthcare network
is not to enable buyers to transfer funds to
sellers, a healthcare network is not a “third
party payment network” within the mean-
ing of the proposed regulations.
Accounts Payable Departments and
Shared-Service Organizations
Many comments were received request-
ing guidance on the interpretation of “third
party payment network” with respect to
accounts payable departments. Under
the proposed regulations, an in-house
accounts payable department is not a
third party settlement organization of a
third party payment network because an
in-house accounts payable department is
2009–49 I.R.B.750December 7, 2009

not a “third party.” Rather, an in-house
accounts payable department is merely an
accounting function of the purchaser of
goods and services by which the purchaser
makes payments directly to sellers on the
purchaser’s own behalf.
In contrast, many purchasers outsource
their accounts payable function to a third
party organization, sometimes referred
to as a “shared-service” organization.
In a shared-service business model, the
shared-service organization acts as an in-
dependent contractor with respect to the
accounts payable of purchasers of goods
and services. A shared-service arrange-
ment allows purchasers to transfer funds to
providers who have established accounts
with the shared-service organization and
have agreed to accept payment for their
goods and services from the shared-service
organization. Thus, the shared-service
business model consists of a central organ-
ization that provides “a network enabling
buyers to transfer funds to sellers who
have established accounts with the organ-
ization and have a contractual obligation
to accept payments through the network.”
JCT Technical Explanation at 61.
Accordingly, under the proposed reg-
ulations, a shared-service organization is
a third party settlement organization of a
third party payment network if: (1) a sub-
stantial number of unrelated providers of
goods and services have established ac-
counts with the shared-service organiza-
tion, and (2) this arrangement enables pur-
chasers of goods and services to trans-
fer funds to these providers, who are ob-
ligated by contract to accept guaranteed
payments from the shared-service organ-
ization in settlement of their transactions
with the purchasers. The shared service
organization must report these transactions
as third party network transactions unless
thede minimisexception applies (that is,
the aggregate payments to each payee do
not exceed $20,000 or the aggregate num-
ber of transactions for each payee does not
exceed 200).
Automated Clearing House (ACH)
Networks
As stated previously, the JCT Technical
Explanation states that an organization
generally is required to report if it provides
“a network enabling buyers to transfer
funds to sellers who have established ac-
counts with the organization and have
a contractual obligation to accept pay-
ment through the network.” JCT Technical
Explanation at 61. The JCT Technical
Explanation further states: “However, an
organization operating a network which
merely processes electronic payments
(such as wire transfers, electronic checks,
and direct deposit payments) between
buyers and sellers, but does not have con-
tractual agreements with sellers to use
such network, is not required to report
under the provision.” JCT Technical Ex-
planation at 61.
Consistent with the JCT Technical Ex-
planation, an example in the proposed
regulations illustrates that payments set-
tled through an automated clearing house
(ACH) network are not settled through a
third party payment network. An ACH
merely processes electronic payments be-
tween payors and payees, and does not
itself have contractual agreements with
payees to use the ACH network. Accord-
ingly, the proposed regulations reflect that
an ACH network is not a third party pay-
ment network, and an ACH is therefore not
required to report under section 6050W.
Aggregated Payees
Section 6050W(b)(4)(A) imposes spe-
cial rules for persons who receive pay-
ments from a payment settlement entity on
behalf of one or more participating pay-
ees and distribute such payments to one or
more participating payees. Under section
6050W(b)(4)(A), such persons are treated
(i) as participating payees with respect to
the payment settlement entity, and (ii) as
payment settlement entities with respect to
the participating payees to whom the per-
son distributes payments.
For example, in the case of a corpora-
tion that receives payment from a bank for
credit card sales transacted at corporate
independently-owned franchise stores,
the bank is required to report the gross
amount of the reportable transactions set-
tled through the corporation even though
the corporation does not accept credit
cards and would not otherwise be treated
as a participating payee under this sec-
tion. In turn, the corporation is required
to report the gross amount of reportable
transactions allocable to each franchise
store. The bank has no obligation to report
the payments allocated by the corpora-
tion to the franchise stores. See Technical
Explanation at 61–62. The proposed reg-
ulations provide an example of persons
that are aggregated payees for purposes of
this section. This example is not meant to
exclude other aggregated payee arrange-
ments.
Electronic Payment Facilitators
A payment settlement entity may
contract with a third party to settle re-
portable payment transactions on behalf
of the payment settlement entity. Sec-
tion 6050W(b)(4)(B) provides a special
rule for such arrangements. In any case
where an “electronic payment facilitator”
or other third party makes payments in
settlement of reportable payment transac-
tions on behalf of the payment settlement
entity, the return under section 6050W
must be filed by the electronic payment
facilitator or other third party in lieu of the
payment settlement entity.
Under the proposed regulations, any
person that has contracted with a payment
settlement entity to make payments on
behalf of the payment settlement entity
to a participating payee in settlement of
reportable payment transactions is subject
to the electronic payment facilitator rule.
Because the electronic payment facilitator
or other third party is required by statute
to file the return if it makes the payment
on behalf of the payment settlement en-
tity, and because the electronic payment
facilitator or other third party files in lieu
of the payment settlement entity, the pay-
ment facilitator or other third party, not
the payment settlement entity, is the party
with the obligation to file the return under
section 6050W in these cases. Therefore,
the electronic payment facilitator or other
third party that makes payment on behalf
of the payment settlement entity is the
party that will be liable for any applicable
penalties for failure to comply with the
information reporting requirements under
section 6050W.
Duplicate Reporting of the Same
Transaction
Section 6050W(g) grants authority to
the Secretary to issue guidance to imple-
ment the reporting requirement, including
rules to prevent the reporting of the same
transaction more than once. Numerous
December 7, 20097512009–49 I.R.B.

commenters requested relief from report-
ing the same transaction under more than
one Code section, in particular with respect
to transactions that will be subject to re-
porting under both sections 6041 (relating
to information at source) and 6050W.
Depending on the circumstances, re-
porting of the same transaction more than
once may be warranted for several rea-
sons. First, the burden for reporting may
fall on different persons. For example, un-
der section 6041, the reporting person is
the payor, whereas under section 6050W,
the reporting person is the payment settle-
ment entity. Requiring reporting from both
reporters will help ensure that the transac-
tion is reported even where one reporter
fails to report.
Second, information reporting under
other Code sections may provide different
information that may be useful to the IRS.
For example, section 6041 requires report-
ing of fixed or determinable gains, profits
and income, whereas section 6050W re-
quires reporting of gross amounts.
Third, exceptions to information re-
porting may apply under one Code section
but not the other, which makes rules to
avoid reporting the same transaction more
than once difficult to coordinate. For
example, §1.6041–3(p) provides that pay-
ments made to corporations are generally
exempt from reporting under section 6041,
whereas no corporate payee exception
exists under section 6050W. Conversely,
for third party network transactions under
section 6050W, ade minimisexception
applies where the aggregate payments to
each payee do not exceed $20,000 or the
aggregate number of transactions for each
payee does not exceed 200, but no similar
exception exists undersection 6041. Thus,
there are compelling reasons to require
reporting under both Code sections.
Nevertheless, for payment card trans-
actions, relief from reporting under section
6041 is warranted because section 6050W
reporting covers all payment card transac-
tions and thus effectively encompasses all
payments subject to section 6041 report-
ing made by payment card. Accordingly,
the proposed regulations amend section
§1.6041–1 to provide that any payment
card transaction that otherwise would be
reportable under both sections 6041 and
6050W must be reported under section
6050W and not section 6041.
Relief from reporting under section
6041 is not warranted, however, for third
party network transactions because such
transactions are not subject to reporting
unless thede minimisthresholds are met.
The payor with the obligation to report
under section 6041 cannot determine with
certainty whether a third party network
transaction is required to be reported under
section 6050W. Additional comments are
requested regarding the application of this
rule to prevent the reporting of the same
transaction more than once.
Commenters also requested relief from
reporting the same transaction under both
sections 3402(t) (relating to withholding
on certain payments made by government
entities) and 6050W. Government entities
frequently use payment cards for payments
for property and services. Such payment
card transactions will be subject both to in-
formation reporting under section 6050W
and to withholding and information report-
ing under section 3402(t).
Information reporting under section
3402(t) and section 6050W serve different
purposes, however. The purpose of infor-
mation reporting under section 6050W is
to encourage voluntary compliance in the
reporting of gross receipts. In contrast, the
purpose of information reporting under
section 3402(t) is to report the amounts of
tax withheld from payments and to furnish
this information to payees and to the IRS.
Both payees and the IRS must have mech-
anisms in place to account for the income
tax that has been withheld from payments.
Therefore, reporting under section 3402(t)
cannot be eliminated for transactions that
will also be required to be reported under
section 6050W.
Further, an exception from reporting
under section 6050W when the same
transaction will be reported under section
3402(t) is not feasible because the payment
settlement entity, such as a merchant ac-
quiring entity in the case of a payment card
transaction, may not have access to the
identity of the actual card user. Thus, the
payment settlement entity would not know
whether the card user is a government
entityrequiredtowithholdonpayments
pursuant to section 3402(t) and would not
be able to determine whether reporting
under section 6050W is excepted. Also,
the proposed rules under section 3402(t)
provide for a $10,000 payment threshold
amount, whereas section 6050W has no
payment threshold amount for payment
card transactions. See REG–158747–06,
2009–4 I.R.B. 362 (73 FR 74,082) (Dec.
5, 2008). Accordingly, the proposed regu-
lations do not provide relief from reporting
the same transaction under both sections
3402(t) and 6050W.
Time, Form and Manner for Reporting
Many commenters recommended that
theIRScreateanewformtobeused
solely for reporting under section 6050W.
A draft form for this purpose, Form
1099–K, “Merchant Card and Third-Party
Payments,” is expected to be released
contemporaneously with these proposed
regulations. Draft Form 1099–K will be
available for viewing and comment on the
IRS web site athttp://www.irs.gov/pub/irs-
dft/f1099k—dft.pdf. Additional guidance
regarding the proper form for reporting
under this section will be issued in time
for filing the first returns due under this
section (returns for calendar year 2011 due
in 2012).
The draft form is expected to require re-
porting, with respectto each participating
payee, of the gross amount of the aggre-
gate reportable payment transactions for
the calendar year and the gross amount of
the aggregate reportable payment transac-
tions for each month of the calendar year.
The inclusion of monthly amounts on the
return filed with the IRS and on the state-
ment furnished to the payee will aid in rec-
onciling payment card and third party net-
work transaction receipts for fiscal year
payees. Additionally, the proposed regula-
tions provide that the time and manner for
reporting under section 6050W will follow
the existing procedures for information re-
porting under other Code sections.
Section 6050W(f) provides that payee
statements may be furnished electroni-
cally. Commenters requested that the ex-
isting procedures for payee statements be
modified to eliminate the requirement for
an affirmative consent to receive the payee
statement under section 6050W electron-
ically. Instead, commenters requested
that merchants already receiving business
communications electronically be deemed
to have consented to receive electronic
payee statements under section 6050W.
Commenters also suggested that reporting
entities not be required to send a separate
communication to payees to inform them
2009–49 I.R.B.752December 7, 2009

of their option to receive payee statements
electronically; rather, the communication
may be included in another business com-
munication. Commenters also suggested
that merchants receiving paper commu-
nications who wish to receive electronic
payee statements be allowed to consent to
electronic payees statements by logging
onto a website to indicate their consent,
with no further written consent required.
The proposed regulations do not adopt
these suggestions to eliminate the existing
consent procedures for furnishing elec-
tronic statements to payees. Additional
comments are requested on whether the
existing consent procedures should be
modified.
Backup Withholding
The Act amended section 3406(b)(3) to
provide that reportable payment transac-
tions subject to information reporting un-
der section 6050W generally are subject to
backup withholding requirements. Section
3406 requires backup withholding in the
case of any reportable payment if a con-
dition for backup withholding, as set forth
in section 3406(a)(1), exists. In the case of
reportable payments, backup withholding
generally applies if the payee fails to fur-
nish his TIN to the payor or if the IRS no-
tifies the payor that the TIN furnished by
the payee is incorrect.
Section 3091(c) of the Act amended
section 3406(b) by expanding the meaning
of reportable payments subject to backup
withholding to include payments required
to be shown on a return required under
section 6050W, effective for amounts paid
after December 31, 2011. Accordingly,
the proposed regulations amend the regu-
lations under section 3406 to provide that
persons making information returns with
respect to any reportable payment under
section 6050W made after December 31,
2011 are included in the definition of “pay-
ors” obligated to backup withhold.
Several commenters expressed con-
cern that when backup withholding for
reportable paymentsreportable under sec-
tion 6050W becomes effective, duplicate
backup withholding on the same payment
could potentially occur. The same re-
portable payment may be reportable under
section 6050W and under another Code
section, such as section 6041 or 6041A,
thus potentially subjecting the payee to as
much as 56-percent withholding for the
same transaction.
Because the proposedregulations pro-
vide relief from reporting under section
6041 for payment card transactions that
would otherwise be reportable under both
sections 6041 and 6050W, the potential
for duplicate backup withholding in such
situations is eliminated. There continues,
however, to be a potential for duplicate
backup withholding for reportable pay-
ments made after December 31, 2011 that
are reportable under section 6050W and
another Code section. Also, in the case
of a payment for services using a third
party payment network after December
31, 2011, the payment potentially could
be subject to backup withholding by the
payor for these services as a reportable
payment under section 6041, and by the
third party settlement organization as a
reportable payment under section 6050W.
A payment settlement entity reporting
under section 6050W is in a better position
to perform backup withholding for a third
party network transaction than the payor
reporting under section 6041. Backup
withholding compliance is difficult for
payors in third party network transactions
because an invoice may not be issued, and
the payor in the transaction may not be
in a position to backup withhold easily
at the time of the transaction. Backup
withholding may also be difficult because
the payor does not make payment directly
to the provider of services; rather, the
third party settlement organization makes
payment to the provider. However, relief
from backup withholding for third party
network transactions reportable under
both section 6050W and section 6041 is
not warranted because such transactions
are not subject to reporting under section
6050W unless thede minimisthresholds
are met. Thus, the payor with the obliga-
tion to report under section 6041 cannot
determine with certainty whether a third
party network transaction is required to be
reported under section 6050W.
For payments that are subject to with-
holding under both sections 3402(t) and
6050W, the potential for duplicate with-
holding is complicated by the 3-percent
withholding requirement contained within
section 3402(t) itself. Section 3402(t)
expressly provides exceptions to the
3-percent withholding requirement for
payments that are subject to backup with-
holding under section 3406 if backup
withholding is actually being deducted
from the payment. Thus, where there is no
3-percent withholding on a government
payment card transaction, the transaction
will be subject to the higher 28-percent
backup withholding under section 3406
instead of the 3-percent withholding under
section 3402(t). However, a potential for
duplicate backup withholding may arise
if information reporting is required under
both sections 3402(t) and 6050W but nei-
ther reporting requirement is satisfied.
The proposed regulations do not elim-
inate the requirement for backup with-
holding for transactions that are reportable
under section 6050W and another Code
section. Comments are requested on the
circumstances under which relief for du-
plicate backup withholding is appropriate
once backup withholding under section
6050W becomes effective.
Proposed Effective/Applicability Dates:
The amendments to the regulations as
proposed will be effective on the date they
are published as final regulations in the
Federal Register.
With respect to the regulations under
sections 6041, 6050W, 6051, 6721 and
6722, the regulations are proposed to ap-
ply to returns for calendar years beginning
after December 31, 2010. With respect to
the regulations under section 3406, the reg-
ulations are proposed to apply to amounts
paid after December 31, 2011.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
Pursuant to the Regulatory Flexibility Act
(5.U.S.C. chapter 6), it is hereby certified
that the regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certifica-
tion is based on the fact that the persons re-
quired to report under section 6050W, pay-
ment settlement entities, will generally not
be small businesses. Merchant acquiring
entities, the payment settlement entities re-
quired to report payment card transactions,
December 7, 20097532009–49 I.R.B.

will primarily be banks with over $175
millioninassets. Thirdpartysettlement
organizations, the payment settlement en-
tities required to report third party network
transactions, will generally not be small
entities by virtue of the definition of a third
party payment network, which requires the
establishment of accounts with a central
organization (the third party settlement or-
ganization) by a substantial number of per-
sons. Further, section 6050W(e) provides
ade minimisexception that exempts third
party settlement organizations from report-
ing transactions with respect to a payee
if the aggregate amount of such transac-
tions does not exceed $20,000 or the ag-
gregate number of such transactions does
not exceed 200. The IRS and the Treasury
Department also request comments on the
accuracy of the statement that the regula-
tions in this document will not have a sig-
nificant economic impact on a substantial
number of small entities. Pursuant to sec-
tion 7805(f) of the Code, this regulation
has been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on their impact
on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and the Treasury Department re-
quest comments on the clarity of the pro-
posed regulations and how they can be
made easier to understand. Comments
are requested on the examples in the pro-
posed regulations, and commentators are
specifically invited to suggest changes to
these examples or to suggest new exam-
ples that they believe would better illus-
trate the principles that should be included
in the final regulations. All comments
will be available for public inspection and
copying.
A public hearing has been scheduled for
February 10, 2010 at 10 am in room 2615,
Internal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC. Due to
building security procedures, visitors must
enter at the Constitution Avenue entrance.
In addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate en-
trance area more than 30 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
FOR FURTHER INFORMATION CON-
TACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments and
an outline of the topics to be discussed
and the time to be devoted to each topic
(a signed original and eight (8) copies) by
January 27, 2010. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the sched-
uling of the speakers will be prepared af-
ter the deadline for receiving outlines has
passed. Copies of the agenda will be avail-
able free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Barbara Pettoni, Office of
Associate Chief Counsel (Procedure and
Administration).
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 31 and
301 are proposed to be amended as fol-
lows:
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 1.6041–1 is amended by
adding a sentence at the end of paragraph
(a)(1)(ii) and adding paragraphs (a)(1)(iv)
and (a)(1)(v) to read as follows:
§1.6041–1 Return of information as to
payments of $600 or more.
(a)***(1)***(i)***
(ii) * * * For payment card transac-
tions (as described in §1.6050W–1(b))
required to be reported on information
returns required under section 6050W
(relating to payment card and third party
network transactions), see special rules in
§1.6041–1(a)(1)(iv).
*****
(iv)Information returns required un-
der section 6050W for calendar years
beginning after December 31, 2010.For
payments made by payment card after
December 31, 2010, that are required to
be reported on an information return un-
der section 6050W (relating to payment
card and third party network transac-
tions), the following rule applies. Payment
card transactions that are described in
paragraph (a)(1)(ii) of this section that
otherwise would be reportable under both
sections 6041 and 6050W are reported un-
der section 6050W and not section 6041.
For provisions relating to information re-
porting for payment card transactions, see
§1.6050W–1.
(v)Example. The provisions of para-
graph (a)(1)(iv) are illustrated by the fol-
lowing example:
Example. Restaurant owner A, in the course of
business, pays $600 of fixed or determinable income
to B, a repairman, by credit card. B is one of a net-
work of unrelated persons that has agreed to accept
A’s credit card as payment under an agreement that
provides standards and mechanisms for settling the
transaction between a merchant acquiring bank and
the persons who accept the cards. Merchant acquir-
ing bank Y is responsible for making the payment
to B. Under paragraph (a)(1)(iv) of this section, A,
as payor, is not required to file an information return
under section 6041 with respect to the transaction be-
cause Y, as the payment settlement entity for the pay-
ment card transaction, is required to file an informa-
tion return under section 6050W.
*****
Par. 3. Section §1.6050W–1 is added
to read as follows:
§1.6050W–1 Information reporting for
payments made in settlement of payment
card and third party network transactions.
(a)In general—(1)General rule.Ev-
ery payment settlement entity, as defined
in paragraph (a)(3) of this section, must
file an information return for each calen-
dar year with respect to payments made in
settlement of reportable payment transac-
tions, as defined in paragraph (a)(2) of this
section, setting forth the following infor-
mation:
(i) The name, address, and taxpayer
identification number (TIN) of each par-
ticipating payee, as defined in paragraph
(a)(4) of this section, to whom one or more
payments in settlement of reportable pay-
ment transactions are made.
2009–49 I.R.B.754December 7, 2009

(ii) With respect to each participating
payee, the gross amount, as defined in
paragraph (a)(5) of this section, of—
(A) The aggregate reportable payment
transactions for the calendar year; and
(B) The aggregate reportable payment
transactions for each month of the calendar
year.
(iii) Any other information required by
the form, instructions or current revenue
procedures.
(2)Reportable payment transaction.
The termreportable payment transaction
means any payment card transaction (as
defined in paragraph (b)(1) of this section)
and any third party network transaction
(as defined in paragraph (c)(1) of this sec-
tion).
(3)Payment settlement entity.Theterm
payment settlement entitymeans a domes-
tic or foreign entity that is—
(i) In the case of a payment card trans-
action, a merchant acquiring entity (as de-
fined in paragraph (b)(2) of this section);
and
(ii) In the case of a third party network
transaction, a third party settlement organ-
ization (as defined in paragraph (c)(2) of
this section).
(4)Participating payee—(i)Definition.
In general, the termparticipating payee
means any person, including any govern-
mental unit (and any agency or instrumen-
tality thereof), who:
(A) In the case of a payment card trans-
action, accepts a payment card (as defined
in paragraph (b)(3) of this section) as pay-
ment; and
(B) In the case of a third party network
transaction, accepts payment from a third
party settlement organization (as defined
in paragraph (c)(2) of this section) in set-
tlement of such transaction.
(ii)Foreign payees. For special rules
relating to foreign payees, see paragraph
(d)(3) of this section.
(5)Gross amount. For purposes of
this section,gross amountmeans the to-
tal dollar amount of aggregate reportable
payment transactions for each participat-
ing payee without regard to any adjust-
ments for credits, cash equivalents, dis-
count amounts, fees, refunded amounts or
any other amounts.
(b)Payment card transactions—(1)
Definition.The termpayment card trans-
actionmeans any transaction in which a
payment card, or any account number or
other indicia associated with a payment
card, is accepted as payment.
(2)Merchant acquiring entity.The
termmerchant acquiring entitymeans
the bank or other organization that has
the contractual obligation to make pay-
ment to participating payees (as defined in
paragraph (a)(4)(i)(A) of this section) in
settlement of payment card transactions.
(3)Payment card.(i)Thetermpay-
ment cardmeans any card, including any
stored-value card as defined in paragraph
(b)(4) of this section, issued pursuant to
an agreement or arrangement that provides
for—
(A) One or more issuers of such cards;
(B) A network of persons unrelated to
each other, and to the issuer, who agree to
accept such cards as payment; and
(C) Standards and mechanisms for
settling the transactions between the mer-
chant acquiring entities and the persons
who agree to accept the cards as payment.
(ii) Persons who agree to accept such
cards as payment as described in this
paragraph (b)(3) are participating pay-
ees within the meaning of paragraph
(a)(4)(i)(A) of this section.
(4)Stored-value cards.Theterm
stored-value cardmeans any card with a
prepaid value, including any gift card.
(c)Third party network transac-
tions—(1)Definition.The termthird party
network transaction
means any transac-
tion that is settled through a third party
payment network.
(2)Third party settlement organization.
The termthird party settlement organiza-
tionmeans the central organization that
has the contractual obligation to make pay-
ments to participating payees (as defined
in paragraph (a)(4)(i)(B) of this section) of
third party network transactions. A cen-
tral organization is a third party settlement
organization if it provides a third party
payment network (as defined in paragraph
(c)(3)(i) of this section) that enables pur-
chasers to transfer funds to providers of
goods and services.
(3)Third party payment network.(i)
The termthird party payment network
means any agreement or arrangement
that—
(A) Involves the establishment of ac-
counts with a central organization by a sub-
stantial number of providers of goods or
services who are unrelated to the organiza-
tion and who have agreed to settle transac-
tions for the provision of the goods or ser-
vices to purchasers according to the terms
of the agreement or arrangement;
(B) Provides standards and mechanisms
for settling the transactions; and
(C) Guarantees payment to the persons
providing goods or services in settlement
of transactions with purchasers pursuant to
the agreement or arrangement.
(ii) Persons who are providers of goods
and services as described in this paragraph
(c)(3) are participating payees within the
meaning of paragraph (a)(4)(i)(B) of this
section.
(4)Exception for de minimis payments.
A third party settlement organization is
required to report any information under
paragraph (a)(1) of this section with re-
spect to third party network transactions of
any participating payee only if—
(i) The amount that would otherwise be
reported under paragraph (a)(1)(ii) of this
section with respect to such transactions
exceeds $20,000; and
(ii) The aggregate number of such trans-
actions exceeds 200.
(d)Special rules—(1)Aggregated pay-
ees. In any case where a person receives
payments from a payment settlement en-
tity (as defined in paragraph (a)(3) of this
section) on behalf of one or more partic-
ipating payees and distributes such pay-
ments to one or more participating payees
(as defined in paragraph (a)(4) of this sec-
tion), the person is treated as:
(i) The participating payee with respect
to the payment settlement entity; and
(ii) The payment settlement entity
with respect to the participating payees to
whom the person distributes payments.
(2)Electronic payment facilitator.If
a payment settlement entity (as defined in
paragraph (a)(3) of this section) contracts
with an electronic payment facilitator or
other third party to settle reportable pay-
ment transactions on behalf of the payment
settlement entity, the electronic payment
facilitator or other third party must file the
annual information return under this sec-
tion in lieu of the payment settlement en-
tity. The electronic payment facilitator or
other third party who makes payment on
behalf of the payment settlement entity is
the party that will be liable for any appli-
cable penalties for failure to comply with
the information reporting requirements of
section 6050W.
December 7, 20097552009–49 I.R.B.

(3)Foreign payees—(i)In general.A
payment settlement entity that is a person
described as a U.S. payor or U.S. middle-
man in §1.6049–5(c)(5) is not required to
make a return of information for payments
to a participating payee with a foreign ad-
dress as long as, prior to payment, the
payee has provided the payment settlement
entity with documentation upon which the
payment settlement entity may rely to treat
the payment as made to a foreign person in
accordance with §1.1441–1(e)(1)(ii). For
purposes of this paragraph (d)(3)(i), the
provisions of §1.1441–1 shall apply by
substituting the term payor for the term
withholding agent and without regard to
the limitation to amounts subject to with-
holding under chapter 3 of the Internal
Revenue Code and the regulations under
that chapter.
(ii)Special rule. A payment settle-
ment entity that is not a person described
as a U.S. payor or U.S middleman in
§1.6049–5(c)(5) is not required to make
a return of information for a payment to
a participating payeethat does not have a
United States address as long as the pay-
ment settlement entity neither knows nor
has reason to know that the participating
payee is a United States person.
(iii)Foreign address; United States ad-
dress. For purposes of this section,for-
eign addressmeans any address that is not
within the United States, as defined in sec-
tion 7701(a)(9) of the Internal Revenue
Code (the States and the District of Colum-
bia).United States addressmeans any ad-
dress that is within the United States.
(4)Unrelated persons. For purposes of
this section,unrelatedmeans any person
who is not related to another person within
the meaning of section 267(b) (providing a
list of relationships), including the applica-
tion of section 267(c) and (e)(3) (providing
rules relating to constructive ownership),
and section 707(b)(1) (relationships with
partnerships).
(e)Examples. The following examples
illustrate the provisions of this section:
Example 1.Merchant acquiring entity. Customer
A purchases goods from merchant B using a credit
card issued by Bank X. B is one of a network of un-
related persons that has agreed to accept credit cards
issued by X as payment under an agreement that pro-
vides standards and mechanisms for settling the trans-
action between a merchant acquiring bank and the
persons who accept the cards. Bank Z is the bank
with the contractual obligation to make payment to
B for goods provided to A in the above transaction.
As defined in paragraph (b)(2) of this section, Z is the
merchant acquiring entity that must file the annual in-
formation return required under paragraph (a)(1) of
this section to report the payment made to settle the
transaction for the sale of goods from B to A.
Example 2.Third party settlement organization.
(i)MerchantBisoneofasubstantialnumberofper-
sons selling goods or services over the Internet that
have an account with X, an Internet payment service
provider. None of these persons, including B, are re-
lated to X, and all have agreed to settle transactions
for the sale of goods or services to customers accord-
ing to the terms of their contracts with X. X has guar-
anteed payment to all of these persons, including B,
for the sale of goods or services to customers. Cus-
tomer A purchases goods from B. A pays X for the
goods purchased from B. X, in turn, makes payment
to B in settlement of the transaction for the sale of
goods from B to A.
(ii) X’s arrangement constitutes a third party pay-
ment network as defined in paragraph (c)(3) of this
section because a substantial number of persons that
are unrelated to X, including B, have established ac-
counts with X, and X is contractually obligated to
settle transactions for the provision of goods or ser-
vices by these persons to purchasers. Thus, under
paragraph (c)(2) of this section, X is a third party
settlement organization and the transaction discussed
in this example is a third party network transaction
under paragraph (c)(1) of this section. Therefore, X
must file the annual information return required un-
der paragraph (a)(1) of this section to report the pay-
ment made to B in settlement of the transaction with
A provided that X’s aggregate payments to B from
third party network transactions exceed $20,000 and
the aggregate number of X’s transactions with B ex-
ceeds 200 (as provided in paragraph (c)(4) of this sec-
tion).
Example 3.Automated clearing house network.
A operates an automated clearing house (“ACH”)
network that merely processes electronic payments
(such as wire transfers, electronic checks, and direct
deposit payments) between buyers and sellers. There
are no contractual agreements between A and the
sellers for the purpose of permitting the sellers to
use the ACH network. Thus, A is not a third party
settlement organization under paragraph (c)(2) of
this section, the ACH network is not a third party
payment network under paragraph (c)(3) of this
section, and the electronic payment transactions are
not third party network transactions under paragraph
(c)(1) of this section. A is not required to file the
annual information return required under paragraph
(a)(1) of this section.
Example 4.Gross amount. Customer A uses a
payment card to purchase $100 worth of goods at
merchant B. Bank X, the merchant acquiring entity
for B, is the party with the contractual obligation to
make payment to B in settlement of the transaction.
X, after deducting fees of $2, makes payment of $98
to settle the transaction for the sale of goods from B
to A. Under paragraph (a)(5) of this section, X must
report the amount of $100, without any reduction for
fees or any other amount, as the gross amount of this
reportable payment transaction on the annual infor-
mation return filed under paragraph (a)(1) of this sec-
tion.
Example 5.Gift card. (i) Customer A purchases a
gift card from Merchant X that may be used only at X
and its related network of stores. A purchases the gift
card using cash. A gives thegiftcardtoB.Busesthe
gift card to purchase goods at one of X’s stores. The
purchase of the gift card by A using cash is not a pay-
ment card transaction described in paragraph (b)(1)
of this section and, thus,is not required to be reported
in a return of information required under paragraph
(a)(1) of this section. Under paragraph (b)(3) of this
section, the gift card is not a payment card because
the gift card is accepted as payment by a person who
is related to the issuer of the gift card. Therefore, the
use of the gift card by B is not required to be reported
in a return of information required under paragraph
(a)(1) of this section.
(ii) The facts are the same as in paragraph (i),
except that B adds value to the gift card using a credit
card. The use of the credit card to add value to the gift
card is a reportable payment transaction (as defined in
paragraph (a)(2) of this section) and must be reported
in a return of information under this section by the
bank or other organization that has the contractual
obligation to make payment to X in settlement of the
transaction.
Example 6.Campus card. (i) Student A pur-
chases a card issued by University Y that may be
used on campus at various university-owned mer-
chants and at various localmerchants unrelated to Y.
A uses the card in the university-owned cafeteria to
purchase lunch. Under paragraph (b)(3) of this sec-
tion, the campus card is not a payment card in this
transaction because the card is accepted as payment
by a person who is related to the issuer of the card.
Therefore, the use of the campus-card by A in the
university cafeteria is not requiredtobereportedina
return of information required under paragraph (a)(1)
of this section.
(ii) The facts are the same as in paragraph (i), ex-
cept that A uses the campus card to purchase lunch
at a local restaurant, unrelated to Y, that has agreed to
accept the campus card as payment. Under paragraph
(b)(3) of this section, the campus card is a payment
card in this transaction because the card is accepted
as payment by a person that is unrelated to this issuer
ofthecardpursuanttoanagreement. Therefore, the
use of the card by A in the local restaurant for the pur-
chase of lunch must be reported in a return of infor-
mation required under paragraph (a)(1) of this section
by the bank or other organization that has the contrac-
tual obligation to make payment to the restaurant in
settlement of the transaction.
Example 7.Prepaid telephone card. A purchases
a prepaid telephone card from Company X that may
be used to make telephone calls using various long-
distance providers unrelated to X that have agreed to
accept the card as payment. A places a telephone call
using the prepaid card as payment for the telephone
call. Under paragraph (b)(3) of this section, the pre-
paid telephone card is a payment card because the
card is accepted as payment by a person that is un-
related to the issuer of the card pursuant to an agree-
ment. Therefore, the use of the prepaid card to make
payment for the telephone call must be reported in a
return of information required under paragraph (a)(1)
of this section by the bank or other organization that
has the contractual obligation to make payment to the
long distance provider in settlement of the transac-
tion.
Example 8.Transit card. City Z accepts a tran-
sit card as payment for use of its mass transit system.
2009–49 I.R.B.756December 7, 2009

The transit card is issued by B, an organization unre-
lated to Z. A network of persons, including Z, who are
unrelated to each other and to B, have agreed to ac-
cept the transit card issued by B as payment for tran-
sit and for other goods and services. Transit rider X
purchases a transit card and uses the card to pay for
travel on Z’s mass transit system. Under paragraph
(b)(3) of this section, the transit card is a payment card
because the card is accepted as payment by a person
who is one of a network of persons that are unrelated
to the issuer of the card and that have agreed to ac-
cept the card as payment. Therefore, the use of the
transitcardbyXtopayfortransitonZ’smasstran-
sit system is a payment card transaction described in
paragraph (b)(1) of this section that must be reported
in a return of information required under paragraph
(a)(1) of this section by the bank or other organiza-
tion that has the contractual obligation to make pay-
ment to Z. Z is the participating payee, described in
paragraph (a)(4)(i)(A) of this section, of the payment
card transaction.
Example 9.Healthcare network. Health car-
rier A operates healthcare network Y. A collects
premiums from covered persons pursuant to a plan
agreement between A and the covered persons for
the cost of membership in Y. Separately, A pays
healthcare providers pursuant to provider agreements
to compensate these providers for services rendered
to covered persons who are members of Y. A is not a
third party settlement organization under paragraph
(c)(2) of this section because A does not operate a
third party payment networkthat enables purchasers
to transfer funds to providers of goods and services.
Therefore, A is not required to file the annual infor-
mation return required under paragraph (a)(1) of this
section.
Example 10.Third party accounts payable.X
is a “shared-service” organization that performs ac-
counts payable services for numerous purchasers that
are unrelated to X. A substantial number of providers
of goods and services have established accounts with
X and have agreed to accept payment from X in
settlement of their transactions with purchasers. The
provider agreement with Xincludes standards and
mechanisms for settling the transactions and guaran-
tees payment to the providers, and the arrangement
enables purchasers to transfer funds to providers.
Under paragraph (c)(3) of this section, X’s accounts
payable services constitute a third party payment
network, of which X is the third party settlement
organization (as defined in paragraph (c)(2) of this
section). For each payee, X must file the annual
information return required under paragraph (a)(1)
of this section to report payments made by X in
settlement of accounts payable to that payee if X’s
aggregate payments to that payee exceed $20,000
and the aggregate number of transactions with that
payee exceeds 200 (as provided in paragraph (c)(4)
of this section).
Example 11.Toll collection network. State A
charges a toll to vehicles that travel its state high-
ways. The tolling agency for A contracted with or-
ganization X to perform its toll collection. X pro-
vides an electronic toll collection system that allows
the toll facility to record the passage of a vehicle with
a transponder affixed to the vehicle. The customer
account associated with the transponder is automat-
ically debited for the amount of the toll. The cus-
tomer funds a balance in the account, which is then
depleted as the toll transactions occur. X periodi-
cally bills the customer to replenish the account. X
then makes payment to A to settle the toll transactions
that are recorded by the transponder. X also contracts
with a substantial number of other entities unrelated
to X that have established accounts with X and have
agreed to accept payment using the electronic toll col-
lection system provided by X. X guarantees payment
to the entities for all toll transactions that are recorded
by the transponders, and the arrangement enables cus-
tomers to transfer funds to State A and other entities
that charge tolls. Under paragraph (c)(3) of this sec-
tion, X’s electronic toll collection system constitutes
a third party payment network, of which X is the third
party settlement organization (as defined in paragraph
(c)(2) of this section). For each payee, including A, X
must file the annual information return required un-
der paragraph (a)(1) of this section to report payments
made by X in settlement of toll transactions if X’s ag-
gregate payments to that payee exceed $20,000 and
the aggregate number of transactions with that payee
exceeds 200 (as provided in paragraph (c)(4) of this
section).
Example 12.Hotel kiosk. Under a “hotel kiosk”
arrangement, Hotel B permits its customers to charge,
to their room account, transactions for goods and ser-
vices at a substantial number of sellers unrelated to
B that operate on B’s premises and have established
accounts in B’s hotel kiosk system. Customers set-
tle their room account with B when they check out,
and B in turn settles the hotel kiosk transactions with
the unrelated sellers. B guarantees payment to the
sellers for these transactions and the arrangement en-
ables customers to transfer funds to the sellers by
means of one payment made to the hotel. Under para-
graph (c)(3) of this section, B’s hotel kiosk system
constitutes a third party payment network, of which
B is the third party settlement organization (as de-
fined in paragraph (c)(2) of this section). For each
payee, B must file the annual information return re-
quired under paragraph (a)(1) of this section to report
payments made by B in settlement of the hotel kiosk
transactions if B’s aggregate payments to that payee
exceed $20,000 and the aggregate number of trans-
actions with that payee exceeds 200 (as provided in
paragraph (c)(4) of this section).
Example 13.
Aggregated payee. Corporation A,
acting on behalf of A’s independently-owned fran-
chise stores, receives payment from Bank X for credit
card sales effectuated at these franchise stores. X, the
payment settlement entity (as defined in paragraph
(a)(3)(i) of this section), is required under paragraph
(d)(1)(i) of this section to report the gross amount
of the reportable payment transactions distributed to
A (notwithstanding the fact that A does not accept
payment cards and wouldnot otherwise be treated
as a participating payee). In turn, under paragraph
(d)(1)(ii), A is required to report the gross amount of
the reportable payment transactions allocable to each
franchise store. X has no reporting obligation under
this section with respect to payments made by A to
its franchise stores.
Example 14.Electronic payment facilitator.
Bank A is a merchant acquiring entity (as defined in
paragraph (b)(2) of this section) with the contractual
obligation to make payments to participating mer-
chants to settle certain credit card transactions. X
enters into a contract with A to settle these credit card
transactions electronically on behalf of A. Under
paragraph (d)(2) of this section, X is an electronic
payment facilitator and must file the information
return required under paragraph (a)(1) of this section
with respect to A’s credit card transactions settled
by X. A has no reporting obligation with respect to
payments made by X on A’s behalf.
(f)Prescribed form. The return re-
quired by paragraph (a)(1) of this section
must be made according to the forms and
instructions published by the IRS.
(g)Time and place for filing. Returns
made under this section for any calendar
year must be filed on or before February
28th (March 31st if filing electronically) of
the following year at the Internal Revenue
Service Center location designated in the
instructions to the relevant form.
(h)Time and place for furnishing state-
ment—(1)In general. Every payment
settlement entity required to file a return
under this section must also furnish to each
participating payee a written statement
with the same information (as described
in paragraph (h)(2) of this section). The
statement must be furnished to the payee
on or before January 31st of the year fol-
lowing the calendar year in which the
reportable payment is made. If the return
of information is not made on magnetic
media, this requirement may be satisfied
by furnishing to such person a copy of
all Forms 1099–K, “Merchant Card and
Third-Party Payments,” or any successor
form with respect to such person filed with
the Internal Revenue Service Center. The
statement will be considered furnished to
the payee if it is mailed to the payee’s last
known address. The payment settlement
entity may furnish the statement electron-
ically with the prior consent of the payee.
(2)Information to be shown on state-
mentfurnishedtopayee. Each written
statement furnished under paragraph
(h)(1) of this section must include the fol-
lowing information—
(i) The name, address, and phone num-
ber (or email address if the statement is fur-
nished electronically) of the information
contact of the payment settlement entity.
(ii) With respect to the participating
payee, the gross amount of—
(A) The aggregate reportable payment
transactions for the calendar year; and
(B) The aggregate reportable payment
transactions for each month of the calendar
year.
December 7, 20097572009–49 I.R.B.

(iii) Any other information required by
the form, instructions, or current revenue
procedures.
(i)Cross-reference to penalties.For
provisions relating to the penalty for fail-
ure to file timely a correct information
return required under section 6050W, see
§301.6721–1 of this chapter (Procedure
and Administration Regulations). For pro-
visions relating to the penalty for failure
to furnish timely a correct payee state-
ment required under section 6050W(f),
see §301.6722–1 of this chapter. See
§301.6724–1 of this chapter for the waiver
of a penalty if failure is due to reasonable
cause and is not due to willful neglect.
(j)Effective/applicability date.The
rules in this section apply to returns for
calendar years beginning after December
31, 2010. The rules in this section are
effective on the date of publication of the
Treasury decision adopting these rules as
final regulations in theFederal Register.
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Par. 4. The authority citation for part
31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 5. Section 31.3406–0 is amended
as follows:
1. Entries for §31.3406(b)(3)–5(a), (b)
and (c) are added.
2. Entry for §31.3406(g)–1 is amended
by adding paragraphs (d), (e), and (f).
The additions read as follows:
§31.3406–0 Outline of the backup
withholding regulations.
*****
§31.3406(b)(3)–5 Reportable payments
of payment card and third party network
transactions.
(a) Payment card and third party net-
work transactions subject to backup with-
holding.
(b) Amount subject to backup withhold-
ing.
(c) Effective/applicability date.
*****
§31.3406(g)–1 Exception for payments
to certain payees and certain other
payments.
*****
(d) Reportable payments made to Cana-
dian nonresident alien individuals.
(e) Certain reportable payments made
outside the United States by foreign per-
sons, foreign offices of United States
banks and brokers, and others.
(f) Special rule for certain payment card
transactions.
*****
Par. 6. Section 31.3406(a)–2 is
amended by revising paragraph (a) to read
as follows:
§31.3406(a)–2 Definition of payors
obligated to backup withhold.
(a)In general.Payormeans the per-
son that is required to make an informa-
tion return under sections 6041, 6041A(a),
6042, 6044, 6045, 6049, 6050A, 6050N,
or 6050W with respect to any reportable
payment (as described in section 3406(b)),
or that is described in paragraph (b) of this
section.
*****
Par. 7. Section 31.3406(b)(3)–5 is
added to read as follows:
§31.3406(b)(3)–5 Reportable payments
of payment card and third party network
transactions.
(a)Payment card and third party net-
work transactions subject to backup with-
holding. A payment of a kind, and to a
payee, that is required to be reported un-
der section 6050W (relating to information
reporting for payment card and third party
network transactions) is a reportable pay-
ment for purposes of section 3406. See
§31.6051–4 for the requirement to furnish
a statement to the payee if tax is withheld
under section 3406.
(b)Amount subject to backup withhold-
ing. In general, the amount described in
paragraph (a) of this section that is subject
to withholding under section 3406 is the
amount subject to reporting under section
6050W.
(c)Effective/applicability date.The
provisions of this section apply to amounts
paid after December 31, 2011.
Par. 8. Section 31.3406(d)–1 is
amended by revising paragraph (d) to read
as follows:
§31.3406(d)–1 Manner required for
furnishing a taxpayer identification
number.
*****
(d)Rents, commissions, nonemployee
compensation, certain fishing boat oper-
ators, and payment card and third party
network transactions, etc.—Manner re-
quired for furnishing a taxpayer identifi-
cation number. For accounts, contracts,
or relationships subject to information
reporting under section 6041 (relating to
information reporting at source on rents,
royalties, salaries, etc.), section 6041A(a)
(relating to information reporting of pay-
ments for nonemployee services), section
6050A (relating to information reporting
by certain fishing boat operators), section
6050N (relating to information report-
ing of payments of royalties), or section
6050W (relating to information reporting
for payment card and third party network
transactions), the payee must furnish the
payee’s taxpayer identification number
to the payor either orally or in writing.
Except as provided in §31.3406(d)–5,
the payee is not required to certify under
penalties of perjury that the taxpayer iden-
tification number is correct regardless of
when the account, contract, or relationship
is established.
Par. 9. Section 31.6051–4 is amended
by revising paragraph (c)(2) to read as fol-
lows:
§31.6051–4 Statement required in case of
backup withholding.
*****
(c)***
(2) The amount subject to reporting un-
der sections 6041, 6041A(a), 6042, 6044,
6045, 6049, 6050A, 6050N, or 6050W
whether or not the amount of the reportable
payment is less than the amount for which
an information return is required. If tax
is withheld under section 3406, the state-
ment must show the amount of the pay-
ment withheld upon;
*****
2009–49 I.R.B.758December 7, 2009

PART 301—PROCEDURE AND
ADMINISTRATION
Par. 10. Section 301.6721–1(g) is
amended by:
1. Removing the language “or” at
the end of paragraphs (g)(2)(vi) and
(g)(3)(xii).
2. Redesignating paragraph (g)(2)(vii)
as (g)(2)(viii).
3. Adding new paragraph (g)(2)(vii).
4.Redesignating paragraphs
(g)(3)(viii),(g)(3)(ix),(g)(3)(x),
(g)(3)(xi), (g)(3)(xii) and (g)(3)(xiii) as
(g)(3)(ix), (g)(3)(x), (g)(3)(xi), (g)(3)(xii),
(g)(3)(xiii) and (g)(3)(xiv).
5. Adding the language “or” at the end
of newly designated paragraph (g)(3)(xiii).
6. Adding new paragraph (g)(3)(viii).
The revisions and additions read as fol-
lows:
§301.6721–1 Failure to file correct
information returns.
*****
(g)* * * (2)* * *
(vii) Section 6050W (relating to infor-
mation returns with respect to payments
made in settlement of payment card and
third party network transactions (effective
for information returns required to be filed
for calendar years beginning after Decem-
ber 31, 2010)), or
*****
(3)* * *
(viii) Section 6050W (relating to infor-
mation returns with respect to payments
made in settlement of payment card and
third party network transactions (effective
for information returns required to be filed
for calendar years beginning after Decem-
ber 31, 2010)),
*****
Par. 11. Section 301.6722–1 is
amended by:
1. Removing the language “and” at the
end of paragraph (d)(2)(xviii).
2.Redesignating paragraphs
(d)(2)(xvi), (d)(2)(xvii), (d)(2)(xviii) and
(d)(2)(xix) as (d)(2)(xvii), (d)(2)(xviii),
(d)(2)(xix) and (d)(2)(xx).
3. Adding new paragraph (d)(2)(xvi).
4. Adding the language “and” at the
end of the newly designated paragraph
(d)(2)(xix).
5. Adding new paragraph (f).
The revisions and additions read as fol-
lows:
§301.6722–1 Failure to furnish correct
payee statements.
*****
(d)* * * (2)* * *
(xvi) Section 6050W (relating to infor-
mation returns with respect to payments
made in settlement of payment card and
third party network transactions, generally
the recipient copy),
*****
(f)Effective/Applicability date.The
provisions of paragraph (d)(2)(xvi) of
this section apply to information returns
required to be filed for calendar years be-
ginning after December 31, 2010.
*****
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2009–86
The Internal Revenue Service has re-
voked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletinthatanorganizationnolonger
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed,
contributions from individuals and orga-
nizations described in section 170(c)(2)
that are otherwise allowable will continue
to be deductible. Protection under sec-
tion 7428(c) would begin on December 7,
2009, and would end on the date the court
first determines that the organization is
not described in section 170(c)(2) as more
particularly set forth in section 7428(c)(1).
For individual contributors, the maximum
deduction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were
the basis for revocation.
Gehrig and Margaret White Charitable
Foundation
Charlotte, NC
Downs Family Foundation
Detroit, MI
December 7, 20097592009–49 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2009–49 I.R.B.iDecember 7, 2009

Numerical Finding List
1
Bulletins 2009–27 through 2009–49
Announcements:
2009-56, 2009-28 I.R.B.145
2009-57, 2009-29 I.R.B.158
2009-58, 2009-29 I.R.B.158
2009-59, 2009-29 I.R.B.158
2009-60, 2009-30 I.R.B.166
2009-61, 2009-33 I.R.B.246
2009-62, 2009-33 I.R.B.247
2009-63, 2009-33 I.R.B.248
2009-64, 2009-36 I.R.B.319
2009-65, 2009-36 I.R.B.319
2009-66, 2009-37 I.R.B.364
2009-67, 2009-38 I.R.B.388
2009-68, 2009-38 I.R.B.388
2009-69, 2009-40 I.R.B.475
2009-70, 2009-41 I.R.B.499
2009-71, 2009-40 I.R.B.475
2009-72, 2009-41 I.R.B.500
2009-73, 2009-41 I.R.B.500
2009-74, 2009-42 I.R.B.537
2009-75, 2009-42 I.R.B.537
2009-76, 2009-45 I.R.B.627
2009-77, 2009-43 I.R.B.567
2009-78, 2009-44 I.R.B.594
2009-79, 2009-46 I.R.B.628
2009-80, 2009-46 I.R.B.646
2009-81, 2009-46 I.R.B.647
2009-82, 2009-48 I.R.B.720
2009-83, 2009-46 I.R.B.647
2009-84, 2009-47 I.R.B.683
2009-86, 2009-49 I.R.B.759
Notices:
2009-51, 2009-28 I.R.B.128
2009-55, 2009-31 I.R.B.170
2009-57, 2009-29 I.R.B.147
2009-58, 2009-30 I.R.B.163
2009-59, 2009-31 I.R.B.170
2009-60, 2009-32 I.R.B.181
2009-61, 2009-32 I.R.B.181
2009-62, 2009-35 I.R.B.260
2009-63, 2009-34 I.R.B.252
2009-64, 2009-36 I.R.B.307
2009-65, 2009-39 I.R.B.413
2009-66, 2009-39 I.R.B.418
2009-67, 2009-39 I.R.B.420
2009-68, 2009-39 I.R.B.423
2009-69, 2009-35 I.R.B.261
2009-70, 2009-34 I.R.B.255
2009-71, 2009-35 I.R.B.262
2009-72, 2009-37 I.R.B.325
2009-73, 2009-38 I.R.B.369
Notices— Continued:
2009-74, 2009-38 I.R.B.370
2009-75, 2009-39 I.R.B.436
2009-76, 2009-43 I.R.B.554
2009-77, 2009-40 I.R.B.449
2009-78, 2009-40 I.R.B.452
2009-79, 2009-40 I.R.B.454
2009-81, 2009-40 I.R.B.455
2009-82, 2009-41 I.R.B.491
2009-83, 2009-44 I.R.B.588
2009-84, 2009-44 I.R.B.592
2009-85, 2009-45 I.R.B.598
2009-86, 2009-46 I.R.B.629
2009-87, 2009-46 I.R.B.630
2009-88, 2009-47 I.R.B.654
2009-89, 2009-48 I.R.B.714
2009-91, 2009-48 I.R.B.717
Proposed Regulations:
REG-140492-02, 2009-43 I.R.B.559
REG-159704-03, 2009-46 I.R.B.632
REG-160871-04, 2009-47 I.R.B.657
REG-152166-05, 2009-32 I.R.B.183
REG-112994-06, 2009-28 I.R.B.144
REG-127270-06, 2009-42 I.R.B.534
REG-155929-06, 2009-47 I.R.B.665
REG-135005-07, 2009-47 I.R.B.681
REG-136563-07, 2009-41 I.R.B.497
REG-108045-08, 2009-43 I.R.B.557
REG-113289-08, 2009-33 I.R.B.244
REG-116614-08, 2009-42 I.R.B.536
REG-123829-08, 2009-48 I.R.B.719
REG-130200-08, 2009-31 I.R.B.174
REG-139068-08, 2009-43 I.R.B.558
REG-139255-08, 2009-52 I.R.B.747
Revenue Procedures:
2009-30, 2009-27 I.R.B.27
2009-31, 2009-27 I.R.B.107
2009-32, 2009-28 I.R.B.142
2009-33, 2009-29 I.R.B.150
2009-34, 2009-34 I.R.B.258
2009-35, 2009-35 I.R.B.265
2009-36, 2009-35 I.R.B.304
2009-37, 2009-36 I.R.B.309
2009-38, 2009-37 I.R.B.362
2009-39, 2009-38 I.R.B.371
2009-40, 2009-39 I.R.B.438
2009-41, 2009-39 I.R.B.439
2009-42, 2009-40 I.R.B.459
2009-43, 2009-40 I.R.B.460
2009-44, 2009-40 I.R.B.462
2009-45, 2009-40 I.R.B.471
2009-46, 2009-42 I.R.B.507
2009-47, 2009-42 I.R.B.524
2009-50, 2009-45 I.R.B.617
Revenue Procedures— Continued:
2009-51, 2009-45 I.R.B.625
2009-52, 2009-49 I.R.B.744
2009-53, 2009-49 I.R.B.746
Revenue Rulings:
2009-18, 2009-27 I.R.B.1
2009-19, 2009-28 I.R.B.111
2009-20, 2009-28 I.R.B.112
2009-21, 2009-30 I.R.B.162
2009-22, 2009-31 I.R.B.167
2009-23, 2009-32 I.R.B.177
2009-24, 2009-36 I.R.B.306
2009-25, 2009-38 I.R.B.365
2009-26, 2009-38 I.R.B.366
2009-27, 2009-39 I.R.B.404
2009-28, 2009-39 I.R.B.391
2009-29, 2009-37 I.R.B.322
2009-30, 2009-39 I.R.B.391
2009-31, 2009-39 I.R.B.395
2009-32, 2009-39 I.R.B.398
2009-33, 2009-40 I.R.B.447
2009-34, 2009-42 I.R.B.502
2009-35, 2009-44 I.R.B.568
2009-36, 2009-47 I.R.B.650
2009-38, 2009-49 I.R.B.736
Tax Conventions:
2009-79, 2009-46 I.R.B.628
Treasury Decisions:
9452, 2009-27 I.R.B.1
9453, 2009-28 I.R.B.114
9454, 2009-32 I.R.B.178
9455, 2009-33 I.R.B.239
9456, 2009-33 I.R.B.188
9457, 2009-41 I.R.B.482
9458, 2009-43 I.R.B.547
9459, 2009-41 I.R.B.480
9460, 2009-44 I.R.B.584
9461, 2009-41 I.R.B.488
9462, 2009-42 I.R.B.504
9463, 2009-40 I.R.B.442
9464, 2009-48 I.R.B.692
9465, 2009-43 I.R.B.542
9466, 2009-43 I.R.B.551
9468, 2009-44 I.R.B.570
9469, 2009-48 I.R.B.687
9470, 2009-49 I.R.B.738
9471, 2009-49 I.R.B.722
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin
2009–26, dated June 29, 2009.
December 7, 2009ii2009–49 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2009–27 through 2009–49
Announcements:
2006-93
Superseded by
Ann. 2009-62, 2009-33 I.R.B.247
Notices:
2002-3
Modified and superseded by
Notice 2009-68, 2009-39 I.R.B.423
2004-67
Supplemented and superseded by
Notice 2009-59, 2009-31 I.R.B.170
2005-76
Modified by
Notice 2009-91, 2009-48 I.R.B.717
2006-70
Obsoleted by
T.D. 9453, 2009-28 I.R.B.114
2006-109
Superseded in part by
Rev. Proc. 2009-32, 2009-28 I.R.B.142
2007-7
Modified by
Notice 2009-82, 2009-41 I.R.B.491
2008-30
Amplified and clarified by
Notice 2009-75, 2009-39 I.R.B.436
2008-43
Obsoleted by
REG-113289-08, 2009-33 I.R.B.244
2009-28
Clarified by
Notice 2009-69, 2009-35 I.R.B.261
2009-31
Amplified by
Rev. Proc. 2009-43, 2009-40 I.R.B.460
2009-42
Amplified by
Rev. Proc. 2009-43, 2009-40 I.R.B.460
2009-54
Amplified by
Notice 2009-89, 2009-48 I.R.B.714
2009-58
Amplified by
Notice 2009-89, 2009-48 I.R.B.714
Proposed Regulations:
REG-130200-08
Hearing cancelled by
Ann. 2009-81, 2009-46 I.R.B.647
Revenue Procedures:
97-27
Clarified and modified by
Rev. Proc. 2009-39, 2009-38 I.R.B.371
97-49
Modified and superseded by
Rev. Proc. 2009-31, 2009-27 I.R.B.107
2002-44
Superseded by
Rev. Proc. 2009-44, 2009-40 I.R.B.462
2002-59
Superseded by
Rev. Proc. 2009-41, 2009-39 I.R.B.439
2005-63
Modified by
Rev. Proc. 2009-39, 2009-38 I.R.B.371
2006-30
Modified by
Rev. Proc. 2009-53, 2009-49 I.R.B.746
2007-44
Modified by
Rev. Proc. 2009-36, 2009-35 I.R.B.304
2007-65
Modified by
Ann. 2009-69, 2009-40 I.R.B.475
2008-34
Superseded by
Rev. Proc. 2009-46, 2009-42 I.R.B.507
2008-38
Superseded by
Rev. Proc. 2009-30, 2009-27 I.R.B.27
2008-44
Superseded by
Rev. Proc. 2009-35, 2009-35 I.R.B.265
2008-52
Amplified, clarified, and modified by
Rev. Proc. 2009-39, 2009-38 I.R.B.371
2008-59
Superseded by
Rev. Proc. 2009-47, 2009-42 I.R.B.524
2008-65
Modified by
Rev. Proc. 2009-33, 2009-29 I.R.B.150
2009-16
Modified by
Rev. Proc. 2009-33, 2009-29 I.R.B.150
Revenue Procedures— Continued:
2009-39
Modified by
Ann. 2009-67, 2009-38 I.R.B.388
Revenue Rulings:
74-346
Superseded by
Rev. Rul. 2009-34, 2009-42 I.R.B.502
75-190
Superseded by
Rev. Rul. 2009-34, 2009-42 I.R.B.502
75-398
Superseded by
Rev. Rul. 2009-34, 2009-42 I.R.B.502
75-526
Superseded by
Rev. Rul. 2009-34, 2009-42 I.R.B.502
2009-22
Corrected by
Ann. 2009-74, 2009-42 I.R.B.537
2009-29
Corrected by
Ann. 2009-74, 2009-42 I.R.B.537
Treasury Decisions:
9456
Corrected by
Ann. 2009-73, 2009-41 I.R.B.500
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin 2009–26, dated June 29, 2009.
2009–49 I.R.B.iiiDecember 7, 2009

December 7, 20092009–49 I.R.B.

INTERNAL REVENUE BULLETIN
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