Internal Revenue Bulletin 2007-40 (PDF rendition): IRS Announcements

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

Bulletin No. 200
7-40
October 1, 2007
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9353, page 721.
Final regulations under section 1045 of the Code relate to part-
nerships and their partners. The regulations provide rules re-
garding the deferral of gain on a partnership’s sale of qualified
small business stock (QSB stock) and a partner’s sale of QSB
stock distributed by a partnership. The regulations also pro-
vide rules for a taxpayer (other than a C corporation) who sells
QSB stock and purchases replacement QSB stock through a
partnership. Rev. Proc. 98–48 modified.
Notice 20
07–70, page 735.
This noti
ce provides guidance to taxpayers to file all Forms
1098–C,C
ontributions of Motor Vehicles, Boats, and Air-
planes,a
long with Form 1096,Annual Summary and Trans-
mittal of
U.S. Information Returns, at the Kansas City Service
Center a
fter December 31, 2007. The Internal Revenue Ser-
vice Cen
ter at Ogden remains the location for Forms 1098–C
filed on
or before December 31, 2007. The Form 1098–C is
an infor
mation form used by a donee organization to report a
contri
bution of a qualified vehicle with a claimed value of more
than $5
00. Notice 2006–1 modified.
Notice 2007–76, page 735.
This notice delays the effective date of Rev. Rul. 2006–57,
2006–47 I.R.B. 911. Rev. Rul. 2007–57 provides guidance
to employers on the use of smartcards or other electronic me-
dia to provide qualified transportation fringes under sections
132(a)(5) and (f) of the Code. The guidance is intended to pro-
vide relief to mass transit providers that are currently finding
it difficult to update their present systems in order to comply
with the Rev. Rul. 2006–57 guidelines prior to the effective
date. Rev. Rul. 2006–57 modified.
Notice 2007–77, page 735.
This notice provides adjusted limitations on housing expenses
for tax year 2007 for purposes of section 911 of the Code.
Rev. Proc. 2007–59, page 745.
This procedure permits certain partnerships to aggregate
gains and losses from an expanded class of qualified financial
assets for purposes of making reverse section 704(c) alloca-
tions under regulations section 1.704–3(e)(3).
Rev. Proc. 2007–61, page 747.
This procedure provides a safe harbor under which companies
taxable under Subchapter L do not have to include any por-
tion of the increase for the taxable year in policy cash values
of life insurance contracts described in section 264(f)(4)(A) of
the Code (ICOLI Contracts) for purposes of applying the insur-
ance company proration rules in sections 807(a)(2), 807(b)(1),
805(a)(4), 812, or 832(b)(5). Stakeholders are asked to com-
ment on the need for additional guidance in this area, specifi-
cally with regard to the existence of any non-tax regulatory rules
or other requirements that limit an insurance company’s ability
to invest in ICOLI Contracts and the effect of any experience
rating, inter-insurance, reciprocal, or reinsurance arrangement
on transactions involving ICOLI Contracts.
(Continued on the next page)
Actions Relating to Court Decisions is on the page following the Introduction.
Fi
nding Lists begin on page ii.

EXEMPT ORGANIZATIONS
Notice 2007–70, page 735.
This notice provides guidance to taxpayers to file all Forms
1098–C,Contributions of Motor Vehicles, Boats, and Air-
planes,along with Form 1096,Annual Summary and Trans-
mittal of U.S. Information Returns, at the Kansas City Service
Center after December 31, 2007. The Internal Revenue Ser-
vice Center at Ogden remains the location for Forms 1098–C
filed on or before December 31, 2007. The Form 1098–C is
an information form used by a donee organization to report a
contribution of a qualified vehicle with a claimed value of more
than $500. Notice 2006–1 modified.
Announcemen
t 2007–82, page 749.
A list is prov
ided of organizations now classified as private foun-
dations.
Announcement 2007–87, page 753.
This announcement describes rules under section 509
of the Code that the Treasury Department and the IRS
anticipate proposing in a notice of proposed rulemaking
(REG–155929–06) regarding (1) the payout requirements
for Type III supporting organizations that are not functionally
integrated, and (2) the criteria for determining whether a
Type III supporting organization is functionally integrated. It
also addresses some additional matters regarding Type III
supporting organizations in response to changes in the law
made by the Pension Protection Act of 2006.
EMPLOYME
NT TAX
Notice 20
07–76, page 735.
This noti
ce delays the effective date of Rev. Rul. 2006–57,
2006–47 I
.R.B. 911. Rev. Rul. 2007–57 provides guidance
to employ
ers on the use of smartcards or other electronic me-
dia to pro
vide qualified transportation fringes under sections
132(a)(
5)and(f)oftheCode.Theguidanceisintendedtopro-
vide rel
ief to mass transit providers that are currently finding
it diffi
cult to update their present systems in order to comply
with the
Rev. Rul. 2006–57 guidelines prior to the effective
date. Re
v. Rul. 2006–57 modified.
ADMINISTRATIVE
Announcement 2007–79, page 749.
This document contains corrections to proposed regulations
(REG–138707–06, 2007–32 I.R.B. 342) that modify final reg-
ulations issued under sections 883(a) and (c) of the Code, re-
lating to income derived by foreign corporations from the inter-
national operation of ships or aircraft.
Announcement 2007–83, page 752.
This document contains a correction to final and temporary
regulations (T.D. 9332, 2007–32 I.R.B. 300) that relate to the
exclusion from gross income derived by certain foreign corpo-
rations engaged in the international operation of ships or air-
craft.
October 1, 20072007–40 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and 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 Sec-
retary (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.
2007–40 I.R.B.October 1, 2007

Actions Relating to Decisions of the Tax Court
It is the policy of the Internal Rev-
enue Service to announce at an early date
whether it will follow the holdings in cer-
tain cases. An Action on Decision is the
document making such an announcement.
An Action on Decision will be issued at
the discretion of the Service only on unap-
pealed issues decided adverse to the gov-
ernment. Generally, an Action on Decision
is issued where its guidance would be help-
ful to Service personnel working with the
same or similar issues. Unlike a Treasury
Regulation or a Revenue Ruling, an Action
on Decision is not an affirmative statement
of Service position. It is not intended to
serve as public guidance and may not be
cited as precedent.
Actions on Decisions shall be relied
upon within the Service only as conclu-
sions applying the law to the facts in the
particular case at the time the Action on
Decision was issued. Caution should be
exercised in extending the recommenda-
tion of the Action on Decision to similar
cases where the facts are different. More-
over, the recommendation in the Action on
Decision may be superseded by new legis-
lation, regulations, rulings, cases, or Ac-
tions on Decisions.
Prior to 1991, the Service published
acquiescence or nonacquiescence only in
certain regular Tax Court opinions. The
Service has expanded its acquiescence
program to include other civil tax cases
where guidance is determined to be help-
ful. Accordingly, the Service now may
acquiesce or nonacquiesce in the holdings
of memorandum Tax Court opinions, as
well as those of the United States District
Courts, Claims Court, and Circuit Courts
of Appeal. Regardless of the court decid-
ing the case, the recommendation of any
Action on Decision will be published in
the Internal Revenue Bulletin.
The recommendation in every Action
on Decision will be summarized as ac-
quiescence, acquiescence in result only,
or nonacquiescence. Both “acquiescence”
and “acquiescence in result only” mean
that the Service accepts the holding of
the court in a case and that the Service
will follow it in disposing of cases with
the same controlling facts. However, “ac-
quiescence” indicates neither approval
nor disapproval of the reasons assigned
by the court for its conclusions; whereas,
“acquiescence in result only” indicates
disagreement or concern with some or all
of those reasons. “Nonacquiescence” sig-
nifies that, although no further review was
sought, the Service does not agree with
the holding of the court and, generally,
will not follow the decision in disposing
of cases involving other taxpayers. In
reference to an opinion of a circuit court
of appeals, a “nonacquiescence” indicates
that the Service willnot follow the hold-
ing on a nationwide basis. However, the
Service will recognize the precedential
impact of the opinion on cases arising
within the venue of the deciding circuit.
The Actions on Decisions published in
the weekly Internal Revenue Bulletin are
consolidated semiannually and appear in
the first Bulletin for July and the Cumula-
tive Bulletin for the first half of the year. A
semiannual consolidation also appears in
the first Bulletin for the following January
and in the Cumulative Bulletin for the last
half of the year.
The Commissioner does NOT ACQUI-
ESCE in the following decision:
United States v. Roxworthy,
1
457 F.3d 590 (6th Cir. 2006),
rev’g No. 04–MC–18–C
(W.D. Ky. Apr. 4, 2005)
1
Nonacquiescence relating to whether an accounting firm’s opinion letters, issued to a companywhile the company’s federal income tax return was being prepared, are protected by the work
product doctrine.
October 1, 20072007–40 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 805.—General
Deductions
A revenue procedure to provideasafeharborun-
der which companies taxable under Subchapter L do
not have to include any portion of the increase for the
taxable year in policy cash values of life insurance
contracts described in section 264(f)(4)(A) (“ICOLI
Contracts”) for purposes of applying the insur-
ance company proration rules in sections 807(a)(2),
807(b)(1), 805(a)(4), 812, or 832(b)(5). See Rev.
Proc. 2007-61, page 747.
Section 807.—Rules for
Certain Reserves
A revenue procedure to provideasafeharborun-
der which companies taxable under Subchapter L do
not have to include any portion of the increase for the
taxable year in policy cash values of life insurance
contracts described in section 264(f)(4)(A) (“ICOLI
Contracts”) for purposes of applying the insur-
ance company proration rules in sections 807(a)(2),
807(b)(1), 805(a)(4), 812, or 832(b)(5). See Rev.
Proc. 2007-61, page 747.
Section 812.—Definition
of Company’s Share and
Policyholders’ Share
A revenue procedure to provideasafeharborun-
der which companies taxable under Subchapter L do
not have to include any portion of the increase for the
taxable year in policy cash values of life insurance
contracts described in section 264(f)(4)(A) (“ICOLI
Contracts”) for purposes of applying the insur-
ance company proration rules in sections 807(a)(2),
807(b)(1), 805(a)(4), 812, or 832(b)(5). See Rev.
Proc. 2007-61, page 747.
Section 832.—Insurance
Company Taxable Income
A revenue procedure to provideasafeharborun-
der which companies taxable under Subchapter L do
not have to include any portion of the increase for the
taxable year in policy cash values of life insurance
contracts described in section 264(f)(4)(A) (“ICOLI
Contracts”) for purposes of applying the insur-
ance company proration rules in sections 807(a)(2),
807(b)(1), 805(a)(4), 812, or 832(b)(5). See Rev.
Proc. 2007-61, page 747.
Section 1045.—Rollover
of Gain From Qualified
Small Business Stock to
Another Qualified Small
Business Stock
26 CFR 1.1045–1: Application to partnerships.
T.D. 9353
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Section 1045 Application to
Partnerships
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations relating to the application
of section 1045 of the Internal Revenue
Code (Code) to partnerships and their
partners. These regulations provide rules
regarding the deferral of gain on a part-
nership’s sale of qualified small business
stock (QSB stock) and a partner’s sale of
QSB stock distributed by a partnership.
These regulations also provide rules for a
taxpayer (other than a C corporation) who
sells QSB stock and purchases replace-
ment QSB stock through a partnership.
The regulations affect partnerships that
invest in QSB stock and their partners.
DATES:Effective Date:These regulations
are effective August 14, 2007.
Applicability Dates:For dates of
applicability of these regulations, see
§1.1045–1(j).
FOR FURTHER INFORMATION
CONTACT: Jian H. Grant at (202)
622–3050 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–1893. Responses to these
collections of information are mandatory
andarerequiredtoobtainabenefit. The
collections of information in these final
regulations are in §1.1045–1(b)(3)(ii)(C),
(b)(5)(ii), and (c)(4)(ii). The informa-
tion collected in §1.1045–1(b)(5)(ii) is
required to ensure that gain from the sale
of QSB stock by a partnership is reported
correctly. The information collected in
§1.1045–1(b)(3)(ii)(C) and (c)(4)(ii) will
be used by the partnership and the partner
to make the basis adjustments upon the
sale of QSB stock and the purchase of
replacement QSB stock when necessary.
The likely respondents are businesses or
other for-profit institutions and small busi-
nesses or organizations.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Estimated total annual reporting bur-
den: 1,500 hours.
The estimated annual burden per re-
spondent varies from 45 to 75 minutes, de-
pending on individual circumstances, with
an estimated average of 1 hour.
Estimated number of respondents:
1,500.
Estimated annual frequency of re-
sponses: On occasion.
Comments concerning the accuracy
of this burden estimate and sugges-
tions for reducing this burden should
be sent to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224, and to theOffice of Manage-
ment and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to these col-
lections of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
return information are confidential, as re-
quired by 26 U.S.C. 6103.
2007–40 I.R.B.721October 1, 2007

Background
This document amends 26 CFR Part 1
under section 1045 of the Code by adding
§1.1045–1 regarding the application of
section 1045 to partnerships and their
partners.
Section 1045 permits a non-corporate
taxpayer that holds QSB stock for more
than six months and sells it after August
5, 1997, to elect to defer recognizing gain
(other than gain treated as ordinary in-
come) on the sale. To qualify for such
deferral, the taxpayer must purchase QSB
stock (replacement QSB stock) within a
60-day period beginning on the date of the
sale of the QSB stock. Any gain not recog-
nized reduces the cost basis of the replace-
ment QSB stock. The taxpayer recognizes
gain to the extent the amount realized on
the sale of the QSB stock exceeds the cost
basis of the replacement QSB stock. The
benefits of section 1045 with respect to a
sale of QSB stock by a partnership flow
through to a non-corporate partner that
held an interest in the partnership at all
times the partnership held the QSB stock.
See section 1045(b)(5) and the legislative
history accompanying section 6005(f)(2)
of the Internal Revenue Service Restruc-
turing and Reform Act of 1998, Public
Law 105–206 (112 Stat. 6005(f)(2)), July
22, 1998. In response to inquiries, the
IRS issued Rev. Proc. 98–48, 1998–2
C.B. 367, which provides procedures for
taxpayers (including passthrough enti-
ties and individuals holding interests in
a passthrough entity) to elect to apply
section 1045. Since Rev. Proc. 98–48
was published, the IRS and the Treasury
Department received further inquiries re-
garding the application of section 1045
to partnerships and their partners. See
§601.601(d)(2)(ii)(b)ofthischapter.
On July 15, 2004, in response to those
inquiries, a notice of proposed rule-
making and a notice of public hearing
(REG–150562–03, 2004–2 C.B. 175)
were published in theFederal Register
(69 FR 42370) regarding the application
of section 1045 to partnerships and their
partners. No one requested to speak at
the public hearing. Accordingly, the pub-
lic hearing scheduled for November 9,
2004, was cancelled in theFederal Reg-
ister(69 FR 62631) on October 27, 2004.
Comments responding to the proposed
regulations were received. After consid-
eration of the comments, the proposed
regulations are adopted as revised by this
Treasury decision.
Summary of Comments and
Explanation of Revisions
1.QSB Stock — Replacement QSB Stock
Requirement
The proposed regulations provided that
the term “QSB stock” had the same mean-
ing given such term by section 1202(c)
and did not include an interest in a part-
nership that held QSB stock. Thus, under
the proposed regulations, an investment
in a partnership that held QSB stock was
not treated as an investment in QSB stock.
Consequently, a partner that sold an inter-
est in a partnership that held QSB stock
was not treated as selling QSB stock, and
could not elect to apply section 1045 with
respect to gain realized on the sale of the
partnership interest.Similarly, under the
proposed regulations, a partner that made a
section 1045 election with respect to QSB
stock sold by the partnership could not
treat as replacement QSB stock an inter-
est in a second partnership that held QSB
stock.
Commentators agreed that an interest in
a partnership that owns QSB stock should
not be treated as an investment in QSB
stock. Some commentators, however, ar-
gued that the final regulations should per-
mit a partner that makes a section 1045
election with respect to QSB stock sold by
one partnership to satisfy the replacement
QSB stock requirement of section 1045 by
holding an interest in a partnership, which
acquires QSB stock within the statutory
period. Commentators believed that the
suggested rule is consistent with the intent
of Congress to encourage investments in
QSB stock.
The final regulations adopt this com-
ment. A taxpayer (other than a C corpo-
ration) that sells QSB stock and elects to
apply section 1045 may satisfy the replace-
ment QSB stock requirement with QSB
stock that is purchased within the statutory
period by a partnership in which the tax-
payer is a partner on the date the QSB stock
is purchased (purchasing partnership). In
addition, the final regulations provide that
an eligible partner of a partnership that
sells QSB stock (selling partnership) and
elects to apply section 1045 may satisfy
the replacement QSB stock requirement
with QSB stock purchased by a purchas-
ing partnership during the statutory period.
The IRS and the Treasury Department be-
lieve that these rules are appropriate be-
cause they are consistent with the underly-
ing continuous economic interest require-
ment of section 1045. Although the final
regulations permit the replacement QSB
stock requirement to be satisfied in this
manner, for the reasons stated, a partner
that sells its interest in the purchasing part-
nership is not treated as selling replace-
ment QSB stock.
The final regulations contain rules for
calculating a partner’sdistributive share of
partnership gain that is not recognized as a
result of an election under section 1045 by
the partner. These rules are necessary for
determining how much gain a partner can
defer upon a sale of QSB stock under sec-
tion 1045. These rules address instances
in which the eligible partner continues to
defer gain under section 1045 from a prior
sale or sales of QSB stock.
2.Basis Adjustments
The proposed regulations provided
rules regarding adjustments to an eligible
partner’s basis in a partnership interest and
a partnership’s basis in replacement QSB
stock. One rule required a partnership
to make a basis adjustment to the part-
nership’s replacement QSB stock by the
amount of gain from the partnership’s sale
of QSB stock that is deferred by an eligible
partner, the effect of which is determined
under the principles of §1.743–1(g), (h),
and (j). Under this rule, the basis adjust-
ments constitute an adjustment to the basis
of the partnership’s replacement QSB
stock with respect to that eligible partner
only. To allow the partnership to make
the appropriate basis adjustments, the pro-
posed regulations required any partner
that must recognize all or a part of the
partner’s distributive share of partnership
section 1045 gain to notify the partnership
of the amount of the partnership section
1045 gain that was recognized.
One commentator argued that many
partnerships that invest in QSB stock are
thinly staffed, and that they would in-
cur additional administrative expenses to
comply with the notification and basis
adjustment requirements. Therefore, the
commentator suggested that the partner
October 1, 20077222007–40 I.R.B.

make the basis adjustments with respect to
the partnership’s replacement QSB stock,
unless the partnership makes an election
to make the basis adjustments.
The IRS and the Treasury Department
believe that, if the partnership makes an
election under section 1045 and purchases
replacement QSB stock, the partnership
is the proper party to make the appropri-
ate basis adjustments with respect to that
stock. Accordingly, this comment is not
adopted. As noted below, a partnership
is not required to maintain these basis ad-
justments for eligible partners that sep-
arately make the election under section
1045. The final regulations also clarify
that if a partnership makes an election un-
der section 1045, the partnership must at-
tach a statement to the partnership return
for the taxable year in which the partner-
ship purchases replacement QSB stock set-
ting forth the computation of the adjust-
ment, the replacement QSB stock to which
the adjustment has been made, the date(s)
on which such stock was acquired by the
partnership, and each partner’s distributive
share of deferred partnership section 1045
gain.
If a taxpayer or an eligible partner
makes an election under section 1045
and treats its interest in QSB stock pur-
chased by a purchasing partnership as
its replacement QSB stock, the final reg-
ulations provide specific rules for the
determination of the partner’s basis in the
replacement QSB stock and interest in the
purchasing partnership. In these cases, the
partner’s adjusted basis in the partnership
interest is reduced by the partner’s gain
that is deferred under section 1045, and
the electing partner must reduce its share
of the partnership’s adjusted basis of the
replacement QSB stock by the amount of
gain deferred. When the basis reduction
results from a partner-level election, the
final regulations require the partner, rather
than the partnership, to retain records set-
ting forth the computation of this basis
adjustment, the replacement QSB stock
to which the adjustment has been made,
and the date(s) on which such stock was
acquired by the purchasing partnership.
3.Gain Recognition Upon Certain
Distributions
The final regulations provide rules re-
quiring a partner to recognize gain upon a
distribution of replacement QSB stock to
another partner thatreduces the partner’s
share of the replacement QSB stock held
by a partnership. The amount of gain that
the partner must recognize is determined
based on the amount of gain that the part-
ner would have recognized upon a sale
of the distributed replacement QSB stock
for its fair market value on the date of the
distribution (not to exceed the amount of
gain previously deferred by the partner
with respect to the distributed replacement
QSB stock). Any gain recognized by a
partner whose interest is reduced must be
taken into account in determining the ad-
justed basis of the partner’s interest in the
partnership and also taken into account in
determining the partnership’s adjusted ba-
sisintheQSBstockdistributedtoanother
partner under §1.1045–1(e)(4). These
rules apply in the case of a partner election
or a partnership election under section
1045.
4.Nonrecognition Limitation
The proposed regulations provided that
the amount of gain that an eligible partner
may defer under section 1045 may not ex-
ceed: (A) the partner’s smallest percent-
age interest in the partnership’s income,
gain, or loss with respect to the QSB stock
that was sold, multiplied by (B) the part-
nership’s realized gain from the sale of
such stock. This nonrecognition rule fol-
lows section 1202(g)(2) and (3) by ensur-
ing that the partner can defer recognition of
only the gain that relates to the partner’s
continuous economic interest in the QSB
stock that was sold.
Commentators agreed with the underly-
ing “continuous ownership” requirement
in the proposed regulations, but raised
concerns that the nonrecognition limita-
tion rule may be difficult to administer
when a partnership does not have a simple
“pro rata” partnership arrangement. One
commentator suggested that the nonrecog-
nition limitation rule only apply in certain
situations.
The IRS and the Treasury Department
continue to believe that a nonrecognition
limitation rule is consistent with section
1045 and the underlying continuous eco-
nomic interest requirement in section
1202(g)(2) and (3). The continuous eco-
nomic interest requirement as applied
under section 1202(c)(1)(B) requires that
QSB stock must be acquired by the tax-
payer at its original issuance in exchange
for money or other property or as com-
pensation for services provided to such
corporation. Taxpayers that invest through
a partnership acquire the requisite interest
for purposes of the continuous economic
interest requirement by an investment of
capital in the partnership. Accordingly, to
address the commentator’s concerns, the
nonrecognition rule has been modified to
provide that the amount of gain that an
eligible partner may defer under section
1045 may not exceed: (A) the partner’s
smallest percentage interest in partnership
capital from the time the QSB stock is ac-
quired until the time the QSB stock is sold,
multiplied by (B) the partnership’s real-
ized gain from the sale of such stock. The
IRS and the Treasury Department believe
that this nonrecognition rule in the final
regulations will be easier to administer, is
consistent with each partner’s economic
interest in the partnership, and will not
inappropriately limit the amount of gain
that can be deferred.
5.Opt Out of Partnership Election by
Partner
The proposed regulations allowed an el-
igible partner to make a section 1045 elec-
tion with respect to all or part of the part-
ner’s share of gain from the partnership’s
sale of QSB stock only if the partnership
did not make a section 1045 election, or the
partnership did make a section 1045 elec-
tion, but failed to purchase any (or enough)
replacement QSB stock within the statu-
tory time period. If a partnership elected
to apply section 1045 and purchased re-
placement QSB stock, all eligible partners
of the partnership were required to defer
their distributive shares of the partnership
section 1045 gain. One commentator sug-
gested that an eligible partner should be
allowed to opt out of a partnership sec-
tion 1045 election and either purchase sep-
arate replacement QSB stock directly, and
elect to apply section 1045 at the partner
level, or recognize the partner’s distribu-
tive share of the partnership section 1045
gain. The IRS and the Treasury Depart-
ment believe that allowing a partner to opt
out of a partnership section 1045 election
is consistent with providing the intended
and desired flexibility for investments in
QSB stock. Accordingly, this comment is
2007–40 I.R.B.723October 1, 2007

adopted. The final regulations provide that
a partner that elects out of a partnership’s
section 1045 election must notify the part-
nership in writing. If an eligible partner
opts out of a partnership section 1045 elec-
tion, such action does not constitute a revo-
cation of the partnership section 1045 elec-
tion and the partnership section 1045 elec-
tion continues to apply to the other part-
ners.
The final regulations do not impose a
deadline for when a partner must notify
the partnership that the partner is opting
out of a partnership section 1045 elec-
tion. The IRS and the Treasury Depart-
ment believe partnerships are responsible
for obtaining the required information to
report gain properly, and that the partner-
ship agreement should require that part-
ners supply this notice to the partnership
in a timely manner.
6.Tiered-partnership Rules
Under the proposed regulations, only an
eligible partner was entitled to defer gain
under section 1045. The proposed regula-
tions provided special rules for determin-
ing whether a partner was an eligible part-
ner if a partnership (upper-tier partnership)
held an interest in a partnership (lower-tier
partnership) that held QSB stock. The pro-
posed regulations disregarded the upper-
tier partnership’s ownership of the lower-
tier partnership and treated each partner of
the upper-tier partnership as owning an in-
terest in the lower-tier partnership directly.
The preamble to the proposed regulations
explained that, although this rule provided
a simple approach, it limited the availabil-
ity of section 1045 in situations involv-
ing tiered partnerships. The IRS and the
Treasury Department requested comments
specifically on the application of section
1045 in tiered-partnership situations.
Commentators suggested that an up-
per-tier partnership should be an “eligible
partner” of a lower-tier partnership and
allowed to make an election to defer
gain under section1045 with respect to
the distributive share of the gain from the
lower-tier partnership’s sale of QSB stock.
After careful consideration, the IRS and
the Treasury Department have concluded
that treating an upper-tier partnership as
an “eligible partner” of a lower-tier part-
nership would create an unacceptable
administrative burden and increased com-
plexity to the rules. Therefore, the final
regulations retain the rule in the proposed
regulations relating to tiered-partnership
structures. The final regulations, however,
clarify that the ruledoes not preclude a
partner in an upper-tier partnership from
treating its interest in QSB stock that
was purchased by either the upper-tier
partnership or a lower-tier partnership as
replacement QSB stock. The final regula-
tions contain an example illustrating this
rule.
7.Disregarded Entity Rules
One commentator suggested that the fi-
nal regulations set forth rules that are spe-
cific to disregarded entities. It has been de-
termined that this suggestion is beyond the
scope of the regulations and, therefore, is
not included in the final regulations.
8.Election Procedures and Reporting
Rules
The proposed regulations provided that
a partnership making a section 1045 elec-
tion must do so on the partnership’s timely
filed return (including extensions) for the
taxable year during which the partnership
sells the QSB stock. The proposed regu-
lations also provided that a partner mak-
ing an election under section 1045 with re-
spect to its distributive share of gain on the
partnership’s sale of QSB stock must do
so on the partner’s timely filed Federal in-
come tax return (including extensions) for
the taxable year in which such gain is taken
into account. The final regulations retain
these rules. However, in both cases, the
proposed regulations stated that the elect-
ing partnership or partner also must fol-
low the procedures of Rev. Proc. 98–48.
In contrast, the final regulations provide
that a partnership making an election un-
der section 1045 or a partner making an
election under section 1045 must do so in
accordance with the applicable forms and
instructions. It is anticipated that the ap-
plicable forms and instructions will be re-
vised to take into account the rules in the
final regulations.
Effective/Applicability Date
The final regulations apply to sales of
QSB stock on or after August 14, 2007.
Effect on Other Documents
Rev. Proc. 98–48, 1998–2 C.B. 367,
is modified to include the following sen-
tence at the end of the PURPOSE section:
“This revenue procedure does not ap-
ply in situations described in §1.1045–1
of the Income Tax regulations.” See
§601.601(d)(2)(ii)(b) of this chapter.
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. It is
hereby certified that the collection of infor-
mation in these regulations will not have a
significant economic impact on a substan-
tial number of small entities. This certi-
fication is based upon the fact that QSB
stock is not held by a substantial number
of small entities and that the time required
to make the election is estimated to aver-
age 1 hour. Therefore, a Regulatory Flexi-
bility Analysis under the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) is not re-
quired. Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
that preceded these regulations was sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regu-
lations is Jian H. Grant, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and the Treasury
Department participated in their develop-
ment.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1045–1 is added to
read as follows:
October 1, 20077242007–40 I.R.B.

§1.1045–1 Application to partnerships.
(a)Overview of section. A partner-
ship that holds qualified small business
stock (QSB stock) (as defined in para-
graph (g)(1) of this section) for more than
6 months, sells such QSB stock, and pur-
chases replacement QSB stock (as defined
in paragraph (g)(2) of this section) may
elect to apply section 1045. An eligible
partner (as defined in paragraph (g)(3) of
this section) of a partnership that sells QSB
stock, may elect to apply section 1045
if the eligible partner purchases replace-
ment QSB stock directly or through a pur-
chasing partnership (as defined in para-
graph (c)(1)(i) of this section). A tax-
payer (other than a C corporation) that
holds QSB stock for more than 6 months,
sells such QSB stock and purchases re-
placement QSB stock through a purchas-
ing partnership may elect to apply section
1045. A section 1045election is revoca-
ble only with the prior written consent of
the Commissioner. To obtain the Commis-
sioner’s prior written consent, the person
who made the section 1045 election must
submit a request for a private letter rul-
ing. (For further guidance, see Rev. Proc.
2007–1, 2007–1 C.B. 1 (or any applica-
ble successor) and §601.601(d)(2)(ii)(b)of
this chapter.) Paragraph (b) of this section
provides rules for partnerships that elect to
apply section 1045. Paragraph (c) of this
section provides rules for certain taxpayers
other than C corporations and for eligible
partners that elect toapply section 1045.
Paragraph (d) of this section provides a
limitation on the amount of gain that an
eligible partner does not recognize under
section 1045. Paragraph (e) of this section
provides rules for partnership distributions
of QSB stock to an eligible partner. Para-
graph (f) of this section provides rules for
contributions of QSB stock or replacement
QSB stock to a partnership. Paragraph (g)
of this section provides definitions of cer-
tain terms used in section 1045 and this
section. Paragraph (h) of this section pro-
vides reporting rules for partnerships and
partners that elect toapply section 1045.
Paragraph (i) of this section provides ex-
amples illustrating the provisions of this
section. Paragraph (j) of this section con-
tains the effective date.
(b)Partnership election—(1)Partner-
ship purchase of replacement QSB stock.
A partnership that holds QSB stock for
more than 6 months, sells such QSB stock,
and purchases replacement QSB stock
may elect in accordance with paragraph
(h)ofthissectiontoapplysection1045.
If the partnership elects to apply section
1045, then, subject to the provisions of
paragraphs (b)(4) and (d) of this section,
each eligible partner shall not recognize
its distributive share of any partnership
section 1045 gain (as determined under
paragraph (b)(2) of this section). For this
purpose, partnership section 1045 gain
equals the partnership’s gain from the sale
of the QSB stock reduced by the greater
of—
(i) The amount of the gain from the sale
of the QSB stock that is treated as ordinary
income; or
(ii) The excess of the amount realized
by the partnership on the sale over the to-
tal cost of all replacement QSB stock pur-
chased by the partnership (excluding the
cost of any replacement QSB stock pur-
chased by the partnership that is otherwise
taken into account under section 1045).
(2)Partner’s distributive share of part-
nership section 1045 gain. A partner’s dis-
tributive share of partnership section 1045
gain shall be in the same proportion as
the partner’s distributive share of the part-
nership’s gain from the sale of the QSB
stock. For this purpose, the partnership’s
gain from the sale of QSB stock and the
partner’s distributive share of that gain are
determined without regard to basis adjust-
ments under section 743(b) and paragraph
(b)(3)(ii) of this section.
(3)Basis adjustments—(i)Partner’s in-
terest in a partnership. The adjusted basis
of an eligible partner’s interest in a partner-
ship shall not be increased under section
705(a)(1) by gain from a partnership’s sale
of QSB stock that is not recognized by the
partner as the result of a partnership elec-
tion under paragraph (b)(1) of this section.
(ii)Partnership’s replacement QSB
stock—(A)Rule. The basis of a partner-
ship’s replacement QSB stock is reduced
(in the order acquired) by the amount of
gain from the partnership’s sale of QSB
stock that is not recognized by an eligi-
ble partner as a result of the partnership’s
election under section 1045. The basis
adjustment with respect to any amount
described in this paragraph (b)(3)(ii) con-
stitutes an adjustment to the basis of the
partnership’s replacement QSB stock with
respect to that partner only. The effect of
such a basis adjustment is determined un-
der the principles of §1.743–1(g), (h), and
(j) except as modified in this paragraph
(b)(3)(ii)(A). If a partnership sells QSB
stock with respect to which a basis adjust-
ment has been made under this paragraph
(b)(3)(ii), and the partnership makes an
election under paragraph (b)(1) of this sec-
tion with respect to the sale and purchases
replacement QSB stock, the basis adjust-
ment shall carry over to the replacement
QSB stock except to the extent otherwise
provided in this paragraph (b)(3)(ii). The
basis adjustment that carries over to the
replacement QSB stock shall be reduced
(but not below zero) by the eligible part-
ner’s distributive share of the excess, if
any, of the greater of the amount deter-
mined under paragraph (b)(1)(i) or (ii)
of this section from the sale of the QSB
stock, over the partnership’s gain from the
sale of the QSB stock (determined without
regard to basis adjustments under section
743 or paragraph (b)(3)(ii) of this section).
The excess amount that reduces the basis
adjustment shall be accounted for as gain
in accordance with §1.743–1(j)(3). See
Example 5of paragraph (i) of this section.
For purposes of this paragraph (b)(3)(ii),
a partnership must presume that a part-
ner did not recognize that partner’s dis-
tributive share of the partnership section
1045 gain as a result of the partnership’s
section 1045 election unless the partner
notifies the partnership to the contrary as
described in paragraph (b)(5)(ii) of this
section. However, if a partnership knows
that a particular partner is classified, for
Federal tax purposes, as a C corporation,
then the partnership may presume that the
partner did not defer recognition of its
distributive share of the partnership sec-
tion 1045 gain, even in the absence of a
notification by the partner. If a partnership
makes an election under section 1045, but
an eligible partner opts out of the election
under paragraph (b)(4) of this section and
provides to the partnership the notifica-
tion required under paragraph (b)(5)(ii) of
this section, no basis adjustments under
this paragraph (b)(3)(ii) are required with
respect to that partner as a result of the
section 1045 election by the partnership.
(B)Tiered-partnership rule.Ifapart-
nership (upper-tier partnership) holds an
interest in another partnership (lower-tier
partnership) that makes an election under
section 1045, the portion of the lower-tier
2007–40 I.R.B.725October 1, 2007

partnership’s basis adjustment as provided
in paragraph (b)(3)(ii)(A) of this section
in the replacement QSB stock must be
segregated and allocated to the upper-tier
partnership and any eligible partner as de-
fined in paragraph (g)(3)(iii) of this sec-
tion. Similarly, that portion of the ba-
sis of the upper-tier partnership’s inter-
est in the lower-tier partnership attribut-
able to the basis adjustment as provided
in paragraph (b)(3)(ii)(A) of this section
in the lower-tier partnership’s replacement
QSB stock must be segregated and allo-
cated solely to any eligible partner as de-
fined in paragraph (g)(2)(iii) of this sec-
tion.
(C)Statement of adjustments.Apart-
nership that must adjust the basis of re-
placement QSB stock under this paragraph
(b) must attach a statement to the partner-
ship return for the taxable year in which
the partnership purchases replacement
QSB stock setting forth the computation
of the adjustment, the replacement QSB
stock to which the adjustment has been
made, the date(s) on which such QSB
stock was acquired by the partnership,
and the amount of the adjustment that is
allocated to each partner.
(4)Eligible partners may opt out of
partnership’s section 1045 election.An
eligible partner may opt out of the partner-
ship’s section 1045 election with respect to
QSB stock either by recognizing the part-
ner’s distributive share of the partnership
section1045gain,orbymakingapartner
section 1045 election under paragraph (c)
of this section with respect to the partner’s
distributive share of the partnership sec-
tion 1045 gain. See paragraph (b)(5)(ii) of
this section for applicable notification re-
quirements. Opting out of a partnership’s
section 1045 election under this paragraph
(b)(4) does not constitute a revocation of
the partnership’s election, and such elec-
tion shall continue to apply to other part-
ners of the partnership.
(5)Notice requirements—(i)Partner-
ship notification to partners. A partner-
ship that makes an election under para-
graph (b)(1) of this section must notify all
of its partners of the election and the pur-
chase of replacement QSB stock, in accor-
dance with the applicable forms and in-
structions, and separately state each part-
ner’s distributive share of partnership sec-
tion 1045 gain from the sale of QSB stock
under section 702. Each partner shall de-
termine whether the partner is an eligible
partner within the meaning of paragraph
(g)(3) of this section and report the part-
ner’s distributive share of partnership sec-
tion 1045 gain from the partnership’s sale
of QSB stock, including gain not recog-
nized, in accordance with the applicable
forms and instructions.
(ii)Partner notification to partnership.
Any partner that must recognize all or part
of the partner’s distributive share of part-
nership section 1045 gain must notify the
partnership, in writing, of the amount of
partnership section 1045 gain that is recog-
nized by the partner. Similarly, an eligible
partner that opts out of a partnership’s sec-
tion 1045 election under paragraph (b)(4)
of this section must notify the partnership,
in writing, that the partner is opting out of
the partnership’s section 1045 election.
(c)Partner election—(1)In gen-
eral—(i)Rule. An eligible partner of
a partnership that sells QSB stock (sell-
ing partnership) may elect in accordance
with paragraph (h) of this section to apply
section 1045 if replacement QSB stock
is purchased by the eligible partner. An
eligible partner of a selling partnership
may elect in accordance with paragraph
(h) of this section to apply section 1045
if replacement QSB stock is purchased by
a partnership in which the taxpayer is a
partner (directly or through an upper-tier
partnership) on the date on which the
partnership acquires the replacement QSB
stock (purchasing partnership). A tax-
payer other that a C corporation that sells
QSB stock held for more than 6 months
at the time of the sale may elect in accor-
dance with paragraph (h) of this section
to apply section 1045 if replacement QSB
stock is purchased by a purchasing part-
nership (including a selling partnership).
(ii)Partner purchase of replacement
QSB stock. Subject to paragraph (d) of
this section, an eligible partner of a selling
partnership that elects to apply section
1045 with respect to the eligible partner’s
purchase of replacement QSB stock must
recognize its distributive share of gain
from the sale of QSB stock by the selling
partnership only to the extent of the greater
of—
(A) The amount of the eligible partner’s
distributive share of the selling partner-
ship’s gain from the sale of the QSB stock
that is treated as ordinary income; or
(B) The excess of the eligible partner’s
share of the selling partnership’s amount
realized (as determined under paragraph
(c)(2) of this section) on the sale by the
selling partnership of the QSB stock (ex-
cluding the cost of any replacement QSB
stock purchased by the selling partner-
ship) over the cost of any replacement
QSB stock purchased by the eligible part-
ner (excluding the cost of any replacement
QSB stock that is otherwise taken into
account under section 1045).
(iii)Partnership purchase of replace-
ment QSB stock—(A)Partner of a selling
partnership. Subject to paragraph (d) of
this section, an eligible partner that treats
its interest in QSB stock purchased by a
purchasing partnership as a purchase of re-
placement QSB stock by the eligible part-
ner and that elects to apply section 1045
with respect to such purchase must rec-
ognize its total gain (the eligible partner’s
distributive share of gain from the selling
partnership’s sale of QSB stock and any
gain taken into account under paragraph
(c)(5) of this section from the sale of re-
placement QSB stock) only to the extent
of the greater of—
(1) The amount of the eligible partner’s
distributive share of the selling partner-
ship’s gain from the sale of the QSB stock
that is treated as ordinary income; or
(2) The excess of the eligible partner’s
share of the selling partnership’s amount
realized (as determined under paragraph
(c)(2) of this section) on the sale by the
selling partnership of the QSB stock (ex-
cluding the cost of any replacement QSB
stock purchased by the selling partner-
ship) over the eligible partner’s share of
the purchasing partnership’s cost of the
replacement QSB stock, as determined
under paragraph (c)(3) of this section (ex-
cluding the cost of any QSB stock that is
otherwise taken intoaccount under section
1045).
(B)Taxpayer other than a C corpora-
tion. Subject to paragraph (d) of this sec-
tion, a taxpayer other than a C corporation
that treats its interest in QSB stock pur-
chased by a purchasing partnership with
respect to which the taxpayer is a partner
as a purchase of replacement QSB stock by
the taxpayer must recognize its gain from
the sale of the QSB stock only to the extent
of the greater of—
October 1, 20077262007–40 I.R.B.

(1) The amount of gain from the sale of
the QSB stock that is treated as ordinary
income; or
(2) The excess of the amount real-
ized by the taxpayer on the sale of the
QSB stock over the partner’s share of
the purchasing partnership’s cost of the
replacement QSB stock, as determined
under paragraph (c)(3) of this section (ex-
cluding the cost of any QSB stock that is
otherwise taken into account under section
1045).
(2)Eligible partner’s share of amount
realized by partnership—(i)—General
rule. The eligible partner’s share of the
amount realized by the selling partnership
is the amount realized by the partnership
on the sale of the QSB stock (excluding
the cost of any replacement QSB stock
otherwise taken into account under section
1045) multiplied by the following frac-
tion—
(A) The numerator of which is the eligi-
ble partner’s distributive share of the part-
nership’s realized gain from the sale of the
QSB stock; and
(B) The denominator of which is the
partnership’s realized gain on the sale of
the QSB stock.
(ii)General rule modified for determin-
ing eligible partner’s share of amount real-
ized by purchasing partnership upon a sale
of replacement QSB stock in certain situa-
tions—(A)No gain realized or loss real-
ized on sale of replacement QSB stock.If
a purchasing partnership does not realize
a gain or realizes a loss from the sale of
replacement QSB stock for which an elec-
tion under this section was made for pur-
poses of applying paragraph (c)(1)(iii)(A)
of this section, the eligible partner’s share
of the amount realized is—
(1) The greater of—
(i) The amount determined in paragraph
(c)(2)(i) of this section from a prior sale
of QSB stock (that is not otherwise taken
into account under paragraph (c)(2) of this
section) in which the eligible partner had a
distributive share of gain allocated to the
eligible partner that was not recognized
under paragraph (c)(1)(iii)(A) of this sec-
tion; or
(ii) The amount realized by a taxpayer
other than a C corporation from a prior
sale of QSB stock (that is not otherwise
taken into account under paragraph (c)(2)
of this section) in which the taxpayer re-
alized gain that was not recognized under
paragraph (c)(1)(iii)(B) of this section; less
(2) The eligible partner’s distributive
share of any loss recognized on the sale of
replacement QSB stock, if applicable.
(B)Eligible partner’s interest in pur-
chasing partnership is reduced and gain
realized on sale of replacement QSB stock.
If an eligible partner’s interest in a pur-
chasing partnership is reduced subsequent
to the sale of QSB stock and the purchas-
ing partnership realizes a gain from the
sale of the replacement QSB stock, the el-
igible partner’s share of the amount re-
alized upon a sale of replacement QSB
stock must be determined under paragraph
(c)(2)(i) of this section based on the dis-
tributive share of the partnership’s realized
gain that would have been allocated to the
eligible partner if the eligible partner’s in-
terest in the partnership had not been re-
duced.
(iii)Eligible partner’s share of the
amount realized. For purposes of de-
termining the eligible partner’s share of
the amount realized by the partnership, the
partnership’s realized gain from the sale of
QSB stock and the eligible partner’s dis-
tributive share of that gain are determined
without regard to basis adjustments under
section 743(b) and paragraphs (b)(3)(ii)
and (c) of this section.
(3)Partner’s share of the cost of QSB
stock purchased by a purchasing partner-
ship. The partner’s share of the cost (ad-
justed basis) of replacement QSB stock
purchased by a purchasing partnership is
the percentage of the partnership’s future
income and gain, if any, that is reasonably
expected to be allocated to the partner (de-
termined without regard to any adjustment
under section 1045) with respect to the re-
placement QSB stock that was purchased
by the partnership, multiplied by the cost
of that replacement QSB stock. The as-
sumptionsmadebyapartnershipindeter-
mining the reasonably expected allocation
of income and gain must be consistent for
each partner. For example, a partnership
may not treat the same item of income or
gain as being reasonably expected to be al-
located to more than one partner.
(4)Basis adjustments—(i)Eligible
partner’s interest in selling partnership.
Under section 705(a)(1), the adjusted ba-
sis of an eligible partner’s interest in a
selling partnership that sells QSB stock
is increased by the partner’s distributive
share of gain without regard to paragraph
(c)(1) of this section. However, if the
selling partnership is also a purchasing
partnership, the adjusted basis of an eligi-
ble partner’s interest in a partnership that
sells QSB stock may be reduced under
paragraph (c)(4)(iii) of this section.
(ii)Replacement QSB stock.Apart-
ner’s basis in any replacement QSB stock
that is purchased by the partner, as well as
the adjusted basis of any replacement QSB
stock that is purchased by a purchasing
partnership and that is treated as the part-
ner’s replacement QSB stock must be re-
duced (in the order replacement QSB stock
is acquired by the partner and purchasing
partnership, as applicable) by the partner’s
distributive share of the gain on the sale of
the selling partnership’s QSB stock that is
not recognized by the partner under para-
graph (c)(1) of this section, or by the gain
on a sale of QSB stock by the partner that is
not recognized by the partner under section
1045, as applicable. If replacement QSB
stock is purchased by the purchasing part-
nership, the purchasing partnership shall
maintain its adjusted basis in the replace-
ment QSB stock without regard to any ba-
sis adjustments required by this paragraph
(c)(4)(ii). The eligible partner, however,
shall in computing its distributive share
of income, gain, loss and deduction from
the purchasing partnership with respect to
the replacement QSB stock take into ac-
count the variation between the adjusted
basis in the QSB stock as determined un-
der this paragraph (c)(4)(ii) and the ad-
justed basis determined without regard to
this paragraph (c)(4)(ii). A partner must
retain records setting forth the computa-
tion of this basis adjustment, the replace-
ment QSB stock to which the adjustment
has been made, and the date(s) on which
such stock was acquired. SeeExamples 7
and8of paragraph (i) of this section.
(iii)Partner’s basis in purchasing part-
nership interest. A partner that treats the
partner’s interest in QSB stock purchased
by a purchasing partnership as the part-
ner’s replacement QSB stock must reduce
(in the order replacement QSB stock is ac-
quired) the adjusted basis of the partner’s
interest in the purchasing partnership by
the partner’s distributive share of the gain
on the sale of the selling partnership’s QSB
stock that is not recognized by the part-
ner pursuant to paragraph (c)(1) of this sec-
tion, or by the gain on a sale of QSB stock
2007–40 I.R.B.727October 1, 2007

by the partner that is not recognized by
the partner under section 1045, as applica-
ble. Similarly, a partner of an upper-tier
partnership that treats the partner’s inter-
est in QSB stock purchased by a lower-tier
purchasing partnership as the partner’s re-
placement QSB stock must reduce (in the
order replacement QSBstock is acquired)
the adjusted basis of the partner’s interest
in the upper-tier partnership by the part-
ner’s distributive share of the gain on the
sale of the selling partnership’s QSB stock
that is not recognized by the partner pur-
suant to paragraph (c)(1) of this section, or
by the gain on a sale of QSB stock by the
partner that is not recognized by the part-
ner under section 1045, as applicable.
(iv)Increase in basis on sale of QSB
stock by purchasing partnership.Apart-
ner that recognizes gain under paragraph
(c)(5) of this section must increase the
adjusted basis of the partner’s interest in
the purchasing partnership under section
705(a)(1) by the amount of the gain recog-
nized by that partner. Similarly, a partner
in an upper-tier partnership that recognizes
gain under paragraph (c)(5) of this sec-
tion must increase the adjusted basis of the
partner’s interest in the upper-tier partner-
ship under section 705(a)(1) by the amount
of the gain recognized by that partner.
(5)Partner recognition of gain.Atthe
time that either the partner or the purchas-
ing partnership (whichever applies) sells
or exchanges replacement QSB stock, the
amount recognized by the partner is deter-
mined by taking into account the basis ad-
justments described in paragraph (c)(4)(ii)
of this section. Similarly, a partner of an
upper-tier partnership that owns an inter-
est in a lower-tier partnership that holds
replacement QSB stock must take into ac-
count the basis adjustments described in
paragraph (c)(4)(ii) of this section in deter-
mining the amount recognized by the part-
ner on a sale of the interest in the lower-tier
partnership by the upper-tier partnership
or the partner’s distributive share of gain
from the upper-tier partnership. See para-
graph (e)(4) of this section for rules ap-
plicable to certain distributions of replace-
ment QSB stock.
(d)Nonrecognition limitation—(1)In
general. For purposes of this section, the
amount of gain that an eligible partner does
not recognize under paragraphs (b)(1) and
(c)(1) of this section cannot exceed the
nonrecognition limitation. Except as oth-
erwise provided in paragraph (d)(2) of this
section, the nonrecognition limitation is
equal to the product of—
(i) The partnership’s realized gain from
the sale of the QSB stock, determined
without regard to any basis adjustment
under section 734(b) or section 743(b)
(other than basis adjustments described in
paragraph (b)(3)(ii) of this section); and
(ii) The eligible partner’s smallest per-
centage interest in partnership capital as
determined in paragraph (d)(2) of this sec-
tion. SeeExample 9of paragraph (i) of this
section.
(2)Eligible partner’s smallest percent-
age interest in partnership capital.An
eligible partner’s smallest percentage in-
terest in partnership capital is the eligible
partner’s percentage share of capital deter-
mined at the time of the acquisition of the
QSB stock as adjusted prior to the time the
QSB stock is sold to reflect any reduction
in the capital of the eligible partner includ-
ing a reduction as a result of a dispropor-
tionate capital contribution by other part-
ners, a disproportionate capital distribution
to the eligible partner or the transfer of an
interest by the eligible partner, but exclud-
ing income and loss allocations.
(3)Special rule for tiered partnerships.
For purposes of paragraph (d)(1)(ii) of this
section, if an eligible partner is treated as
owning an interest in a lower-tier purchas-
ing partnership through an upper-tier part-
nership, the eligible partner’s percentage
interest in the purchasing partnership shall
be proportionately adjusted to reflect the
eligible partner’s percentage interest in the
upper-tier partnership.
(e)Partnership distribution of QSB
stock to a partner—(1)In general.Sub-
ject to paragraphs (e)(2) and (3) of this
section, in the case of a partnership dis-
tributionofQSBstocktoapartner,the
partner shall be treated for purposes of this
section as—
(i) Having acquired such stock in the
same manner as the partnership; and
(ii) Having held such stock during any
continuous period immediately preceding
the distribution during which it was held
by the partnership. SeeExamples 10and
11of paragraph (i) of this section.
(2)Eligibility under section 1202(c).
Paragraph (e)(1) of this section does not
apply unless all eligibility requirements
with respect to QSB stock as defined in
section 1202(c) are met by the distributing
partnership with respect to its investment
in QSB stock.
(3)Distribution nonrecognition limita-
tion—(i)Generally. The amount of gain
that an eligible partner does not recognize
under this section on the sale of QSB stock
that was distributed by the partnership to
the partner cannot exceed the distribution
nonrecognition limitation. For this pur-
pose, the distribution nonrecognition limi-
tation is—
(A) The partner’s section 1045 amount
realized (determined under paragraph
(e)(3)(ii) of this section); reduced by
(B) The partner’s section 1045 ad-
justed basis (determined under paragraph
(e)(3)(iii) of this section).
(ii)Section 1045 amount realized—(A)
QSB stock received in liquidation of part-
ner’s interest and in certain nonliquidat-
ing distributions. If a partner receives QSB
stock from the partnership in a distribu-
tion in liquidation of the partner’s inter-
est in the partnership or as part of a series
of related distributions by the partnership
in which the partnership distributes all of
the partnership’s QSB stock of a particu-
lar type, then the partner’s section 1045
amount realized is the partner’s amount re-
alized from the sale of the distributed QSB
stock, multiplied by a fraction—
(1) The numerator of which is the
partner’s smallest percentage interest in
partnership capital determined under para-
graph (e)(3)(ii)(B)of this section; and
(2
) The denominator of which is the
partner’s percentage interest in that type
of QSB stock immediately after the dis-
tribution (determined under paragraph
(e)(3)(iv) of this section).
(B)Partner’s smallest percentage in-
terest in partnership capital.Apartner’s
smallest percentage interest in partnership
capital is the partner’s percentage share of
capital determined at the time of the acqui-
sition of the QSB stock as adjusted prior to
the time the QSB stock is distributed to the
partner to reflect any reduction in the capi-
tal of the partner including a reduction as a
result of a disproportionate capital contri-
bution by other partners, a disproportion-
ate capital distribution to the partner, or the
transfer of a capital interest by the partner,
but excluding income and loss allocations.
(C)QSB stock received in other distri-
butions. If a partner receives QSB stock
in a distribution from the partnership that
is not described in paragraph (e)(3)(ii)(A)
October 1, 20077282007–40 I.R.B.

of this section, the partner’s section 1045
amount realized is the partner’s amount re-
alized from the sale of the distributed QSB
stock multiplied by the partner’s smallest
percentage interest in partnership capital
determined under paragraph (e)(3)(ii)(B)
of this section.
(iii)Section 1045 adjusted basis—(A)
QSB stock received in liquidation of part-
ner’s interest and in certain nonliquidat-
ing distributions. If a partner receives QSB
stock from the partnership in a distribu-
tion in liquidation of the partner’s inter-
est in the partnership or as part of a series
of related distributions by the partnership
in which the partnership distributes all of
the partnership’s QSB stock of a particular
type, then the partner’s section 1045 ad-
justed basis is the product of—
(1) The partnership’s basis in all of the
QSB stock of the type distributed (with-
out regard to basis adjustments under sec-
tion 734(b) or section 743(b), other than
basis adjustments described in paragraphs
(b)(3)(ii) and (c)(4)(ii) of this section);
(2) The partner’s smallest percentage
interest in partnership capital determined
under paragraph (e)(3)(ii)(B) of this sec-
tion; and
(3) The proportion of the distributed
QSB stock that was sold by the partner.
(B)QSB stock received in other distri-
butions. If a partner receives QSB stock
in a distribution from the partnership that
is not described in paragraph (e)(3)(iii)(A)
of this section, the partner’s section 1045
adjusted basis is the product of—
(1) The partnership’s basis in the QSB
stocksoldbythepartner(withoutregard
to basis adjustments under section 734(b)
or section 743(b), other than basis adjust-
ments described in paragraphs (b)(3)(ii)
and (c)(4)(ii) of this section); and
(2) The partner’s smallest percentage
interest in partnership capital determined
under paragraph (e)(3)(ii)(B) of this sec-
tion.
(iv)Partner’s percentage interest in dis-
tributed QSB stock. For purposes of this
paragraph (e)(3), a partner’s percentage in-
terest in a type of QSB stock immediately
after a partnership distribution is the value
(as of the date of the distribution) of the
QSB stock distributed to the partner di-
vided by the value (as of the date of the dis-
tribution) of all of that type of QSB stock
that was acquired by the partnership.
(v)QSB stock of the same type. For pur-
poses of this paragraph (e)(3), QSB stock
will be of the same type as the distributed
QSB stock if it has the same issuer and
the same rights and preferences as the dis-
tributed QSB stock and was acquired by
the partnership at original issue.
(4)Distribution of replacement QSB
stock to a partner that reduces another
partner’s interest in the replacement QSB
stock. For purposes of this section, a
partner must recognize gain upon a dis-
tribution of replacement QSB stock to
another partner thatreduces the partner’s
share of the replacement QSB stock held
by a partnership. The amount of gain
that the partner must recognize is deter-
mined based on the amount of gain that
the partner would recognize upon a sale
of the distributed replacement QSB stock
for its fair market value on the date of the
distribution but not to exceed the amount
that was previously not recognized by the
partner under section 1045 with respect
to the distributed replacement QSB stock.
Any gain recognized by a partner whose
interest is reduced must be taken into ac-
count in determining the adjusted basis of
the partner’s interest in the partnership and
also taken into account in determining the
partnership’s adjusted basis in the QSB
stock distributed to another partner under
paragraph (e)(3) of this section.
(f)Contribution of QSB stock or re-
placement QSB stock to a partnership.
Section 721 applies to a contribution of
QSB stock to a partnership. Except as
provided in section 721(b), any gain that
was not recognized by the taxpayer un-
der section 1045 is not recognized when
the taxpayer contributes QSB stock to a
partnership in exchange for a partnership
interest. Stock that is contributed to a
partnership is not QSB stock in the hands
of the partnership. SeeExample 12of
paragraph (i) of this section.
(g)Definitions.For purposes of section
1045 and this section, the following terms
are defined as follows:
(1)Qualified small business stock.The
termqualified small business stock(QSB
stock) has the meaning provided in section
1202(c). The term “QSB stock” does not
include an interest in a partnership that pur-
chases or holds QSB stock. SeeExample
1of paragraph (i) of this section.
(2)Replacement QSB stock.Theterm
replacement QSB stockis any QSB stock
purchased within 60 days beginning on the
date of a sale of QSB stock.
(3)Eligible partner—(i)In general.
Exceptasprovidedinparagraphs (e)(1),
(g)(3)(ii), (iii) and (iv) of this section, an
eligible partner with respect to QSB stock
is a taxpayer other than a C corporation
that holds an interest in a partnership on
the date the partnership acquires the QSB
stock and at all times thereafter for more
than 6 months until the partnership sells or
distributes the QSB stock.
(ii)Acquisition by gift or at death.For
purposes of paragraph (g)(3)(i) of this sec-
tion, a taxpayer who acquires from a part-
ner (other than a C corporation) by gift or
at death an interest in a partnership that
holds QSB stock is treated as having held
the acquired interest in the partnership dur-
ing the period the partner (other than a
C corporation) held the interest in the part-
nership.
(iii)Tiered partnership. For purposes
of paragraph (g)(3)(i) of this section, if a
partnership (upper-tier partnership) holds
an interest in another partnership (lower-
tier partnership) that holds QSB stock, then
the upper-tier partnership’s ownership of
the lower-tier partnership is disregarded
and each partner of the upper-tier partner-
ship is treated as owning the interest in the
lower-tier partnership directly. The partner
of the upper-tier partnership is treated as
owning the interest in the lower-tier part-
nership during the period in which both—
(A) The partner of the upper-tier part-
nership held an interest in the upper-tier
partnership; and
(B) The upper-tier partnership held an
interest in the lower-tier partnership. See
Examples 3and4of paragraph (i) of this
section.
(iv)Multiple tiers of partnerships.
Principles similar to those described in
paragraph (g)(3)(iii) of this section apply
where a taxpayer holds an interest in a
lower-tier partnership through multiple
tiers of partnerships.
(4)Month(s). For purposes of this sec-
tion, the termmonth(s)means a period
commencing on the same numerical day of
any calendar month as the day on which
the QSB stock is sold and ending with the
close of the day preceding the numerically
corresponding day ofthe succeeding cal-
endar month or, if there is no correspond-
ing day, with the last day of the succeeding
calendar month.
2007–40 I.R.B.729October 1, 2007

(h)Reporting and election rules—(1)
Time and manner of making election.A
partnership making an election under sec-
tion 1045 (as described under paragraph
(b)(1) of this section) must do so on the
partnership’s timely filed (including ex-
tensions) Federal income tax return for the
taxable year during which the sale of QSB
stock occurs. A partner making an elec-
tion under section 1045 (as described un-
der paragraph (c)(1) of this section) must
do so on the partner’s timely filed (includ-
ing extensions) Federal income tax return
for the taxable year during which the part-
ner’s distributive share of the partnership’s
gain from the sale of the QSB stock is
taken into account by such partner under
section 706. In addition, a partnership or
partner making an election under section
1045 must make such election in accor-
dance with the applicable forms and in-
structions.
(2)Purchases, distributions, and sales
of QSB stock or replacement QSB stock
by partnerships. A partnership that pur-
chases, distributes to a partner, or sells
or exchanges QSB stock or replacement
QSB stock must provide information to
the Commissioner and to the partnership’s
partners to the extent provided by the ap-
plicable forms and instructions.
(3)Nonrecognition of gain by eligible
partners. An eligible partner that does not
recognize gain under section 1045 must
provide information to the Commissioner
to the extent provided by the applicable
forms and instructions.
(i)Examples. The provisions of this
section are illustrated by the following ex-
amples:
Example 1.Sale of a partnership interest.On
January 1, 2008, A, an individual, X, a C corpora-
tion, and Y, a C corporation,form PRS, a partnership.
A, X, and Y each contribute $250 to PRS and agree
to share all partnership items equally. PRS purchases
QSB stock for $750 on February 1, 2008. On Novem-
ber 4, 2008, A sells A’s interest in PRS for $500, re-
alizing $250 of capital gain. Under paragraph (g)(1)
of this section, an interest in a partnership that holds
QSB stock is not treated as QSB stock. Therefore,
the sale of an interest in a partnership that holds QSB
stock is not treated as a sale of QSB stock, and A
may not elect to apply section 1045 with respect to
A’s $250 gain from the sale of A’s interest in PRS.
Example 2.Election by partner; replacement by
partnership. (i) Assume the same facts as inExam-
ple 1,exceptthatAdoesnotsellA’sinterestinPRS.
Instead, PRS sells the QSB stock (QSB1 stock) for
$1,500 on November 3, 2008. PRS realizes $750 of
gain from the sale of the QSB1 stock (none of which
is treated as ordinary income) and allocates $250 of
gain to each of A, X, and Y. PRS does not make a sec-
tion 1045 election. On November 30, 2008, A con-
tributes $500 to ABC, a partnership, in exchange for
a 10 percent interest in ABC. ABC then purchases
QSB stock (QSB2 stock) for $5,000 on December 1,
2008. ABC has no other assets. A makes an elec-
tion under paragraph (c)(1) of this section and treats
A’s percentage interest in ABC’s QSB2 stock as re-
placement QSB stock under paragraph (c)(1)(iii) of
this section with respect to the $250 gain PRS allo-
cated to A. Under paragraph (c)(3) of this section,
A’s share of the cost of QSB2 stock purchased by
ABC is $500 (A’s reasonably expected income and
gain with respect to QSB2 stock, or 10 percent multi-
plied by the cost of the QSB2 stock, $5,000). Under
paragraph (c)(1)(iii) of this section, A will not recog-
nize the $250 gain PRS allocated to A, because A’s
share of the amount realized by PRS, $500 (the total
amount realized by the partnership on the sale of the
QSB1 stock ($1,500) multiplied by A’s share of the
gain from the sale of the QSB1 stock ($250) over the
total gain realized by the partnership on the sale of
the QSB1 stock ($750)), does not exceed A’s share
of ABC’s cost of the QSB2 stock acquired by ABC,
$500. Under paragraph (c)(4)(ii) of this section, A
must reduce A’s share of ABC’s basis in the QSB2
stock by $250. Under paragraph (c)(4)(iii) of this sec-
tion, A must reduce A’s basis in A’s interest in ABC
by $250. Under paragraph (c)(4)(i) of this section,
A’s basis in A’s interest in PRS is increased by $250.
(ii) Assume the same facts as in paragraph (i) of
thisExample 2, except that A does not contribute
$500 to ABC in exchange for apartnership interest.
Instead, on November 30, 2008, EFG, a partnership
in which A has an existing 10 percent partnership in-
terest, purchases QSB stock for $5,000. Under para-
graph (c)(1) of this section, A may treat A’s 10 per-
cent interest in EFG’s QSB stock as replacement QSB
stock with respect to the $250 of gain PRS allocated
to A.
(iii) Assume the same facts as in paragraph (i) of
thisExample 2, except that ABC owns QSB stock that
ABC purchased on November 10, 2008, and ABC
does not purchase QSB stock on December 1, 2008.
Under paragraph (c)(1) of this section, ABC is not a
purchasing partnership with respect to A for the QSB
stock ABC purchased on November 10, 2008. A may
not treat A’s percentage interest in ABC’s QSB stock
as replacement QSB stock to defer the $250 gain PRS
allocated to A, because A acquired its interest in ABC
after ABC acquired the QSB stock.
(iv) Assume the same facts as in paragraph (i) of
thisExample 2,exceptthatABCsellsQSB2stock
on July 30, 2009, for $5,000. ABC realizes no gain
or loss on the sale of QSB2 stock. A desires to con-
tinue to rollover the $250 gain from the sale of QSB1
stock. Under paragraph (c)(2)(ii)(A) of this section,
A’s share of the amount realized is $500, which was
A’s share of the amount realized on the prior sale of
QSB1 stock. Accordingly, A must elect to apply sec-
tion 1045 and purchase $500 of replacement QSB
stock either directly or through a purchasing partner-
ship to continue to defer the $250 gain from the sale
of QSB1 stock.
Example 3.Tiered partnerships; partnership
election. (i) On January 1, 2008, A, an individual,
and B, an individual, each contribute $500 to UTP,
(upper-tier partnership) for equal partnership inter-
ests. On February 1, 2008, UTP and C, an individual,
each contribute $1,000 to LTP, (lower-tier partner-
ship) for equal partnership interests. On March 1,
2008, LTP purchases QSB stock for $500. On April
1, 2008, D, an individual, joins UTP by contributing
$500 to UTP for a
1
/3interest in UTP. On December
1, 2008, LTP sells the QSB stock for $2000. Under
paragraph (g)(3)(iii) of this section, A, B, and D
are treated as owning an interest in LTP during the
period in which each of the partners held an interest
in UTP and UTP held an interest in LTP. Therefore,
under paragraphs (g)(3)(i) and (iii) of this section, A
and B are eligible partners, and D and UTP are not
eligible partners with respect to the QSB stock sold
by LTP. Under paragraph (g)(3)(i) of this section, C
is also an eligible partner with respect to the QSB
stocksoldbyLTP.
(ii) Assume the same facts as in paragraph (i) of
thisExample 3.LTPrealizesagainof$1,500onthe
December 1, 2008, sale of QSB stock. LTP allocates
$750 of gain to each of UTP and C. UTP, in turn, al-
locates $250 (of the $750 of gain allocated to UTP) to
each of A, B, and D. LTP makes a section 1045 elec-
tion. On January 1, 2009, LTP purchases replacement
QSB stock for $2,000. Under paragraph (b)(5)(ii) of
this section, D notifies UTP that it recognizes $250 of
gain and UTP notifies LTP. Because A, B, and C are
eligible partners with respect to the QSB stock sold
by LTP, A and B may each defer $250 of LTP’s sec-
tion 1045 gain and C may defer $750 of LTP’s section
1045 gain. LTP must decrease its basis in the replace-
ment QSB stock by the $750 of partnership section
1045 gain that was allocated to C and by $500 of the
partnership section 1045 gain that was allocated to
UTP. These basis reductions are with respect to UTP
(A and B) and C only. Under paragraph (b)(3)(ii)(B)
of this section, the basis of UTP’s interest in LTP at-
tributable to the LTP’s replacement QSB stock must
be segregated and allocated to A and B. In addition,
A and B each have a $250 negative basis adjustment
in their respective interests in UTP. If UTP sells its
interest in LTP for $1,250, A and B would each rec-
ognize $250 of gain from the sale of the LTP interest.
D would not recognize any gain or loss from the sale.
Example 4.Tiered partnerships; partner election.
(i) On January 1, 2008, A, an individual, and X, a
C corporation, form UTP, a partnership. A and X
each contribute $250 to UTP and agree to share all
partnership items equally. Also, on January 1, 2008,
UTP and Y, a C corporation, form LTP, a partnership.
UTP and Y contribute $500 and $250, respectively, to
LTP. UTP and Y agree to share all partnership items
equally. LTP purchases QSB stock for $750 on Feb-
ruary 1, 2008. On November 3, 2008, LTP sells the
QSB stock for $1,500. LTP realizes $750 of gain
from the sale of the QSB stock (none of which is
treated as ordinary income) and allocates $250 gain
to Y and $500 gain to UTP. Of the $500 gain allocated
to UTP from the sale of QSB stock, $250 is allocated
to A and $250 is allocated to X. LTP purchases re-
placement QSB stock (replacement QSB1 stock) for
$1,350 on December 15, 2008. LTP does not make
an election under section 1045. Under the rules pro-
vided in paragraph (c) of this section, A makes an
election under section 1045 on its timely filed return
for the taxable year for which the distributive share of
gain from the sale of QSB stock is taken into account
by A under section 706. Under paragraph (c)(1)(iii)
of this section, A treats A’s interest in replacement
QSB1 stock as replacement stock with respect to A’s
October 1, 20077302007–40 I.R.B.

distributive share of LTP’s section 1045 gain. On
March 30, 2009, LTP sells replacement QSB1 stock
for $1,650. LTP realizes $300 of gain from the sale of
replacement QSB1 stock (none of which is treated as
ordinary income) and allocates $100 to Y and $200
to UTP.
(ii) Under paragraph (c)(1)(iii) of this section,
A must recognize its distributive share of gain from
LTP’s sale of QSB stock ($250) only to the extent
of the greater of A’s distributive share of LTP’s gain
from the sale of QSB stock that is treated as ordinary
income ($0) or the amount by which A’s share of
the amount realized by LTP’s sale of QSB stock
exceeds A’s share of LTP’s cost of the replacement
QSB1 stock, $50 (
1
/3
rd
of $1,500, or $500, minus
1
/3
rd
of $1,350, or $450). Because Y is not an eli-
gible partner of LTP under paragraph (g)(3) of this
section, Y must recognize its $250 distributive share
of partnership gain from the sale of the QSB stock.
Also, X is not an eligible partner under paragraph
(g)(3) of this section, and it must recognize its $250
distributive share of gain from UTP attributable to
UTP’s distributive share of $500 of LTP’s gain from
the sale of QSB stock.
(iii) Under section 705(a)(1), the adjusted basis
of Y’s interest in LTP is increased by $250, and the
adjusted basis of UTP’s interest in LTP is increased
by $500. Under section 705(a)(1), the adjusted basis
of X’s interest in UTP is increased by $250, and the
adjusted basis of A’s interest in UTP is increased by
$250. However, under paragraph (c)(4)(iii) of this
section, the adjusted basis of A’s interest in UTP is
reduced by the $200 of partnership section 1045 gain
that was not recognized by A.
(iv) Under paragraph (c)(4)(ii) of this section, the
LTP’s adjusted basis in replacement QSB1 stock is
reduced by the $200 of gain from the sale of QSB
stock that is not recognized by A, as a result of A’s
election under section 1045. A must retain records
setting forth the computation of this basis adjustment,
the replacement QSB stock to which the adjustment
is made, and dates the stock was acquired. LTP’s ad-
justed basis in the replacement QSB1 stock is main-
tained without regard to the eligible partner’s adjust-
ment provided in paragraph (c)(4)(ii) of this section.
(v) On the sale of replacement QSB1 stock, LTP
realizes a gain of $300, $100 of which is allocated to
Y and $200 of which is allocated to UTP. UTP allo-
cates$100ofthisgaintoA.Underparagraph(c)(5)
of this section, in determining A’s amount recognized
upon the sale of replacement QSB1 stock by LTP, A
must take into account A’s basis adjustment of $200.
Accordingly, A recognizes a total gain of $300 upon
the sale of replacement QSB1 stock, absent an addi-
tional section 1045 election by A or LTP. Under para-
graph (c)(4)(iv) of this section, the adjusted basis of
A’s interest in UTP is increased by $300 under sec-
tion 705(a)(1).
(vi) Assume the same facts as in paragraph (i) of
thisExample 4, except that UTP sells its entire in-
terest in LTP on March 30, 2009, for $1,200. UTP
realizes a gain of $200 on the sale of its interest in
LTP ($1,200 amount realized less $1,000 adjusted
basis) and allocates $100 of this gain to A. Under
paragraph (c)(5) of this section, in determining A’s
amount recognized upon the sale of UTP’s interest in
LTP, A must take into account A’s basis adjustment
of $200. Accordingly, A recognizes a total gain of
$300 upon the sale of the interest in LTP. Under para-
graph (c)(4)(iv) of this section, the adjusted basis in
A’s interest in UTP is increased by $300 under sec-
tion 705(a)(1).
Example 5.Partnership sale of QSB stock and
purchase and sale of replacement QSB stock.(i)On
January 1, 2008, A, an individual, X, a C corporation,
and Y, a C corporation, form PRS, a partnership. A,
X, and Y each contribute $250 to PRS and agree to
share all partnership items equally. PRS purchases
QSB stock for $750 on February 1, 2008. On Novem-
ber 3, 2008, PRS sells the QSB stock for $1,500. PRS
realizes $750 of gain from the sale of the QSB stock
(none of which is treated as ordinary income) and al-
locates $250 of gain to each of A, X, and Y. PRS pur-
chases replacement QSB stock (replacement QSB1
stock) for $1,350 on December 15, 2008. On its
timely filed return for the taxable year during which
the sale of the QSB stock occurs, PRS makes an elec-
tion to apply section 1045. A does not make an elec-
tion to apply section 1045 with respect to the Novem-
ber 3, 2008, sale of QSB stock. PRS knows that X
and Y are C corporations. On March 30, 2009, PRS
sells replacement QSB1 stock for $1,650. PRS real-
izes $300 of gain from the sale of replacement QSB1
stock (none of which is treated as ordinary income)
and allocates $100 of gain to each of A, X, and Y. A
does not make an election to apply section 1045 with
respect to the March 30, 2009, sale of replacement
QSB1 stock.
(ii) Under paragraph (b)(1) of this section, the
partnership section 1045 gain from the November 3,
2008, sale of QSB stock is $600 ($750 gain less $150
($1,500 amount realized on the sale of QSB stock
less $1,350 cost of replacement QSB1 stock)). This
amount must be allocated among the partners in the
same proportions as the entire gain from the sale of
QSB stock is allocated to the partners,
1
/3($200) to
A,
1
/3($200) to X, and
1
/3($200) to Y.
(iii) Because neither X nor Y is an eligible partner
under paragraph (g)(3) of this section, X and Y must
each recognize its $250 distributive share of partner-
ship gain from the sale of QSB stock. Because A is
an eligible partner under paragraph (g)(3) of this sec-
tion, A may defer recognition of A’s $200 distribu-
tive share of partnership section 1045 gain. A is not
required to separately elect to apply section 1045. A
must recognize A’s remaining $50 distributive share
of the partnership’s gain from the sale of QSB stock.
(iv) Under section 705(a)(1), the adjusted bases
of X’s and Y’s interests in PRS are each increased
by $250. Under section 705(a)(1) and paragraph
(b)(3)(i) of this section, the adjusted basis of A’s
interest in PRS is not increased by the $200 of part-
nership section 1045 gain that was not recognized by
A, but is increased by A’s remaining $50 distributive
share of gain.
(v) PRS must decrease its basis in the replacement
QSB1 stock by the $200 of partnership section 1045
gain that was allocated to A. This basis reduction is
a reduction with respect to A only. PRS then adjusts
A’s distributive share of gain from the sale of replace-
ment QSB1 stock to reflect the effect of A’s basis ad-
justment under paragraph (b)(3)(ii) of this section. In
accordance with the principles of §1.743–1(j)(3), the
amount of A’s gain from the March 30, 2009, sale
of replacement QSB1 stock in which A has a $200
negative basis adjustment equals $300 (A’s share of
PRS’s gain from the sale of replacement QSB1 stock
($100), increased by the amount of A’s negative basis
adjustment for replacement QSB1 stock ($200)). Ac-
cordingly, upon the sale of replacement QSB1 stock,
A recognizes $300 of gain, and X and Y each recog-
nize $100 of gain.
(vi) Assume the same facts as in paragraph (i) of
thisExample 5, except that PRS purchases replace-
ment QSB stock (replacement QSB2 stock) on April
15, 2009, for $1,150 and PRS makes an election to
apply section 1045 with respect to the March 30,
2009, sale of replacement QSB1 stock. Under para-
graph (b)(3)(ii)(A) of this section, PRS’ $200 basis
adjustment in QSB1 stock relating to the November
3, 2008, sale of QSB stock carries over to the basis
adjustment for QSB2 stock. This basis adjustment
is an adjustment with respect to A only. The $200
basis adjustment is reduced by A’s distributive share
of the excess of $500 (the greater of the amount de-
termined under paragraph (b)(1)(i), $0, or (ii) of this
section, $500 ($1,650 amount realized on the sale of
QSB1 stock less $1,150 cost of replacement QSB2
stock)) over $300 (PRS’ gain from the sale of QSB1
stock), or $67 ($200 ($500 minus $300) divided by
3). Under paragraph (b)(3)(ii)(A), A must account
for the $67 excess amount that reduces PRS’ basis
adjustment in QSB2 stock as gain in accordance with
§1.743–1(j)(3). Therefore, A now has a $133 neg-
ative basis adjustment with respect to replacement
QSB2 stock (($200) negative basis adjustment from
the November 3, 2008, sale of QSB stock plus $67
positive basis adjustment from the March 30, 2009,
sale of QSB1 stock). A also recognizes the $100 of
gain allocated by PRS to A from the March 30, 2009,
sale of replacement QSB1 stock for total gain recog-
nition of $167 ($100 plus $67).
Example 6.Partnership sale of QSB stock; elec-
tion by eligible partner; replacement QSB stock pur-
chased by purchasing partnership. (i) Assume the
samefactsasinExample 5except that PRS does not
make an election under section 1045 with respect to
the sale of either the QSB stock on November 3, 2008,
or the QSB1 stock on March 30, 2009. However, A
makes an election under section 1045 with respect to
the sale of QSB stock and treats the purchase of QSB1
stock on December 15, 2008, by PRS, as the purchase
of replacement QSB stock. Additionally, A makes an
election under section 1045 with respect to the sale of
QSB1 stock and treats the purchase of QSB2 stock on
April 15, 2009, by PRS, as the purchase of replace-
ment QSB stock.
(ii) A’s distributive share of gain from the Novem-
ber 3, 2008, sale of QSB stock is $250 (A’s
1
/3in-
terest in $750 of total PRS gain). Under paragraph
(c)(1)(iii) of this section, A must recognize only $50
of A’s distributive share of PRS’ gain of $250, that is
the excess of A’s share of the amount realized on the
sale of QSB stock, or $500 (the total amount realized
by PRS on the sale of QSB stock ($1,500) multiplied
by A’s share of the gain from the sale of QSB stock
($250) over the total gain realized by PRS on the sale
of QSB stock ($750)), minus A’s share of PRS’ cost
of QSB1 stock, or $450 (
1
/3of $1,350). Under sec-
tion 705(a)(1) and paragraph (c)(4)(i) of this section,
A’s adjusted basis in its interest in PRS is increased
by $250. However, under paragraph (c)(4)(iii) of this
section, because PRS is a purchasing partnership, A’s
adjusted basis of its interest in PRS is then reduced
by the deferred gain of $200. Also under paragraph
(c)(4)(ii) of this section, PRS’ adjusted basis in QSB1
stock is reduced by the gain not recognized of $200
2007–40 I.R.B.731October 1, 2007

and A must take into account such adjusted basis in
computing A’s income, gain, loss or deduction with
respect to QSB1 stock. A must retain records set-
ting forth the computation of this basis adjustment,
the replacement QSB stock to which the adjustment
is made, and dates the stock was acquired.
(iii) A’s distributive share of gain from the March
30, 2009, sale of QSB1 stock is $100 (A’s
1
/3interest
in $300 of total PRS gain) and under paragraph (c)(5)
of this section, A must take into account A’s $200
basis adjustment with respect to the QSB1 stock that
was sold. Accordingly, A’s total gain from the sale of
QSB1 stock is $300. Under paragraph (c)(1)(iii) of
this section, A must recognize only $167 of A’s to-
tal gain of $300, that is, the excess of A’s share of
theamountrealizedonthesaleofQSB1stock,or
$550 (the total amount realized by PRS on the sale
of QSB1 stock ($1,650) multiplied by A’s share of
the gain from the sale of QSB1 stock ($100) over the
total gain realized by PRS on the sale of QSB1 stock
($300)) minus A’s share of PRS’ cost of QSB2 stock,
or $383 (
1
/3of $1,150). Under section 705(a)(1), A’s
adjusted basis in A’s interest in PRS is increased by
A’s $100 distributive share of gain from the sale of
QSB1 stock. Under paragraph (c)(4)(iv) of this sec-
tion, A’s adjusted basis of A’s interest in PRS is in-
creased by the additional $67 of gain recognized un-
der paragraph (c)(5) of this section. Also, under para-
graph (c)(4)(ii) of this section, PRS’ adjusted basis
in QSB2 stock is reduced by the gain not recognized
of $133 ($300 minus $167) and A must take into ac-
count such adjusted basis in computing A’s income,
gain, loss or deduction with respect to QSB2 stock.
A must retain records setting forth the computation
of this basis adjustment, the replacement QSB stock
to which the adjustment is made, and dates the stock
was acquired.
Example 7.Partnership sale of QSB stock and
partner purchase of replacement QSB stock.(i)As-
sume the same facts as in paragraph (i) ofExample
5, except that PRS does not make an election un-
der section 1045 with respect to the sale of the QSB
stock and does not purchase replacement QSB stock.
On November 30, 2008, A, an eligible partner under
paragraph (g)(3) of this section, purchases replace-
ment QSB stock for $500. A elects pursuant to para-
graph (c) of this section to apply section 1045 on A’s
timely filed return for the taxable year that A is re-
quired to include A’s distributive share of PRS’ gain
fromthesaleoftheQSBstock.
(ii) Under paragraph (c)(2) of this section, A’s
share of the amount realized from PRS’ sale of the
QSB stock is $500 (the total amount realized by the
partnership on the sale of the QSB stock ($1,500)
multiplied by A’s share of the gain from the sale of
the QSB stock ($250) over the total gain realized by
the partnership on the sale of the QSB stock ($750)).
Because A purchased, within 60 days of PRS’ sale
of the QSB stock, replacement QSB stock for a cost
equal to A’s share of the partnership’s amount real-
ized on the sale of the QSB stock, and because A
made an election pursuant to paragraph (c) of this sec-
tion to apply section 1045, A defers recognition of A’s
$250 distributive share of gain from PRS’ sale of the
QSB stock. Under section 705(a)(1) and paragraph
(c)(4)(i) of this section, the adjusted basis of A’s in-
terest in PRS is increased by $250. Under paragraph
(c)(4)(ii) of this section, A’s adjusted basis in the re-
placement QSB stock is $250 ($500 cost minus $250
nonrecognition amount).
Example 8.Partial replacement by partnership;
partial replacement by partner. (i) On January 1,
2008, A, an individual, and X, a C corporation, form
PRS, a partnership. A and X each contribute $500 to
PRS and agree to share all partnership items equally.
PRS purchases QSB stock on February 1, 2008, for
$1,000 and subsequently sells the QSB stock on Jan-
uary 31, 2010, for $3,000. PRS realizes $2,000 of
gainfromthesaleoftheQSBstock(noneofwhich
is treated as ordinary income) and allocates $1,000
ofgaintoeachofAandX.OnFebruary10,2010,
PRS purchases replacement QSB stock for $2,200.
On March 20, 2010, A purchases replacement QSB
stock for $400. PRS makes an election to apply sec-
tion 1045 under paragraph (b)(1) of this section with
respect to the partnership section 1045 gain from the
sale of QSB stock and A does not opt out of PRS’
section 1045 election under paragraph (b)(4) of this
section. Also, A makes an election under paragraph
(c)(1) of this section with respect to the remaining
gain from the sale of the QSB stock.
(ii) Under paragraph (b)(1) of this section, part-
nershipsection1045gainis$1,200($2,000less$800
($3,000 amount realized on the sale of the QSB stock
minus $2,200 cost of the replacement QSB stock)).
This amount is allocated among the partners in the
same proportions as the entire gain from the sale of
the QSB stock is allocated to the partners,
1
/2to A
($600), and
1
/2to X ($600). Because A is an eligible
partner, A defers recognition of A’s $600 distributive
share of partnership section 1045 gain.
(iii) A also made an election under section 1045
and purchased, within 60 days of PRS’ sale of the
QSB stock, replacement QSB stock for $400. There-
fore, under paragraph (c)(1) of this section, A may
defer a portion of A’s distributive share of the remain-
ing gain from the partnership’s sale of the QSB stock.
A must recognize that remaining gain to the extent
that A’s share of the amount realized by PRS on the
sale of the QSB stock (excluding the cost of the QSB
stock that was replaced by PRS) exceeds the cost of
the replacement QSB stock purchased by A during
the 60-day period following the sale of the QSB stock.
The amount realized by PRS on the sale of the QSB
stock (excluding the cost of the QSB stock that was
replaced by PRS) is $800 ($3,000 minus $2,200). Un-
der paragraph (c)(2) of this section, A’s share of that
amount realized is $400 ($1,000 (A’s share of the re-
alized gain from the sale of the QSB stock) / $2,000
(PRS total realized gain from the sale of the QSB
stock) multiplied by $800). Because the replacement
QSB stock purchased by A cost $400, A defers recog-
nition of all of the remaining gain from the sale of the
QSB stock.
(iv) The adjusted basis of A’s interest in PRS is
not increased by the $600 gain that was not recog-
nized pursuant to paragraph (b)(1) of this section, but
is increased by the $400 gain that was not recognized
pursuant to paragraph (c)(1)of this section. See para-
graphs (b)(3)(i) and (c)(4)(i) of this section. PRS
must decrease its basis in the replacement QSB stock
by the $600 of partnership section 1045 gain that was
allocated to A. See paragraph (b)(3)(ii) of this sec-
tion. A must decrease A’s basis in the replacement
QSB stock purchased by A by the $400 not recog-
nized pursuant to paragraph (c)(1) of this section. See
paragraph (c)(4)(ii) of this section.
Example 9.Change in partner’s interest in part-
nership while partnership holds QSB stock.(i)On
January 1, 2008, A, an individual, and X, a C corpo-
ration, form PRS, a partnership. A and X each con-
tribute $500 to PRS and agree to share all partnership
items equally. PRS purchases QSB stock on Febru-
ary 1, 2008, for $1,000. On August 2, 2008, A sells a
25 percent interest in PRS to Z. On July 10, 2009, A
repurchases the 25 percent interest from Z for $500.
PRS makes a timely election under section 754 for
the 2008 taxable year. Under section 743(b), A has
a positive basis adjustment of $250. On January 31,
2011, PRS sells the QSB stock for $3,000. PRS re-
alizes $2,000 of gain from the sale of the QSB stock
(none of which is treated as ordinary income) and al-
locates $1,000 of gain to each of A and X. On Febru-
ary 10, 2010, PRS purchases replacement QSB stock
for $3,000. PRS makes an election to apply section
1045 under paragraph (b)(1) of this section with re-
spect to the partnership section 1045 gain from the
sale of QSB stock.
(ii) Of the $2,000 of realized gain from the sale of
the QSB stock, PRS allocates $1,000 to A and $1,000
to X. However, A has a positive basis adjustment of
$250 under section 743(b) as a result of the purchase
of the 25 percent interest in PRS from Z; therefore,
A’s share of the gain is reduced to $750. Because A is
an eligible partner under paragraph (g)(3) of this sec-
tion, A may defer recognition of A’s distributive share
of gain from the sale of the QSB stock subject to the
nonrecognition limitation described in paragraph (d)
of this section. The smallest percentage interest that
A held in PRS capital during the time that PRS held
the QSB stock is 25 percent. Under the nonrecogni-
tion limitation, A may not defer more than 25 per-
cent of the partnership gain realized from the sale of
the QSB stock (determined without regard to any ba-
sis adjustment under section 734(b) or section 743(b),
other than a basis adjustment described in paragraph
(b)(3)(ii) of this section). Because the partnership’s
realized gain determined without regard to A’s basis
adjustment under section 743(b) is $2,000, A may de-
fer recognition of $500 (25 percent of $2,000) of the
gain from the sale of the QSB stock. A must recog-
nize the remaining $250 of that gain.
Example 10.Sale by partner of QSB stock re-
ceived in a liquidating distribution. (i) On January
1, 2008, A, an individual, and X, a C corporation,
form PRS, a partnership. A and X each contribute
$1,500 to PRS and agree to share all partnership
items equally. PRS purchases QSB stock on Feb-
ruary 1, 2008, for $3,000. On May 1, 2008, when
the QSB stock has appreciated in value to $4,000, A
contributes $1,000 to PRS, increasing A’s interest in
PRS capital to 60 percent. On June 1, 2011, when
the QSB stock is still worth $4,000, PRS makes
a liquidating distribution of $3,000 worth of QSB
stock to A. Under section 732, A’s basis in the dis-
tributed QSB stock is $2,500. A sells the QSB stock
on August 4, 2011, for $6,000, realizing a gain of
$3,500 (none of which is treated as ordinary income).
A purchases replacement QSB stock on August 30,
2011, for $5,500, and makes an election under sec-
tion 1045 with respect to the August 4, 2011, sale of
QSB stock.
(ii) A is an eligible partner under paragraph (g)(3)
of this section. Therefore, under paragraph (e)(1) of
this section, A is treated as having acquired the dis-
tributed QSB stock in the same manner as PRS and as
October 1, 20077322007–40 I.R.B.

having held the QSB stock since February 1, 2008, its
original issue date. Because A purchased, within 60
days of A’s sale of the QSB stock, replacement QSB
stock, A is eligible to defer a portion of A’s gain from
the sale of the QSB stock. A must recognize gain,
however, to the extent that A’s amount realized on the
sale of the QSB stock, $6,000, exceeds the cost of the
replacement QSB stock purchased by A during the
60-day period beginning on the date of the sale of the
QSB stock, $5,500. Accordingly, A must recognize
$500 of the gain from the sale of the QSB stock. A
defers recognition of the remaining $3,000 of gain to
the extent that such gain does not exceed the distribu-
tion nonrecognition limitation under paragraph (e)(3)
of this section.
(iii) Under paragraph (e)(3)(i) of this section, A’s
nonrecognition limitation with respect to the sale of
the QSB stock is A’s section 1045 amount realized
with respect to the stock, reduced by A’s section 1045
adjusted basis with respect to the stock. A’s amount
realized from the sale is the product of A’s amount
realized from the sale, $6,000; and a fraction—
(1)ThenumeratorofwhichisA’ssmallestper-
centage interest in PRS capital with respect to such
stock, 50 percent; and
(2) The denominator of which is A’s percentage
interest in that type of partnership QSB stock immedi-
ately after the distribution, 75 percent (the value of the
stock distributed to A, $3,000, divided by the value of
all QSB stock of that type acquired by PRS, $4,000).
(iv) Therefore, A’s section 1045 amount realized
is $4,000 ($6,000 multiplied by 50/75). Because PRS
distributed the QSB stock to A in liquidation of A’s
interest in PRS, A’s section 1045 adjusted basis is the
product of PRS’ basis in all of the QSB stock of the
type distributed, $3,000; A’s smallest percentage in-
terest in PRS capital with respect to QSB stock of the
type distributed, 50 percent; and the percentage of the
distributed QSB stock that was sold by A, 100 per-
cent. Therefore, A’s section 1045 adjusted basis is
$1,500 (the product of $3,000, 50 percent, and 100
percent)) and A’s nonrecognition limitation amount
on the sale of the QSB stock is $2,500 ($4,000 sec-
tion 1045 amount realized minus $1,500 section 1045
adjusted basis). Accordingly, A defers recognition of
$2,500 of the remaining $3,000 gain from the sale of
the QSB stock and must recognize $500 of the re-
maining $3,000 gain. Accordingly, A’s total gain rec-
ognized from the sale of the QSB stock is $1,000.
(v) A’s basis in the replacement QSB stock is
$3,000 (cost of the replacement QSB stock, $5,500,
reduced by the gain not recognized under section
1045, $2,500).
Example 11.Sale by partner of QSB stock re-
ceived in a nonliquidating distribution. (i) The facts
are the same as inExample 10, except that, on June 1,
2011, PRS distributes only $2,000 of the QSB stock
to A, reducing A’s interest in PRS capital from 60 per-
cent to 33 percent. PRS’ basis in the distributed QSB
stock is $1,500. On November 1, 2011, A sells for
$2,500 the QSB stock distributed by PRS to A and
purchases, within 60 days of the date of sale of the
QSB stock, replacement QSB stock for $2,500. A
makes a timely election to apply section 1045 with
respect to A’s sale of the distributed QSB stock.
(ii) Under section 732, A’s basis in the distributed
QSB stock is $1,500. Therefore, A realizes a gain on
the sale of the distributed QSB stock of $1,000. Be-
cause A made an election to apply section 1045 to
the sale, and because A purchased, within 60 days of
A’s sale of the QSB stock, replacement QSB stock
at a cost equal to the amount realized on the sale of
the distributed QSB stock, A defers recognition of the
gain from the sale of the QSB stock to the extent that
such gain does not exceed the distribution nonrecog-
nition limitation.
(iii) Under paragraph (e)(3) of this section, the
nonrecognition limitation with respect to A’s sale of
the QSB stock is A’s section 1045 amount realized
reduced by A’s section 1045 adjusted basis. Because
PRS did not distribute all of the particular type of
QSB stock and the distribution of the QSB stock to
A was not in liquidation of A’s interest in PRS, un-
der paragraph (e)(3)(ii)(C) of this section A’s section
1045 amount realized is $1,250 (A’s amount realized
from the sale of the distributed QSB stock, $2,500,
multiplied by A’s smallest percentage interest in PRS
capital with respect to such stock, 50 percent). Un-
der paragraph (e)(3)(iii)(B) of this section, A’s sec-
tion 1045 adjusted basis is the product of the part-
nership’s basis in the QSB stock sold by the part-
ner, $1,500, and A’s smallest percentage interest in
the partnership capital with respect to such stock, 50
percent. Therefore, A’s section 1045 adjusted basis
is $750 (50 percent of $1,500), and A’s nonrecogni-
tion limitation amount on the sale of the QSB stock
is $500 ($1,250 section 1045 amount realized minus
$750 section 1045 adjusted basis). As this amount is
less than the amount of gain that A is eligible to defer
under section 1045, $1,000, A defers recognition of
only $500 of the gain from the sale of the QSB stock.
A must recognize the remaining $500 of that gain.
(iv) A’s basis in the replacement QSB stock is
$2,000 (cost of the replacement QSB stock, $2,500,
reduced by the gain not recognized under section
1045, $500).
Example 12.Contribution of replacement QSB
stock to a partnership. (i) On January 1, 2008, A,
an individual, B, an individual, and X, a C corpora-
tion, form PRS, a partnership. A, B, and X each con-
tribute $250 to PRS and agree to share all partner-
ship items equally. On February 1, 2008, PRS pur-
chases QSB stock for $750. PRS sells the QSB stock
on November 3, 2008, for $1,050. PRS realizes $300
of gain from the sale of the QSB stock (none of which
is treated as ordinary income) and allocates $100 of
gain to each of its partners. PRS informs the part-
ners that it does not intend to make an election un-
der section 1045 with respect to the sale of the QSB
stock. Each partner’s share of the amount realized
from the sale of the QSB stock is $350. On Novem-
ber 30, 2008, A, an eligible partner within the mean-
ing of paragraph (g)(3) of this section, purchases re-
placement QSB stock for $350 and makes a section
1045 election under paragraph (c)(1) of this section.
Subsequently, A transfers the replacement QSB stock
to ABC, a partnership, in exchange for an interest in
ABC.
(ii) Because A purchasedwithin 60 days of PRS’s
sale of the QSB stock, replacement QSB stock for a
cost equal to A’s share of the partnership’s amount
realized on the sale of the QSB stock, and because
A made a valid election to apply section 1045 with
respect to A’s share of the gain from PRS’s sale of
the QSB stock, A does not recognize A’s $100 dis-
tributive share of the gain from PRS’s sale of the
QSB stock. Before the contribution of the replace-
ment QSB stock to ABC, A’s adjusted basis in the re-
placement QSB stock is $250 ($350 cost minus $100
nonrecognition amount). A does not recognize gain
upon the contribution of QSB stock to ABC under
section 721(a). Upon the contribution of the replace-
ment QSB stock to ABC, A’s basis in the ABC part-
nership interest is $250, and ABC’s basis in the re-
placement QSB stock is $250. However, the replace-
ment QSB stock does not qualify as QSB stock in
ABC’s hands. Neither A nor ABC will be eligible
to defer gain under section 1045 on a subsequent sale
of the replacement QSB stock.
(j)Effective/applicability date—In gen-
eral. This section applies to sales of QSB
stock on or after August 14, 2007.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In §602.101 paragraph (b) is
amended by adding in numerical order,
§1.1045–1, to read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.1045–1........................................................... 1545–1893
*****
2007–40 I.R.B.733October 1, 2007

Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
Approved August 2, 2007.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on August 13,
2007, 8:45 a.m., and published in the issue of the Federal
Register for August 14, 2007, 72 F.R. 45346)
October 1, 20077342007–40 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Information Reporting by
Organizations That Receive
Charitable Contributions of
Certain Motor Vehicles, Boats,
and Airplanes
Notice 2007–70
SECTION 1. PURPOSE
This notice provides information on
where to file a completed Form 1098–C,
Contributions of Motor Vehicles, Boats,
and Airplanes,aninformationformused
by a donee organization to report a con-
tribution of a qualified vehicle with a
claimed value of morethan $500, for cal-
endar years ending on or after December
31, 2008. This notice changes where to file
a completed Form 1098–C as described in
Section 3 of Notice 2006–1, 2006–1 C.B.
347.
SECTION 2. BACKGROUND
Notice 2006–1, 2006–1 C.B. 347, pro-
vides guidance on the reporting require-
ments under § 170(f)(12)(D) of the Inter-
nal Revenue Code, which apply to any
donee organization that receives a contri-
bution of a qualified vehicle after Decem-
ber 31, 2004, the claimed value of which
is more than $500. Notice 2006–1, Sec-
tion 3, provides that if a donee organi-
zation receives a contribution of a quali-
fied vehicle, with a claimed value of more
than $500, after December 31, 2004, the
donee organization is required to provide
a contemporaneous written acknowledg-
ment to the donor. Notice 2006–1 spec-
ifies that the donee organization may use
a completed Form 1098–C,Contributions
of Motor Vehicles, Boats, and Airplanes,
for the contemporaneous written acknowl-
edgment. The notice also specifies that the
Form 1098–C along with Form 1096,An-
nual Summary and Transmittal of U.S. In-
formation Returns, be filed with the Inter-
nal Revenue Service Center, Ogden, UT
84201–0027.
SECTION 3. WHERE TO FILE A
FORM 1098–C, CONTRIBUTIONS OF
MOTOR VEHICLES, BOATS, AND
AIRPLANES
All Forms 1098–C,Contributions of
Motor Vehicles, Boats, and Airplanes,
along with Form 1096,Annual Summary
and Transmittal of U.S. Information Re-
turns, filed after December 31, 2007, must
be filed with the Internal Revenue Service
Center, Kansas City, MO 64999. The In-
ternal Revenue Service Center at Ogden
remains the location for Form 1098–C
filed on or before December 31, 2007.
Future changes to the filing location for
Form 1098–C will be announced and
placed in the instructions to Form 1096,
Annual Summary and Transmittal of U.S.
Information Returns.
The filing instructions for Form
1098–C in Section 3 of Notice 2006–1,
2006–1 C.B. 347, are hereby modified.
SECTION 4. DRAFTING
INFORMATION
The principal author of this notice is
Carolyn Ibok of Exempt Organizations,
Tax Exempt and Government Entities Di-
vision. For further information regarding
this notice, contact Carolyn Ibok at (202)
283–8923 (not a toll-free call).
Qualified Transportation
Fringes
Notice 2007–76
The purpose of this notice is to de-
lay the effective date of Revenue Ruling
2006–57, 2006–47 I.R.B. 911. Revenue
Ruling 2006–57 provides guidance to em-
ployers on the use of smartcards, debit or
credit cards, or other electronic media to
provide qualified transportation fringes
under Internal Revenue Code §§ 132(a)(5)
and 132(f). Treasury and the IRS have
become aware that certain transit sys-
tems may need additional time to modify
their technology and make it compati-
ble with the requirements for vouchers
set forth in Revenue Ruling 2006–57.
Therefore, the ruling’s effective date,
which was set for January 1, 2008, is de-
layed to January 1, 2009. Nevertheless,
employers and employees may rely on
Revenue Ruling 2006–57 with respect to
transactions occurring prior to January 1,
2009. The principal author of this no-
tice is Michael R. Skutley of the Office
of Associate Chief Counsel (Tax Exempt
& Government Entities). For further in-
formation regarding this notice, contact
Mr. Skutley at (202) 622–6040 (not a
toll-free call).
Determination of Housing Cost
Amounts Eligible for Exclusion
or Deduction for 2007
Notice 2007–77
SECTION 1. PURPOSE
This notice provides adjustments to the
limitation on housing expenses for pur-
poses of section 911 of the Internal Rev-
enue Code (Code) for specific locations for
2007. These adjustments are made on the
basis of geographic differences in housing
costs relative to housing costs in the United
States.
SECTION 2. BACKGROUND
Section 911(a) of the Code allows a
qualified individual to elect to exclude
from gross income the foreign earned in-
come and housing cost amount of such
individual. Section 911(c)(1) defines the
term “housing cost amount” as an amount
equal to the excess of (A) the housing
expenses of an individual for the taxable
year to the extent such expenses do not
exceed the amount determined under sec-
tion 911(c)(2), over (B) 16 percent of the
exclusion amount (computed on a daily
basis) in effect under section 911(b)(2)(D)
for the calendar year in which such taxable
year begins ($70.44 per day for 2007, or
$85,700 for the full year), multiplied by
the number of days of that taxable year
within the applicable period described in
section 911(d)(1). The applicable period
is the period during which the individual
2007–40 I.R.B.735October 1, 2007

meets the tax home requirement of section
911(d)(1) and either thebona fideresi-
dence requirement of section 911(d)(1)(A)
or the physical presence requirement of
section 911(d)(1)(B). Assuming that the
entire taxable year of a qualified individ-
ual is within the applicable period, the
section 911(c)(1)(B) amount for 2007 is
$13,712 ($85,700 x .16).
Section 911(c)(2)(A) of the Code lim-
its the housing expenses taken into account
in section 911(c)(1)(A) to an amount equal
to (i) 30 percent (adjusted as may be pro-
vided under the Secretary’s authority un-
der section 911(c)(2)(B)) of the amount in
effect under section 911(b)(2)(D) for the
calendar year in which the taxable year of
the individual begins, multiplied by (ii) the
number of days of that taxable year within
the applicable period described in section
911(d)(1). Thus, under this general limi-
tation, a qualified individual whose entire
taxable year is within the applicable period
is limited to maximum housing expenses
of $25,710 ($85,700 x .30) in 2007.
Section 911(c)(2)(B) of the Code au-
thorizes the Secretary to issue regulations
or other guidance to adjust the percentage
under section 911(c)(2)(A)(i) based on
geographic differences in housing costs
relative to housing costs in the United
States. Pursuant to this authority, the
Internal Revenue Service (IRS) and the
Treasury Department published Notice
2006–87, 2006–43 I.R.B. 766, and Notice
2007–25, 2007–12 I.R.B. 760, to provide
adjustments to the limitation on housing
expenses for 2006 for qualified individuals
incurring housing expenses in countries
with high housing costs relative to housing
costs in the United States.
SECTION 3. TABLE OF ADJUSTED
LIMITATIONS FOR 2007
The following table provides adjusted
limitations on housing expenses (in lieu
of the otherwise applicable limitation of
$25,710) for 2007.
CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
Argen
tina
Bueno
sAires
120.2743,900
AustraliaCanberra70.6825,800
AustraliaMelbourne72.6026,500
Aust
ralia
Pert
h
109.5940,000
AustriaVienna78.9728,824
Bahamas, TheNassau136.1649,700
Bahr
ain
Bahr
ain
120.5544,000
BarbadosBarbados103.2937,700
BelgiumAntwerp98.9036,100
Bel
gium
Bru
ssels
137.5350,20
0
BelgiumGosselies98.9036,100
BelgiumHoogbuul98.9036,100
Be
lgium
Mo
ns
98.9
0
36,1
00
BelgiumSHAPE/Chievres98.9036,100
BermudaBermuda197.2672,000
B
osnia-Herzegovina
S
arajevo
7
4
.
52
2
7
,
200
BrazilBrasilia101.6437,100
BrazilRio de Janeiro96.1635,100
B
razil
S
ao Paolo
1
27
.
40
4
6
,
500
CanadaCalgary109.0439,800
CanadaDartmouth92.8833,900
CanadaEdmonton83.0130,300
CanadaHalifax92.8833,900
CanadaLondon/Ontario79.1828,900
CanadaMontreal153.9756,200
CanadaOttawa118.9043,400
October 1, 20077362007–40 I.R.B.

CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
CanadaToronto126.0346,000
CanadaVancouver122.1944,600
CanadaVictoria92.3333,700
CanadaWinnipeg80.0029,200
ChileSantiago96.7135,300
ChinaBeijing134.6249,137
ChinaHong Kong313.15114,300
ChinaShanghai156.1757,001
ColombiaBogota148.2254,100
ColombiaAll cities other than Bogota
and Barranquilla
123.0144,900
Costa RicaSan Jose71.7826,200
Dominican RepublicSanto Domingo110.9640,500
EcuadorGuayaquil84.3830,800
EcuadorQuito83.5630,500
FranceGarches238.9087,200
FranceLe Havre105.4838,500
FranceLyon149.3254,500
FranceMarseille139.7351,000
FranceMontpellier123.8445,200
FranceParis238.9087,200
FranceSevres238.9087,200
FranceSuresnes238.9087,200
FranceVersailles238.9087,200
GermanyBabenhausen116.9742,700
GermanyBad Aibling99.7336,400
GermanyBad Nauheim93.4234,100
GermanyBaumholder106.5838,900
GermanyBerlin143.2952,300
GermanyBirkenfeld106.5838,900
GermanyBoeblingen127.4046,500
GermanyButzbach91.5133,400
GermanyDarmstadt116.9942,700
GermanyErlangen74.2527,100
GermanyFrankfurt am Main122.1944,600
GermanyFriedberg93.4234,100
GermanyFuerth74.2527,100
GermanyGarmisch-Partenkirchen101.1036,900
GermanyGeilenkirchen80.2729,300
2007–40 I.R.B.737October 1, 2007

CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
GermanyGelnhausen126.5846,200
GermanyGermersheim88.7732,400
GermanyGiebelstadt101.4037,000
GermanyGiessen91.5133,400
GermanyGrafenwoehr75.8927,700
GermanyHanau126.5846,200
GermanyHannover87.4031,900
GermanyHeidelberg116.7142,600
GermanyIdar-Oberstein106.5838,900
GermanyIngolstadt125.7545,900
GermanyKaiserslautern, Landkreis130.4147,600
GermanyKitzingen101.4037,000
GermanyLeimen116.7142,600
GermanyLudwigsburg127.4046,500
GermanyMainz143.8452,500
GermanyMannheim116.7142,600
GermanyMunich125.7545,900
GermanyNellingen127.4046,500
GermanyNeubruecke106.5838,900
GermanyNuernberg74.2527,100
GermanyOber Ramstadt116.9942,700
GermanyOberammergau101.1036,900
GermanyPirmasens130.4147,600
GermanyRheinau116.7142,600
GermanySchwabach74.2527,100
GermanySchwetzingen116.7142,600
GermanySeckenheim116.7142,600
GermanySembach130.4147,600
GermanyStuttgart127.4046,500
GermanyWertheim101.4037,000
GermanyWiesbaden143.8452,500
GermanyWuerzberg101.4037,000
GermanyZirndorf74.2527,100
GermanyZweibrueken130.4147,600
October 1, 20077382007–40 I.R.B.

CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
GermanyAll cities other than Augsburg,
Babenhausen, Bad Aibling,
Bad Kreuznach, Bad
Nauheim, Baumholder,
Berchtesgaden, Berlin,
Birkenfeld, Boeblingen, Bonn,
Bremen, Bremerhaven,
Butzbach, Cologne,
Darmstadt, Delmenhorst,
Duesseldorf, Erlangen,
Flensburg, Frankfurt am Main,
Friedberg, Fuerth, Garlstedt,
Garmisch-Partenkirchen,
Geilenkirchen, Gelnhausen,
Germersheim, Giebelstadt,
Giessen, Grafenwoehr,
Grefrath, Greven, Gruenstadt,
Hamburg, Hanau, Handorf,
Hannover, Heidelberg,
Heilbronn, Herongen,
Idar-Oberstein, Ingolstadt,
Kaiserslautern, Landkreis,
Kalkar, Karlsruhe, Kerpen,
Kitzingen, Koblenz, Leimen,
Leipzig, Ludwigsburg,
Mainz, Mannheim,
Moenchen-Gladbach,
Muenster, Munich,
Nellingen, Neubruecke,
Noervenich, Nuernberg, Ober
Ramstadt, Oberammergau,
Osterholz-Scharmbeck,
Pirmasens, Rheinau,
Rheinberg, Schwabach,
Schwetzingen, Seckenheim,
Sembach, Stuttgart,
Twisteden, Wahn, Wertheim,
Wiesbaden, Worms,
Wuerzburg, Zirndorf and
Zweibrueken.
103.2937,700
GreeceAthens94.2534,400
GreeceArgyroupolis91.2333,300
GreeceElefsis94.2534,400
GreeceEllinikon94.2534,400
GreeceMt. Hortiatis91.2333,300
GreeceMt. Parnis94.2534,400
GreeceMt. Pateras94.2534,400
GreeceNea Makri94.2534,400
GreecePerivolaki91.2333,300
GreecePiraeus94.2534,400
2007–40 I.R.B.739October 1, 2007

CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
GreeceSouda Bay (Crete)72.8826,600
GreeceTanagra94.2534,400
GreeceThessaloniki91.2333,300
GuatemalaGuatemala City103.0137,600
Holy See, TheHoly See, The159.1858,100
HungaryBudapest89.0432,500
IndiaMumbai156.1957,011
IndiaNew Delhi73.7526,920
IndonesiaJakarta103.4937,776
IrelandDublin80.5529,400
IrelandLimerick80.0029,200
IrelandShannon Area80.0029,200
ItalyCatania78.6328,700
ItalyGenoa103.2937,700
ItalyGioia Tauro85.4831,200
ItalyLa Spezia103.2937,700
ItalyLeghorn99.4536,300
ItalyMilan237.5386,700
ItalyNaples131.2347,900
ItalyPisa99.4536,300
ItalyPordenone-Aviano109.5940,000
ItalyRome159.1858,100
ItalySardinia81.3729,700
ItalySigonella78.6328,700
ItalyTurin118.6343,300
ItalyVerona75.8927,700
ItalyVicenza110.6840,400
ItalyAll cities other than Avellino,
Brindisi, Catania, Florence,
Gaeta, Genoa, Gioia Tauro,
La Spezia, Leghorn,
Milan, Mount Vergine,
Naples, Nettuno, Pisa,
Pordenone-Aviano, Rome,
Sardinia, Sigonella, Turin,
Verona and Vicenza.
91.2333,300
JamaicaKingston112.8841,200
JapanAkashi73.7026,900
JapanAtsugi93.1534,000
JapanCamp Zama93.1534,000
JapanChiba-Ken93.1534,000
October 1, 20077402007–40 I.R.B.

CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
JapanFussa93.1534,000
JapanGifu80.0029,200
JapanGotemba75.0727,400
JapanHaneda93.1534,000
JapanKanagawa-Ken93.1534,000
JapanKomaki80.0029,200
JapanMachida-Shi93.1534,000
JapanNagoya103.5237,786
JapanOkinawa Prefecture123.5645,100
JapanOsaka-Kobe145.3053,036
JapanSagamihara93.1534,000
JapanSaitama-Ken93.1534,000
JapanSasebo73.7026,900
JapanTachikawa93.1534,000
JapanTokyo234.7985,700
JapanTokyo-to99.7336,400
JapanYokohama131.2347,900
JapanYokosuka113.4241,400
JapanYokota93.1534,000
KoreaCamp Carroll77.5328,300
KoreaCamps Market179.1865,400
KoreaChinhae83.0130,300
KoreaChunchon76.9928,100
KoreaColbern179.1865,400
KoreaK–16179.1865,400
KoreaKimhae86.0331,400
KoreaKimpo Airfield179.1865,400
KoreaKwangju82.1930,000
KoreaMercer179.1865,400
KoreaMunsan75.6227,600
KoreaOsan AB93.4234,100
KoreaPusan86.0331,400
KoreaPyongtaek93.4234,100
KoreaSeoul179.1865,400
KoreaSuwon179.1865,400
KoreaTaegu97.5335,600
KoreaTongduchon75.6227,600
KoreaUijongbu106.8539,000
KoreaWaegwan77.5328,300
2007–40 I.R.B.741October 1, 2007

CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
KoreaAll cities other than Ammo
Depot #9, Camp Carroll,
Camps Market, Changwon,
Chinhae, Chunchon, Colbern,
K–16, Kimhae, Kimpo
Airfield, Kunsun, Kwangju,
Mercer, Munsan, Osan AB,
Pusan, Pyongtaek, Seoul,
Suwon, Taegu, Tongduchon,
Uijongbu, and Waegwan.
87.4031,900
KuwaitKuwait City166.8560,900
KuwaitAll cities other than Kuwait
City
149.5954,600
LuxembourgLuxembourg130.6847,700
MacedoniaSkopje96.9935,400
MalaysiaKuala Lumpur131.5048,000
MalaysiaAll cities other than Kuala
Lumpur
92.3333,700
MaltaMalta108.2239,500
MexicoHermosillo91.2333,300
MexicoMazatlan81.9229,900
MexicoMexico City116.1642,400
MexicoMonterrey108.4939,600
MexicoAll cities other than
Ciudad Juarez, Cuernavaca,
Guadalajara, Hermosillo,
Matamoros, Mazatlan,
Merida, Metapa, Mexico
City, Monterrey, Nogales,
Nuevo Laredo, Tapachula,
Tijuana, Tuxtla Gutierrez,
Veracruz.
103.8437,900
NetherlandsAmsterdam144.9352,900
NetherlandsAruba98.6336,000
NetherlandsBrunssum90.1432,900
NetherlandsEygelshoven90.1432,900
NetherlandsHague, The163.2959,600
NetherlandsHeerlen90.1432,900
NetherlandsHoensbroek90.1432,900
NetherlandsHulsberg90.1432,900
NetherlandsKerkrade90.1432,900
NetherlandsLandgraaf90.1432,900
NetherlandsMaastricht90.1432,900
NetherlandsPapendrecht114.5241,800
October 1, 20077422007–40 I.R.B.

CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
NetherlandsRotterdam114.5241,800
NetherlandsSchaesburg90.1432,900
NetherlandsSchinnen90.1432,900
NetherlandsSchiphol144.9352,900
NetherlandsYpenburg163.2959,600
NetherlandsAll cities other than
Amsterdam, Aruba,
Brunssum, Coevorden,
Eygelshoven, The Hague,
Heerlen, Hoensbroek,
Hulsberg, Kerkrade,
Landgraaf, Maastricht,
Margraten, Papendrecht,
Rotterdam, Schaesburg,
Schinnen, Schiphol, and
Ypenburg.
83.2930,400
New ZealandAuckland97.8135,700
New ZealandWellington92.6033,800
NicaraguaManagua87.1231,800
NorwayOslo83.7630,573
NorwayStavanger96.4435,200
NorwayAll cities other than Oslo and
Stavanger.
98.0835,800
PanamaPanama City88.2232,200
PeruLima74.7927,300
PhilippinesCavite98.6336,000
PhilippinesManila98.6336,000
PolandPoland72.3326,400
PortugalAlverca145.4853,100
PortugalLajes Field71.7826,200
PortugalLisbon145.4853,100
QatarDoha95.3034,786
RussiaMoscow249.0490,900
RussiaSaint Petersburg113.7041,500
RussiaSakhalin Island212.3377,500
RussiaVladivostok212.3377,500
RussiaYekaterinburg129.8647,400
RwandaKigali86.3031,500
Saudi ArabiaJeddah84.0230,667
Saudi ArabiaRiyadh84.0230,667
SingaporeSingapore155.3456,700
South AfricaPretoria110.1440,200
2007–40 I.R.B.743October 1, 2007

CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
SpainBarcelona108.4939,600
SpainMadrid107.6739,300
SpainRota92.6033,800
SpainValencia111.5140,700
SwitzerlandBern139.4550,900
SwitzerlandGeneva194.2570,900
SwitzerlandZurich107.4539,219
SwitzerlandAll cities other than Bern,
Geneva and Zurich.
90.1432,900
TaiwanTaipei122.4244,685
ThailandBangkok100.2736,600
TurkeyAnkara89.0432,500
TurkeyElmadag89.0432,500
TurkeyIzmir-Cigli86.5831,600
TurkeyManzarali89.0432,500
TurkeyYamanlar86.5831,600
UkraineKiev89.9832,844
United Arab EmiratesAbu Dhabi84.0730,687
United Arab EmiratesDubai116.3142,452
United KingdomBasingstoke112.6041,099
United KingdomBath112.3341,000
United KingdomBracknell170.1462,100
United KingdomBristol106.0338,700
United KingdomCambridge117.8143,000
United KingdomCaversham202.1973,800
United KingdomCheltenham128.2246,800
United KingdonChicksands72.6026,500
United KingdomCroughton105.7538,600
United KingdomFairford108.7739,700
United KingdomFarnborough141.9251,800
United KingdomFelixstowe123.2945,000
United KingdomGibraltar122.2444,616
United KingdomHarrogate119.1843,500
United KingdomHigh Wycombe170.1462,100
United KingdomKemble108.7739,700
United KingdomLakenheath150.9655,100
United KingdomLiverpool106.3038,800
United KingdomLondon213.1577,800
United KingdomLoudwater143.8452,500
October 1, 20077442007–40 I.R.B.

CountryLocation
LimitationonHousing
Expenses (daily)
Limitation on Housing
Expenses (full year)
United KingdomMenwith Hill119.1843,500
United KingdomMildenhall150.9655,100
United KingdomOxfordshire105.7538,600
United KingdomPlymouth105.7538,600
United KingdomPortsmouth105.7538,600
United KingdomReading170.1462,100
United KingdomRochester109.3239,900
United KingdomSouthampton121.1044,200
United KingdomSurrey132.6148,402
United KingdomWaterbeach120.2743,900
United KingdonWest Byfleet72.3326,400
United KingdomWiltshire113.9741,600
United KingdomAll cities other than
Basingstoke, Bath, Belfast,
Birmingham Bracknell,
Bristol, Brough, Bude,
Cambridge, Caversham,
Chelmsford, Cheltenham,
Chicksands, Croughton,
Dunstable, Edinburgh, Edzell,
Fairford, Farnborough,
Felixstowe, Ft. Halstead,
Glenrothes, Greenham
Common,Harrogate,High
Wycombe, Hythe, Kemble,
Lakenheath, Liverpool,
London, Loudwater, Menwith
Hill, Mildenhall, Nottingham,
Oxfordshire, Plymouth,
Portsmouth, Reading,
Rochester, Southampton,
Surrey, Waterbeach, Welford,
West Byfleet, and Wiltshire.
104.9338,300
VenezuelaCaracas156.1657,000
VietnamHanoi128.2246,800
EFFECTIVE DATE
This notice is effective for taxable years
beginning on or after January 1, 2007.
DRAFTING INFORMATION
The principal author of this notice is
Paul J. Carlino of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Mr. Carlino at (202) 622–3840 (not a toll-
free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also: Part I, Sections 704(c); 1.704–3(e)(3).)
Rev. Proc. 2007–59
SECTION 1. PURPOSE
The purpose of this revenue procedure
is to permit certain partnerships to aggre-
gate gains and losses from an expanded
class of qualified financial assets for pur-
poses of making reverse section 704(c) al-
locations under § 1.704–3(e)(3).
SECTION 2. BACKGROUND
01. To prevent the shifting of tax con-
sequences among partners with respect to
precontribution gain or loss, section 704(c)
requires partnerships to allocate income,
gain, loss, and deductions with respect to
property contributed by a partner so as to
take into account any variation between
the adjusted tax basis of the property and
2007–40 I.R.B.745October 1, 2007

its fair market value at the time of the con-
tribution. These allocations must be made
using a reasonable method that is consis-
tent with the purpose of section 704(c).
Section 1.704–3(a)(6) provides that simi-
lar rules apply to differences between book
value and tax basis that are created by a
revaluation of partnership assets pursuant
to § 1.704–1(b)(2)(iv)(f) (reverse section
704(c) allocations).
02. Section 1.704–3(a)(2) provides that
section 704(c) allocations are generally
made on a property-by-property basis.
Therefore, built-in gains and losses from
different items of contributed or revalued
property generallycannot be aggregated.
03. Section 1.704–3(e)(3) provides a
special rule that allowssecurities partner-
ships to make reverse section 704(c) allo-
cations on an aggregate basis. Specifically,
§ 1.704–3(e)(3)(i) provides that, for pur-
poses of making reverse section 704(c) al-
locations, a securities partnership may ag-
gregate built-in gains and losses from qual-
ified financial assets using any reasonable
approach that is consistent with the pur-
pose of section 704(c).
04. Section 1.704–3(e)(3)(iii)(A) pro-
vides that a partnership is a securities part-
nership if the partnership is either a man-
agement company or an investment part-
nership, and the partnership makes all of its
book allocations in proportion to the part-
ners’ relative bookcapital accounts (ex-
cept for reasonable special allocations to a
partner that provides management services
or investment advisory services to the part-
nership).
05. Section 1.704–3(e)(3)(iii)(B)(1)
provides that a partnership is a manage-
ment company if it is registered with the
Securities and Exchange Commission as
a management company under the Invest-
ment Company Act of 1940, as amended
(15 U.S.C. 80a).
06. Section 1.704–3(e)(3)(iii)(B)(2)
provides that a partnership is an invest-
ment partnership if (1) on the date of each
capital account restatement, the partner-
ship holds qualified financial assets that
constitute at least 90 percent of the fair
market value of the partnership’s non-cash
assets; and (2) the partnership reasonably
expects, as of the end of the first taxable
year in which the partnership adopts an
aggregate approach under § 1.704–3(e)(3),
to make revaluations at least annually.
07. Section 1.704–3(e)(3)(ii)(A) pro-
vides that a qualified financial asset is any
personal property (including stock) that
is actively traded. Actively traded means
actively traded as defined in § 1.1092(d)–1
(defining actively traded property for pur-
poses of the straddle rules). In addition,
under § 1.704–3(e)(3)(ii)(B), for man-
agement companies, qualified financial
assets also include the following, even if
not actively traded: shares of stock in a
corporation; notes, bonds, debentures, or
other evidences of indebtedness; interest
rate, currency, or equity notional principal
contracts; evidences of an interest in, or
derivative financial instruments in, any se-
curity, currency, or commodity, including
any option, forward or futures contract,
or short position; or any similar financial
instrument.
08. Sections 1.704–3(e)(3)(iv) and (v)
describe two methods of making reverse
section 704(c) allocations on an aggregate
basis that are generally reasonable, the par-
tial netting and the full netting approaches,
respectively.
09. Section 1.704–3(a)(10) provides
that an allocation method (or combination
of methods) is not reasonable if the con-
tribution of property (or event that results
in reverse section 704(c) allocations) and
the corresponding allocation of tax items
with respect to the property are made with
a view to shifting the tax consequences of
built-in gain or loss among the partners
in a manner that substantially reduces the
present value of the partners’ aggregate tax
liability.
10. Section 1.704–3(e)(4) provides in
relevant part that the Commissioner may,
by published guidance or by letter ruling,
permit: (1) aggregation of properties other
than assets described in paragraphs (e)(2)
and (e)(3) of § 1.704–3; (2) partnerships
other than securities partnerships to aggre-
gate gain and loss from qualified financial
assets; and (3) aggregation of qualified fi-
nancial assets for purposes of making sec-
tion 704(c) allocations in the same man-
ner as that described in paragraph (e)(3) of
§ 1.704–3.
SECTION 3. DEFINITIONS
01.Qualified Partnerships.For pur-
poses of this revenue procedure, a part-
nership is a Qualified Partnership if it sat-
isfies the following requirements: (1) the
partnership makes all of its book alloca-
tions in proportion to the partners’ relative
book capital accounts (except for reason-
able special allocations to a partner that
provides management services or invest-
ment advisory servicesto the partnership);
(2) the partnership reasonably expects, as
of the end of the first taxable year in which
the partnership adopts an aggregate ap-
proach under this revenue procedure, to
make revaluations of qualified financial
assets at least four times annually; (3) on
the date of each capital account restate-
ment during the taxable year, the partner-
ship holds qualified financial assets that
constitute at least 90 percent of the partner-
ship’s non-cash assets; (4) the partnership
reasonably expects, as of the first day of
each taxable year for which the partnership
seeks to aggregate under this revenue pro-
cedure, that the partnership (a) will have
at least 10 unrelated partners at all times
during the taxable year; and (b) will make
at least 200 trades of qualified financial
assets during the taxable year, the aggre-
gate value of which will comprise at least
50% of the book value of the partnership’s
assets (including cash) as of the first day
of the taxable year; and (5) the applica-
tion of the aggregation method to reverse
section 704(c) allocations under this rev-
enue procedure is not made with a view
to shifting the tax consequences of built-in
gain or loss among the partners in a man-
ner that substantially reduces the present
value of the partners’ aggregate tax liabil-
ity. For purposes of this paragraph, part-
ners are treated as related if they are related
within the meaning of sections 267(b) or
707(b).
02.Qualified financial assets.Solely
for purposes of this revenue procedure,
qualified financial assets are (1) those as-
sets described in § 1.704–3(e)(3)(ii)(A)
and (B); (2) any interest in a partner-
ship that is traded on an established se-
curities market or readily tradable on
a secondary market or the substantial
equivalent thereof within the meaning of
§ 1.7704–1(c); and (3) any interest owned
by the partnership (the upper-tier part-
nership) in a partnership (the lower-tier
partnership) that represents it is a securi-
ties partnership or a Qualified Partnership,
provided that such interest is (i) less than
10 percent of the capital and profits of
the lower-tier partnership and that the up-
per-tier partnership does not actively or
October 1, 20077462007–40 I.R.B.

materially participate in the management
or operations of the lower-tier partnership;
and (ii) less than 5 percent of the total
book value of the upper-tier partnership’s
assets (including cash) as of the first day
of the taxable year.
SECTION 4. APPLICATION
01.Automatic permission to aggregate
qualified financial assets.Permission is
hereby granted to any Qualified Partner-
ship as defined in this revenue procedure
to aggregate built-in gains and losses from
qualified financial assets for purposes
of making reverse section 704(c) allo-
cations under § 1.704–3(e)(3). Pursuant
to § 1.704–3(e)(3)(i), once a partnership
adopts an aggregate approach under this
revenue procedure, that partnership must
apply the same aggregate approach to all of
its qualified financial assets for all taxable
years in which the partnership qualifies as
a Qualified Partnership. However, a part-
nership may choose not to aggregate all of
the partnership’s qualified financial assets
provided that such qualified assets do not
exceed in the aggregate 30 percent of the
book value of the partnership’s non-cash
assets at the time any such qualified finan-
cial assets is acquired.
02.Subsequent failure to qualify as a
Qualified Partnership. A Qualified Part-
nership that adopts an aggregate approach
under this revenue procedure and subse-
quently fails to qualify as a Qualified Part-
nership must make reverse section 704(c)
allocations on an asset-by-asset basis after
the date of disqualification. The partner-
ship, however, is not required to disaggre-
gate the book gain or book loss from qual-
ified asset revaluations before the date of
disqualification when making reverse sec-
tion 704(c) allocations on or after the date
of disqualification.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for
taxable years beginning on or after Octo-
ber 1, 2007. However, taxpayers may ap-
ply this revenue procedure to taxable years
beginning after December 31, 2005.
SECTION 6. REQUEST FOR
COMMENTS
.01Comments Requested. The Trea-
sury and IRS request comments on the
appropriateness of the factors used to de-
fine Qualified Partnerships and qualified
financial assets. Additionally, comments
are requested on whether additional factors
should be considered in defining Quali-
fied Partnerships and qualified financial
assets. The Treasury and the IRS also re-
quest comments as to whether additional
guidance regarding the aggregation of
qualified financial assets for purposes of
making reverse section 704(c) allocations
is appropriate or necessary.
.02Submission of Comments.Writ-
ten comments may be submitted to
the Office of Associate Chief Counsel
(Passthroughs & Special Industries),
Attention: Jonathan E. Cornwell (Rev-
enue Procedure 2007–59), CC:PSI:B01,
Internal Revenue Service, 1111 Con-
stitution Avenue, N.W., Washington,
DC 20224. Alternatively, taxpayers
may submit comments electronically to
notice.comments@irscounsel.treas.gov.
Please include “Revenue Procedure
2007–59” in the subject line of any elec-
tronic communications. Comments will
be available for public inspection and
copying.
SECTION 7. DRAFTING
INFORMATION
The principal authors of this revenue
procedure are Jonathan E. Cornwell and
Steven A. Schmoll of the Office of Asso-
ciate Chief Counsel (Passthroughs & Spe-
cial Industries). For further information
regarding this revenue procedure, contact
Mr. Cornwell or Mr. Schmoll at (202)
622–3050 (not a toll-free call).
Section 807.—Rules for Certain Reserves
(Also §§ 805, 812, 832.)
Rev. Proc. 2007–61
SECTION 1. PURPOSE
This revenue procedure provides a safe
harbor under which an insurance company
subject to tax under subchapter L of the In-
ternal Revenue Code is not required to take
into account any portion of the increase
for the taxable year in policy cash val-
ues of life insurance contracts described in
§ 264(f)(4)(A) (I-COLI Contracts) for pur-
poses of applying the insurance company
proration rules in §§ 807(a)(2), 807(b)(1),
805(a)(4), 812, or 832(b)(5).
SECTION 2. BACKGROUND
.01Insurance company proration rules.
(1) To clearly reflect income, an insurance
company is allowed to deduct increases
in certain insurance reserves reflecting the
company’s obligations to policyholders.
Like other taxpayers, an insurance com-
pany may receive tax-favored income,
such as tax-exempt interest, intercorporate
dividends, and the inside build-up under
life insurance contracts. Because a portion
of the reserve increase can be viewed as
funded by tax-favored income, the insur-
ance company proration rules require that
tax-favored income be prorated between
the insurance company and its policyhold-
ers.See§§ 807(a) and (b) (requiring that
a life insurance company’s deductible re-
serves be reduced by the “policyholders’
share” of certain tax-favored income) and
§ 832(b)(5)(B) (requiring that a property
and casualty insurance company’s de-
ductible additions to reserves be reduced
by 15 percent of tax-favored income).
See also§ 805(a)(4) (generally limiting
a life insurance company’s deduction for
dividends received to the “company’s
share” of the dividends); § 812 (setting
forth the methodology for determining the
company’s share and the policyholder’s
share).
(2) Prior to 1997, the tax-favored in-
vestment income items taken into ac-
count under the insurance company pro-
ration rules were tax-exempt interest and
intercorporate dividends. In the Tax-
payer Relief Act of 1997, 1997–4 C.B.
(Vol. 1) 165–69 (“1997 Act”), Con-
gress amended §§ 807(a)(2), 807(b)(1),
805(a)(4), 812(d)(1), and 832(b)(5) to
take into account “the increase for the
taxable year in policy cash values . . .
of life insurance policies and annuity and
endowmentcontracts to which section
264(f) applies.” (Emphasis added.)See
§ 1084(b) of the 1997 Act. The legislative
history explained:
[T]he rules reducing certain deductions
for losses incurred, in the case of prop-
erty and casualty companies, and re-
ducing reserve deductions or dividends
received deductions of life insurance
companies, are modified to take into ac-
count the increase in the cash values
2007–40 I.R.B.747October 1, 2007

of life insurance policies or annuity or
endowment contracts held by insurance
companies.
H. R. Rep. No. 105–220, 105
th
Cong., 1
st
Sess. 588 (1997), 1997–4 (Vol. 2) C.B.
2058.
.02Contracts to which § 264(f) applies.
The IRS and the Treasury Department
have become aware of questions con-
cerning the interpretation of the phrase
“contracts to which § 264(f) applies.” For
example, it may be argued that § 264(f)
does not “apply” to contracts described
in § 264(f)(4)(A) (i.e., contracts cover-
ing 20-percent owners,officers, directors
and employees) because those contracts
are excepted from the disallowance rule
of § 264(f)(1). Alternatively, it may be
argued that the § 264(f)(4)(A) exception
applies only for purposes of the disal-
lowance rule of § 264(f)(1) and that other
provisions of § 264(f) continue to “apply”
to contracts covering 20-percent owners,
officers, directors and employees.See,
e.g.,§ 264(f)(4)(C).
SECTION 3. SCOPE
This revenue procedure applies to
I-COLI Contracts covering no more than
35 percent of the total aggregate number of
the individuals described in § 264(f)(4)(A)
at any time during the taxable year.
SECTION 4. SAFE HARBOR
For purposes of applying the insurance
companyprorationrulesin§§807(a)(2),
807(b)(1), 805(a)(4), 812, or 832(b)(5), an
insurance company is not required to take
into account any portion of the increase for
the taxable year in the policy cash values
(within the meaning of section 805(a)(4))
of I-COLI contracts to which this revenue
procedure applies pending the publication
of additional guidance. Arrangements in-
volving such contracts, however, remain
subject to challenge by the IRS under other
provisions of the tax law, including judi-
cial doctrines such as the business purpose
doctrine.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective
September 11, 2007. If, in response to
comments, additional guidance is pub-
lished interpreting the phrase “contracts to
which section 264(f) applies,” such guid-
ance will apply prospectively.
SECTION 6. REQUEST FOR
COMMENTS
.01 Comments are requested concern-
ing the need for additional guidance in this
area. Specifically, comments are requested
regarding the existence of any non-tax reg-
ulatory rules or other requirements that
limit an insurance company’s ability to in-
vest in I-COLI Contracts and the effect
of any experience rating, inter-insurance,
reciprocal, or reinsurance arrangement on
transactions involving I-COLI Contracts.
In addition, the IRS would welcome com-
ments on the operation of arrangements in-
volving I-COLI Contracts.
.02 Comments should be submitted
by December 31, 2007. Comments may
besubmittedbymailaddressedto: In-
ternal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, D.C.
20044, Attn. CC:PA:LPD:PR (Rev. Proc.
2007–61), Room 5205; by hand deliv-
ery (Monday through Friday between the
hours of 8:00 a.m. through 4:00 p.m.)
addressed to: Courier’s Desk, Internal
Revenue Service, Attn.: CC:PA:LPD:PR
(Rev. Proc. 2007–61), Room 5205, 1111
Constitution Avenue, NW, Washington,
DC 20224; or by email addressed to:
Notice.Comments@irscounsel.treas.gov.
Commentators should include the identi-
fication number of the publication (Rev.
Proc. 2007–61) in both the email subject
line and the body of the comment. All
materials submitted will be available for
public inspection and copying.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Stephen D. Hooe and
John E. Glover of the Office of Asso-
ciate Chief Counsel (Financial Institutions
& Products). For further information re-
garding this notice, contact Messrs. Hooe
or Glover (202) 622–3900 (not a toll-free
call).
October 1, 20077482007–40 I.R.B.

Part IV. Items of General Interest
Exclusions From Gross Income
of Foreign Corporations;
Correction
Announcement 2007–79
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of pro-
posedrulemakingbycross-referenceto
temporary regulations.
SUMMARY: This document contains cor-
rections to notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations (REG–138707–06, 2007–32 I.R.B.
342) that were published in theFederal
Registeron Monday, June 25, 2007 (72
FR 34650) modifying final regulations is-
sued under section 883(a) and (c) of the
Internal Revenue Code, relating to income
derived by foreign corporations from the
international operation of ships or aircraft.
FOR FURTHER INFORMATION
CONTACT: Patricia A. Bray, (202)
622–3880 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemaking by
cross-reference to temporary regulations
that are the subject of this correction are
under section 883 (a) and (c) of the Inter-
nal Revenue Code.
Need for Correction
As published, notice of proposed rule-
making by cross-reference to temporary
regulations (REG–138707–06) contains
errors that may proveto be misleading and
are in need of clarification.
Correction of Publication
Accordingly, the publication of the
proposed regulations (REG–138707–06),
which was the subject of FR Doc.
E7–12037, is corrected as follows:
1. On page 34650, column 2, in the
preamble, under the paragraph heading
“Paperwork Reduction Act”, line 1 of the
fourth paragraph, the language “Whether
the proposed collection of” is corrected to
read “Whether the proposed collections
of”.
2. On page 34650, column 2, in the pre-
amble, under the paragraph heading “Pa-
perwork Reduction Act”, line 2 of the fifth
paragraph, the language “associated with
the proposed collection” is corrected to
read “associated with the proposed collec-
tions”.
3. On page 34651, column 1, in the pre-
amble, under the paragraph heading “Com-
ments and Public Hearing”, line 7, the lan-
guage “and Treasury Department specifi-
cally” is corrected to read “and the Trea-
sury Department specifically”.
4. On page 34651, column 2, in the
preamble, under the paragraph heading
“Drafting Information”, line 5, the lan-
guage “personnel from the IRS and Trea-
sury” is corrected to read “personnel from
the IRS and the Treasury”.
LaNita Van Dyke,
Chief, Publications and
Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on August 10,
2007, 8:45 a.m., and published in the issue of the Federal
Register for August 13, 2007, 72 F.R. 45199)
Foundations Status of Certain
Organizations
Announcement 2007–82
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations
in the Cumulative List of Organizations
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations that are not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
21st Century Inventions, Inc.,
St. Louis, MO
39 East, Inc., Newport News, VA
99 Wayz 2 Win Foundation, Inc.,
Atlanta, GA
A1 Credit Counseling, Inc.,
Fort Smith, AR
Academy of MartialArts Foundation,
Inc., Scarsdale, NY
Act Today Foundation, Las Vegas, NV
ADCO Development Corporation,
Commerce City, CO
Advocates for Better Health, Inc.,
San Diego, CA
African American Free Loan Corp.,
Cleveland Heights, OH
Afro Charity, Inc., St. Paul, MN
AJ’s Helping Hand, Lansing, MI
Alferdaws Islamic Center, Oakhurst, NJ
All Neighborhood Group Home, Inc.,
Jakin, GA
Allen-Lee Community Development
Corporation, Columbus, OH
Alpha Gardens Community Development
Corporation, Burgaw, NC
Alta Housing Corporation, Granbury, TX
American-Russian Education Assc., Inc.,
Scarsdale, NY
American Tae Kwon Do Foundation,
Sherwood, OR
Angels International, Inc., Rockville, MD
Animal Advocacy and Relief Foundation,
Encino, CA
Arizona Children First Shelter, Inc.,
Chandler, AZ
Artemis, Inc., Santa Fe, NM
ASJ, Inc., Hartford, CT
Assist by Knight, Inc., Philadelphia, PA
Autism Family Services of New Jersey,
Inc., Trenton, NJ
B & H Financial Educators, Inc.,
Arvada, CO
Barnabas Bar Petra, Inc., Fayetteville, NC
Baseball in Africa, Inc., Shrewsbury, MA
Basketball Services Unlimited,
Houston, TX
Black Heritage Rider, Inc., Piscataway, NJ
2007–40 I.R.B.749October 1, 2007

Boundless Development Corporation,
Memphis, TN
Brazilian Arts Foundation,
West Hollywood, CA
Building Young Leaders, Inc., Tulsa, OK
California Street Performers Association,
Richmond, CA
Call Kyle, Inc., Hamilton Square, NJ
Castle Center, Inc., Hazelton, PA
Centro De Restauracion Jesus Manantial
De Vida, Inc., Manati, PR
Challenging Minds, Carson, CA
Challenging the Arts,
North Richland Hills, TX
Changing Lives at Home, Inc.,
Baltimore, MD
Charity Horse Adoption & Rescue
Mission, Tomball, TX
Charlene’s Turtle Sanctuary,
Carrollton, TX
Cherish the Child Academy,
Hackettstown, NJ
Cherokee Heights Community
Development Corporation, Macon, GA
Child Safety Exchange, Torrance, CA
Childrens of the Light Academy,
Wichita, KS
Christian Education Network, Inc.,
Lexington, KY
Christian Life Services, Inc.,
Philadelphia, PA
Christopher’s Guests, Pittsburgh, PA
Chosen Generation, Fort Myers, FL
Church of the Simple Faith, Inc.,
Aubrey, TX
Citizens for Santo, Inc., Santo, TX
Coalition of Multi Ethnic Partnership and
Support Services B, Plainview, NY
Coccon, Inc., Charleston, WV
Come Back to Eden, Inc., Gresham, OR
Community Counseling Services of North
Carolina, Wilmington, NC
Community Energy Foundation, Tyler, TX
Community Housing Administration,
Columbia, SC
Community Transitional Services and
Resources, Los Angeles, CA
Community Voices in Action, Inc.,
Beaumont, TX
Connecticut Habilitation Centers,
Colchester, CT
Connie and Priscilla Mack Foundation,
Washington, DC
Covenant Medical Transporters, Inc.,
Birmingham, AL
Cowboys for Kids, Inc., Rhinebeck, NY
Creating Academic and Social Excellence
Youth Development Program, Inc.,
Cleveland, OH
Creative Biomedical Research Institute,
Philadelphia, PA
Crime Victims Advocacy Council,
Lansing, MI
Crisis Counseling Center, Bakersfield, CA
Cunningham Lifesafety Education Center,
Inc., Denver, CO
Current Elijah Ministries, Inc.,
The Woodlands, TX
Cyber Anthropology, Chevy Chase, MD
Cyber-Sight Foundation, Inc.,
Indianapolis, IN
D. R. Johnson Ministries, Centennial, CO
Dare to be Different of the Bay Area,
Alameda, CA
Design Workshop Foundation, Aspen, CO
Designer Sewing Tech Center, Chicago, IL
Dewdrop Foundation, Inc., Mableton, GA
Divine Works, Inc., Tallahassee, FL
DKY Developers Association, Mokena, IL
Downtown Miamisburg, Inc.,
Miamisburg, OH
End Times Storm Ministries, Inc.,
Oklahoma City, OK
Energy Master Planning Institute, Inc.,
Silver Spring, MD
Estate and Wealth Strategies Institute at
Michigan State University, Sarasota, FL
Evans Christian Learning Center, Inc.,
Columbus, MS
EveningofPrayerCEDC,Charleston,SC
Excel Youth Foundation, Irwindale, CA
Exsousia Ministries, Inc., Tulsa, OK
Fairview Community Development
Corporation, Inc., Birmingham, AL
Faithful Women of God—Paws Octave,
Elkton, MD
Family Service Organization,
New York, NY
Family Support Center of New Jersey,
Inc., Trenton, NJ
First Step Transitional Living Foundation,
Los Angeles, CA
Foundation for Evidence-Based Medicine
Education, Orange, CA
Foxmore Care, Inc., Corona, NY
Franklin Concept Group, Inc.,
Philadelphia, PA
Free for All Outreach Mission, Inc.,
Newton, GA
Freedom West Development Corporation,
Rockford, IL
Friends of Compton Creek, Compton, CA
Friends of River Park, Inc., Ellijay, GA
Friends of the Mohegans, Inc.,
Greenfield Pk, NY
G F F Community Development
Corporation, Inc., Kalamazoo, MI
Game Conservation International,
Fort Worth, TX
Genesis Full Life, San Antonio, TX
George Graff Westchester-Putman
Building Trades Scholarship Fund,
Elmsford, NY
Gerry and Franca Mulligan Foundation,
Inc., Westport, CT
Get on the Bus of Christ, Inc.,
Beaumont, TX
Global Relief Assistance, Inc.,
Beltsville, MD
GloryToGodMission,LaCrescenta,CA
Go Community Organization, Inc.,
Chicago, IL
Golden Gate, Lake City, SC
Grace & Mercy Christian Shelter,
Woodville, MS
Grace Foundation, Langley, WA
GracePoint America, Inc., Norcross, GA
Greater Bethel Development Corporation,
Charlotte, NC
Greater St. Paul Educational Center,
Port Allen, LA
Greater Works, Inc., Atlanta, GA
Green Door, Inc., Miami, FL
Greenwise Alliance, Inc., Annapolis, MD
Guided Endeavors, Inc.,
Mount Vernon, NY
Gunga Coleman-Helen Hunter Centers
for Success, West Hills, CA
Haggai Community Services,
Culver City, CA
Haitian American Professionals Coalition,
Inc., Fort Lauderdale, FL
Hammond Heights, Inc.,
North Augusta, SC
Hamptons Artillery, Centre Hall, PA
Harold B. Rhodes Music Foundation,
Pasadena, CA
Heavens Angel Paws, Lakewood, CA
Helping Animals Lives Organization,
Kerens, TX
Helping Hand Mission, Chicago, IL
Helpnow, Inc., Frederick, MD
Historic Royal Palaces, Inc.,
Washington, DC
Home Away From Home II,
Little Rock, AR
Homeward Bound Outreach, Stuttgart, AR
Hope Factory, Inc., Smithfield, RI
Hour of Restoration & Community
Development Corporation,
Cheneyville, LA
October 1, 20077502007–40 I.R.B.

IFF Foundation for Philanthropy,
Irvine, CA
Iluminadas Performing Arts School and
Educational Services, Inc., St. Paul, MN
Imua Transit Services, Honolulu, HI
In Depth Ministries, Inc., Houston, TX
In Line With the Word Ministries, Inc.,
Tallahassee, FL
Information Integrity Foundation,
Naperville, IL
Institute for At Risk Children,
Alexandria, VA
Institute for Research on Learning
Technology Visions, Inc., Menands, NY
Institute for the Healing Heart Foundation,
Houston, TX
Jackson Community Center for the Deaf,
Jackson, MS
Jackson Youth League, Jackson, MO
Jeto Productions, Inc., Pine Bluff, AR
Jetta’s Track Club, Inc., Bergensfield, NJ
Joetta Clark-Diggs Sports Foundation,
Inc., Hillsborough, NJ
John B. McLendon Foundation, Inc.,
Roswell, GA
JRT Productions, Inc., Starruca, PA
Kealakehe Ahupua’a 2020,
Kailua-Kona, HI
Khal-Khai, Inc., Warrensville Heights, OH
Khocolate Keepsakes II Childrens
Literacy Museum, Irving, TX
Kids 101, Inc., Eugene, OR
Kingdom Foundation, Somerset, KY
Kingdom Kids Child Placing Agency,
Lancaster, TX
Konkel Scholarship Foundation, Inc.,
Walsh, CO
Legal Clinic and Counseling Center, Inc.,
Alexandria, LA
Lifestyle Changes, Inc., Missouri City, TX
Lighthouse Core Development
Corporation, South Orange, NJ
Lithonia Development Corp., Inc.,
Lithonia, GA
Little Rock Community Development
Corp., Selma, AL
Logansport Health Education Center, Inc.,
Logansport, IN
London Bridges Kids Foundation,
Powder Springs, GA
M B International Refugee Center,
Orlando, FL
Make it Public, Inc., San Francisco, CA
Making a Difference in the Community,
Inc., Atlanta, GA
Medieval Properties, Incorporated,
Lakewood, CO
Michigan Dominators Softball Club,
Clinton, MI
Michigan National Organization
for Women Foundation, Inc.,
East Lansing, MI
Millennium Hills Development Group,
Inc., Murfreesboro, TN
Mind Star, Inc., San Diego, CA
Minnesota AG Network, Mahtomedi, MN
Morenci Area Community Center,
Morenci, MI
Mother Nature’s Axle-Economic
Development and Support,
Milwaukee, WI
Motivational Centers, Brooklyn, NY
Mt. Olive Housing, Inc., Myrtle Beach, SC
Museum of Pop Culture,
Redwood City, CA
MYGPA.ORG, Atlanta, GA
NAALA National Association for
the Advancement of Living Artists,
Houston, TX
National 12 Rounds Mentoring Program,
Inc., Bowie, MD
National Committee for History of Art,
Inc., Los Angeles, CA
Natural Health Research Institute,
San Diego, CA
Natures Creations, Inc., Borden, IN
Neily Peach Happy Home,
Willingboro, NJ
New City Community Development
Corporation, New Orleans, LA
New Covenant Christian Outreach,
Kemo, MO
New Covenant Community Education
Corporation, Dallas, TX
Next Chance Recovery Center of Atlanta,
Inc., Atlanta, GA
Nita’s Private Outreach Home,
Legrange, CA
North Florence Ministries of the Holy
Spirit, Inc., Florence, SC
NP Leadership Collaborative,
Birmingham, MI
Nu-Light Economic Development
Corporation, Houston, TX
Oakland Wrestling Club, Oakland, NJ
Oasis of Hope Ministries, Jefferson, TX
One Spirit One World,
Westlake Village, CA
Operation Educate, Highland Park, MI
Optimal Health Quest, Inc.,
Baltimore, MD
Orphan Charity, Costa Mesa, CA
Our Children’s Hope, Inc., Flanders, NJ
Outreach International, Inc., Branford, CT
Pagedale Community Association,
St. Louis, MO
Pairadocs Community Development
Corp., Dallas, TX
Panhandle Sports Medicine Association,
Amarillo, TX
Patterson/Horton Retreat Center & Youth
Home, Franklinton, LA
Peace Patrol Program, Inc.,
Missouri City, TX
Pearls of Wisdom, Yarnell, AZ
Peer Plus Education & Training
Advocates, Chicago, IL
People Helping People Help Themselves,
Salt Lake City, UT
People on the Rise Community
Economic Development Corporation,
Plainfield, NJ
People With Pride, Incorporated,
Ontario, CA
PHSmith,Houston,TX
Pleasant Grove Community Development
Service Center, Inc., Fairfield, AL
Positive Focus Foundation, Inc.,
Washington, DC
Pride of Wisconsin Farms, Inc., Elroy, WI
Progressive Care Systems, Inc.,
St. Clair Shores, MI
Projects for Positive Change,
Roseville, CA
Radiology Research Fund, Eugene, OR
RE-1J Foundation, Inc., Holyoke, CO
Recognizing All Cultures Equally, Inc.,
Portsmouth, VA
Recovering Pharmacists Network of
Florida, Inc., Longwood, FL
Regional Collection Education
Foundation, Inc., Marietta, OH
Restore Trust, Longville, LA
Rosslyn Academy International, Inc.,
Trout Run, PA
Ryan Stoller Fund for Acute Head Trauma
Patients, Inc., Perrysburg, OH
SAAF Group, Inc., Birmingham, AL
Safety First for Kids, Detroit, MI
San Diego Foundation for Recovery,
San Diego, CA
Sapintia Culture and Education
Foundation, Bellevue, WA
Save The Rain Forests Foundation,
Las Vegas, NV
Saving Noahs Generation, Inc.,
Kansas City, MO
Seafaring College, Inc., Sarasota, FL
Second Chance for Teens, Incorporated,
Baltimore, MD
Seeds of Salvation Christian Ministry,
Elk Grove, CA
2007–40 I.R.B.751October 1, 2007

Service to Mankind Foundation, Inc.,
Jasper, GA
Shango, Inc., Center for the Study of
African American Art and Culture,
Dayton, OH
Skills Development for Self Reliance,
Marietta, GA
South Central Training & Research
Consortium, Los Angeles, CA
Sports Resource Program,
Rancho Palos Verdes, CA
Springfield Tigers,Inc., Springfield, IL
Starfestival, Lexington, MA
Strong Women of God, Inc., Baldwin, FL
Suburban Chamber of Commerce
Foundation, Willow Grove, PA
Support Teen Outreach Program,
Doylestown, PA
Sword of Splendor International Ministry,
Inc., Bronx, NY
Tarae Simone Family Services, Inc.,
Bellflower, CA
TCR Children’s Services,
East Palo Alto, CA
Teen Action Program, Los Angeles, CA
Texas Prostate Cancer Coalition,
Houston, TX
TJ Family Enterprise, Inc., Mokena, IL
To Kindle Spirit A Not For Profit
Corporation, Annandale, VA
Transcom Community Development
Corp., Houston, TX
Tree of Life Economic Development, Inc.,
Birmingham, AL
Trost Living Charities, Orlando, FL
TS August, Reston, VA
Turning Point Educational Experience,
Spring Hill, TN
Tyler County Ministers Union,
Chester, TX
Union Valley Outreach Ministries, Inc.,
Wynne, AR
United Christian Children’s Fund,
Tukwila, WA
Venture Capital & Loan, Inc.,
Mount Pleasant, MI
Victory Resource Institute,
Springfield, MO
Vocational Education and Careers
Centers, Riverdale, GA
WCI Educational Foundation,
Asheville, NC
Westerville Cats Baseball Club,
Cumberland, MD
Will Power-Power, Houston, TX
William and Sylvia Development
Corporation, Philadelphia, PA
Willis Center for Personal Growth
and Development, Incorporated,
Inglewood, CA
Women in Transition, Inc., Baltimore, MD
Work Life Initiatives, Inc.,
West Chester, PA
Working Together as One Production,
Humble, TX
Workshops Unlimited, Inc.,
Royal Palm Beach, FL
Zapotlan Project, Inc., Argyle, TX
Zara’ Ministries, Belleville, IL
Zoe Group Outreach, Norcross, GA
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nal Revenue Service will issue a ruling or
determination letter with the revised clas-
sification as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
vided in section 1.509(a)–7 of the Income
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
Exclusions From Gross Income
of Foreign Corporations;
Correction
Announcement 2007–83
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correcting amendment.
SUMMARY: This document contains cor-
rections to final and temporary regulations
(T.D. 9332, 2007–32 I.R.B. 300) that were
published in theFederal Registeron
Monday, June 25, 2007 (72 FR 34600)
relating to the exclusion from gross in-
come of income derived by certain foreign
corporations engaged in the international
operation of ships or aircraft.
DATES: The correction is effective August
13, 2007.
FOR FURTHER INFORMATION
CONTACT: Patricia A. Bray, (202)
622–3880 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final and temporary regulations
that are the subject of this correction are
under section 883 of the Internal Revenue
Code.
Need for Correction
As published, final and temporary reg-
ulations (T.D. 9332) contain an error that
may prove to be misleading and is in need
of clarification.
*****
Correction of Publication
Accordingly, 26 CFR part 1 is cor-
rected by making the following correcting
amendment:
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 1.883–1 is amended
by revising paragraph (h)(3) to read as fol-
lows:
§ 1.883–1 Exclusion of income from
the international operation of ships or
aircraft.
*****
(h) * * *
(3) For further guidance, see the entry
for § 1.883–1T(h)(3).
*****
LaNita Van Dyke,
Chief, Publications and
Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on August 10,
2007, 8:45 a.m., and published in the issue of the Federal
Register for August 13, 2007, 72 F.R. 45159)
October 1, 20077522007–40 I.R.B.

Payout Requirements for Type
III Supporting Organizations
That are Not Functionally
Integrated
Announcement 2007–87
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Advance notice of proposed
rulemaking.
SUMMARY: This document describes
rules that the Treasury Department and
the IRS anticipate proposing, in a notice
of proposed rulemaking, regarding the
payout requirements for Type III support-
ing organizations that are not functionally
integrated, the criteria for determining
whether a Type III supporting organization
is functionally integrated, the modified re-
quirements for Type III supporting organi-
zations that are organized as trusts, and the
requirements regarding the type of infor-
mation a Type III supporting organization
must provide to its supported organiza-
tion(s) to demonstrate that it is responsive
to its supported organization(s). Sections
1241and1243ofthePensionProtection
Act of 2006 amended the law with re-
spect to Type III supporting organizations
prompting a need to revise the Treasury
Regulations regarding the four matters
mentioned above. These new require-
ments and criteria would apply to Type III
supporting organizations as defined under
sections 509(a)(3)(B)(iii) and 4943(f)(5)
of the Internal Revenue Code (Code). This
document also invites comments from the
public regarding the proposed payout re-
quirement and the proposed criteria for
qualifying as functionally integrated. All
materials submitted will be available for
public inspection and copying.
DATES: Written or electronic comments
must be submitted by October 31, 2007.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–155929–06), room
5203, Internal Revenue Service, PO 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–155929–06),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, D.C., or sent electroni-
cally via the Federal eRulemaking Por-
tal at http://www.regulations.gov/(IRS
REG–155929–06).
FOR FURTHER INFORMATION
CONTACT: Concerning submissions,
Richard A. Hurst at (202) 622–2949
(TDD Telephone) and his e-mail address
isRichard.A.Hurst@irscounsel.treas.gov;
concerningtheproposed
rules,Philip T. Hackney or
Michael B. Blumenfeld at (202) 622–6070
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
The Pension Protection Act of 2006,
Pub. L. No. 109–280, 120 Stat. 780
(2006) (PPA), amended the requirements
that an organization exempt from tax under
section 501(c)(3) of the Code must meet to
qualify as a Type III supporting organiza-
tion under section 509(a)(3) of the Code.
This advanced notice of proposed rule-
making describes the rules that the Trea-
sury Department and the IRS expect to
propose to implement the new qualifica-
tion requirements for Type III supporting
organizations enacted by Congress and so-
licits comments from the public.
Public Charities versus Private
Foundations
Under section 509(a), an organization
described in section 501(c)(3) is a private
foundation unless it meets the require-
ments of section 509(a)(1), (2), (3), or
(4). Organizations described in section
501(c)(3) that meet the requirements of
section 509(a)(1), (2), (3), or (4) are re-
ferred to as public charities.
Private foundations, which are gener-
ally divided into two categories, operating
and non-operating, depending on the type
of activity in which the foundation en-
gages, are subject to a different set of
requirements than those applicable to pub-
lic charities. Sections 4940 through 4948
impose various restrictions and excise
taxes on private foundations along with
their disqualified persons and foundation
managers, that are generally not applica-
ble to public charities. Furthermore, more
stringent deduction limitations apply to
contributions made to private non-operat-
ing foundations than apply to contributions
to public charities. For example, under
section 170(b)(1)(A), an individual who
makes a cash contribution to a public char-
ity may deduct up to fifty percent of his or
her contribution base (a modified adjusted
gross income amount) in the year of his or
her contribution, while the same contribu-
tion to a private non-operating foundation
would be limited to thirty percent of the in-
dividual’s contribution base under section
170(b)(1)(B). In addition, deductions for
contributions of certain appreciated prop-
erty to a private non-operating foundation
are limited to the contributor’s basis in
the property under section 170(e)(1)(A),
while the same contribution to a public
charity could result in a deduction based
on the property’s fair market value under
section 170(e)(1)(B)(ii).
Supporting Organizations
Public charities that meet the require-
ments of section 509(a)(3) are known as
supporting organizations. To be classified
as a supporting organization, an organiza-
tion must satisfy an organizational test, an
operational test, a relationship test, and a
disqualified person control test. The or-
ganizational and operational tests require
that the organization be organized and at
all times thereafter operated exclusively
for the benefit of, to perform the functions
of, or to conduct the purposes of one or
more publicly supported organizations de-
scribed in section 509(a)(1) or (2). The
relationship test requires that the organ-
ization be operated, supervised, or con-
trolled by or in connection with one or
more publicly supported organizations. Fi-
nally, the disqualified person control test
requires that the organization not be con-
trolled directly or indirectly by certain dis-
qualified persons.
2007–40 I.R.B.753October 1, 2007

Relationship Test
Treasury Regulation (Treas. Reg.)
§ 1.509(a)–4(f)(2) sets forth three struc-
tural or operational relationships a sup-
porting organization is permitted to have
with its supported organization(s). Each
supporting organization must have one of
the three types of relationships with the
organization(s) it supports to be a sup-
porting organization described in section
509(a)(3) of the Code. The purpose of the
relationship requirement is to ensure that a
supporting organization has a sufficiently
close tie to one or more publicly supported
organizations such that the supporting or-
ganization will be accountable to a broader
public constituency.
A supporting organization that is oper-
ated, supervised or controlled by one or
more publicly supported organizations is
commonly known as a Type I supporting
organization. The relationship a Type I
supporting organization has with its sup-
ported organization(s) is comparable to
that of a parent-subsidiary relationship.
A supporting organization supervised or
controlled in connection with one or more
publicly supported organizations is com-
monly known as a Type II supporting
organization. The relationship a Type II
supporting organization has with its sup-
ported organization(s) is comparable to
a brother-sister corporate relationship. A
supporting organization that is operated in
connection with one or more publicly sup-
ported organizations is commonly known
as a Type III supporting organization.
Qualification Requirements for Type
III Supporting Organizations Prior to
Enactment of the Pension Protection Act
In general, Treas.Reg.
§ 1.509(a)–4(i)(1) requires an organ-
ization to meet a “responsiveness test”
and an “integral part test” to satisfy the
relationship requirement for a Type III
supporting organization.
Responsiveness Test: General Rule.
Treas. Reg. § 1.509(a)–4(i)(2)(i) provides
that an organization is “considered to meet
the ‘responsiveness test’ if the organiza-
tion is responsive to the needs or demands
of” its publicly supported organizations.
Treas. Reg. § 1.509(a)–4(i)(2)(ii) pro-
vides that a supporting organization may
demonstrate responsiveness to its publicly
supported organization(s) if: (1)(a) one or
more of its officers, directors, or trustees
are elected or appointed by the officers,
directors, trustees, or membership of its
publicly supported organization(s), (b)
one or more members of the governing
bodies of its publicly supported organi-
zation(s) are also officers, directors, or
trustees of, or hold other important of-
fices in, the supporting organization, or
(c) the officers, directors, or trustees of the
supporting organization maintain a close,
continuous working relationship with the
officers, directors, ortrustees of its pub-
licly supported organization(s); and (2) by
reason of such arrangement, the officers,
directors, or trustees of its publicly sup-
ported organization(s) have a significant
voice in the investment policies of the
supporting organization, the timing and
the manner of making grants, the selection
of the grant recipients by the supporting
organization, and otherwise directing the
use of the income or assets of the support-
ing organization.
In addition, with respect to an organi-
zation that was supporting a publicly sup-
ported organization before November 20,
1970, Treas. Reg. § 1.509(a)–4(i)(1)(ii)
provides that additional facts and circum-
stances, such as a historic and continuing
relationship between the supporting organ-
ization and its supported organization(s),
may be taken into account, in addition to
the factors described in the general respon-
siveness test above, to establish compli-
ance with the responsiveness test.
Responsiveness Test:Charitable
Trusts.Before enactment of the PPA, one
way of satisfying the responsiveness test,
under Treas. Reg. § 1.509(a)–4(i)(2)(iii),
required that (1) the supporting organ-
ization be a charitable trust under state
law, (2) each publicly supported organi-
zation that the trust supports be named as
a beneficiary under the charitable trust’s
governing instrument, and (3) each ben-
eficiary organization have the power to
enforce the trust and compel an account-
ing under State law. As described below,
this method of satisfying the responsive-
ness test was effectively removed by the
PPA.
Integral Part Test.Treas. Reg.
§ 1.509(a)–4(i)(3)(i) provides that a sup-
porting organization is required to es-
tablish that “it maintains a significant
involvement in the operations of one or
more publicly supported organizations
and such publicly supported organiza-
tions are in turn dependent upon the
supporting organization for the type of
support which it provides.” Treas. Reg.
§ 1.509(a)–4(i)(3)(ii) and (iii) sets forth
two alternative ways to meet the integral
part test. The first method is typically
referred to as the “but for” test. In this
advance notice of proposed rulemaking,
the second method of meeting the integral
part test will be referred to as the “atten-
tiveness” test.
Integral Part Test, Alternative I: the
“but for” test.Under Treas. Reg.
§ 1.509(a)–4(i)(3)(ii) the “but for” test
is satisfied if “the activities engaged in
[by the supporting organization] for or
on behalf of the publicly supported or-
ganizations are activities to perform the
functions of, or to carry out the purposes
of, such organizations, and, but for the in-
volvement of the supporting organization,
would normally be engaged in by the pub-
licly supported organizations themselves.”
Integral Part Test, Alternative II:
the “attentiveness” test.The “at-
tentiveness” test, under Treas. Reg.
§ 1.509(a)–4(i)(3)(iii), requires a sup-
porting organization to (1) make pay-
ments of substantially all of its income
to or for the use of one or more pub-
licly supported organizations, (2) provide
enough support to one or more publicly
supported organizations to insure the at-
tentiveness of such organizations to the
operations of the supporting organiza-
tion, and (3) pay a substantial amount
of the total support of the supporting or-
ganization to those publicly supported
organizations that meet the attentiveness
requirement. Rev. Rul. 76–208, 1976–1
C.B. 161, (see § 601.601(d)(2) of this
chapter), provides that the phrase “sub-
stantially all of its income” in Treas. Reg.
§ 1.509(a)–4(i)(3)(iii) means at least 85
percent of its adjusted net income.
PPA Amendments to Qualification
Requirements for Type III Supporting
Organizations
The PPA amended the qualification re-
quirements for Type III supporting orga-
nizations, modifying both the integral part
test and the responsiveness test.
Sections 1241 and 1243 of the PPA en-
acted Code sections 509(f) and 4943(f)(5).
October 1, 20077542007–40 I.R.B.

These provisions define the term Type
III supporting organization and distin-
guish between functionally integrated and
non-functionally integrated Type III sup-
porting organizations. These two new
categories appear toreflect the distinc-
tion drawn in the Treasury Regulations
between those organizations that meet the
integral part test by meeting the “but for”
test and those that meet the integral part
test by meeting the “attentiveness” test.
In conformity with existing Treasury
Regulations, new section 4943(f)(5)(A)
defines a Type III supporting organiza-
tion as a supporting organization that is
operated in connection with one or more
section 509(a)(1) or (2) organizations.
New section 4943(f)(5)(B) defines a func-
tionally integrated Type III supporting
organization as a Type III supporting
organization that is not required under
regulations established by the Secretary
to make payments to supported organiza-
tions due to the activities of the organi-
zation related to performing the functions
of, or carrying out the purposes of, such
supported organizations. Although this
language appears similar to the “but for”
prong of the integral part test, the Staff
of the Joint Committee on Taxation in
its technical explanation of the provision
notes that there is “concern that the cur-
rent regulatory standards for satisfying
the integral part test not by reason of a
payout [i.e., the existing “but for” test]
are not sufficiently stringent to ensure that
there is a sufficient nexus between the
supporting and supported organizations.”
See Staff of the Joint Committee on Tax-
ation,Technical Explanation of H.R. 4,
the “Pension Protection Act of 2006,” as
Passed by the House on July 28, 2006, and
as Considered by the Senate on August 3,
2006(JCX–38–06) at 360 n. 571, August
3, 2006 (Technical Explanation). In par-
ticular, the Technical Explanation states
that in revising the Type III supporting or-
ganization regulationsthe Secretary “shall
strengthen the standard for qualification as
[a Type III supporting] organization that is
not required to pay out.”Id.
Section 1241(d)(1) of the PPA directed
the Secretary to promulgate new regula-
tions on the payments required by Type III
supporting organizations that are not func-
tionally integrated. Section 1241(d)(1)
of the PPA provides that such regulations
shall require non-functionally integrated
Type III supporting organizations to make
distributions of a “percentage of either in-
come or assets to supported organizations
(defined in new section 509(f)(3) of [the]
Code) in order to ensure that a significant
amount is paid” to their supported organi-
zations. The Technical Explanation notes
that there is concern that merely requiring
a Type III supporting organization to pay
out substantially all of its net income (as
under the “attentiveness” prong of the in-
tegral part test) does not necessarily result
in significant distributions to publicly sup-
ported organizations relative to the value
of the assets held by the Type III sup-
porting organization and “as compared to
amounts paid out by nonoperating private
foundations.” See Technical Explanation
at 360 n. 571.
Section 1241(c) of the PPA modified
the responsiveness test as it applies to char-
itable trusts. Effectively, section 1241(c)
provides that having each organization that
the trust supports be a publicly supported
organization named as a beneficiary under
the trust’s governing instrument and estab-
lishing that each beneficiary organization
has the power to enforce the trust and com-
pel an accounting is no longer sufficient to
satisfy the responsiveness test as provided
in Treas. Reg. § 1.509(a)–4(i)(2)(iii).
The Technical Explanation states that a
Type III supporting organization orga-
nized as a trust must now “establish to
the satisfaction of the Secretary, that it
has a close and continuous relationship
with the supported organization such that
the trust is responsive to the needs or
demands of the supported organization.”
Technical Explanation at 362. Under sec-
tion 1241(e)(2)(A) of the PPA, trusts that
operated in connection with a publicly sup-
ported organization on August 17, 2006,
have until August 17, 2007 to satisfy the
modified responsiveness test under Treas.
Reg. 1.509(a)–4(i)(2)(ii). For other trusts,
the provision was effective on August 17,
2006.
Finally, section 1241(b) added section
509(f)(1)(A), whichcontains another re-
quirement for Type III supporting organi-
zations. The provision requires a Type III
supporting organization to provide each of
its supported organizations with “such in-
formation as the Secretary may require to
ensure that such organization is responsive
to the needs or demands of the supported
organization.”
As described in this advanced notice
of proposed rulemaking, the Treasury De-
partment and the IRS intend to propose
regulations that provide (1) the payout re-
quirements for Type III supporting organi-
zations that are not functionally integrated,
(2) the criteria for determining whether a
Type III supporting organization is func-
tionally integrated, (3) the modified re-
sponsiveness test for Type III supporting
organizations that are organized as charita-
ble trusts, and (4) the type of information
a Type III supporting organization will be
required to provide to its supported organ-
ization(s) to demonstrate that it is respon-
sive.
Explanation of Provisions
Summary of Proposed Criteria for
Qualifying as a Type III Supporting
Organization
The Treasury Department and the IRS
expect that all Type III supporting or-
ganizations will be required to meet the
responsiveness test under Treas. Reg.
§ 1.509(a)–4(i)(2)(ii). In addition, it is
expected that Type III supporting or-
ganizations that are functionally inte-
grated will be required to meet: (A) the
“but for” test in existing Treas. Reg.
§ 1.509(a)–4(i)(3)(ii); (B) an expendi-
ture test that will resemble the qualifying
distributions test for private operating
foundations; and (C) an assets test that
will resemble the alternative assets test for
private operating foundations. Finally, it is
expected that a Type III supporting organ-
ization that is not functionally integrated
will be required to meet a payout require-
ment equal to the qualified distribution
requirement of a private non-operating
foundation. In addition, there will be a
limit on the number of publicly supported
organizations a non-functionally inte-
grated Type III supporting organization
may support. These proposed criteria for
qualifying as a Type III supporting organ-
ization will replace the integral part test in
the existing regulations. These provisions
are explained in more detail below.
Definition of Functionally Integrated
Type III Supporting Organization and
2007–40 I.R.B.755October 1, 2007

the Applicability of Private Operating
Foundation Rules
Private operating foundations under
section 4942(j)(3) share strong similari-
ties with Type III functionally integrated
supporting organizations under section
4943(f)(5)(B) in that both are expected
to be directly engaged in the active con-
duct of charitable activities rather than
only making grants to, or for the use of,
charitable organizations. The Code and
Treasury Regulations provide extensive
rules used to determine whether a private
foundation is a private operating founda-
tion. See section 4942(j)(3) and Treas.
Reg. § 53.4942(b). The Treasury De-
partment and the IRS believe that these
rules provide a useful model for devel-
oping standards to determine whether a
Type III supporting organization is func-
tionally integrated, and that adoption of
similar rules under section 4943(f)(5)(B)
will further the Congressional purpose
articulated in the Technical Explanation of
strengthening the nexus between a func-
tionally integrated Type III supporting
organization and the publicly supported
organization(s) it supports.
To qualify as a private operating foun-
dation under section 4942(j)(3), an organ-
ization must satisfy a qualifying distribu-
tions test and one of three alternative tests
described below. Under the qualifying dis-
tributions test, a private operating foun-
dation must make qualifying distributions
“directly for the active conduct of the ac-
tivities constituting the purpose or function
for which it is organized and operated,”
equal to substantiallyall (at least 85 per-
cent) of the lesser of its adjusted net in-
come or its minimum investment return.
Under section 4942(e)(1), the minimum
investment return is equal to 5 percent of
the excess of (A) the aggregate fair market
value of all the foundation’s assets other
than those used (or held for use) directly
in carrying out the organization’s exempt
purpose over (B) the acquisition indebted-
ness with respect to such assets. Under
Treas. Reg. § 53.4942(b)–1(b)(1), a qual-
ifying distribution directly for the active
conduct of activities constituting the foun-
dation’s exempt purpose is a distribution
that is used by the foundation itself to carry
out its exempt activities rather than paid to
other organizations to help them carry out
their exempt activities.
In addition, a private operating foun-
dation must meet one of three alternative
tests: an assets test, an endowment test
or a support test. The assets test, under
section 4942(j)(3)(B)(i) and Treas. Reg.
§ 53.4942(b)–2(a), requires that substan-
tially more than half (at least 65 percent) of
the assets of an operating foundation must
be devoted directly to the private operat-
ing foundation’s exempt purpose activi-
ties, or to functionally related businesses
(see section 4942(j)(4)), or both, or are
stock of a corporation controlled by, and
substantially all (at least 85 percent) of
the assets of which are devoted to, the
foundation. The endowment test, under
Treas. Reg. § 53.4942(b)–2(b), requires
a foundation to make qualifying distribu-
tions directly for theactive conduct of its
exempt activities in an amount not less
than two thirds of its minimum investment
return. The support test, under Treas. Reg.
§ 53.4942(b)–2(c), is satisfied if substan-
tially all (85 percent) of a foundation’s
support (other than gross investment in-
come) is normally received from the gen-
eral public and from five or more exempt
organizations that are not related to each
other or the recipient foundation, if the
foundation does not normally receive more
than 25 percent of its support from any
one such exempt organization; and if the
foundation does not normally receive more
than 50 percent of its support from gross
investment income.
Description of the Proposed Functionally
Integrated Test
The Treasury Department and the IRS
anticipate that the proposed regulations
will define the term functionally integrated
Type III supporting organization as a Type
III supporting organization that meets: (A)
the “but for” test in existing Treas. Reg.
§ 1.509(a)–4(i)(3)(ii); (B) an expenditure
test consistent with section 4942(j)(3)(A);
and (C) an assets test consistent with sec-
tion 4942(j)(3)(B)(i). It is expected that
the expenditure test will require a func-
tionally integrated Type III supporting
organization to use substantially all of the
lesser of (a) its adjusted net income or (b)
five percent of the aggregate fair market
value of all its assets (other than assets
that are used, or held for use, directly in
supporting the charitable programs of the
supported organizations) directly for the
active conduct of activities that directly
further the exempt purposes of the orga-
nizations it supports. The assets test will
require the organization to devote at least
65 percent of the aggregate fair market
value of all its assets directly for the active
conduct of activities that directly further
the exempt purposes of the organizations
it supports. The Treasury Department and
the IRS believe that requiring functionally
integrated Type III supporting organiza-
tions to satisfy the expenditure and assets
tests, in addition to the “but for” test, will
be stronger than the existing integral part
test and ensure a sufficient nexus between
a supporting organization and the organi-
zation(s) it supports. These tests also will
ensure that a sufficient amount is being
dedicated directly to the active conduct of
activities that further the exempt purposes
of publicly supported organizations.
The term “adjusted net income” is
expected to have substantially the same
meaning as that term has in section 4942(f)
and Treas. Reg. § 53.4942(a)–2(d). The
valuation of assets is expected to be de-
termined in a manner similar to the rules
under section 4942(e)(2) and Treas. Reg.
§ 53.4942(a)–2(c)(4).
The Treasury Department and the IRS
also intend that certain Type III supporting
organizations that oversee or facilitate the
operation of an integrated system that in-
cludes one or more charities and that may
be unable to satisfy the “direct active con-
duct” and “directly further” requirements
of the expenditure and assets tests, such as
certain hospital systems, will be classified
as functionally integrated in the proposed
regulations if they satisfy the existing “but
for” test.
The proposed regulations will not per-
mit a functionally integrated Type III sup-
porting organization to qualify as function-
ally integrated by using the endowment
or support tests that are available to pri-
vate operating foundations as alternatives
to the proposed assets test. Because the
endowment test is similar to the expen-
diture test, the Treasury Department and
the IRS believe that the endowment test
would not provide sufficient additional as-
surances of a tight nexus between a func-
tionally integrated supporting organization
and its supported organizations. Further-
more the support test, which focuses on
sources of support received by a private
foundation rather than on its activities, ap-
October 1, 20077562007–40 I.R.B.

pears to be inapplicable to the functionally
integrated concept. By requiring at least
65 percent of the value of all assets of each
functionally integrated supporting organi-
zation to be devoted directly for the active
conduct of the activities of its supported
organizations, the proposed assets test is
intended to ensure that the connection be-
tween the supporting and supported orga-
nizations is significant.
Payout Requirement for Type III
Supporting Organizations that are not
Functionally Integrated
In establishing a payout requirement
for non-functionally integrated Type III
supporting organizations, the Treasury
Department and the IRS expect to fol-
low the framework of the existing section
4942 qualifying distribution regulations
applicable to private non-operating foun-
dations. Private non-operating founda-
tions have operated under these qualifying
distribution regulations for many years.
The Treasury Department and the IRS
believe these rules are appropriate for
Type III grant-making organizations, and
would further the Congressional purpose
articulated in the Technical Explanation
of ensuring that, as compared to amounts
paid out by private non-operating founda-
tions, significant amounts are being paid
to supported organizations even if the sup-
porting organization’s assets produce little
or no income.
A private non-operating foundation
is required under section 4942 to make
certain qualifying distributions or pay an
excise tax. A private non-operating foun-
dation is generally liable for this excise
tax under section 4942(a) and (b) if it does
not make qualifying distributions each
year equal to its minimum investment re-
turn. The minimum investment return is
five percent of the aggregate fair market
value of all the foundation’s assets other
than those used (or held for use) directly
in carrying out the organization’s exempt
purpose over the acquisition indebtedness
with respect to such assets. Qualifying
distributions under section 4942(g) are
generally those distributions (including
reasonable and necessary administrative
expenses) paid to accomplish charitable
purposes.
Description of the Proposed Payout Rule
The Treasury Department and the IRS
anticipate that the proposed regulations
will (A) require a non-functionally inte-
grated Type III supporting organization to
meet a payout requirement and (B) limit
the number of publicly supported organi-
zations a non-functionally integrated Type
III supporting organization may support.
The payout requirement will call for a
Type III supporting organization that is not
functionally integrated to distribute annu-
ally to or for the use of its supported or-
ganizations an amount equal to at least
five percent of the aggregate fair market
value of all its assets (other than assets that
are used, or held for use, directly in sup-
porting the charitable programs of its sup-
ported organizations). Additionally, the
Treasury Department and the IRS are con-
cerned that a supporting organization’s re-
lationship with andaccountability to its
supported organizations is diminished as
the number of its supported organizations
increases. Accordingly, except for organi-
zations in existence on or before the date
the regulations are proposed, it is expected
that the proposed regulations will also pro-
vide that non-functionally integrated Type
III supporting organizations will be limited
to supporting no more than five publicly
supported organizations. An organization
in existence on or prior to the date regula-
tions are proposed may support more than
five supported organizations only if the or-
ganization distributes at least 85 percent
of its total required payout amount to, or
for the use of, publicly supported organi-
zations to which the supporting organiza-
tion is responsive pursuant to Treas. Reg.
§ 1.509(a)–4(i)(2)(ii). The anticipated pro-
posed payout rules are intended to ensure
that a non-functionally integrated Type III
supporting organization has a tight nexus
with its supported organization(s).
The Treasury Department and the IRS
recognize that requiring an existing Type
III supporting organization that supports
more than five supported organizations to
provide 85 percent of its total required
payout to those supported organizations
to which it is responsive may affect ex-
isting donee relationships. The Treasury
Department and the IRS solicit comments
on whether transitional rules are needed
with respect to this proposed limitation re-
garding distributions to supported organi-
zations.
The valuation of assets for purposes of
the payout requirement is expected to be
determined in a manner similar to that un-
der section 4942(e)(2) and Treas. Reg.
§ 53.4942(a)–2(c)(4). The proposed dis-
tribution rules will be similar to the distri-
bution rules under section 4942. It is ex-
pected that amounts paid by an organiza-
tion to accomplish the exempt purposes of
its supported organizations will be consid-
ered as distributed to or for the use of its
supported organization(s).
Responsiveness Test
Except as explained below with respect
to charitable trusts, the Treasury Depart-
ment and the IRS do not expect to mod-
ify the responsiveness test. Thus, all Type
III supporting organizations will be ex-
pected to meet the responsiveness test un-
der Treas. Reg. § 1.509(a)–4(i)(2)(ii). Ac-
cordingly, a Type III supporting organiza-
tion will be expected to demonstrate the
necessary relationship between its officers,
directors or trustees and those of its sup-
ported organization(s), and further show
that this relationship results in the officers,
directors or trustees of its supported organ-
ization(s) having a significant voice in the
operations of the supporting organization.
Responsiveness Test for Charitable Trusts
Consistent with section 1241(c) of the
PPA, discussed in the Background sec-
tion above, the proposed regulations will
provide that charitable trusts must satisfy
the responsiveness test under Treas. Reg.
§ 1.509(a)–4(i)(2)(ii). Thus, for instance,
a trust would be expected to show that its
trustees have a close, continuous working
relationship with theofficers, directors,
or trustees of the publicly supported or-
ganization(s) it supports and that through
such relationship the officers, directors or
trustees of its publicly supported organ-
ization(s) have a significant voice in the
operations of the supporting organization.
Comments are requested with respect to
potential transition relief given that the
statute directs that this modified test apply
as of August 17, 2007 to trusts already in
existence on the date of enactment of the
PPA.
2007–40 I.R.B.757October 1, 2007

Requirement to Provide Supported
Organizations with Information
Regarding Responsiveness
The proposed regulations will provide
rules for the form, content and timing of
the information Type III supporting or-
ganizations are required to provide their
supported organization(s) under section
509(f)(1)(A). The Treasury Department
and the IRS solicit comments as to what
information the Secretary should require
a Type III supporting organization to pro-
vide to each of its supported organizations
to ensure that such supporting organiza-
tion is responsive to the needs or demands
of its supported organization(s).
Consequences for Failing to Satisfy the
Proposed Tests
The proposed regulations will clarify
that an organization that would otherwise
be classified as a Type III supporting or-
ganization, but either does not establish
that it is functionally integrated or does
not satisfy the payout requirement for non-
functionally integrated organizations in a
taxableyear,willbeclassifiedasaprivate
foundation for such taxable year and all
subsequent taxable years until it terminates
its private foundation status under section
507. The Treasury Department and the
IRS solicit comments on how the require-
ments for a private foundation termination
under section 507 should apply in these cir-
cumstances.
Transitional Issues
Implementation of the new qualifica-
tion requirements for Type III supporting
organizations enacted in the PPA will raise
transitional issues for certain organiza-
tions. For instance, an organization that
currently qualifies as a Type III supporting
organization by meeting the attentiveness
prong of the integral part test might be pro-
hibitedbyitscurrentgoverninginstrument
from distributing capital or corpus, thus
preventing it from being able to satisfy
the new payout requirement for non-func-
tionally integrated Type III supporting
organizations without a change to such
instrument. The Treasury Department
and the IRS invite comments regarding
potential transition rules for supporting
organizations in existence as of the date
of enactment of the PPA that will provide
such organizations a reasonable opportu-
nity to amend their governing instruments
or make other changes to comply with the
law as amended by the PPA.
Proposed Effective Date
Except as otherwise noted, the Trea-
sury Department and the IRS anticipate
that these new proposed rules for Type III
supporting organizations would apply to
taxable years with respect to each organ-
ization beginning after the date these rules
are published in the Federal Register as fi-
nal or temporary regulations.
Request for Comments
Before the notice of proposed rulemak-
ing is issued, consideration will be given
to any written comments (a signed origi-
nal and eight (8) copies)orelectroniccom-
ments that are submitted timely to the IRS.
All comments will be available for public
inspection and copying.
Drafting Information
The principal authors of this
advance notice of proposed rule-
making are Philip T. Hackney and
Michael B. Blumenfeld, Office of the
Chief Counsel (Tax-exempt and Govern-
ment Entities), however, other personnel
from the IRS and the Treasury Department
participated in its development.
Kevin M. Brown,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on August 1,
2007, 8:45 a.m., and published in the issue of the Federal
Register for August 2, 2007, 72 F.R. 42335)
October 1, 20077582007–40 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 rul-
ings 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.
2007–40 I.R.B.iOctober 1, 2007

Numerical Finding List
1
Bulletins 2007–27 through 2007–40
Announcements:
2007-61, 2007-28 I.R.B.84
2007-62, 2007-29 I.R.B.115
2007-63, 2007-30 I.R.B.236
2007-64, 2007-29 I.R.B.125
2007-65, 2007-30 I.R.B.236
2007-66, 2007-31 I.R.B.296
2007-67, 2007-32 I.R.B.345
2007-68, 2007-32 I.R.B.348
2007-69, 2007-33 I.R.B.371
2007-70, 2007-33 I.R.B.371
2007-71, 2007-33 I.R.B.372
2007-72, 2007-33 I.R.B.373
2007-73, 2007-34 I.R.B.435
2007-74, 2007-35 I.R.B.483
2007-75, 2007-36 I.R.B.540
2007-76, 2007-36 I.R.B.560
2007-77, 2007-38 I.R.B.662
2007-78, 2007-38 I.R.B.663
2007-79, 2007-40 I.R.B.749
2007-80, 2007-38 I.R.B.667
2007-81, 2007-38 I.R.B.667
2007-82, 2007-40 I.R.B.749
2007-83, 2007-40 I.R.B.752
2007-85, 2007-39 I.R.B.719
2007-86, 2007-39 I.R.B.719
2007-87, 2007-40 I.R.B.753
Notices:
2007-54, 2007-27 I.R.B.12
2007-55, 2007-27 I.R.B.13
2007-56, 2007-27 I.R.B.15
2007-57, 2007-29 I.R.B.87
2007-58, 2007-29 I.R.B.88
2007-59, 2007-30 I.R.B.135
2007-60, 2007-35 I.R.B.466
2007-61, 2007-30 I.R.B.140
2007-62, 2007-32 I.R.B.331
2007-63, 2007-33 I.R.B.353
2007-64, 2007-34 I.R.B.385
2007-65, 2007-34 I.R.B.386
2007-66, 2007-34 I.R.B.387
2007-67, 2007-35 I.R.B.467
2007-68, 2007-35 I.R.B.468
2007-69, 2007-35 I.R.B.468
2007-70, 2007-40 I.R.B.735
2007-71, 2007-35 I.R.B.472
2007-72, 2007-36 I.R.B.544
2007-73, 2007-36 I.R.B.545
2007-74, 2007-37 I.R.B.585
2007-75, 2007-39 I.R.B.679
2007-76, 2007-40 I.R.B.735
Notices— Continued:
2007-77, 2007-40 I.R.B.735
Proposed Regulations:
REG-121475-03, 2007-35 I.R.B.474
REG-128274-03, 2007-33 I.R.B.356
REG-114084-04, 2007-33 I.R.B.359
REG-149036-04, 2007-33 I.R.B.365
REG-149036-04, 2007-34 I.R.B.411
REG-101001-05, 2007-36 I.R.B.548
REG-119097-05, 2007-28 I.R.B.74
REG-128843-05, 2007-37 I.R.B.587
REG-142695-05, 2007-39 I.R.B.681
REG-147171-05, 2007-32 I.R.B.334
REG-148951-05, 2007-36 I.R.B.550
REG-163195-05, 2007-33 I.R.B.366
REG-118886-06, 2007-37 I.R.B.591
REG-128224-06, 2007-36 I.R.B.551
REG-138707-06, 2007-32 I.R.B.342
REG-139268-06, 2007-34 I.R.B.415
REG-142039-06, 2007-34 I.R.B.415
REG-144540-06, 2007-31 I.R.B.296
REG-148393-06, 2007-39 I.R.B.714
REG-103842-07, 2007-28 I.R.B.79
REG-116215-07, 2007-38 I.R.B.659
REG-118719-07, 2007-37 I.R.B.593
Revenue Procedures:
2007-42, 2007-27 I.R.B.15
2007-43, 2007-27 I.R.B.26
2007-44, 2007-28 I.R.B.54
2007-45, 2007-29 I.R.B.89
2007-46, 2007-29 I.R.B.102
2007-47, 2007-29 I.R.B.108
2007-48, 2007-29 I.R.B.110
2007-49, 2007-30 I.R.B.141
2007-50, 2007-31 I.R.B.244
2007-51, 2007-30 I.R.B.143
2007-52, 2007-30 I.R.B.222
2007-53, 2007-30 I.R.B.233
2007-54, 2007-31 I.R.B.293
2007-55, 2007-33 I.R.B.354
2007-56, 2007-34 I.R.B.388
2007-57, 2007-36 I.R.B.547
2007-58, 2007-37 I.R.B.585
2007-59, 2007-40 I.R.B.745
2007-60, 2007-39 I.R.B.679
2007-61, 2007-40 I.R.B.747
Revenue Rulings:
2007-42, 2007-28 I.R.B.44
2007-43, 2007-28 I.R.B.45
2007-44, 2007-28 I.R.B.47
2007-45, 2007-28 I.R.B.49
2007-46, 2007-30 I.R.B.126
2007-47, 2007-30 I.R.B.127
Revenue Rulings— Continued:
2007-48, 2007-30 I.R.B.129
2007-49, 2007-31 I.R.B.237
2007-50, 2007-32 I.R.B.311
2007-51, 2007-37 I.R.B.573
2007-52, 2007-37 I.R.B.575
2007-53, 2007-37 I.R.B.577
2007-54, 2007-38 I.R.B.604
2007-55, 2007-38 I.R.B.604
2007-56, 2007-39 I.R.B.668
2007-57, 2007-36 I.R.B.531
2007-58, 2007-37 I.R.B.562
2007-59, 2007-37 I.R.B.582
2007-60, 2007-38 I.R.B.606
Tax Conventions:
2007-75, 2007-36 I.R.B.540
Treasury Decisions:
9326, 2007-31 I.R.B.242
9327, 2007-28 I.R.B.50
9328, 2007-27 I.R.B.1
9329, 2007-32 I.R.B.312
9330, 2007-31 I.R.B.239
9331, 2007-32 I.R.B.298
9332, 2007-32 I.R.B.300
9333, 2007-33 I.R.B.350
9334, 2007-34 I.R.B.382
9335, 2007-34 I.R.B.380
9336, 2007-35 I.R.B.461
9337, 2007-35 I.R.B.455
9338, 2007-35 I.R.B.463
9339, 2007-35 I.R.B.437
9340, 2007-36 I.R.B.487
9341, 2007-35 I.R.B.449
9342, 2007-35 I.R.B.451
9343, 2007-36 I.R.B.533
9344, 2007-36 I.R.B.535
9345, 2007-36 I.R.B.523
9346, 2007-37 I.R.B.570
9347, 2007-38 I.R.B.624
9348, 2007-37 I.R.B.563
9349, 2007-39 I.R.B.668
9350, 2007-38 I.R.B.607
9351, 2007-38 I.R.B.616
9352, 2007-38 I.R.B.621
9353, 2007-40 I.R.B.721
9355, 2007-37 I.R.B.577
9356, 2007-39 I.R.B.675
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2007–1 through 2007–26 is in Internal Revenue Bulletin
2007–26, dated June 25, 2007.
October 1, 2007ii2007–40 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2007–27 through 2007–40
Announcements:
84-26
Obsoleted by
T.D. 9336, 2007-35 I.R.B.461
84-37
Obsoleted by
T.D. 9336, 2007-35 I.R.B.461
Notices:
89-110
Modified by
REG-142695-05, 2007-39 I.R.B.681
99-6
Obsoleted as of January 1, 2009 by
T.D. 9356, 2007-39 I.R.B.675
2002-45
Modified by
REG-142695-05, 2007-39 I.R.B.681
2003-81
Modified and supplemented by
Notice 2007-71, 2007-35 I.R.B.472
2006-1
Modified by
Notice 2007-70, 2007-40 I.R.B.735
2006-43
Modified by
T.D. 9332, 2007-32 I.R.B.300
2006-56
Clarified by
Notice 2007-74, 2007-37 I.R.B.585
2006-89
Modified by
Notice 2007-67, 2007-35 I.R.B.467
2007-3
Modified by
Notice 2007-69, 2007-35 I.R.B.468
2007-26
Modified by
Notice 2007-56, 2007-27 I.R.B.15
Proposed Regulations:
EE-16-79
Withdrawn by
REG-142695-05, 2007-39 I.R.B.681
EE-130-86
Withdrawn by
REG-142695-05, 2007-39 I.R.B.681
Proposed Regulations— Continued:
REG-243025-96
Withdrawn by
REG-142695-05, 2007-39 I.R.B.681
REG-117162-99
Withdrawn by
REG-142695-05, 2007-39 I.R.B.681
REG-157711-02
Corrected by
Ann. 2007-74, 2007-35 I.R.B.483
REG-119097-05
Hearing location change by
Ann. 2007-81, 2007-38 I.R.B.667
REG-109367-06
Hearing scheduled by
Ann. 2007-66, 2007-31 I.R.B.296
REG-138707-06
Corrected by
Ann. 2007-79, 2007-40 I.R.B.749
REG-143601-06
Corrected by
Ann. 2007-71, 2007-33 I.R.B.372
REG-143797-06
Cancellation of hearing by
Ann. 2007-85, 2007-39 I.R.B.719
REG-103842-07
Corrected by
Ann. 2007-77, 2007-38 I.R.B.662
Revenue Procedures:
90-27
Superseded by
Rev. Proc. 2007-52, 2007-30 I.R.B.222
95-28
Superseded by
Rev. Proc. 2007-54, 2007-31 I.R.B.293
97-14
Modified and superseded by
Rev. Proc. 2007-47, 2007-29 I.R.B.108
98-48
Modified by
T.D. 9353, 2007-40 I.R.B.721
2002-9
Modified and amplified by
Rev. Proc. 2007-48, 2007-29 I.R.B.110
Rev. Proc. 2007-53, 2007-30 I.R.B.233
2004-42
Superseded by
Notice 2007-59, 2007-30 I.R.B.135
2005-16
Modified by
Rev. Proc. 2007-44, 2007-28 I.R.B.54
Revenue Procedures— Continued:
2005-27
Superseded by
Rev. Proc. 2007-56, 2007-34 I.R.B.388
2005-66
Clarified, modified, and superseded by
Rev. Proc. 2007-44, 2007-28 I.R.B.54
2006-25
Superseded by
Rev. Proc. 2007-42, 2007-27 I.R.B.15
2006-27
Modified by
Rev. Proc. 2007-49, 2007-30 I.R.B.141
2006-33
Superseded by
Rev. Proc. 2007-51, 2007-30 I.R.B.143
2006-53
Modified by
Rev. Proc. 2007-60, 2007-39 I.R.B.679
2006-55
Superseded by
Rev. Proc. 2007-43, 2007-27 I.R.B.26
2007-4
Modified by
Notice 2007-69, 2007-35 I.R.B.468
2007-15
Superseded by
Rev. Proc. 2007-50, 2007-31 I.R.B.244
Revenue Rulings:
54-378
Clarified by
Rev. Rul. 2007-51, 2007-37 I.R.B.573
67-93
Obsoleted by
T.D. 9347, 2007-38 I.R.B.624
69-141
Modified by
REG-142695-05, 2007-39 I.R.B.681
74-299
Amplified by
Rev. Rul. 2007-48, 2007-30 I.R.B.129
75-425
Obsoleted by
Rev. Rul. 2007-60, 2007-38 I.R.B.606
76-450
Obsoleted by
T.D. 9347, 2007-38 I.R.B.624
78-257
Obsoleted by
T.D. 9347, 2007-38 I.R.B.624
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2007–1 through 2007–26 is in Internal Revenue Bulletin 2007–26, dated June 25, 2007.
2007–40 I.R.B.iiiOctober 1, 2007

Revenue Rulings— Continued:
78-369
Revoked by
Rev. Rul. 2007-53, 2007-37 I.R.B.577
89-96
Amplified by
Rev. Rul. 2007-47, 2007-30 I.R.B.127
92-17
Modified by
Rev. Rul. 2007-42, 2007-28 I.R.B.44
94-62
Supplemented by
Rev. Rul. 2007-58, 2007-37 I.R.B.562
2001-48
Modified by
T.D. 9332, 2007-32 I.R.B.300
2002-41
Modified by
REG-142695-05, 2007-39 I.R.B.681
2003-102
Modified by
REG-142695-05, 2007-39 I.R.B.681
2005-24
Modified by
REG-142695-05, 2007-39 I.R.B.681
2006-36
Modified by
REG-142695-05, 2007-39 I.R.B.681
2006-57
Modified by
Notice 2007-76, 2007-40 I.R.B.735
2007-59
Amplified by
Notice 2007-74, 2007-37 I.R.B.585
Treasury Decisions:
8073
Removed by
T.D. 9349, 2007-39 I.R.B.668
9321
Corrected by
Ann. 2007-68, 2007-32 I.R.B.348
Ann. 2007-78, 2007-38 I.R.B.663
9330
Corrected by
Ann. 2007-80, 2007-38 I.R.B.667
9332
Corrected by
Ann. 2007-83, 2007-40 I.R.B.752
October 1, 2007iv2007–40 I.R.B.

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