Internal Revenue Bulletin 2009-4 (PDF rendition): IRS Notices

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Bulletin No. 200
9-4
January 26, 2009
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9434, page 339.
Final regulations under section 368 of the Code provide guid-
ance on when and to what extent creditors of a corporation
will be treated as proprietors of the corporation in determining
whether continuity of interest is preserved in a potential reor-
ganization.
T.D. 9435, page 333.
REG–150670–07, page 378.
Final, temporary, and proposed regulations under section 355
of the Code narrow the reach of section 355(a)(3)(B) to harmo-
nize its application with the application of section 355(b), con-
sistent with the 2006 amendments to section 355(b), the 2007
proposed regulations under section 355(b), and the 2007 grant
of authority that was provided in the Tax Technical Corrections
Act of 2007. Rev. Ruls. 65–286 and 76–54 obsoleted by
T.D. 9435.
REG–113462–08, page 379.
Proposed regulations under section 7701(1) of the Code clarify
that a disregarded entity is a person for purposes of regulations
section 1.881–3.
Notice 2009–8, page 347.
This notice provides interim guidance on recently enacted sec-
tion 457A of the Code which became effective January 1,
2009. Section 457A generally provides that compensation de-
ferred under a nonqualified deferred compensation plan of a
nonqualified entity is includible in gross income when there is
no substantial risk of forfeiture of the right to such compensa-
tion. For this purpose, the term nonqualified deferred compen-
sation plan has the meaning provided under section 409A(d),
subject to some modifications, and the term nonqualified entity
means (a) any foreign corporation unless substantially all of its
income is (i) effectively connected with the conduct of a trade
or business in the U.S., or (ii) subject to a comprehensive for-
eign income tax, and (b) any partnership unless substantially
all of its income is allocated to persons other than (i) foreign
persons with respect to whom such income is not subject to a
comprehensive foreign income tax, and (ii) tax-exempt organi-
zations.
Rev. Proc. 2009–15, page 356.
Section 305.This procedure provides temporary guidance
regarding section 305 treatment of a stock distribution by
a publicly traded regulated investment company (RIC) or
real estate investment trust (REIT) in which the shareholders
have an election to receive money or stock, subject to an
aggregate limitation on the amount of money to be distributed.
Rev. Proc. 2008–68 amplified and superseded.
EMPLOYEE PLANS
Notice 2009–2, page 344.
Weighted average interest rate update; corporate bond
indices; 30-year Treasury securities; segment rates.
This notice contains updates for the corporate bond weighted
average interest rate for plan years beginning in January 2009;
the 24-month average segment rates; the funding transitional
segment rates applicable for January 2009; and the minimum
present value transitional rates for December 2008.
(Continued on the next page)
Fi
nding Lists begin on page ii.
Index for January begins on page iv.

Notice 2009–8, page 347.
This notice provides interim guidance on recently enacted sec-
tion 457A of the Code which became effective January 1,
2009. Section 457A generally provides that compensation de-
ferred under a nonqualified deferred compensation plan of a
nonqualified entity is includible in gross income when there is
no substantial risk of forfeiture of the right to such compensa-
tion. For this purpose, the term nonqualified deferred compen-
sation plan has the meaning provided under section 409A(d),
subject to some modifications, and the term nonqualified entity
means (a) any foreign corporation unless substantially all of its
income is (i) effectively connected with the conduct of a trade
or business in the U.S., or (ii) subject to a comprehensive for-
eign income tax, and (b) any partnership unless substantially
all of its income is allocated to persons other than (i) foreign
persons with respect to whom such income is not subject to a
comprehensive foreign income tax, and (ii) tax-exempt organi-
zations.
EMPLOYMENT TAX
REG–158747–06, page 362.
Proposed regulations under section 3402(t) of the Code have
been issued relating to withholding. The regulations reflect
changes in the law made by the Tax Increase Prevention and
Reconciliation Act of 2005 that require federal, state, and local
government entities to withhold income tax when making pay-
ments to persons providing property or services.
ADMINISTRATIVE
T.D. 9437, page 341.
Final regulations under section 7216 of the Code provide rules
relating to the disclosure and use of tax return information by
tax return preparers. The regulations provide updated guid-
ance regarding the disclosure of a taxpayer’s social security
number to a tax return preparer located outside of the United
States.
REG–160872–04, page 358.
Proposed regulations under section 6707 of the Code imple-
ment the amendments provided by the American Jobs Creation
Act of 2004. The regulations provide the rules relating to the
assessment of penalties against material advisors who fail to
timely file a true and complete return required under section
6111(a).
January 26, 20092009–4 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax law with
integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2009–4 I.R.B.January 26, 2009

January 26, 20092009–4 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 301.—
Distributions
of Property
26 CFR 1.301–1
0: Rules applicable with respect to
distribution
s of money and other property.
This revenue p
rocedure provides temporary guid-
ance regardi
ng certain stock distributions by publicly
traded regul
ated investment companies (RICs) and
real estate i
nvestment trust (REITs). See Rev. Proc.
2009-15, pag
e 356.
Section 305.—Distributions
of Stock and Stock Rights
26 CFR 1.305–1: Stock dividends.
This revenue procedure provides temporary guid-
ance regarding certain stock distributions by publicly
traded regulated investment companies (RICs) and
real estate investment trust (REITs). See Rev. Proc.
2009-15, page 356.
Section 355.—Distribution
of Stock and Securities of
a Controlled Corporation
26 CFR 1.355–2T(g): Guidance regarding the treat-
ment of a controlled corporation under section
355(a)(3)(B).
A temporary regulation narrows the reach of sec-
tion 355(a)(3)(B) to harmonize its application with
the application of section 355(b), consistent with the
2006 amendments to section 355(b), the 2007 pro-
posed regulations under section 355(b), and the 2007
grant of authority that was provided in the Tax Tech-
nical Corrections Act of 2007. See T.D. 9435, page
333.
26 CFR 1.35
5–2(g): Guidance regarding the treat-
ment of a c
ontrolled corporation under section
355(a)(3
)(B).
Apropose
d regulation narrows the reach of sec-
tion 355(
a)(3)(B) to harmonize its application with
the appli
cation of section 355(b), consistent with the
2006 amen
dments to section 355(b), the 2007 pro-
posed re
gulations under section 355(b), and the 2007
grant of
authority that was provided in the Tax Tech-
nical Co
rrections Act of 2007. See REG-150670-07,
page 378.
26 CFR 1.355–1
: Distribution of stock and securities
of a controlle
d corporation.
T.D. 9435
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Regarding the
Treatment of Stock of a
Controlled Corporation Under
Section 355(a)(3)(B)
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
final and temporary regulations that pro-
vide guidance regarding the distribution
of stock of a controlled corporation ac-
quired in a transaction described in section
355(a)(3)(B) of the Internal Revenue Code
(Code). This action is necessary in light
of amendments to section 355(b). These
temporary regulations will affect corpo-
rations and their shareholders. The text
of these temporary regulations also serves
as the text of the proposed regulations
(REG–150670–07) set forth in the notice
of proposed rulemaking on this subject in
this issue of the Bulletin.
DATES:Effective Date: These final and
temporary regulations are effective on De-
cember 15, 2008.
Applicability Date: For dates of appli-
cability, see §1.355–2T(i).
FOR FURTHER INFORMATION
CONTACT: Russell P. Subin, (202)
622–7790 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
S
ection 355 provides the rules for
t
ax-free distributions of the stock of cer-
t
ain controlled corporations. Since 2006
Congress has e
nacted several amend-
ments to secti
on 355. See sections 202
and 507 of the T
ax Increase Prevention
and Reconcil
iation Act of 2005, Public
Law 109–222 (
120 Stat. 345); Division
A, Section 41
0oftheTaxReliefand
Health Care A
ct of 2006, Public Law
109–432 (12
0 Stat. 2922, 2963); Section
4(b) of the T
ax Technical Corrections
Act of 2007,
Public Law 110–172
(121 Stat. 2
473, 2476) (Technical
Correction
s). Furthermore, the IRS
and Treasu
ry Department have issued
proposed §
1.355–3 (REG–123365–03,
2007–23 I.
R.B. 1357 [72 FR 26012] (May
8, 2007)),
which would provide guidance
regardin
g satisfaction of the active trade
or busine
ss (ATB) requirement of section
355(b).
Section 3
55(a) provides that, under cer-
tain circ
umstances, a corporation may dis-
tribute s
tock and securities in a corpora-
tion it co
ntrols to its shareholders and secu-
rity hol
ders without causing either the dis-
tributi
ng corporation (distributing) or its
shareho
lders and security holders to rec-
ognize i
ncome, gain, or loss. For this
purpos
e, control is defined under section
368(c)
.
Sectio
ns 355(a)(1)(C) and 355(b)(1)
genera
lly require that distributing and the
contro
lled corporation (controlled) each
be enga
ged, immediately after the distri-
bution
, in the active conduct of a trade or
busin
ess. Section 355(b)(2)(A) provides
that a
corporation shall be treated as en-
gaged
in the active conduct of a trade or
busin
ess if and only if it is engaged in the
activ
e conduct of a trade or business.
Secti
on 355(b)(2)(B) requires that
the tr
ade or business have been actively
cond
ucted throughout the five-year pe-
riod
ending on the date of the distribu-
tion
(pre-distribution period). Section
355(
b)(2)(C) provides that the trade or
busi
ness must not have been acquired
in a t
ransaction in which gain or loss
was
recognized, in whole or in part (tax-
abl
e transaction or taxable acquisition),
wit
hin the pre-distribution period. Sec-
tio
n 355(b)(2)(D) provides that control
of a
corporation that (at the time of ac-
qu
isition of control) was conducting the
tr
ade or business must not have been
2009–4 I.R.B.333January 26, 2009

directly or indirectly acquired by any
distributee corporation or by distributing
during the pre-distribution period in a tax-
able transaction. For purposes of section
355(b)(2)(D), all distributee corporations
that are members of the same affiliated
group(asdefinedinsection1504(a)with-
out regard to section 1504(b)) shall be
treated as one distributee corporation.
Section 355(b)(3)(A) provides that for
purposes of determining whether a corpo-
ration meets the requirements of section
355(b)(2)(A), all members of such cor-
poration’s separate affiliated group (SAG)
shall be treated as one corporation. Section
355(b)(3)(B) provides that for purposes of
section 355(b)(3), the termSAGmeans,
with respect to any corporation, the affili-
ated group that would be determined under
section 1504(a) if such corporation were
the common parent and section 1504(b)
did not apply. Section 355(b)(3)(C) pro-
vides that if a corporation became a SAG
member as a result of one or more taxable
transactions, any trade or business con-
ducted by such corporation (at the time
that such corporation became such a mem-
ber) shall be treated for purposes of section
355(b)(2) as acquired in a taxable trans-
action. Section 355(b)(3)(A) through (C)
are collectively referred to in this pream-
ble as the SAG regime. In addition, for
purposes of this preamble, the termDSAG
means the SAG of which distributing is
the common parent,CSAGmeans the SAG
of which controlled is the common par-
ent, and generally the “SAG” of a corpo-
ration means the SAG of which such cor-
poration is the common parent. In addi-
tion, throughout this preamble, references
to DSAG and CSAG include a reference
to distributing and controlled, respectively,
where such corporation is not the common
parent of a SAG (for example, such corpo-
ration has no subsidiaries).
Section 355(a)(3)(B)provides that for
purposes of section 355 (other than sec-
tion 355(a)(1)(D)) and so much of sec-
tion 356 as relates to section 355, stock
of controlled acquired by distributing by
reason of any transaction (i) which occurs
within five years of the distribution of such
stock, and (ii) which is a taxable transac-
tion, shall not be treated as stock of con-
trolled, but as other property (hot stock
rule). Stock treated as other property un-
der section 355(a)(3)(B) is referred to in
this preamble as hot stock.
Section 1.355–2(g) (as applied prior to
the applicability of these temporary reg-
ulations) (former §1.355–2(g)) provides
that for purposes of section 355(a)(1)(A),
stock of controlled acquired in a taxable
transaction (other than a transaction de-
scribed in §1.355–3(b)(4)(iii)) within the
pre-distribution period shall not be treated
as stock of controlled but shall be treated
as “other property.” However, for pur-
poses of section 355(a)(1)(D), the stock so
acquired is stock of controlled.
Section 355(b)(3)(D) provides that the
Secretary shall prescribe such regulations
as are necessary or appropriate to carry out
the purposes of section 355(b)(3), includ-
ing regulations that provide for the proper
application of section 355(b)(2)(B), (C),
and (D), and modify the application of sec-
tion 355(a)(3)(B), in connection with the
application of section 355(b)(3). Pursuant
to this grant of authority, these temporary
regulations modify the application of sec-
tion 355(a)(3)(B) in order to harmonize the
hot stock rule and section 355(b).
Explanation of Provisions
1.Hot Stock Rule Inapplicable Where
Controlled is a DSAG Member
Congress enacted section 355(b)(3)
because it was concerned that, prior to a
distribution under section 355, corporate
groups conducting business in separate
corporate entities often had to undergo
elaborate restructurings to place active
businesses in the proper entities to satisfy
the ATB requirement. See, for example,
H.R. Rep. No. 109–304, at 53, 54 (2005).
The effect of section 355(b)(3) is to treat
a corporation’s SAG as a single corpora-
tion for purposes of the ATB requirement.
Consistent with this treatment, Congress
enacted the Technical Corrections to clar-
ify:
that if a corporation became a member
of a separate affiliated group as a result
of one or more transactions in which
gain or loss was recognized in whole or
in part, any trade or business conducted
by such corporation (at the time that
such corporation became such a mem-
ber) is treated for purposes of section
355(b)(2) as acquired in a transaction
in which gain or loss was recognized in
whole or in part. Accordingly, such an
acquisition is subject to the provisions
of section 355(b)(2)(C), and may qual-
ifyasanexpansionofanexistingactive
trade or business conducted by the dis-
tributing corporation or the controlled
corporation, as the case may be.
The provision clarifies that the Trea-
sury Department shall prescribe regu-
lations that provide for the proper ap-
plication of sections 355(b)(2)(B), (C),
and (D) in the case of any corporation
that is tested for active business under
the separate affiliated group rule, and
that modify the application of section
355(a)(3)(B) in the case of such a cor-
poration in a manner consistent with the
purposes of the provision.
153 Cong. Rec. S16057 (daily ed. Dec.
19, 2007) (Joint Committee on Taxation’s
explanation of H.R. 4839, which expla-
nation was printed in the Congressional
Record at the request of Senator Baucus,
who stated that the explanation expressed
the Senate Finance Committee’s under-
standing of the bill).
Accordingly, the SAG regime affords
a group a certain amount of flexibility
regarding the satisfaction of the ATB
requirement. For example, Congress
indicated that, for purposes of section
355(b), in certain circumstances a stock
acquisition will be treated in a manner
comparable to an asset acquisition and,
as such, may constitute an expansion of
an existing trade or business. The IRS
and Treasury Department have further
interpreted the SAG regime to disregard
acquisitions of additional stock of a cur-
rent subsidiary SAG member for purposes
of satisfying the ATB requirement. See
proposed §1.355–3(b)(1)(ii).
Although the SAG regime is not appli-
cable for purposes of section 355(a)(3)(B),
the Technical Corrections provide a spe-
cific grant of regulatory authority indicat-
ing that the application of the hot stock
rule may be modified to apply in a manner
consistent with the SAG regime of section
355(b)(3). Toward that end, these tem-
porary regulations reflect the fundamental
conclusion that the hot stock rule should
not apply to any acquisition of stock of
controlled where controlled is a DSAG
member at any time after the acquisition
(but prior to the distribution of controlled).
Such a conclusion resolves conflicts
that would otherwise arise under section
355(a)(3)(B) and section 355(b). For ex-
ample, suppose distributing acquired all of
January 26, 20093342009–4 I.R.B.

controlled’s stock in ataxable transaction
that qualified as an expansion of distribut-
ing’s existing trade or business under the
SAG regime, and later distributed all such
stock within five years of the acquisition in
an unrelated transaction. The distribution
would satisfy the ATB requirement but,
absent the rule reflected in these temporary
regulations, could otherwise be fully tax-
able under the hot stock rule. Such a result
seems inconsistent with Congressional
intent. Similarly, to achieve consistency
with the SAG regime, if controlled is a
DSAG member and distributing acquires
additional controlled stock, such acquisi-
tion should be disregarded for purposes of
section 355(a)(3)(B).
Therefore, these temporary regulations
generally provide that controlled stock ac-
quired by the DSAG within the pre-distri-
bution period in a taxable transaction con-
stitutes hot stock, except if controlled is a
DSAG member at any time after the acqui-
sition (but prior to the distribution of con-
trolled). Accordingly, each of Rev. Rul.
76–54, 1976–1 C.B. 96, and Rev. Rul.
65–286, 1965–2 C.B. 92, is obsolete.
2.Transfers Among DSAG Members
Consistent with the SAG regime, which
treats the DSAG as a single corporation,
transfers of controlled stock owned by
DSAG members immediately before and
immediately after the transfer are disre-
garded and are not treated as acquisitions
for purposes of the hot stock rule. Com-
pare proposed §1.355–3(b)(1)(ii) (apply-
ing a similar rule for purposes of the ATB
requirement).
3.Hot Stock Rule Inapplicable to
Acquisitions from Certain Affiliates
Former §1.355–2(g) provided that the
hot stock rule did not apply to acquisi-
tions of controlled stock in a transaction
described in §1.355–3(b)(4)(iii) (affili-
ate exception). In other words, former
§1.355–2(g) generally exempted from
the hot stock rule an acquisition of con-
trolled stock by distributing from a mem-
ber of the affiliated group (as defined in
§1.355–3(b)(4)(iv)) of which distributing
was a member. Compare Notice 2007–60,
2007–2 C.B. 466 (IRS will not challenge
applicability of §1.355–3(b)(4)(iii) to
distributions effected on or before date
temporary or final regulations modifying
§1.355–3(b)(4)(iii)are published). These
temporary regulations retain the affiliate
exception of former §1.355–2(g) (includ-
ing its treatment of stock described in
section 1504(a)(4)). The IRS and Treasury
Department, however, continue to study
what impact transfers between affiliates
should have on the satisfaction of the ATB
requirement and the application of the hot
stock rule and believe that, when finalized,
the rules regarding the ATB requirement
and the hot stock rule should generally be
applied consistently with respect to trans-
actions between affiliates.
4.Future Guidance Under Section
355(a)(3)(B)
The IRS and Treasury Department are
considering issuing additional guidance
under section 355(a)(3)(B), as described
in this section 4 of the preamble. Such
guidance would be in addition to, rather
than in replacement of, these temporary
regulations. In this issue of the Bul-
letin (REG–150670–07), comments are
requested regarding these temporary reg-
ulations and the issues described in this
preamble.
A.Dunn Trust and Predecessor Issues
Section 355(a)(3)(B) applies to con-
trolled stock acquired by reason of any
transaction during thepre-distribution pe-
riod in which gain or loss is recognized
inwholeorinpart. Theprimarytypesof
transactions for which the IRS and Trea-
sury Department are considering issuing
additional guidance generally involve the
effect of indirect acquisitions and the ex-
tent to which predecessor rules should
apply for purposes of the hot stock rule.
Although the IRS and Treasury Depart-
ment are considering addressing in future
guidance the issues arising in transactions
described in this section 4.A. of the pre-
amble, no inference should be drawn re-
garding the present application of section
355(a)(3)(B), including these temporary
regulations, to such transactions.
For example, future guidance may ad-
dress whether, in a situation where a corpo-
ration that owns controlled stock joins the
DSAG in a taxable transaction, the DSAG
is treated as acquiring the controlled stock
in a taxable transaction. Compare section
355(b)(3)(B); proposed §1.355–3(b)(1)(ii)
and (b)(4)(i). Similarly, guidance may ad-
dress the treatment of taxable acquisitions
of controlled stock during the pre-distri-
bution period by a corporation that subse-
quently joins the DSAG in a nontaxable
transaction.
The IRS and Treasury Department
are also considering issuing additional
guidance that treats the DSAG as mak-
ing any acquisition made by a prede-
cessorofaDSAGmember. Compare
H.R. Rep. No. 83–2543, at 38 (1954)
(Conf. Rep.) (“by reason of” language
of section 355(a)(3)(B) encompasses
purchase of controlled stock by a
corporation that is in control of distributing
prior to “downstairs merger” by such
purchaser into distributing). For this
purpose, a predecessorofacorporation
would be a corporation that transfers its
assets to such corporation in a transaction
to which section 381(a) applies. Such
guidance would address the circumstances
in which a predecessor of distributing
(or predecessor of a DSAG member)
effects an acquisitionof controlled stock
described in section 355(a)(3)(B).
Additionally, if a DSAG acquires stock
of a corporation (target) during the pre-dis-
tribution period in a taxable transaction
and such target is subsequently acquired by
controlled in a section 381(a) transaction,
the earlier taxable acquisition of target
stock may implicate section 355(a)(3)(B).
A conceptually similar issue was ad-
dressed inDunn Trust v. Commissioner,
86 T.C. 745 (1986),acq. (1998–1 C.B.
5 n. 4 (acquiescing in result only)), ex-
cept that inDunn Trustthe target that was
acquired by distributing was not subse-
quently acquired by controlled in a section
381(a) transaction. Instead, inDunn Trust,
distributing acquired stock of target in a
taxable transaction and subsequently con-
tributed such target stock (which stock
could not have been distributed without vi-
olating section 355(a)(3)(B)) to controlled
in exchange for controlled stock in a non-
taxable transaction. The Tax Court ruled
that the controlled stock was not hot stock
under section 355(a)(3)(B). Where dis-
tributing acquires target stock in a taxable
transaction, and the target is subsequently
either combined with controlled in a non-
taxable section 381(a) transaction or (as
inDunn Trust)acquiredbycontrolledina
nontaxable stock acquisition, the IRS and
Treasury Department believe that such
2009–4 I.R.B.335January 26, 2009

acquisitions raise an issue as to whether
target or controlled is the “real controlled”
for purposes of section 355(a)(3)(B).
Identifying the “real controlled” might
be illustrated by the following example.
Assume that distributing owns an amount
of stock in controlled that constitutes con-
trol within the meaning of section 368(c)
but which does not meet the require-
ments of section 1504(a)(2). Controlled,
in turn, owns stock of a target subsidiary
that satisfies the requirements of sec-
tion 1504(a)(2). Distributing acquires
additional target stock in a taxable trans-
action, which stock is then contributed
to controlled in exchange for additional
controlled stock in a transaction to which
section 351(a) applies. Assume that nei-
ther controlled nor target joins the DSAG
after either step. Thequestion under sec-
tion 355(a)(3)(B) is whether a target whose
stock is acquired by the DSAG in a taxable
transaction should betreated as the “real
controlled”, where such additional target
stock is subsequently acquired by the ac-
tual controlled (or, in some cases, a CSAG
member) in a nontaxable transaction. The
IRS and Treasury Department are consid-
ering issuing guidance that would provide
that a target whose stock is acquired by
distributing in a taxable transaction may
be treated as the “real controlled” for pur-
poses of section 355(a)(3)(B) if, at the
time of the distribution, the CSAG cannot
satisfy the requirements of section 355(b)
without taking intoaccount an ATB con-
ducted by the target at the time the DSAG
acquired the stock of the target in the tax-
able transaction. In other words, section
355(a)(3)(B) could be implicated as a re-
sult of an acquisition of target stock if the
targetisengagedinanATBatthetime
the DSAG acquires the target stock in a
taxable transaction, the target stock is then
acquired by controlled (or, in some cases,
a CSAG member) prior to the distribution,
and at the time of the distribution of the
controlled stock the CSAG is not able to
satisfy the requirements of section 355(b)
without taking into account an ATB that
was being conducted by the target at the
time the DSAG acquired the target stock
in the taxable transaction.
B.Issuances of controlled stock outside
the Dunn Trust or predecessor context
The IRS and Treasury Department
are considering additional guidance that
would generally provide that issuances
of controlled stock by controlled to dis-
tributinginataxabletransactiondonot
give rise to hot stock. For example, such
an acquisition may occur where section
357(c) applies (see Rev. Rul. 78–442,
1978–2 C.B. 143) (distributing transfers
a business to wholly-owned controlled,
which assumes distributing’s liabilities)).
As noted in Rev. Rul. 78–442, the IRS
and Treasury Department believe that
section 355(b)(2)(C) was not intended to
apply to such an acquisition of a trade
or business by controlled from distribut-
ing under the facts of that ruling even
if it is a taxable transaction because the
acquisition was not from an “outside
party”. “[F]or the same reasons, section
355(a)(3)[(B)] . . . is not applicable to the
distribution” of controlled stock acquired
in such a transaction.
The IRS and Treasury Department re-
quest comments regarding the extent to
which issuances by controlled of con-
trolled stock to distributing in taxable
transactions should not give rise to hot
stock, whether distributing must own some
minimum percentage in controlled at the
time of such issuance in order for such
an acquisition to be excepted from sec-
tion 355(a)(3)(B), and the extent to which
such transactions are adequately addressed
under section 355(a)(1)(B) (relating to
device) and section 355(g) (relating to
distributions involving disqualified invest-
ment corporations).
C.Redemptions of controlled stock
Finally, the IRS and Treasury Depart-
ment request comments regarding the
effect of redemptions of controlled stock
under section 355(a)(3)(B). Generally, if
the controlled shares distributed by dis-
tributing were not acquired by distributing
during the pre-distribution period, such
shares cannot be hot stock. Therefore,
a redemption by controlled of its stock
from unrelated parties generally should
not cause any portion of distributing’s con-
trolled stock to become hot stock. Such a
rule may be distinguishable from the rule
under section 355(b)(2)(D). SeeMcLaulin
v. Commissioner, 276 F.3d 1269 (11th
Cir. 2001) (applying section 355(b)(2)(D)
when distributing acquired control of a
subsidiary through a redemption of sub-
sidiary stock), and Rev. Rul. 57–144,
1957–1 C.B. 123 (same).
The distinction can be made based on
the different focus of the provisions. Sec-
tion 355(a)(3)(B) provides that controlled
stock “acquired by the distributing corpo-
ration” during the pre-distribution period
in a taxable transaction is hot stock, and is
directed at the property distributed to the
distributing shareholders. In a redemption,
generally no additional shares of stock are
acquired by distributing and generally no
additional value is distributed to the dis-
tributing shareholders. In contrast, section
355(b)(2)(D) prohibits the acquisition of
“control of a corporation.” Control is a req-
uisite status in order for distributing to dis-
tribute the stock of controlled to its share-
holders under section 355. A redemption
can confer this status on distributing with-
out distributing’s acquiring any additional
shares of stock.
However, for purposes of section
355(a)(3)(B), the IRS and Treasury De-
partment believe that a redemption of con-
trolled stock from a shareholder other than
distributing is the equivalent of distribut-
ing’s purchase of controlled stock from
the redeemed shareholder to the extent
distributing is the source of funds for the
redemption. Further, the IRS and Treasury
Department are studying whether there
are other situations in which distribut-
ing’s increased percentage ownership in
controlled resulting from redemptions of
controlled stock from a shareholder other
than distributing should be treated as hot
stock.
5.Request for Comments
In this issue of the Bulletin
(REG–150670–07), the IRS and Treasury
Department are requesting comments
regarding these temporary regulations,
including comments on whether section
355(a)(3)(B) should use the same defi-
nition of taxable transaction as section
355(b), whether the exception for acquisi-
tions from certain affiliates should be the
same for both provisions, and the other
issues described in this preamble.
January 26, 20093362009–4 I.R.B.

Effective/Applicability Date
These temporary regulations are gener-
ally applicable for distributions occurring
after December 15, 2008. However, unless
taxpayers elect otherwise, these temporary
regulations do not apply to any distribu-
tion occurring after December 15, 2008,
that is pursuant to a transaction which is (1)
made pursuant to an agreement which was
binding on December 15, 2008, and at all
times thereafter; (2) described in a ruling
request submitted to the IRS on or before
such date; or (3) described on or before
such date in a public announcement or in
a filing with the Securities and Exchange
Commission. Furthermore, taxpayers may
elect to apply these temporary regulations
retroactively to distributions to which sec-
tion 4(b) of the Technical Corrections ap-
plies (generally to distributions occurring
after May 17, 2006).
Effect on Other Documents
The following publications are obsolete
as of the applicability of these temporary
regulations:
Rev. Rul. 76–54, 1976–1 C.B. 96.
Rev. Rul. 65–286, 1965–2 C.B. 92.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant reg-
ulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. These tem-
porary regulations provide taxpayers with
relief from the application of section
355(a)(3)(B) in certain situations. For
this reason, it has been determined, pur-
suant to 5 U.S.C. 553(b)(B), that good
cause exists for dispensing with the notice
and public comment procedures and that,
pursuant to 5 U.S.C. 553(d)(3), good
cause exists to dispense with a delayed
effective date. For the applicability
of the Regulatory Flexibility Act refer
to the Special Analyses section of the
preamble to the cross-reference notice of
proposed rulemaking published in this
issue of the Bulletin. Pursuant to section
7805(f) of the Code, these regulations
have been submitted to the Chief Counsel
for Advocacy of the Small Business
Administration for comment on their
impact on small business.
Drafting Information
The principal author of these temporary
regulations is Russell P. Subin of the Of-
fice of Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and Treasury Department participated
in their development.
Availability of IRS Documents
Documents published in the IRB cited
in this preamble are available from the
Superintendent of Documents, U.S. Gov-
ernment Printing Office, Washington, DC
20402.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.355–2T(g) and (i) are also is-
sued under 26 U.S.C. 355(b)(3)(D). * * *
Par. 2. Section 1.355–0 is amended
by amending the entry under §1.355–2 to
paragraph (g) and add paragraph (i) to read
as follows:
§1.355–0 Outline of sections.
*****
§1.355–2 Limitations.
*****
(g) [Reserved].
*****
(i) [Reserved].
Par. 3. Section 1.355–0T is added to
read as follows:
§1.355–0T Outline of sections
(temporary).
This section lists the major paragraphs
under §1.355–2T.
§1.355–2T Limitations (temporary).
(a) through (f)(2) [Reserved]. For
further guidance, see the entries for
§1.355–2(a) through (f)(2) in §1.355–0.
(g) Recently acquired controlled stock
under section 355(a)(3)(B).
(1) Other property.
(2) Exceptions.
(3) DSAG.
(4) Taxable transaction.
(5) Examples.
(h) [Reserved]. For further guidance,
see the entry for §1.355–2(h) in §1.355–0.
(i) Effective/applicability date.
(1) In general.
(2) Transition election.
(3) Retroactive election.
(4)Mannerofelection.
(5) Prior law.
(6) Expiration date.
Par. 4. Section 1.355–1 is amended by
revising paragraph (a) to read as follows:
§1.355–1 Distribution of stock and
securities of a controlled corporation.
(a)Effective/applicability date of cer-
tain sections. Except as otherwise pro-
vided, this section and §§1.355–2 through
1.355–4 apply to transactions occurring
after February 6, 1989. For transactions
occurring on or before that date, see
26 CFR 1.355–1 through 1.355–4 (revised
as of April 1, 1987). This section and
§§1.355–2 through 1.355–4, other than
§1.355–2(g) and (i) and §1.355–2T, do
not reflect the amendments to section 355
made by the Revenue Act of 1987, the
Technical and Miscellaneous Revenue Act
of 1988, and the Tax Technical Corrections
Act of 2007. For the applicability date
of §§1.355–2T(g), 1.355–5, 1.355–6, and
1.355–7, see §§1.355–2T(i), 1.355–5(e),
1.355–6(g), and 1.355–7(k), respectively.
*****
Par. 5. Section 1.355–2 is amended
by revising paragraph (g) and adding para-
graph (i) to read as follows:
§1.355–2 Limitations.
*****
(g) [Reserved]. For further guidance,
see §1.355–2T(g).
*****
(i) [Reserved]. For further guidance,
see §1.355–2T(i).
Par. 6. Section 1.355–2T is added to
read as follows:
2009–4 I.R.B.337January 26, 2009

§1.355–2T Limitations (temporary).
(a) through (f)(2) [Reserved]. For fur-
ther guidance, see §1.355–2(a) through
(f)(2).
(g)Recently acquired controlled stock
under section 355(a)(3)(B)—(1)Other
property. Except as provided in paragraph
(g)(2) of this section, for purposes of sec-
tion 355(a)(1)(A), section 355(c), and so
much of section 356 as relates to section
355, stock of a controlled corporation ac-
quired by the DSAG in a taxable transac-
tion (as defined in paragraph (g)(4) of this
section) within the five-year period ending
on the date of the distribution (pre-distri-
bution period) shall not be treated as stock
of the controlled corporation but shall be
treated as “other property.” Transfers of
controlled corporation stock that is owned
by the DSAG immediately before and im-
mediately after the transfer are disregarded
and are not acquisitions for purposes of
this paragraph (g)(1).
(2)Exceptions. Paragraph (g)(1) of this
section does not apply to an acquisition of
stock of the controlled corporation—
(i) If the controlled corporation is a
DSAG member at any time after the ac-
quisition (but prior to the distribution); or
(ii) Described in §1.355–3(b)(4)(iii).
(3)DSAG. For purposes of this para-
graph (g), aDSAGis the distributing
corporation’s separate affiliated group
(the affiliated groupwhichwouldbede-
termined under section 1504(a) if such
corporation were the common parent and
section 1504(b) did not apply) that con-
sists of the distributing corporation as the
common parent and allcorporations af-
filiated with the distributing corporation
through stock ownership described in sec-
tion 1504(a)(1)(B) (regardless of whether
the corporations are includible corpora-
tions under section 1504(b)). For purposes
of paragraph (g)(1) of this section, any
reference to the DSAG is a reference to
the distributing corporation if it is not the
common parent of a separate affiliated
group.
(4)Taxable transaction—(i)Generally.
For purposes of this paragraph (g), atax-
able transactionis a transaction in which
gain or loss was recognized in whole or in
part.
(ii)Dunn Trust and predecessor issues.
[Reserved].
(5)Examples. The following exam-
ples illustrate this paragraph (g). Assume
that C, D, P, and S are corporations, X is
an unrelated individual, each of the trans-
actions is unrelated to any other transac-
tion and, but for the issue of whether C
stock is treated as “other property” under
section 355(a)(3)(B), the distributions sat-
isfy all of the requirements of section 355.
No inference should be drawn from any
of these examples as to whether any re-
quirements of section 355 other than sec-
tion 355(a)(3)(B), as specified, are satis-
fied. Furthermore, the following defini-
tions apply:
(i)Purchaseis an acquisition that is a
taxable transaction.
(ii)Section 368(c) stockis stock consti-
tuting control within the meaning of sec-
tion 368(c).
(iii)Section 1504(a)(2) stockis stock
meeting the requirements of section
1504(a)(2).
Example 1.Hot stock. For more than five years,
D has owned section 368(c) stock but not section
1504(a)(2) stock of C. In year 6, D purchases addi-
tional C stock from X. However, D does not own
section 1504(a)(2) stock of C after the year 6 pur-
chase. If D distributes all of its C stock within five
years after the year 6 purchase, for purposes of section
355(a)(1)(A), section 355(c), and so much of section
356 as relates to section 355, the C stock purchased
in year 6 would be treated as “other property.” See
paragraph (g)(1) of this section.
Example 2.C becomes a DSAG member.For
more than five years, D has owned section 368(c)
stock but not section 1504(a)(2) stock of C. In year 6,
D purchases additional C stock from X such that D’s
total ownership of C is section 1504(a)(2) stock. If
D distributes all of its C stock within five years after
the year 6 purchase, the distribution of the C stock
purchased in year 6 wouldnot be treated as “other
property” because C becomes a DSAG member. See
paragraph (g)(2)(i) of this section. The result would
be the same if D did not own any C stock prior to year
6 and D purchased all of the C stock in year 6. See
paragraph (g)(2)(i) of this section. Similarly, if D did
not own any C stock prior to year 6, D purchased 20
percent of the C stock in year 6, and then acquired
all of the remaining C stock in year 7, the C stock
purchased in year 6 and the C stock acquired in year
7 (even if purchased) wouldnot be treated as “other
property” because C becomes a DSAG member. See
paragraph (g)(2)(i) of this section.
Example 3.Intra-SAG transaction.Formore
than five years, D has owned all of the stock of S.
D and S, in the aggregate, have owned section 368(c)
stock but not section 1504(a)(2) stock of C. There-
fore, D and S are DSAG members, but C is not. In
year 6, D purchases S’s C stock. If D distributes all
of its C stock within five years after the year 6 pur-
chase, the distribution of the C stock purchased in
year 6 would not be treated as “other property”. D’s
purchase of the C stock from S is disregarded for pur-
poses of paragraph (g)(1) of this section because that
C stock was owned by the DSAG immediately before
and immediately after the purchase. See paragraph
(g)(1) of this section.
Example 4.Affiliate exception.Formorethan
five years, P has owned 90 percent of the sole out-
standing class of the stock of D and a portion of the
stock of C, and X has owned the remaining 10 per-
cent of the D stock. Throughout this period, D has
owned section 368(c) stock but not section 1504(a)(2)
stock of C. In year 6, D purchases P’s C stock. How-
ever, D does not own section 1504(a)(2) stock of C
after the year 6 purchase. If D distributes all of its
C stock to X in exchange for X’s D stock within five
years after the year 6 purchase, the distribution of the
C stock purchased in year 6 would not be treated as
“other property” because the C stock was purchased
from a member (P) of the affiliated group (as defined
in §1.355–3(b)(4)(iv)) of which D is a member, and P
did not purchase that C stock within the pre-distribu-
tion period. See paragraph (g)(2)(ii) of this section.
(h) [Reserved]. For further guidance,
see §1.355–2(h).
(i)Effective/applicability date—(1)In
general. Paragraphs (g)(1) through (g)(5)
of this section apply to distributions occur-
ring after December 15, 2008. However,
except as provided in paragraph (i)(2) of
this section, paragraphs (g)(1) through
(g)(5) of this section do not apply to any
distribution occurring after December 15,
2008, that is pursuant to a transaction
which is—
(i) Made pursuant to an agreement
which was binding on December 15, 2008,
and at all times thereafter;
(ii) Described in a ruling request sub-
mitted to the Internal Revenue Service on
or before such date; or
(iii) Described on or before such date in
a public announcement or in a filing with
the Securities and Exchange Commission.
(2)Transition election. In the case of
any distribution described in the second
sentence of paragraph (i)(1) of this section,
taxpayers may elect to apply all of para-
graphs (g)(1) through (g)(5) of this section.
However, neither the distributing corpora-
tion nor any person related to the distribut-
ing corporation within the meaning of sec-
tion 267(b) (determined immediately be-
fore or immediately after the distribution)
maymakesuchanelectionwithrespectto
a distribution unless all such persons make
such an election with respect to such dis-
tribution.
(3)Retroactive election. In the case
of any distribution occurring on or before
December 15, 2008, taxpayers may elect
to apply all of paragraphs (g)(1) through
(g)(5) of this section to distributions to
which section 4(b) of the Tax Techni-
January 26, 20093382009–4 I.R.B.

cal Corrections Act of 2007, Public Law
110–172 (121 Stat. 2473, 2476) applies
(generally applicableto distributions made
after May 17, 2006, as provided in section
4(d) of that act). However, neither the
distributingcorporationnoranypersonre-
lated to the distributing corporation within
the meaning of section 267(b) (determined
immediately before or immediately after
the distribution) may make such an elec-
tion with respect to a distribution unless
all such persons make such an election
with respect to such distribution.
(4)Manner of election. Taxpayers may
make any election available under this
paragraph (i) by applying the selected rule
on its original or amended return.
(5)Prior law. For distributions to
which paragraphs (g)(1) through (g)(5) of
this section do not apply, see §1.355–2(g),
as contained in 26 CFR part 1, revised as
of April 1, 2008.
(6)Expiration date. The applicability
of paragraph (i) of this section will expire
on December 15, 2011.
Steve T. Miller,
(Acting) Deputy Commissioner for
Services and Enforcement.
Approved December 2, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 12,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 15, 2008, 73 F.R. 75946)
Section 368.—Definitions
Relating to Corporate
Reorganizations
26 CFR 1.368–1: Purpose and scope of exception to
reorganization exchanges.
T.D. 9434
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Creditor Continuity of Interest
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations providing guidance regard-
ing when and to what extent creditors of a
corporation will be treated as proprietors
of the corporation in determining whether
continuity of interest (“COI”) is preserved
in a potential reorganization. These final
regulations are necessary to provide clar-
ity to parties engaging in reorganizations
of insolvent corporations, both inside and
outside of bankruptcy. These final regu-
lations affect corporations, their creditors,
and their shareholders.
DATES:Effective Date:These final reg-
ulations are effective on December 12,
2008.
Applicability Date:For dates of appli-
cability, see §1.368–1(e)(9).
FOR FURTHER INFORMATION
CONTACT: Jean Brenner (202)
622–7790, Douglas Bates (202)
622–7550, or Bruce Decker (202)
622–7550 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
On March 10, 2005, the IRS and Trea-
sury Department published a notice of
proposed rulemaking (REG–163314–03,
2005–1 C.B. 835) in theFederal Regis-
ter(70 FR 11903) proposing regulations
that would provide guidance regarding the
application of the nonrecognition rules of
subchapter C of the Internal Revenue Code
(Code) to transactions involving insolvent
corporations and to other transactions that
raise similar issues. No public hearing
regarding the proposed regulations was
requested or held. The IRS and Treasury
Department have carefully considered the
comments regarding the proposed regula-
tions. The IRS and Treasury Department
continue to consider the issues raised and
to evaluate the complexity and necessity
for valuation under the exchange of net
value requirement. In the interim, these
final regulations adopt the portion of the
proposed regulations that deals with the
circumstances in which (and the extent to
which) creditors of acorporation will be
treated as proprietors of the corporation in
determining whether continuity of interest
is preserved in a potential reorganization.
Explanation of Provisions
These final regulations provide that, in
certain circumstances, stock received by
creditors may count for continuity of in-
terest purposes both inside and outside of
bankruptcy proceedings. The expansion
of the application of the G reorganization
rules to reorganizations of insolvent corpo-
rations outside of bankruptcy is consistent
with Congress’ intent to facilitate the reha-
bilitation of troubled corporations. S. Rep.
No 96–1035, 96
th
Sess. 35 (1980). Ac-
cordingly, the final regulations adopt the
rules proposed for creditors of an insol-
vent target corporation outside of a title
11 or similar case in new §1.368–1(e)(6)
with only minor modifications and clarifi-
cations. The final regulations treat claims
of the most senior class of creditors to re-
ceive a proprietary interest in the issuing
corporation and claimsof all equal classes
of creditors (together, the senior claims)
differently from the claims of classes of
creditors junior to the senior claims (the
junior claims). The final regulations treat
such senior claims as representing propri-
etary interests in the target corporation.
While such senior claims, and all junior
claims, are treated as representing a pro-
prietary interest in the target corporation,
the determination of the value of propri-
etary interests in the target corporation rep-
resented by the senior claims is made by
calculating the average treatment for all
senior claims. The final regulations pro-
vide that the value of a proprietary inter-
est in the target corporation represented by
a senior claim is determined by multiply-
ing the fair market value of the creditor’s
claim by a fraction, the numerator of which
is the fair market value of the proprietary
interests in the issuing corporation that are
received in the aggregate in exchange for
the senior claims, and the denominator of
which is the sum of the amount of money
and the fair market value of all other con-
sideration (including the proprietary inter-
ests in the issuing corporation) received in
the aggregate in exchange for such claims.
In contrast to the treatment of the senior
creditor class that receives stock of the is-
suing corporation, the value of the propri-
etary interest in the target corporation rep-
resented by a junior claim is the fair mar-
ket value of the junior claim. The effect of
this rule is that there is 100 percent conti-
nuity of interest if each senior claim is sat-
2009–4 I.R.B.339January 26, 2009

isfied with the same ratio of stock to non-
stock consideration and no junior claim is
satisfied with nonstock consideration.
An example was added to the COI rule
in response to a suggestion that the fi-
nal regulations demonstrate the bifurca-
tion of senior claims when the creditors of
the class receive disproportionate amounts
of acquiring corporation stock and other
property. Also, in response to comments, a
rule was added to the final regulations re-
quiring that in the situation where there is
only one class of creditors receiving stock,
more than ade minimisamount of issuing
corporation stock must be exchanged for
the creditors’ proprietary interests relative
to the total consideration received by the
insolvent target corporation, its sharehold-
ers, and its creditors, before the stock will
be counted for purposes of COI.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these final regulations and, be-
cause the regulations do not impose a col-
lection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Code, the notice of pro-
posed rulemaking preceding these regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal authors of these regula-
tions are Jean Brenner, Douglas Bates, and
Bruce Decker of the Office of Associate
Chief Counsel (Corporate). However,
other personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Ado
ption of Amendments to the
Re
gulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.368–1 is amended by:
1. Adding a sentence after the fifth sen-
tence of paragraph (e)(1)(i).
2. Adding a sentence at the end of para-
graph (e)(1)(ii).
3. Revising paragraph (e)(3).
4. Redesignating paragraphs (e)(6),
(e)(7), and (e)(8) as paragraphs (e)(7),
(e)(8), and (e)(9) respectively, and adding
a new paragraph (e)(6).
5. AddingExample 10to the end of
newly designated paragraph (e)(8).
6. Adding a sentence at the end of
newly designated paragraph (e)(9)(i).
The additions and revisions read as fol-
lows:
§1.368–1 Purpose and scope of exception
to reorganization exchanges.
*****
(e) * * *
(1) * * *
(i) * * * See paragraph (e)(6) of this sec-
tion for rules related to when a creditor’s
claim against a target corporation is a pro-
prietary interest in the corporation. * * *
(ii) * * * A proprietary interest in the
target corporation is not preserved to the
extent that creditors (or former creditors)
of the target corporation that own a pro-
prietary interest in the corporation under
paragraph (e)(6) of this section (or would
be so treated if they had received the con-
sideration in the potential reorganization)
receive payment for the claim prior to
the potential reorganization and such pay-
ment would be treated as other property
or money received in the exchange for
purposes of section 356 had it been a dis-
tribution with respect to stock.
(3)Related person acquisitions. A pro-
prietary interest in the target corporation
is not preserved if, in connection with a
potential reorganization, a person related
(as defined in paragraph (e)(4) of this sec-
tion) to the issuing corporation acquires,
for consideration other than stock of the is-
suing corporation, either a proprietary in-
terest in the target corporation or stock of
the issuing corporation that was furnished
in exchange for a proprietary interest in the
target corporation. The preceding sentence
does not apply to the extent those persons
who were the direct or indirect owners of
the target corporation prior to the potential
reorganization maintain a direct or indirect
proprietary interest in the issuing corpora-
tion.
*****
(6)Creditors’ claims as proprietary in-
terests—(i)In general. A creditor’s claim
against a target corporation may be a pro-
prietary interest in the target corporation if
the target corporation is in a title 11 or sim-
ilar case (as defined in section 368(a)(3))
or the amount of the target corporation’s
liabilities exceeds thefair market value of
its assets immediately prior to the poten-
tial reorganization. In such cases, if any
creditor receives a proprietary interest in
the issuing corporation in exchange for its
claim, every claim of that class of credi-
tors and every claim of all equal and ju-
nior classes of creditors (in addition to the
claims of shareholders) is a proprietary in-
terest in the target corporation immediately
prior to the potential reorganization to the
extent provided in paragraph (e)(6)(ii) of
this section.
(ii)Value of proprietary interest—(A)
Claims of most senior class of creditor re-
ceiving stock. A claim of the most senior
class of creditors receiving a proprietary
interest in the issuing corporation and a
claim of any equal class of creditors will
be treated as a proprietary interest in ac-
cordance with the rules of this paragraph
(e)(6)(ii). For a claim of the most senior
class of creditors receiving a proprietary
interest in the issuing corporation and a
claim of any equal class of creditors, the
value of the proprietary interest in the tar-
get corporation represented by the claim is
determined by multiplying the fair market
value of the claim by a fraction, the numer-
ator of which is the fair market value of
the proprietary interests in the issuing cor-
poration that are received in the aggregate
in exchange for the claims of those classes
of creditors, and the denominator of which
is the sum of the amount of money and
the fair market value of all other consid-
eration (including the proprietary interests
in the issuing corporation) received in the
aggregate in exchange for such claims. If
only one class (or one set of equal classes)
of creditors receives stock, such class (or
set of equal classes) is treated as the most
senior class of creditors receiving stock.
January 26, 20093402009–4 I.R.B.

When only one class (or one set of equal
classes) of creditors receives issuing cor-
poration stock in exchange for a creditor’s
proprietary interest in the target corpora-
tion, such stock will be counted for mea-
suring continuity of interest provided that
the stock issued by the issuing corpora-
tion is notde minimisin relation to the to-
tal consideration received by the insolvent
target corporation, its shareholders, and its
creditors.
(B)Claims of junior classes of creditor
receiving stock. The value of a proprietary
interest in the target corporation held by a
creditor whose claim is junior to the claims
of other classes of target claims which are
receiving proprietary interests in the issu-
ing corporation is the fair market value of
the junior creditor’s claim.
(iii)Bifurcated claims. If a creditor’s
claim is bifurcated into a secured claim and
an unsecured claim pursuant to an order
in a title 11 or similar case (as defined in
section 368(a)(3)) or pursuant to an agree-
ment between the creditor and the debtor,
the bifurcation of the claim and the alloca-
tion of consideration to each of the result-
ing claims will be respected in applying the
rules of this paragraph (e)(6).
(iv)Effect of treating creditors as pro-
prietors. The treatment of a creditor’s
claim as a proprietary interest in the tar-
get corporation shall not preclude treating
shares of the target corporation as propri-
etary interests in the target corporation.
*****
(8) * * *
Example 10.Creditors treated as owning a pro-
prietary interest.(i)More than one class of creditor
receives issuing corporation stock. T has assets with
a fair market value of $150x and liabilities of $200x.
T has two classes of creditors: two senior creditors
with claims of $25x each; and one junior creditor with
a claim of $150x. T transfers all of its assets to P in
exchange for $95x in cash and shares of P stock with
a fair market value of $55x. Each T senior creditor
receives $20x in cash and P stock with a fair market
value of $5x in exchange for his claim. The T junior
creditor receives $55x in cash and P stock with a fair
market value of $45x in exchange for his claim. The
T shareholders receive no consideration in exchange
for their T stock. Under paragraph (e)(6) of this sec-
tion, because the amount of T’s liabilities exceeds the
fair market value of its assets immediately prior to
the potential reorganization, the claims of the credi-
tors of T may be proprietary interests in T. Because
the senior creditors receiveproprietary interests in P
in the transaction in exchange for their claims, their
claims and the claim of the junior creditor and the
T stock are treated as proprietary interests in T im-
mediately prior to the transaction. Under paragraph
(e)(6)(ii)(A) of this section, the value of the propri-
etary interest of each of the senior creditors’ claims
is $5x (the fair market value of the senior creditor’s
claim, $25x, multiplied by a fraction, the numerator
of which is $10x, the fair market value of the propri-
etary interests in the issuing corporation, P, received
in the aggregate in exchange for the claims of all the
creditors in the senior class, and the denominator of
which is $50x, the sum of the amount of money and
the fair market value of all other consideration (in-
cluding the proprietary interests in P) received in the
aggregate in exchange for such claims). Accordingly,
$5x of the stock that each of the senior creditors re-
ceives is counted in measuring continuity of inter-
est. Under paragraph (e)(6)(ii)(B) of this section, the
value of the junior creditor’s proprietary interest in
T immediately prior to the transaction is $100x, the
value of his claim. Thus, the value of the creditors’
proprietary interests in total is $110x and the creditors
received $55x worth of P stock in total in exchange
for their proprietary interests. Therefore, P acquired
50 percent of the value of theproprietary interests in T
in exchange for P stock. Because a substantial part of
the value of the proprietary interests in T is preserved,
the continuity of interest requirement is satisfied.
(ii)One class of creditor receives issuing corpo-
ration stock and cash in disproportionate amounts.T
has assets with a fair market value of $80x and liabil-
ities of $200x. T has one class of creditor with two
creditors, A and B, each having a claim of $100x. T
transfers all of its assets to P for $60x in cash and
shares of P stock with a fair market value of $20x.
A receives $40x in cash in exchange for its claim. B
receives $20x in cash and P stock with a fair mar-
ket value of $20x in exchange for its claim. The T
shareholders receive no consideration in exchange for
their T stock. The P stock is notde minimisin rela-
tion to the total consideration received. Under para-
graph (e)(6) of this section, because the amount of T’s
liabilities exceeds the fair market value of its assets
immediately prior to the potential reorganization, the
claims of the creditors of T may be proprietary inter-
ests in T. Because the creditors of T received propri-
etary interests in P in the transaction in exchange for
their claims, their claims and the T stock are treated
as proprietary interests in T immediately prior to the
transaction. Under paragraph (e)(6)(ii)(A) of this sec-
tion, the value of the proprietary interest of each of the
senior creditors is $10x (the fair market value of a se-
nior creditor’s claim, $40x, multiplied by a fraction,
the numerator of which is $20x, the fair market value
of the proprietary interests in the issuing corporation,
P, received in the aggregate in exchange for the claims
of all the creditors in the class, and the denominator of
which is $80x, the sum of the amount of money and
the fair market value of all other consideration (in-
cluding the proprietary interests in P) received in the
aggregate in exchange for such claims). Accordingly,
$10x of the cash that was received by A and $10x
of the P stock that was received by B are counted in
measuring continuity of interest. Thus, the value of
the creditors’ proprietary interests in total is $20x and
the creditors received $10x worth of P stock in total
in exchange for their proprietary interests. Therefore,
P acquired 50 percent of the value of the proprietary
interests in T in exchange for P stock. Because a sub-
stantial part of the value of the proprietary interests in
T is preserved, the continuity of interest requirement
is satisfied.
(9) (i) * * * The sixth sentence of para-
graph (e)(1)(i) of this section, the last sen-
tence of paragraph (e)(1)(ii) of this section,
paragraph (e)(3) of this section, paragraph
(e)(6) of this section, andExample 10of
paragraph (e)(8) of this section apply to
transactions occurring after December 12,
2008.
*****
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved December 3, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 11,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 12, 2008, 73 F.R. 75566)
Section 7216.—Disclosure
or Use of Information by
Preparers of Returns
26 CFR 301.7216–3: Disclosure or use permitted
only with the taxpayer’s consent.
T.D. 9437
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Amendments to the Section
7216 Regulations—Disclosure
or Use of Information by
Preparers of Returns
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and removal of temporary
regulations.
SUMMARY: This document contains fi-
nal regulations that provide rules relating
to the disclosure and use of tax return in-
formation by tax return preparers. These
regulations affect tax return preparers and
provide updated guidance regarding the
disclosure of a taxpayer’s social security
number to a tax return preparer located
outside of the United States.
2009–4 I.R.B.341January 26, 2009

DATES:Effective Date:These regulations
are effective on December 16, 2008.
ApplicabilityDate:See
§301.7216–3(d), which states that the
regulations apply to disclosures or uses
of tax return information occurring on or
after January 1, 2009.
FOR FURTHER INFORMATION
CONTACT: Molly K. Donnelly, (202)
622–4940 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends 26 CFR part
301. On December 8, 2005, the Trea-
sury Department and the IRS pub-
lished a notice of proposed rulemaking
(REG–137243–02, 2006–1 C.B. 317)
in theFederal Register(70 FR 72954)
proposing amendments to the regulations
under section 7216 (regarding the use or
disclosure of tax return information by
income tax return preparers). On January
3, 2008, the Treasury Department and the
IRS issued final regulations under sec-
tion 7216 (T.D. 9375, 2008–5 I.R.B. 344)
applicable to disclosures or uses of tax
return information occurring on or after
January 1, 2009. Thus, T.D. 9375 replaced
previously issued final regulations that
remain applicable to disclosures or uses of
tax return information occurring prior to
January 1, 2009.
T.D. 9375 included a revision of
§301.7216–3(b)(4) which, for disclosures
and uses of tax return information occur-
ring on or after January 1, 2009, provided
that an income tax return preparer located
in the United States may not disclose the
taxpayer’s social security number (SSN)
to a tax return preparer located outside
of the United States even if the taxpayer
consents to the disclosure.
On July 1, 2008, a temporary regu-
lation (T.D. 9409, 2008–29 I.R.B. 118)
was published in theFederal Regis-
ter(73 FR 37804) that created a lim-
ited exception to the rule prohibiting
the disclosure of a taxpayer’s SSN out-
side of the United States. This tempo-
rary regulation modified the rules under
§301.7216–3(b)(4). A notice of proposed
rulemaking (REG–121698–08, 2008–29
I.R.B. 163) cross-referencing the tem-
porary regulations was published in the
Federal Registerfor the same day (73 FR
37910), requesting comments and setting
a public hearing date.
Summary of Comments and
Explanation of Revisions
The IRS and the Treasury Department
requested written or electronic comments
by September 30, 2008. Persons wish-
ing to present oral comments at the pub-
lic hearing scheduled for October 6, 2008,
were to submit an outline of the topics to be
discussed at the hearing by September 15,
2008, and written or electronic comments
by September 30, 2008. No written or
electronic comments or requests to speak
at the hearing, together with the required
outline of topics, were submitted, and the
hearing was cancelled (73 FR 56534).
The final regulations adopt the rules
published in the proposed regulations
without substantial change. The final
regulations maintain the general rule in
§301.7216–3(b)(4) providing that an in-
come tax return preparer located in the
United States may not disclose the tax-
payer’s SSN to a tax return preparer lo-
cated outside of the United States even
if the taxpayer consents to the disclo-
sure. The final regulations create a limited
exception to the general rule providing
that a tax return preparer located within
the United States, including any territory
or possession of the United States, may
obtain consent to disclose the taxpayer’s
SSN to a tax return preparer located out-
side of the United States or any territory
or possession of the United States only if
the tax return preparer discloses the SSN
through the use of an adequate protection
safeguard as described in guidance pub-
lished in the Internal Revenue Bulletin and
verifies the maintenance of the adequate
data protection safeguards in the request
for the taxpayer’s consent pursuant to the
specifications described in guidance pub-
lished in the Internal Revenue Bulletin.
The rules adopted in the final reg-
ulations are substantially identical to
those proposed in the notice of pro-
posed rulemaking with the exception that
§301.7216–3T(d), which set forth the
effective date for the rules contained in
the temporary regulations, was removed
and not adopted in the final regulations
because the identical effective date is cur-
rently set forth in §301.7216–3(d). In
addition, minor and non-substantive ed-
its were made to provide grammatical
consistency and clarity throughout the
regulations. Additional guidance regard-
ing the adequate data protection safeguard
set forth in the regulations may be found
in Revenue Procedure 2008–35, 2008–29
I.R.B. 132. See §601.601(d)(2)(ii)(b).
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 determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because
the regulations do not impose a collection
of information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice of
proposed rulemaking preceding these reg-
ulations were submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Molly K. Donnelly, Office of the
Associate Chief Counsel (Procedure and
Administration).
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Paragraph 2. Section 301.7216–3 is
amended by revising paragraph (b)(4) to
read as follows:
§301.7216–3 Disclosure or use permitted
only with the taxpayer’s consent.
*****
(b) * * *
January 26, 20093422009–4 I.R.B.

(4)No consent to the disclosure of
a taxpayer’s social security number to
a return preparer outside of the United
States with respect to a taxpayer filing
areturnintheForm1040Series—(i)In
general. Except as provided in paragraph
(b)(4)(ii) of this section, a tax return pre-
parer located within the United States,
including any territory or possession of
the United States, may not obtain consent
to disclose the taxpayer’s social security
number (SSN) with respect to a taxpayer
filing a return in the Form 1040 Series,
for example, Form 1040, Form 1040NR,
Form 1040A, or Form 1040EZ, to a tax re-
turn preparer located outside of the United
States or any territory or possession of
the United States. Thus, if a tax return
preparer located within the United States
(including any territory or possession of
the United States) obtains consent from an
individual taxpayer to disclose tax return
information to another tax return pre-
parer located outside of the United States,
as provided under §§301.7216–2(c) and
301.7216–2(d), the tax return preparer
located in the United States may not dis-
close the taxpayer’s SSN, and the tax
return preparer must redact or otherwise
mask the taxpayer’s SSN before the tax
return information is disclosed outside of
the United States. If a tax return preparer
located within the United States initially
receives or obtains a taxpayer’s SSN from
another tax return preparer located outside
of the United States, however, the tax re-
turn preparer within the United States may,
without consent, retransmit the taxpayer’s
SSN to the tax return preparer located
outside the United States that initially pro-
videdtheSSNtothetaxreturnpreparer
located within the United States. For pur-
poses of this section, a tax return preparer
located outside of the United States does
not include a tax return preparer who is
continuously and regularly employed in
the United States or any territory or pos-
session of the United States and who is
in a temporary travel status outside of the
United States.
(ii)Exception.A tax return preparer lo-
cated within the United States, including
any territory or possession of the United
States, may obtain consent to disclose the
taxpayer’s SSN to a tax return preparer lo-
cated outside of the United States or any
territory or possession of the United States
only if the tax return preparer within the
United States discloses the SSN to a tax
return preparer outside of the United States
through the use of an adequate data protec-
tion safeguard as defined by the Secretary
in guidance published in the Internal Rev-
enue Bulletin (see §601.601(d)(2)(ii)(b) of
this chapter) and verifies the maintenance
of the adequate data protection safeguards
in the request for the taxpayer’s consent
pursuant to the specifications described by
the Secretary in guidance published in the
Internal Revenue Bulletin.
*****
§301.7216–3T [Removed]
Paragraph 3. Section 301.7216–3T is
removed.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved December 10, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on December 15,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 16, 2008, 73 F.R. 76216)
2009–4 I.R.B.343January 26, 2009

Part III. Administrative, Procedural, and Miscellaneous
Update for Weighted Average
Interest Rates, Yield Curves,
and Segment Rates
Notice 2009–2
This notice provides guidance as to the
corporate bond weighted average interest
rate and the permissible range of interest
rates specified under § 412(b)(5)(B)(ii)(II)
of the Internal Revenue Code as in ef-
fect for plan years beginning before 2008.
It also provides guidance on the corpo-
rate bond monthly yield curve (and the
corresponding spot segment rates), the
24-month average segment rates, and
the funding transitional segment rates
under § 430(h)(2). In addition, this no-
tice provides guidance as to the interest
rate on 30-year Treasury securities un-
der § 417(e)(3)(A)(ii)(II) as in effect for
plan years beginning before 2008, the
30-year Treasury weighted average rate
under § 431(c)(6)(E)(ii)(I), and the min-
imum present value segment rates under
§ 417(e)(3)(D) as in effect for plan years
beginning after 2007.
CORPORATE BOND WEIGHTED
AVERAGE INTEREST RATE
Sections412(b)(5)(B)(ii)and
412(l)(7)(C)(i), as amended by the Pen-
sion Funding Equity Act of 2004 and by
the Pension Protection Act of 2006 (PPA),
provide that the interest rates used to cal-
culate current liability and to determine
the required contribution under § 412(l)
for plan years beginning in 2004 through
2007 must be within a permissible range
based on the weighted average of the rates
of interest on amounts invested conser-
vatively in long term investment grade
corporate bonds during the 4-year period
ending on the last day before the beginning
of the plan year.
Notice 2004–34, 2004–1 C.B. 848, pro-
vides guidelines for determining the cor-
porate bond weighted average interest rate
and the resulting permissible range of in-
terest rates used to calculate current liabil-
ity. That notice establishes that the corpo-
rate bond weighted average is based on the
monthly composite corporate bond rate de-
rived from designated corporate bond in-
dices. The methodology for determining
the monthly composite corporate bond rate
as set forth in Notice 2004–34 continues to
apply in determining that rate. See Notice
2006–75, 2006–2 C.B. 366.
The composite corporate bond rate for
December 2008 is 6.64 percent. Pursuant
to Notice 2004–34, the Service has de-
termined this rate as the average of the
monthly yields for the included corporate
bond indices for that month.
The following corporate bond weighted
average interest rate was determined for
plan years beginning in the month shown
below.
For Plan Years
Beginning inPermissible Range
MonthYear
Corporate
Bond Weighted
Average90%to100%
January20096.29
5.67
6.29
YIELD CURVE AND SEGMENT
RATES
Generally for plan years beginning
after 2007 (except for delayed effective
dates for certain plans under sections 104,
105, and 106 of PPA), § 430 of the Code
specifies the minimum funding require-
ments that apply to single employer plans
pursuant to § 412. Section 430(h)(2) spec-
ifies the interest rates that must be used
to determine a plan’s target normal cost
and funding target. Under this provision,
present value is generally determined us-
ing three 24-month average interest rates
(“segment rates”), each of which applies
to cash flows during specified periods.
However, an election may be made under
§ 430(h)(2)(D)(ii) to use the monthly yield
curve in place of the segment rates. For
plan years beginning in 2008 and 2009, a
transitional rule under § 430(h)(2)(G) pro-
vides that the segment rates are blended
with the corporate bond weighted average
as specified above. An election may be
made under § 430(h)(2)(G)(iv) to use the
segment rates without applying the transi-
tional rule.
Notice 2007–81, 2007–44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, the
24-month average corporate bond segment
rates, and the funding transitional segment
rates used to compute the target normal
cost and the funding target. Pursuant to
Notice 2007–81, the monthly corporate
bond yield curve derived from Decem-
ber 2008 data is in Table I at the end of
this notice. The spot first, second, and
third segment rates for the month of De-
cember 2008 are, respectively, 6.72, 7.12,
and 6.36. The three 24-month average
corporate bond segment rates applicable
for January 2009 under the election of
§ 430(h)(2)(G)(iv) are as follows:
First
Segment
Second
Segment
Third
Segment
5.326.45
6.69
January 26, 20093442009–4 I.R.B.

The transitional segment rates under
§ 430(h)(2)(G) applicable for January
2009, taking into account the corporate
bond weighted average of 6.29 stated
above, are as follows:
For Plan Years
Beginning in
First
Segment
Second
Segment
Third
Segment
2008
5.97
6.346.42
2009
5.64
6.40
6.56
30-YEAR TREASURY SECURITIES
INTEREST RATES
Section 417(e)(3)(A)(ii)(II) (prior to
amendment by PPA) defines the appli-
cable interest rate, which must be used
for purposes of determining the minimum
present value of a participant’s benefit
under § 417(e)(1) and (2), as the annual
rate of interest on 30-year Treasury se-
curities for the month before the date
of distribution or such other time as the
Secretary may by regulations prescribe.
Section 1.417(e)–1(d)(3) of the Income
Tax Regulations provides that the applica-
ble interest rate for a month is the annual
rate of interest on 30-year Treasury secu-
rities as specified by the Commissioner
for that month in revenue rulings, notices
or other guidance published in the Internal
Revenue Bulletin.
The rate of interest on 30-year Treasury
securities for December 2008 is 2.87 per-
cent. The Service has determined this rate
as the monthly average of the daily deter-
mination of yield on the 30-year Treasury
bond maturing in May 2038.
Generally for plan years beginning
after 2007, § 431 specifies the mini-
mum funding requirements that apply to
multiemployer plans pursuant to § 412.
Section 431(c)(6)(B)specifies a minimum
amount for the full-funding limitation
described in section 431(c)(6)(A), based
on the plan’s current liability. Section
431(c)(6)(E)(ii)(I) provides that the inter-
est rate used to calculate current liability
for this purpose must be no more than 5
percent above and no more than 10 percent
below the weighted average of the rates of
interest on 30-year Treasury securities dur-
ing the four-year period ending on the last
day before the beginning of the plan year.
Notice 88–73, 1988–2 C.B. 383, provides
guidelines for determining the weighted
average interest rate. The following rates
were determined for plan years beginning
in the month shown below.
For Plan Years
Beginning inPermissible Range
MonthYear
30-Year
Treasury
Weighted
Average
90%to
105%
January2009
4.59
4.144.82
MINIMUM PR
ESENT VALUE
SEGMENT RA
TES
Generally
for plan years beginning af-
ter Decem
ber 31, 2007, the applicable in-
terest ra
tes under § 417(e)(3)(D) are seg-
ment rate
s computed without regard to a
24-month a
verage. For plan years begin-
ning in 200
8 through 2011, the applica-
ble intere
st rate is the monthly spot seg-
ment rate b
lended with the applicable rate
under § 41
7(e)(3)(A)(ii)(II) as in effect
for plan y
ears beginning in 2007. No-
tice 2007
–81 provides guidelines for de-
termining
the minimum present value seg-
ment rates
. Pursuant to that notice, the
minimum pr
esent value transitional seg-
ment rates
determined for December 2008,
taking in
to account the December 2008
30-year T
reasuryrateof2.87statedabove,
are as fol
lows:
For Plan Years
Beginning in
First
Segment
Second
Segment
Third
Segment
20083.643.72
3.57
20094.41
4.57
4.27
DRAFTING INFORMATION
The principal author of this notice is
Tony Montanaro of the Employee Plans,
Tax Exempt and Government Entities Di-
vision. Mr. Montanaro may be e-mailed at
RetirementPlanQuestions@irs.gov.
2009–4 I.R.B.345January 26, 2009

Table I
Monthly Yield Curve for December 2008
Maturity YieldMaturity YieldMaturity YieldMaturity YieldMaturity Yield
0.55.4220.5
6.90
40.5
6.29
60.5
6.11
80.5
6.01
1.06.1021.06.8741.0
6.29
61.06.1081.06.01
1.56.6521.56.8441.56.2861.56.1081.56.01
2.07.0022.06.8142.06.2762.06.1082.06.01
2.5
7.14
22.5
6.78
42.5
6.27
62.5
6.09
82.5
6.01
3.07.1423.06.7643.06.2663.0
6.09
83.06.00
3.5
7.07
23.5
6.73
43.5
6.26
63.5
6.09
83.5
6.00
4.0
6.98
24.06.7044.0
6.25
64.0
6.09
84.06.00
4.5
6.90
24.56.6844.56.2464.56.0884.56.00
5.0
6.84
25.0
6.66
45.0
6.24
65.0
6.08
85.0
6.00
5.5
6.81
25.5
6.64
45.5
6.23
65.5
6.08
85.5
6.00
6.06.8126.06.6246.06.2366.06.0886.05.99
6.5
6.83
26.5
6.60
46.5
6.22
66.5
6.07
86.5
5.99
7.06.8727.0
6.58
47.06.2267.06.0787.05.99
7.5
6.93
27.56.5647.56.2167.56.0787.55.99
8.06.9928.0
6.55
48.06.2168.06.0688.05.99
8.57.0528.56.5348.5
6.20
68.5
6.06
88.5
5.99
9.0
7.10
29.0
6.52
49.0
6.20
69.0
6.06
89.0
5.99
9.57.1629.5
6.51
49.5
6.19
69.56.0689.55.98
10.07.2030.0
6.49
50.0
6.19
70.06.06
90.0
5.98
10.57.2430.56.4850.56.1870.56.0590.55.98
11.07.2731.06.47
51.0
6.1871.0
6.05
91.05.98
11.5
7.30
31.5
6.46
51.5
6.17
71.56.05
91.55.98
12.07.3132.0
6.4552.0
6.1772.0
6.05
92.0
5.98
12.5
7.32
32.5
6.43
52.5
6.16
72.5
6.0492.55.98
13.07.3233.06.42
53.0
6.1673.06.04
93.0
5.97
13.57.3133.56.4153.56.1673.56.0493.55.97
14.07.3034.06.40
54.06.15
74.06.0494.05.97
14.5
7.28
34.5
6.39
54.56.1574.5
6.0494.55.97
15.0
7.26
35.0
6.38
55.0
6.14
75.0
6.0395.05.97
15.5
7.24
35.5
6.37
55.5
6.14
75.5
6.0395.55.97
16.07.2136.06.37
56.0
6.1476.06.03
96.0
5.97
16.57.1836.56.3656.56.1376.56.0396.55.97
17.07.1437.0
6.3557.0
6.1377.06.0397.05.96
17.5
7.11
37.5
6.34
57.5
6.13
77.5
6.0297.55.96
18.07.0738.06.33
58.0
6.1278.06.02
98.0
5.96
18.5
7.04
38.5
6.32
58.5
6.12
78.5
6.0298.55.96
19.0
7.01
39.0
6.3259.06.12
79.0
6.02
99.0
5.96
19.5
6.97
39.56.3159.56.1179.56.0299.55.96
20.06.9440.06.3060.06.1180.06.01100.05.96
January 26, 20093462009–4 I.R.B.

Interim Guidance Under
Section 457A
Notice 2009–8
PURPOSE
This notice provides interim guidance
on the application of § 457A to nonqual-
ified deferred compensation plans of non-
qualified entities. Section 457A gener-
ally provides that any compensation that
is deferred under a nonqualified deferred
compensation plan of a nonqualified entity
is includible in gross income when there
is no substantial risk of forfeiture of the
rights to such compensation. For purposes
of § 457A, the termnonqualified deferred
compensation planhas the same mean-
ing as provided under § 409A(d), subject
to certain modifications. For purposes of
§ 457A, the termnonqualified entitymeans
(a) any foreign corporation unless substan-
tially all of its income is (i) effectively
connected with the conduct of a trade or
business in the United States, or (ii) sub-
ject to a comprehensive foreign income
tax, and (b) any partnership unless sub-
stantially all of its income is allocated to
persons other than (i) foreign persons with
respect to whom such income is not sub-
ject to a comprehensive foreign income
tax, and (ii) organizations which are ex-
empt from tax under Title 26 of the United
States Code. Section 457A is a provi-
sion of the Tax Extenders and Alternative
Minimum Tax Relief Act of 2008, Div. C
of Pub. L. No. 110–343 (TEAMTRA),
which was enacted on October 3, 2008.
This guidance is intended as interim
guidance to assist taxpayers in applying
§ 457A while the Treasury Department
and the IRS consider further guidance
on the application of § 457A. The Trea-
sury Department and the IRS anticipate
issuing further guidance on issues not ad-
dressed by this notice. Future guidance
may also modify the guidance provided
in this notice, for example by expanding
upon the definition of a nonqualified en-
tity as set forth in this notice. In addition,
certain provisions of this notice refer to
interim guidance under Notice 2008–115,
2008–52 I.R.B. 1367 (Dec. 29, 2008)
(reporting and withholding obligations
under § 409A for taxable years beginning
on and after January 1, 2008), and pro-
posed regulations under § 409A (proposed
§ 1.409A–4, REG–148326–05, 2008–51
I.R.B. 1325 [73 Fed. Reg. 74380] (Dec.
8, 2008)). Future guidance under § 457A
may need to be adapted to any future
changes to the guidance provided in No-
tice 2008–115 and the proposed § 409A
regulations. However, as provided in the
sectionentitled“EFFECTIVE DATE,”
any future guidance under § 457A that
would expand the coverage of § 457A
will be prospective and will not apply to a
service provider’s taxable year beginning
before the issuance of such guidance.
Comments are requested on all aspects
of this notice. See the section entitled
“REQUEST FOR COMMENTS”forin-
formation on how to submit comments.
INTERIM GUIDANCE ON
APPLICATION OF § 457A
A.Section 457A — In General
Q–1 When is compensation includible
in gross income under § 457A?
A–1 As a general rule, § 457A provides
that any compensation that is deferred
under a nonqualified deferred compen-
sation plan of a nonqualified entity is
includible in gross income when there
is no substantial risk of forfeiture of the
rights to such compensation. However,
deferred compensation is not includible in
gross income if the amount of the com-
pensation is not determinable, in which
case additional taxes apply to such com-
pensation at the time the amount of such
compensation becomes determinable and
is includible in gross income. Section B
of this notice (Q&A–2 through Q&A–4)
addresses the definition of the termnon-
qualified deferred compensation plan.
Section C (Q&A–5 through Q&A–14)
addresses which service providers are
covered by § 457A and the definition of
the termnonqualified entity. Section D
(Q&A–15 through Q&A–18) addresses
the calculation of the amount includi-
ble in income under § 457A. Section E
(Q&A–19 through Q&A–21) addresses
when deferred amounts are considered to
be not determinable. Section F (Q&A–22
through Q&A–23) addresses the appli-
cation of the effective dates. Section G
(Q&A–24 through Q&A–27) addresses is-
sues related to the coordination of § 457A
with § 409A.
B.Definition of a Nonqualified Deferred
Compensation Plan
Q–2 What is a nonqualified de-
ferred compensation plan for purposes of
§ 457A?
A–2 (a)General rule. Except as oth-
erwise provided in this A–2, for purposes
of § 457A, the termnonqualified de-
ferred compensation planhas the meaning
given such term under § 409A(d) and
§ 1.409A–1(a). With respect to an arrange-
ment between a partner and a partnership,
taxpayers may rely upon the applicable
guidance under § 409A, which as of Jan-
uary 9, 2008, included Notice 2005–1,
Q&A–7, 2005–1 C.B. 274, § II.E of the
preamble to the proposed § 409A reg-
ulations published on October 4, 2005
(REG–158080–04, 2005–2 C.B. 786
[70 Fed. Reg. 57930]) and § III.G of the
preamble to the final § 409A regulations
published on April 17, 2007 (T.D. 9321,
2007–1 C.B. 1123 [72 Fed. Reg. 19234]).
However, see Q&A–3 through Q&A–4
of this notice regarding the definition
of substantial risk of forfeiture and the
application of the short-term deferral rule
for purposes of § 457A.
(b)Equity appreciation rights.As
provided in § 457A(d)(3)(A), the term
nonqualified deferred compensation plan
also includes any plan that provides a
right to compensation based on the ap-
preciation in value of a specified num-
ber of equity units of the service re-
cipient. Accordingly, except as other-
wise provided in this paragraph A–2(b),
§ 1.409A–1(b)(5)(i)(B) (exception for cer-
tain stock appreciation rights) does not
apply for purposes of determining whether
an arrangement provides for deferred
compensation for purposes of § 457A.
However, the exceptions from coverage
under § 1.409A–1(b)(5)(i)(A) (exception
for nonstatutory stock options on service
recipient stock issued with an exercise
price not less than fair market value at
the date of grant and with no other defer-
ral feature) and § 1.409A–1(b)(5)(i)(C)
(exception for statutory stock options) ap-
ply. Solely for purposes of this paragraph
A–2(b), the exception from coverage un-
der § 1.409A–1(b)(5)(i)(B) may be applied
so that a stock appreciation right which
by its terms at all times must be settled
in service recipient stock, and is settled
in service recipient stock (and otherwise
2009–4 I.R.B.347January 26, 2009

meets the requirements of that section),
will be excluded from coverage under
§ 457A. In addition, for purposes of ap-
plying the exception from coverage under
§ 1.409A–1(b)(5)(i)(A) to an equity in-
terest in a non-corporate entity (meaning
a right to purchase actual equity in such
entity, and not a mere right to an amount
equal to the appreciation in such equity),
the rules of § 1.409A–1(b)(5)(i)(A) are
appliedbyanalogy.
(c)Short-term deferral exception.In
applying § 1.409A–1(b)(4) (exception
from the definition of deferred compen-
sation for purposes of § 409A for certain
short-term deferrals), the definition of sub-
stantial risk of forfeiture in Q&A–3 of this
notice is applied in lieu of the definition
in § 1.409A–1(d). In addition, deferred
compensation for purposes of § 457A does
not include a § 457A short-term deferral
(as defined in Q&A–4).
Q–3 What is a substantial risk of forfei-
ture for purposes of § 457A?
A–3 (a)General rule. For purposes of
§ 457A, the rights of a person to compen-
sation are subject to a substantial risk of
forfeiture only if such person’s rights to
such compensationare conditioned upon
the future performance of substantial ser-
vices by such person. Thus, for example,
the rights of a person to compensation (in-
cluding a stock right) are not subject to
a substantial risk of forfeiture merely be-
cause those rights are subject to the oc-
currence of a condition related to a pur-
pose of the compensation, or are condi-
tioned, directly or indirectly, upon the re-
fraining from the performance of services.
The addition of any risk of forfeiture af-
ter the legally binding right to compensa-
tion arises, or any extension of a period
during which compensation is subject to
a risk of forfeiture is disregarded for pur-
poses of determining whether such com-
pensation is subject to a substantial risk
of forfeiture. However, an amount may
be considered subjectto a substantial risk
of forfeiture beyond the date or time at
which the recipient otherwise could have
elected to receive the compensation if the
present value of such amount (disregard-
ing, in determining the present value, the
risk of forfeiture) is materially greater than
the present value of the amount the recipi-
ent otherwise could have elected to receive
absent such risk of forfeiture. For purposes
of determining whether an amount that is
subject to a risk of forfeiture is materially
greater than the amount the recipient oth-
erwise could have elected to receive absent
such risk of forfeiture, compensation, such
as salary, that the service provider would
receive for continuing to perform services
is not taken into account. For example, if a
bonus plan provides an election between a
cash payment or restricted stock units with
a present value that is materially greater
(disregarding the risk of forfeiture) than
the present value of such cash payment and
that will be forfeited absent continued ser-
vices for a period of years, the right to the
restricted stock units generally is treated as
subject to a substantialrisk of forfeiture.
(b)Stock rights. For the application
of the definition of a substantial risk of
forfeiture to a stock right (as defined in
§ 1.409A–1(l)), see §1.409A–1(d)(2).
(c)Enforcement of forfeiture condition.
For rules on the determination of whether
the risk of forfeiture is substantial with re-
spect to the rights of a service provider that
owns a significant amount of the total vot-
ing power or value of the service recipient,
see § 1.409A–1(d)(3).
Q–4 What is a short-term deferral for
purposes of § 457A (a § 457A short-term
deferral)?
A–4 (a)General rule. Deferred com-
pensation for purposes of § 457A does
not include a short-term deferral as pro-
vided under § 457A(d)(3)(B) (a § 457A
short-term deferral). The term§ 457A
short-term deferralrefers to compensation
that is paid not later than 12 months af-
ter the end of the service recipient’s tax-
able year during which the right to the pay-
ment of the compensation is first no longer
subject to a substantial risk of forfeiture.
For purposes of this special rule, the ser-
vice recipient is the person for whom the
service provider is directly providing ser-
vices at the time the right to the payment of
such compensation is first no longer sub-
ject to a substantial risk of forfeiture. In
addition, as provided in Q&A–2(c), any
amount qualifying as a short-term defer-
ral under § 1.409A–1(b)(4), applied using
the definition of substantial risk of forfei-
ture for § 457A purposes as described in
Q&A–3, does not constitute deferred com-
pensation for purposes of § 457A.
(b)Example. If on January 1, 2009, an employee
is provided a right to a future payment of $10,000
if the employee continues providing services to his
or her employer through January 1, 2011, and the
amount is paid out not later than 12 months after
the end of the employer’s taxable year that includes
January 1, 2011, the arrangement is not subject to
§ 457A. However, if the amount is not paid to the
employee before the end of that 12-month period, the
arrangement is subject to § 457A and $10,000 is in-
cludible in the employee’s gross income on January
1, 2011.
C.Nonqualified Entities
Q–5 To which types of service
providers does § 457A apply?
A–5 A service provider subject to
§ 457A may include an individual, cor-
poration, subchapter S corporation, part-
nership, personal service corporation (as
defined in § 269A(b)(1)), noncorporate
entity that would be a personal service cor-
poration if it were a corporation, qualified
personal service corporation (as defined in
§ 448(d)(2)), and noncorporate entity that
would be a qualified personal service cor-
poration if it were a corporation. A service
provider may be subject to § 457A re-
gardless of whether such person accounts
for gross income from the performance of
services under the cash receipts and dis-
bursements method of accounting or under
the accrual method of accounting. How-
ever, an independent contractor is not a
service provider subject to § 457A if an ar-
rangement with respect to the independent
contractor would be excluded from cov-
erage under § 1.409A–1(f)(2) (generally
excluding arrangements with indepen-
dent contractors having multiple unrelated
clients, but not excluding arrangements
with such independent contractors that
provide management services).
Q–6 What is a nonqualified entity for
purposes of § 457A?
A–6 For purposes of § 457A, as pro-
vided in § 457A(b), the termnonqualified
entitymeans—(1) any foreign corporation
unless substantially all of its income is (A)
effectively connected with the conduct of
a trade or business in the United States, or
(B) subject to a comprehensive foreign in-
come tax; and (2) any partnership unless
substantially all of its income is allocated
to persons other than (A) foreign persons
with respect to whom such income is not
subject to a comprehensive foreign income
tax, and (B) organizations which are ex-
empt from tax under Title 26 of the United
States Code.
Q–7 How is it determined whether an
entity is a foreign corporation or a partner-
January 26, 20093482009–4 I.R.B.

ship for purposes of determining whether
an entity is a nonqualified entity under
§ 457A?
A–7 For purposes of § 457A, the term
foreign corporationmeans a corporation
as defined in § 7701(a)(3) that is not do-
mestic as defined in § 7701(a)(4). For
purposes of § 457A, the termpartner-
shiphas the meaning given that term in
§ 7701(a)(2).
Q–8 How is it determined whether sub-
stantially all of a foreign corporation’s in-
come is subject to a comprehensive foreign
income tax?
A–8 (a)In general. For purposes of
§ 457A, substantially all of the income of a
foreign corporation is subject to a compre-
hensive foreign income tax if, for the tax-
able year of the foreign corporation ending
with or within the service provider’s rele-
vant taxable year (as determined in accor-
dance with Q&A–13)—
(i) either (A) the foreign corporation is
eligible for the benefits of a comprehen-
sive income tax treaty between its country
of residence and the United States (as de-
termined in accordance with Q&A–10), or
(B) the foreign corporation demonstrates
to the satisfaction of the Secretary that it is
resident for tax purposes in a foreign coun-
try that has a comprehensive income tax;
and
(ii) the foreign corporation is not taxed
by the foreign corporation’s country of res-
idence under any regime or arrangement
that is materially more favorable than the
corporate income taxotherwise generally
imposedbysuchcountry.
(b)Exception where nonresidence
source income is excluded.Notwithstand-
ing paragraph A–8(a), substantially all of
the income of a foreign corporation will
not be treated as subject to a comprehen-
sive foreign income tax if—
(i) the foreign corporation’s taxable
income determined under the laws of its
country of residence excludes, in whole
or in part, nonresidence source income
realized by the foreign corporation; and
(ii) the aggregate amount of nonresi-
dence source income of the foreign corpo-
ration that is excluded for the relevant tax-
able year (the excluded amount) exceeds
20 percent of the gross income of the for-
eign corporation.
(c)Excluded income. For purposes of
paragraph A–8(b)—
(i) the foreign corporation’s taxable in-
come under the laws of its country of res-
idence excludes an item of nonresidence
source income if the foreign corporation’s
taxable income does not include such in-
come, or excludes such income by means
of exemption, exclusion (including an ex-
clusion from gross income), deduction (in-
cluding a dividends received deduction or
dividends paid deduction (or similar pro-
vision)), by means of taxation of such in-
come at a rate of tax less than 50 percent
of the generally applicable rate, or by other
means;
(ii) the foreign corporation’s gross in-
come is defined as the foreign corpora-
tion’s gross income as determined under
the income tax laws of the foreign corpora-
tion’s country of residence plus all nonres-
idence source income of the foreign corpo-
ration to the extent not otherwise included
in the foreign corporation’s gross income;
(iii) the termnonresidence source in-
comemeans any items of income that
would be included in gross income, deter-
mined under the principles of § 61, from
sources outside the foreign corporation’s
country of residence, including dividends
distributed by corporations that are not
resident in the foreign corporation’s coun-
try of residence; and
(iv) an item of nonresidence source
income is not included in the excluded
amount to the extent that such item of
nonresidence source income is—(A) ef-
fectively connectedwith the conduct of
a trade or business in the United States
under § 882 and the regulations thereun-
der that is not exempt from U.S. federal
income tax pursuant to a treaty obliga-
tion of the United States (for example,
because the income is not attributable to a
permanent establishment); (B) a dividend
from a corporation that is domestic (within
the meaning of § 7701(a)(4)); or (C) a
dividend from a corporation substantially
all of the income of which is subject to a
comprehensive foreign income tax (deter-
mined by applying the principles of this
A–8).
Q–9 How is it determined whether
substantially all of a foreign corporation’s
income is effectively connected with the
conduct of a trade or business in the United
States?
A–9 For purposes of § 457A, substan-
tially all of the income of a foreign cor-
poration is treated as effectively connected
with the conduct of a trade or business in
the United States if, for the taxable year
of the foreign corporation ending with or
within the service provider’s relevant tax-
able year (as determined under Q&A–13),
at least 80 percent of the gross income of
the foreign corporation (as defined in para-
graph A–8(c)(ii)) is effectively connected
with the conduct of a trade or business in
the United States under § 882 and the regu-
lations thereunder that is not exempt from
U.S. federal income tax pursuant to a treaty
obligation of the United States (for exam-
ple, because the income is not attributable
to a permanent establishment).
Q–10 When is a foreign person eligible
for the benefits of a comprehensive income
tax treaty for purposes of § 457A?
A–10 For purposes of § 457A, the term
comprehensive income tax treatymeans
every income tax treaty of the United
States in force as of January 9, 2009, other
than the income taxtreaty with Bermuda
and the income tax treaty with the Nether-
lands Antilles. To be eligible for the
benefits of such a comprehensive income
tax treaty for purposes of § 457A, a for-
eign person must be a resident within the
meaning of such term under the relevant
treaty and must satisfy any other relevant
requirements of that treaty, including the
requirements under any applicable limita-
tion on benefits provision.
Q–11 How is it determined whether
substantially all of a partnership’s income
for a taxable year is allocated to persons
other than (A) foreign persons with respect
to whom such income is not subject to a
comprehensive foreign income tax and (B)
organizations which are exempt from tax
under Title 26 of the United States Code?
A–11 (a)In general.Under
§ 457A(b)(2), a partnership is not a non-
qualified entity with respect to a taxable
year if it has income and substantially
all of its income for the taxable year
is allocated to persons not described in
§ 457A(b)(2)(A) or (B) (a person not
described in § 457A(b)(2)(A) or (B) is
referred to herein as aneligible person).
Substantially all of a partnership’s income
is treated for purposes of § 457A(b)(2) as
allocated to eligible persons with respect
to a taxable year only if at least 80 percent
of the gross income of the partnership for
such taxable year is allocated to eligible
persons, as provided in paragraph A–11(e)
below. The paragraphs of this A–11 below
2009–4 I.R.B.349January 26, 2009

provide guidance on whether substantially
all of the income of a partnership that
is the sponsor (see Q&A–14) of a non-
qualified deferred compensation plan is
allocated to eligiblepersons, including
determining—(i) the gross income of such
a partnership; (ii) which persons may be
treated as receiving allocations of such
gross income; and (iii) which allocations
of gross income will be treated as made to
eligible persons. An item or portion of an
item of gross income may be treated for
purposes of this Q&A–11 as allocated to
any one of (and only one of) the following:
(i) a partnership, if the partnership is the
sponsor (see Q&A–14) of the nonqualified
deferred compensation plan and subject
to a comprehensive foreign income tax
with respect to such income as provided
in paragraph A–11(f), (ii) a partner of the
partnership, or (iii) any direct or indirect
owner of the partner.
(b)Gross income and allocations for
U.S. relevant partnerships. With respect
to a U.S. relevant partnership that is the
sponsor (see Q&A–14) of a nonqual-
ified deferred compensation plan, the
termgross income of the partnership
has the same meaning as for purposes
of § 702(c) (see also §§ 1.702–1(c) and
1.704–1(b)(1)(vii)). A partnership is a
U.S. relevant partnership if it either (i)
is required to file a return of partnership
income under § 6031 or (ii) determines
the distributive share of income of any
partner in accordance with § 704. If a
U.S. relevant partnership allocates any
income net of deductions, gross income
is treated as being allocated to the partner
who received the related allocation of net
income to the extent such net income is
derived from gross income (determined
under § 702(c) principles). Allocations of
income to the partners are the actual tax
allocations of the partnership determined
under § 704 for the partnership’s relevant
taxable year under Q&A–13 of this notice.
Gross income of a foreign partnership, or a
domestic partnership that is treated under
the laws of a foreign country as resident
in that country for tax purposes, that is the
sponsor (see Q&A–14) of the nonquali-
fied deferred compensation plan may be
treated as allocated to the partnership.
(c)Gross income and allocations for
partnerships that are not U.S. relevant
partnerships. Gross income of a partner-
ship that is the sponsor (see Q&A–14) of a
nonqualified deferred compensation plan
that is not a U.S. relevant partnership is
determined for the partnership’s relevant
taxable year under Q&A–13 of this notice
using any reasonable method that incor-
porates the principles of § 61. Further, for
purposes of this Q&A–11, gross income
of a partnership that is the sponsor (see
Q&A–14) of a nonqualified plan and is
not a U.S. relevant partnership is deemed
allocated to a partner to the extent that
the partner includes such income in its
gross income on a current basis under the
income tax laws of the country of which
such partner is a resident (except if in-
cluded in income solely by reason of an
anti-deferral regime, for example, §§ 951
et seq., §§ 1293et seq., or comparable
provisions of foreign law), whether or not
such income is distributed to such person.
Gross income of a partnership that is not
a U.S. relevant partnership and that is the
sponsor (see Q&A–14) of the nonquali-
fied deferred compensation plan may be
treated as allocated tothe partnership.
(d)Tiered ownership. (i) An item or
portionofanitemofgrossincomeof
the partnership that is the sponsor (see
Q&A–14) of a nonqualified deferred com-
pensation plan that is allocated to a partner
pursuant to paragraph A–11(b) or (c) may
be treated as income allocated to any one
direct or indirect owner of such partner
that takes such income into account on a
current basis under the income tax laws of
the country of which such owner is a res-
ident (except if included in income solely
by reason of an anti-deferral regime, for
example, §§ 951et seq., §§ 1293et seq.,
or comparable provisions of foreign law),
whether or not such income is distributed
to such owner.
(ii) An item or portion of an item of
gross income of the partnership that is the
sponsor (see Q&A–14) of a nonqualified
deferred compensation plan that is allo-
cated pursuant to paragraph A–11(b) or (c)
to a partner that is a trust or estate that
is a United States person, as defined in
§ 7701(a)(30), may be treated as allocated
to a beneficiary of the trust or estate if the
beneficiary takes such income into account
on a current basis.
(e)Gross income allocations to eligible
persons. Gross income is allocated to an
eligible person to the extent—
(i) gross income that is derived in an
unrelated trade or business as described
in § 512(a) is allocated to an organization
subject to U.S. federal income tax on such
income under § 511;
(ii) gross income that is effectively con-
nected with the conduct of a trade or busi-
ness in the United States, within the mean-
ing of § 871(b) or § 882(a), as applica-
ble (effectively connected income), is allo-
cated to a person subject to U.S. federal in-
come tax on such income under § 871(b)
or § 882(a), as applicable, and not exempt
from U.S. federal income tax pursuant to a
treaty obligation of the United States;
(iii) gross income is allocated to
a United States person (as defined in
§ 7701(a)(30)) other than (A) an organ-
ization exempt from tax under Title 26
of the United States Code; (B) a domes-
tic partnership within the meaning of
§ 7701(a)(30)(B); or (C) a trust or estate,
except to the extent the trust or estate is
subject to U.S. federal income tax in re-
spect of such income and such income is
neither included in the gross income of a
beneficiary under § 652 or § 662 nor paid
or permanently set aside for a charitable
purpose within the meaning of § 642(c);
or
(iv) gross income that is not effectively
connected income is allocated to a person
that is not a United States person, as de-
fined in § 7701(a)(30) (a foreign person)
(a foreign person is deemed to include for
these purposes and for purposes of para-
graph A–11(f) below a domestic partner-
ship that is the sponsor (see Q&A–14)
of the nonqualified deferred compensation
plan and that is treated under the laws of a
foreign country as resident in that country
for tax purposes), who is subject to a com-
prehensive foreign income tax with respect
to such income as provided in paragraph
A–11(f) below.
(f)Comprehensive Foreign Income Tax.
For purposes of this A–11 a foreign person
is subject to a comprehensive foreign in-
come tax with respect to an item of income
of the partnership only if both—
(i) The foreign person takes such in-
come into account on a current basis un-
der the income tax laws of the country in
which the foreign person is resident (ex-
cept if included in income solely by reason
of an anti-deferral regime, for example,
§§ 951et seq., §§ 1293et seq., or compa-
rable provisions of foreign law), whether
or not such income is distributed to such
foreign person; and
January 26, 20093502009–4 I.R.B.

(ii)(A) In the case of a foreign per-
son that is not a nonresident alien indi-
vidual—(I) the foreign person is an en-
tity that is not fiscally transparent under
the law of the entity’s jurisdiction (as de-
fined in § 1.894–1(d)(3)(ii)) with respect
to such income; (II) the foreign person
satisfies the requirements of Q&A–8(a)(i)
and (ii) treating the foreign person as the
“foreign corporation” for this purpose; and
(III) such income is not excluded from
such foreign person’s taxable income by
means of exemption, exclusion, dividends
paid deduction or dividends received de-
duction (or similar provision), by means of
taxation of such income at a rate less than
50 percent of the generally applicable rate,
or by other means; or
(B) In the case of a foreign person that
is a nonresident alien individual—(I) such
nonresident alien individual is eligible for
the benefits of a comprehensive income
tax treaty with the United States, or such
nonresident alien individual demonstrates
to the satisfaction of the Secretary that
such nonresident alienindividual is subject
to a comprehensive foreign income tax;
and (II) such income is not excluded from
such foreign person’s taxable income by
means of exemption, exclusion (including
an exclusion from gross income), deduc-
tion (including a dividends paid deduction
or dividends received deduction (or sim-
ilar provision)), by means of taxation of
such income at a rate less than 50 percent
of the generally applicable rate, or by other
means.
(g)Examples. The following examples
illustrate the rules in this A–11. For pur-
poses of Examples 1 through 3, assume
the following. PRS is a domestic partner-
ship. PRS has two partners, A, a domestic
corporation that is not an organization ex-
empt from tax under Title 26 of the United
States Code, and B, an entity exempt from
tax pursuant to § 501(a). Under the PRS
partnership agreement, A is allocated the
first $700 of net income, and any remain-
ing net income is allocated 75% to A and
25% to B. Net losses are allocated 75% to
A and 25% to B. Assume that B’s distribu-
tive share of income of PRS does not con-
stitute unrelated business taxable income
to B and that all of PRS’ allocations of in-
come, gain, loss and deduction satisfy the
requirements of § 704.
Example 1. For the taxable year ending on De-
cember 31, 2009, PRS has $1,500 in gross income
and no other gains, losses or deductions. Under the
PRS partnership agreement, A is allocated the first
$700 of net income, and the remaining $800 of net in-
come is allocated $600 to A (75% x $800) and $200
to B (25% x $800). In 2009, PRS is not a nonqualified
entity under § 457A(b)(2) and this Q&A–11 because
$1,300 of gross income is allocated to A, which is at
least 80% of the gross income of PRS (80% x $1,500
= $1,200).
Example 2. For its taxable year ending Decem-
ber 31, 2009, PRS has $1,000 in ordinary income,
$300 of deductions (or net ordinary income of $700),
$8,000 of gains, and no losses. Under the PRS
partnership agreement, A is allocated the first $700
of net income, and the $8,000 of gain is allocated
$6,000 to A (75% x $8,000) and $2,000 to B (25% x
$8,000). In 2009, PRS is a nonqualified entity under
§ 457A(b)(2) and this Q&A–11 because $7,000 of
gross income is allocated to A, which is less than
80% of the gross income of PRS (80% x $9,000 =
$7,200).
Example 3. For its taxable year ending December
31, 2009, PRS has a $1,400 net loss ($100 of gross
income, $1,500 of deductions, and no other gains or
losses). Under the PRS partnership agreement, A is
allocated $1,050 of the net loss (75% x $1,400). B is
allocated $350 of the net loss (25% x $1,400). Un-
der § 702(c), A’s share of gross income of PRS is
$75 (75% x $100). In 2009, PRS is a nonqualified
entity under § 457A(b)(2) and this Q&A–11 because
less than 80% of PRS’ gross income is allocated to A
(80% x $100 = $80).
Example 4. In 2009, K and B are partners in KB
partnership, a partnership organized under the laws
of foreign country 1 that is fiscally transparent under
the laws of foreign country 1. KB is a partnership for
U.S. federal income tax purposes and a U.S. relevant
partnership hereunder. K is an entity organized under
the laws of foreign country 2, and K is fiscally trans-
parent under the laws of foreign country 2 and has
in effect an election to be treated as a corporation for
U.S. federal tax purposes. B is a domestic corporation
that is not an organization exempt from tax under Ti-
tle 26 of the United States Code. The owners of K are
S, an individual who is a citizen and resident of for-
eign country 3, and J, a foreign corporation. S is eli-
gible for the benefits of a comprehensive income tax
treaty with the United States and takes into account
under the income tax laws of country 3 her share of
gross income of K on a current basis, whether or not
such income is distributed to S. S’s share of such in-
come is taxed under the laws of country 3 at a rate
not less than the generally applicable rate, is not oth-
erwise excluded from S’s income and is not included
in income by reason of an anti-deferral regime. J is
not subject to tax on its share of income of K. Income
of KB is not effectively connected income. KB is a
calendar year taxpayer. Foreign country 1 does not
impose a tax on the income of KB, and foreign coun-
try 2 does not impose a tax on the income of K.
Because KB is a U.S relevant partnership, KB
must determine its gross income of KB for U.S. fed-
eral tax purposes and whether at least 80% of this
gross income is allocated during 2009 to eligible per-
sons.
(i) Gross income of KB allocated to B is income
described in paragraph A–11(e)(iii) and is therefore
allocated to an eligible person.
(ii) Because K is fiscally transparent under the
laws of country 2, gross income of KB allocated to
K is not income subject to a comprehensive foreign
income tax in the hands of K for purposes of para-
graph A–11(f). However, gross income of KB that is
taken into account by S is treated as gross income that
is allocated to eligible persons because S is a nonres-
ident alien individual who is eligible for the benefits
of a comprehensive income tax treaty with the United
States and includes her share of K’s gross income on
a current basis whether or not distributed to S, such
income is taxed under the laws of country 3 at a rate
not less than the generally applicable rate and not oth-
erwise excluded from S’s income and is not included
in income by reason of ananti-deferral regime.
(iii) Gross income of KB that is allocated to K and
taken into account by J is not income that is allocated
to eligible persons because neither K nor J is subject
to a comprehensive foreign income tax with respect
to such income.
Q–12 Does § 457A apply to deferred
compensation that would have been de-
ductible against income of a foreign corpo-
ration which is taxable under § 882 if the
compensation had been paid in cash on the
date that such compensation ceased to be
subject to a substantial risk of forfeiture?
A–12 In the case of a foreign corpora-
tion with income which is taxable under
§ 882, § 457A does not apply to compensa-
tion that, had such compensation been paid
in cash on the date that such compensation
ceased to be subject to a substantial risk of
forfeiture, would have been deductible un-
der the principles of § 882 and the regula-
tions thereunder by such foreign corpora-
tion against such income. If such compen-
sation expense would not have been part
of the corporation’s cost of goods sold, the
compensationwillbeconsideredtohave
been deductible by the foreign corpora-
tion against such income only to the extent
that the compensation would be properly
allocated and apportioned to such income
under the principles of § 1.861–8et seq.
If such compensation expense would have
been part of the corporation’s cost of goods
sold, the compensation will be considered
to have been deductible by the corporation
against such income using any reasonable
method that is satisfactory to the Secretary
based on all facts and circumstances.
Q–13 When is the determination made
whether an entity is a nonqualified entity?
A–13 (a)General rule. The determi-
nation of whether an entity is a nonqual-
ified entity is made as of the last day of
each of the service provider’s taxable years
in which the nonqualified deferred com-
pensation is no longer subject to a sub-
stantial risk of forfeiture and remains de-
2009–4 I.R.B.351January 26, 2009

ferred. Accordingly, if the plan sponsor
becomes a nonqualified entity during a ser-
vice provider’s taxable year and is a non-
qualified entity as of the last day of the ser-
vice provider’s taxable year, amounts de-
ferred under the plan are subject to § 457A
for that taxable year of the service provider
and the amounts are includible in income
to the extent that the amounts are not sub-
ject to a substantial risk of forfeiture and
have not previously been included in in-
come. Similarly, if the plan sponsor ceases
to be a nonqualified entity during a service
provider’s taxable year, and is not a non-
qualified entity as of the last day of the
service provider’s taxable year, amounts
deferred under the plan are not subject to
§ 457A for that taxable year of the ser-
vice provider. Comments are requested
regarding alternative approaches to deter-
mine whether and when nonqualified de-
ferred compensation becomes subject to
§ 457A where the nonqualified deferred
compensation is no longer subject to a sub-
stantial risk of forfeiture and is still de-
ferred, and the entity becomes a nonqual-
ified entity in a subsequent taxable year.
See the section below entitled “Request
for Comments” for information on the sub-
mission of comments.
(b)Special rule for partnerships.
Whether a partnership is a nonqualified
entity as of the last day of the service
provider’s taxable year is determined
based on the allocations (or deemed allo-
cations) of gross income by the partnership
for the partnership’s taxable year ending
with or within the service provider’s tax-
able year. If a partnership does not yet
have a taxable year that has ended or ends
on the last day of the service provider’s
taxable year, a reasonable, good faith
estimate of such allocation (or deemed al-
location) of the partnership for its current
taxable year must be used to determine
whether it is a nonqualified entity.
Q–14 How is it determined whether a
nonqualified deferred compensation plan
is a plan of a nonqualified entity?
A–14 The determination of whether a
nonqualified deferred compensation plan
is a plan of a nonqualified entity (for pur-
poses of this notice, whether a nonquali-
fied entity is the “sponsor”, or one of the
“sponsors”, of the plan) is determined as
of the last day of the service provider’s
relevant taxable year as determined under
Q&A–13. For this purpose, with respect
to any amount deferred under a plan, the
sponsor of the plan is any entity or enti-
ties which, if the entity paid the amount de-
ferred in cash to the service provider in the
relevant taxable year (as determined un-
der Q&A–13), would be entitled to a com-
pensation deduction under U.S. federal in-
come tax principles.
D.Amount Includible in Income
Q–15 Does § 457A apply to a right to
earnings on deferred compensation that is
subject to § 457A?
A–15 Yes. For purposes of § 457A and
this notice, references to deferred com-
pensation include references to income
(whether actual or notional) attributable to
such compensation or such income. When
the right to earnings is specified under
the terms of the plan, the legally binding
right to earnings arises at the time of the
deferral of the compensation to which the
earnings relate. Accordingly, rights to
reasonable earnings credited on at least
an annual basis are includible in gross
income under § 457A when the right to
the earnings credited is no longer sub-
ject to a substantial risk of forfeiture (as
defined in Q&A–3 of this notice). The
right to earnings that are not reasonable
earnings, or that are not credited at least
annually, will result in some or all of the
earnings being treated as currently de-
ferred amounts in accordance with rules
analogous to the rules set forth in proposed
§ 1.409A–6(b)(2)(iii) (crediting of earn-
ings and losses), § 1.409A–6(b)(2)(ii)(B)
(use of an unreasonable actuarial assump-
tion or method), and § 1.409A–6(b)(3)(ii)
(account balance plans — unreasonable
rate of return).
Q–16 How is the amount includible in
income under § 457A determined?
A–16 Except as provided in Q&A–19
and Q&A–20, for purposes of § 457A, the
amount includible in income is determined
under the rules applicable to the determi-
nation of amounts includible in income un-
der § 409A(a). For the currently appli-
cable rules, see Notice 2008–115, which
provides certain rules including a rule per-
mitting taxpayers to rely upon proposed
§ 1.409A–4.
Q–17 If an amount is included in gross
income under § 457A before the amount is
paid to the service provider, is the amount
also includible in income when the amount
is paid to the service provider?
A–17 To the extent a deferred amount
is included in income under § 457A before
the amount is paid to the service provider,
the amount is not includible in income
when the amount is paid to the service
provider. However, after such amount is
included in income by the service provider,
§ 457A may continue to apply to the right
to future reasonable earnings on such pre-
viously included amounts (see Q&A–15).
For purposes of determining the amount
previously included in income that is not
includible in income at the time of the
payment, taxpayers may rely upon rules
that are the same as the rules of proposed
§1.409A–4(f).
Q–18 If an amount is included in in-
come under § 457A before the amount is
paid to the service provider, and before
such amount is paid the right to the amount
is forfeited or otherwise permanently lost,
is the service provider entitled to a loss?
A–18 Yes. If an amount is included in
income under § 457A before the amount
is paid to the service provider and, be-
fore such amount is paid, the right to the
amount is forfeited or otherwise perma-
nently lost, the service provider may rely
upon rules that are the same as the rules
of proposed § 1.409A–4(g) for purposes of
determining the availability of any loss.
E.Deferred Amounts that are not
Determinable
Q–19 When is the deferred amount
to which a service provider is entitled
treated as not determinable for purposes
of § 457A?
A–19 (a)In general. For purposes of
§ 457A, the deferred amount to which a
service provider is entitled is treated as
not determinable if the deferred amount
would be calculated under proposed
§ 1.409A–4(b)(2)(iv) (application of
the general calculation rules to formula
amounts), if such rule were effective. Un-
der proposed § 1.409A–4(b)(2)(iv), for a
plan that is not an account balance plan,
an amount payable in a future taxable year
is a formula amount (and thus not deter-
minable) to the extent that the amount
payable in a future taxable year is depen-
dent upon factors that, after applying the
assumptions and other rules set out in the
proposed regulations, are not determinable
January 26, 20093522009–4 I.R.B.

as of the end of the service provider’s
taxable year. This generally occurs where
the amount of the payment (and not the
timing of the payment) is unknown at the
end of the taxable year because it is based
upon factors that remain variable as of the
end of the taxable year. For example, an
annual bonus based on annual profits as of
December 31, 2010 is a formula amount
(and thus an indeterminable amount) at
all times prior to December 31, 2010.
However, the deferred amount is deter-
minable as of December 31, 2010 because
the information necessary to calculate the
bonus exists, regardless of whether the
calculation of the annual profits is readily
available.
Q–20 When is a deferred amount that is
treated as not determinable at the time that
the compensation is otherwise includible
in gross income under § 457A required to
be included in income?
A–20 A deferred amount that is treated
as not determinable at the time that the
compensation is otherwise includible in
gross income under § 457A is required
to be included in gross income when the
deferred amount becomes determinable.
For purposes of calculating the amount
includible in gross income at such time,
the rules of Q&A–16 apply.
Q–21 What additional taxes apply to a
deferred amount that is treated as not deter-
minable at the time that the compensation
is otherwise includible in gross income un-
der § 457A?
A–21 When a deferred amount that is
treated as not determinable at the time that
the compensation is otherwise includible
in gross income under § 457A becomes de-
terminable and must be included in gross
income, the tax for the taxable year in
which the compensation is includible in
gross income is increased by the sum of
(a) an amount equal to 20 percent of the
amount of the compensation and (b) the
premium interest tax on the compensation.
For purposes of this A–21, the premium
interest tax is the amount of interest at
the underpayment rate under § 6621 plus
1 percentage point on the underpayments
that would have occurred had the deferred
compensation been includible in gross in-
come for the taxable year in which first
deferred or, if later, the first taxable year
in which the deferred compensation is not
subject to a substantial risk of forfeiture (as
defined in Q&A–3 of this notice). For pur-
poses of calculating the premium interest
tax, rules analogous to the rules provided
in proposed § 1.409A–4(d) apply, if such
rule were effective.
F.Effective Dates for Application of
§457A
Q–22 What is the effective date of
§ 457A?
A–22 Section 457A applies to amounts
deferred that are attributable to services
performed after December 31, 2008. In
the case of any amount deferred to which
§ 457A would not otherwise apply solely
by reason of the fact that the amount is
attributable to services performed before
January 1, 2009, to the extent the amount
deferred is not included in gross income
in a taxable year beginning before 2018,
that amount deferred is includible in gross
income in the later of (a) the last taxable
year beginning before January 1, 2018 or
(b) the first taxable year in which there
is no substantial risk of forfeiture of the
right to the amount deferred (as defined in
Q&A–3 of this notice).
Q–23 For purposes of applying the ef-
fective date, how are the periods of service
to which the compensation is attributable
determined?
A–23 (a)Services to which compensa-
tion is attributable.
(1)General rule: compensation attrib-
utabletoaserviceperiodbasedonplan
formula. If a service provider obtains a
legally binding right to compensation un-
der a plan on or before December 31, 2008,
and as of December 31, 2008 that plan
provides for benefit payments under a for-
mula that relates to a specific period of ser-
vice in a year (such as relating to compen-
sation paid during that period), the com-
pensation is attributable to that specific
period, except as otherwise provided in
this A–23. To the extent that, based on
the terms of the plan as of December 31,
2008, compensation is not attributable to
services performed in a particular period,
then the compensation generally is attrib-
utable to services performed during the
year in which the employee obtains the
legally binding right to the compensation.
If a service provider is entitled to com-
pensation only upon an involuntary sepa-
ration from service, the amount attribut-
able to services performed on or before
December 31, 2008 is the amount the ser-
vice provider would be entitled to based
upon the years of service and compensa-
tion earned as of December 31, 2008 (dis-
regarding any requirement to perform fur-
ther services). Any additional amount to
which the service provider becomes enti-
tled after December 31, 2008 due solely
to additional services performed after De-
cember 31, 2008 is attributable to service
performed after December 31, 2008. A
right to reasonable earnings on amounts
deferred attributableto services performed
before December 31, 2008 is treated as
attributable to services performed before
December 31, 2008, but only to the extent
further services were not required after De-
cember 31, 2008 to retain the right to the
earnings.
(2)Legally binding right. Compensa-
tion is not attributable to a period of ser-
vices prior to the date the service provider
obtains a legally binding right to the com-
pensation. A service provider does not
have a legally binding right to compen-
sation to the extent that compensation
may be reduced unilaterally or eliminated
by the service recipient or other person
after the services creating the right to
the compensation have been performed.
However, if the facts and circumstances
indicate that the discretion to reduce or
eliminate the compensation is available
or exercisable only upon a condition, or
the discretion to reduce or eliminate the
compensation lacks substantive signifi-
cance, then the employee has a legally
binding right to the compensation. For
this purpose, compensation is not con-
sidered subject to unilateral reduction or
elimination merely because it may be re-
duced or eliminated by operation of the
objective terms of the plan, such as the
application of a nondiscretionary, objec-
tive provision creating a substantial risk
of forfeiture. (See §§ 1.409A–1(b)(1) and
31.3121(v)(2)–1(b)(3)(i) for additional
rules regarding when an employee obtains
a legally binding right to compensation.)
(3)Substantial risk of forfeiture.Tothe
extent that under a plan’s terms as of De-
cember 31, 2008, a service provider’s right
to compensation is subject to a substantial
risk of forfeiture (as defined in Q&A–3)
in the form of a requirement to continue
to perform substantial future services for
the service recipient after December 31,
2008, the compensation generally is for
services performed over the period of time
2009–4 I.R.B.353January 26, 2009

that the service provider is required to con-
tinue to perform substantial future services
for the service recipient and is attributed
to that period on apro ratabasis, unless
the compensation is attributable to a dif-
ferent period under the rule in paragraph
A–23(b)(1). For purposes of applying the
effective date, if the substantial risk of for-
feiture lapses after December 31, 2008,
but before the substantial risk of forfei-
ture would otherwise have lapsed under
the terms of the plan as of December 31,
2008 if the service provider had continued
providing services (such as due to death,
disability or an acceleration of the vesting
requirement), the allocation remains pro-
rated over the period from when the ser-
vice provider obtained the legally binding
right to the payment to the date that the
substantial risk of forfeiture would other-
wise have lapsed under the terms of the
plan as of December 31, 2008 if the service
provider had continued providing services.
(4)Plan terms as of December 31,
2008. A plan’s terms as of December 31,
2008, include only the plan’s terms as
in effect on December 31, 2008, and do
not include any amendment to such plan
terms after December 31, 2008, even if
the amendment to such plan terms is made
effective retroactively to a date earlier
than January 1, 2009. Notwithstanding
the foregoing, the terms of a plan may be
amended retroactively to provide that a
substantial risk of forfeiture that would
otherwise lapse on or after January 1, 2009
will be treated as having lapsed effective
before January 1, 2009, provided that the
amendment is made in writing and effec-
tive before July 1, 2009, and provided
further that any shortening of the period
during which a deferred amount was sub-
ject to a substantial risk of forfeiture must
beappliedconsistentlytoeveryservice
provider participating in that arrangement
or a substantially similar arrangement.
(b)Examples. For purposes of these ex-
amples, the description of the terms of the
relevant plan refers to the terms of the plan
as of December 31, 2008, except where
otherwise provided.
Example 1. Employee A obtains on January 1,
2006 a legally binding right to be paid $400,000 at
the end of December, 2014, but only if A continues
to be employed on December 31, 2010. In this case,
apro rataportion of the compensation is attributable
to services performed during 2006, 2007, 2008, 2009,
and 2010, so that 60% of the amount deferred is at-
tributable to services performed before 2009.
Example 2. Employee C obtains on December
31, 2007 a legally binding right to be paid on Feb-
ruary 1, 2014 an amount equal to 10% of employee
C’s salary during the period from January 1, 2008
through December 31, 2009, and employee C’s
salary is $400,000 for each of 2008 and 2009. In
this case, the compensation is attributablepro ratato
services performed in 2008 and 2009, so that 50%
of the amount deferred is attributable to services
performed in 2008.
Example 3. Employee D obtains on December 31,
2007 a legally binding right to be paid on January 1,
2014 an amount equal to 20% of D’s highest annual
salary times the number of years of service completed
by D before January 1, 2010, but only if D remains
employed through December 31, 2009. Employee D
remains employed through December 31, 2009 and
has an annual salary of $400,000 in 2008. Under
the terms of the plan in this case, under the rule in
paragraph A–23(a)(1), the compensation attributable
to services performed in 2008 is the present value of
$80,000 (20% of Employee D’s annual salary in 2008
times 1 year of service) payable on January 1, 2014.
Example 4. Employee E obtains on December 31,
2008 a legally binding right to be paid $400,000 on
February 1, 2010 (without any requirement of con-
tinued employment). Under these facts and circum-
stances, the compensation is not attributable to ser-
vices performed in a period of time after December
31, 2008.
Example 5. Employee F obtains on December 31,
2008 a stock appreciation right with a 10-year term
and an exercise price equal to the fair market value of
the stock on December 31, 2008 (without any require-
ment of continued employment in order to be able to
exercise the right and receivepayment). Thecom-
pensation is not attributable to services performed in
a period of time after December 31, 2008.
Example 6. Employee G obtains on January 1,
2008 a stock appreciation right with a 10-year term
and an exercise price equal to the fair market value of
the stock on January 1, 2008, but the stock appreci-
ation right can be exercised only after the employee
has continued his or her employment for three more
years (through December 31,2010). In this case, the
amount deferred under the stock appreciation right
is attributable to services performed from January 1,
2008 through December 31, 2010, so that one-third
of the amount deferred is attributable to services per-
formed before January 1, 2009.
Example 7. Employee H obtains on January 1,
2000 a right to a retirement benefit payable solely
upon separation from service (including separation
from service due to death or disability) as a life an-
nuity equal to a monthly payment of 3% multiplied
by the average of the highest three years of com-
pensation multiplied again by the number of years
of service Employee H had completed with the ser-
vice recipient. As of December 31, 2008, Employee
H had completed 15 years of service and the aver-
age of the highest three years of compensation was
$250,000. The deferred amount attributable to ser-
vices performed on or before December 31, 2008
equals the present value of the life annuity calculated
using the years of service completed and the compen-
sation earned as of December 31, 2008. Any increase
in the deferred amount due to an additional year of
service or an increase in compensation after Decem-
ber 31, 2008 would be a deferred amount attributable
to services performed after December 31, 2008.
Example 8. Employee J obtains on January 1,
2008 a right to a bonus equal to 10% of the increase in
the value of a pool of assets, calculable and payable
one year after Employee J’s separation from service.
Because any increase in the value through the date of
payment would not be due to Employee J’s continued
services, the entire deferred amount is attributable to
services performed during 2008.
Example 9. Employee K obtains on January 1,
2008 a right to an amount payable on January 1, 2014,
but only if Employee K continues to provide services
through December 31, 2010, or dies or becomes dis-
abled before December 31, 2010. On July 1, 2010,
Employee K dies. Because under the terms of the
plan as of December 31, 2008, Employee K was re-
quired to continue to provide services through De-
cember 31, 2010, one-third of the deferred amount
continues to be attributable to services performed be-
fore January 1, 2009.
Example 10. Employee L obtains on January
1, 2008 a right to an amount payable on January 1,
2014, but only if Employee L continues to provide
services through December 31, 2010, or dies or
becomes disabled before December 31, 2010. On
January 1, 2010, the arrangement is amended so that
Employee L is entitled to payment of the amount re-
gardless of whether Employee L continues to provide
services after December31, 2009. For purposes of
the effective date of § 457A, this amendment is dis-
regarded and only one-third of the amount deferred
is treated as attributable to services performed on or
before December 31, 2008.
Example 11. Employee M obtains on January 1,
2008 a right to an amount payable on January 1, 2014,
but only if Employee M continues to provide ser-
vices through December 31, 2010, or dies or becomes
disabled before December 31, 2010. On March 15,
2009, the arrangement is amended so that Employee
M is entitled to payment of the amount regardless of
whether Employee M continues to provide services
after December 31, 2008. Provided that the same
amendment is made and applied consistently to every
service provider participating in the same or a sub-
stantially similar arrangement sponsored by the same
service recipient, the amendment is not disregarded
for purposes of the effective date under § 457A and
all of the amount deferred is treated as attributable to
services performed on or before December 31, 2008.
G.Coordination with § 409A
Q–24 How does § 457A coordinate
with§409A?
A–24 Sections 457A and 409A may
both apply to amounts deferred under the
same arrangement. For purposes of ap-
plying § 409A to arrangements covered
by § 457A, rules similar to those address-
ing arrangements subject to § 457(f) ap-
ply. Accordingly, an inclusion in income
under § 457A is treated as a payment for
purposes of the short-term deferral rule un-
der § 1.409A–1(b)(4). In addition, until
further guidance, the inclusion in income
January 26, 20093542009–4 I.R.B.

under § 457A of earnings on amounts sub-
ject to § 457A is treated as a payment in
accordance with a fixed schedule of pay-
ments if the earnings are reasonable, are
credited at least annually, and are included
in income under § 457A for the later of
the taxable year in which such earnings
are credited or when such amounts would
otherwise be includible in income under
§ 457A. However, the right to an amount
that is not subject to § 457A because it is a
§ 457A short-term deferral under Q&A–4
is subject to § 409A unless the arrange-
ment also qualifies as a short-term deferral
under § 1.409A–1(b)(4).
Q–25 What transition rules apply under
§ 409A with respect to amounts covered
by § 457A that are attributable to services
performed before January 1, 2009?
A–25 Solely with respect to a deferred
amount attributable to services performed
before January 1, 2009, a change in the
time and form of payment to conform the
date of distribution to the date the amount
mayberequiredtobeincludedinincome
under § 457A(d)(2) will not be treated
as an impermissible acceleration under
§ 409A(a)(3) and § 1.409A–3(j)(1), pro-
vided that such change in the time and
form of payment is established in writing
and effective on or before December 31,
2011. To the extent a deferred amount
attributable to services performed before
January 1, 2009 was earned and vested
before December 31, 2004 and is not
otherwise covered by § 409A due to the
application of the effective date rules un-
der § 1.409A–6, a change in the time and
form of payment solely to conform the
date of distribution to the date the amounts
mayberequiredtobeincludedinincome
under § 457A(d)(2) is not treated as a ma-
terial modification of such arrangement
under § 1.409A–6(a)(4), provided that
such change in the time and form of pay-
ment is established in writing and effective
on or before December 31, 2011.
Q–26 What transition rules apply under
§ 409A with respect to amounts covered
by § 457A that are attributable to services
performed after December 31, 2008?
A–26 In general, the right to a deferred
amount to which § 457A applies will not
constitute a deferred amount under § 409A
because the amount will be “paid” for pur-
poses of the short-term deferral rule under
§ 1.409A–1(b)(4) no later than the time at
which the right to the amount is no longer
subject to a substantial risk of forfeiture.
Accordingly, a plan provision stating that
an amount will be payable in cash at the
time the amount is includible in income
under § 457A will not be required because
the right to payment of such amount will
not be subject to § 409A. However, pay-
ment timing issues under § 409A may arise
if the right to a deferred amount becomes
subject to § 457A in a future year (for ex-
ample, because the plan sponsor becomes
a nonqualified entity), or ceases to be sub-
ject to § 457A in a future year (because
the plan sponsor ceases to be a nonquali-
fied entity before the right to the substan-
tial risk of forfeiture lapses). In addition,
payment timing issues may arise if earn-
ings on deferred compensation become in-
cludible in gross income under § 457A, to
the extent such earnings would otherwise
have been accumulated and paid at a de-
ferred date. To address these issues, until
further guidance the payment of a deferred
amount during the service provider’s tax-
able year in which such amount becomes
includible in income under § 457A will
not constitute an impermissible accelera-
tion of a payment under § 409A(a)(3) or
§ 1.409A–3(j). However, plan provisions
will still be necessary to address use of
the § 457A short-term deferral rule (see
Q&A–4).
Q–27 What transition rules apply under
§ 409A with respect to certain back-to-
back arrangements attributable to services
performed before January 1, 2009?
A–27 (a) If the service provider is also a
service recipient (the intermediate service
recipient) and maintains one or more non-
qualified deferred compensation arrange-
ments for its serviceproviders covered by
§ 457A under which any amount is attrib-
utable to services performed before Jan-
uary 1, 2009, a change in the time and
form of payment of such amount solely to
conform the date of payment to the date
the amount is required to be included in
income will not be treated as an imper-
missible acceleration under § 409A(a)(3)
and § 1.409A–3(j)(1), provided that such
change in the time and form of payment
is established in writing and effective on
or before December 31, 2011. To the ex-
tent a deferred amount covered by § 457A
was earned and vested before December
31, 2004 and is not otherwise subject to
§ 409A due to the application of the effec-
tive date rules under § 1.409A–6, a change
in the time and form of payment solely to
conform the date of distribution to the date
the amount is required to be included in
income under § 457A will not be treated
as a material modification of such arrange-
ment under § 1.409A–6(a)(4), provided
that such change in the time and form of
payment is established in writing and ef-
fective on or before December 31, 2011.
(b) With respect to a back-to-back ar-
rangement under which a service provider
provides services to a service recipient
(the intermediate service recipient) that in
turn provides services to another service
recipient (the ultimate service recipient),
to the extent the arrangement is covered
by § 409A, all potential times and forms of
payment under which the service provider
may be paid a deferred amount by the
intermediate service recipient must com-
ply with the requirements of § 409A and
§ 1.409A–3. This means that the service
provider must be payable upon a permissi-
ble payment event, which may include the
service provider’s separation from service.
However, a nonqualified deferred com-
pensation arrangement that provides for
the service provider to be paid when the
intermediate service recipient separates
from service from the ultimate service re-
cipient is not a permissible payment event.
Nothing in this A–27 should be interpreted
as changing this requirement. In addition,
no opinion is expressed as to whether
such an arrangement would satisfy the
requirements of the transition guidance
for periods before the effective date of
the final § 409A regulations (January 1,
2009). For the applicable transition rules,
see Notice 2007–86, 2007–46 I.R.B. 990.
REQUEST FOR COMMENTS
The Treasury Department and the IRS
anticipate issuing additional guidance with
respect to § 457A. The Treasury Depart-
ment and the IRS request comments on
the topics addressed in this notice, and
any other issues arising under § 457A. The
Treasury Department and the IRS specifi-
cally request comments regarding the fol-
lowing topics:
1. Whether and to what extent a lim-
itation on benefits provision or exchange
of information program is relevant to the
determination of what is a “comprehensive
income tax treaty.”
2009–4 I.R.B.355January 26, 2009

2. The extent to which a reimburse-
ment arrangement with respect to a domes-
tic taxpayer service recipient and a non-
qualified entity that has agreed to share or
reimburse the domestic taxpayer service
recipient’s compensation costs should re-
sult in the domestic taxpayer service recip-
ient also being treated as a nonqualified en-
tity.
3. The potential scope of the exception
to the definition of substantial risk of for-
feiture that may be provided by regulation
under § 457A(d)(1)(B), relating to the sin-
gle investment asset.
4. The proper treatment of trusts that
are partners in a partnership and beneficia-
ries of these trusts for purposes of deter-
mining to whom income of a partnership
is allocated under § 457A(b)(2).
All materials submitted will be avail-
able for public inspection and copying.
Comments may be submitted to Internal
Revenue Service, CC:PA:LPD:PR (Notice
2009–8), Room 5203, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may also be hand-delivered
Monday through Friday between the hours
of8a.m.and4p.m.totheCourier’sDesk
at 1111 Constitution Avenue, NW, Wash-
ington, DC 20224, Attn: CC:PA:LPD:PR
(Notice 2009–8), Room 5203. Submis-
sions may also be sent electronically via
the internet to the following email address:
Notice.comments@irscounsel.treas.gov.
Include the notice number (Notice
2009–8) in the subject line.
EFFECTIVE DATE
Until further guidance is issued, tax-
payersmayrelyontherulesinthisno-
tice for purposes of § 457A effective from
October 3, 2008 (the date of enactment of
TEAMTRA). Further guidance that would
expand the coverage of § 457A will be
prospective and will not apply to a service
provider’s taxable years beginning before
the issuance of such guidance.
CONTACT INFORMATION
For further information regarding this
notice, contact Stephen Tackney of the Of-
fice of Division Counsel/Associate Chief
Counsel (Tax Exempt & Government En-
tities) at (202) 927–9639 (not a toll-free
call).
26 CFR 601.601: Rules and regulations.
(Also: Part I, §§ 301, 305.)
Rev. Proc. 2009–15
SECTION 1. PURPOSE
Rev. Proc. 2008–68, 2008–52 I.R.B.
1373, provides temporary guidance re-
garding certain stock distributions by pub-
licly traded real estate investment trusts
(REITs). This revenue procedure ampli-
fies and supersedes Rev. Proc. 2008–68
to extend the same treatment to publicly
traded regulated investment companies
(RICs).
SECTION 2. BACKGROUND
.01 Section 305(a) of the Internal Rev-
enue Code (“Code”) provides that, except
as otherwise provided in section 305, gross
income does not include the amount of any
distribution of the stock of a corporation
made by such corporation to its sharehold-
ers with respect to its stock.
.02 Section 305(b)(1) provides that sec-
tion 305(a) shall not apply to a distribution
by a corporation of its stock, and the distri-
bution shall be treated as a distribution of
property to which section 301 applies, if
the distribution is, at the election of any of
the shareholders (whether exercised before
or after the declaration thereof), payable
either in its stock or in property.
.03 Section 305(b)(2) provides that sec-
tion 305(a) shall not apply to a distribution
by a corporation of its stock, and the distri-
bution shall be treated as a distribution of
property to which section 301 applies, if
the distribution (or a series of distributions
of which such distribution is one) has the
result of the receipt of property by some
shareholders, and an increase in the pro-
portionate interests of other shareholders
in the assets or earnings and profits of the
corporation.
.04 Section 1.305–2(a) of the Income
Tax Regulations provides that under sec-
tion 305(b)(1), if any shareholder has the
righttoanelectionoroptionwithrespect
to whether a distribution shall be made ei-
ther in money or any other property, or in
stock or rights to acquire stock of the dis-
tributing corporation, then, with respect to
all shareholders, thedistribution of stock
or rights to acquire stock is treated as a dis-
tribution of property to which section 301
applies regardless of—
(1) Whether the distribution is actually
made in whole or in part in stock or in stock
rights;
(2) Whether the election or option is
exercised or exercisable before or after the
declaration of the distribution;
(3) Whether the declaration of the dis-
tribution provides that the distribution will
be made in one medium unless the share-
holder specifically requests payment in the
other;
(4) Whether the election governing the
nature of the distribution is provided in the
declaration of the distribution or in the cor-
porate charter or arises from the circum-
stances of the distribution; or
(5) Whether all or part of the sharehold-
ers have the election.
.05 Section 1.305–1(b)(2) provides that
where a corporation which regularly dis-
tributes its earnings and profits, such as a
regulated investment company, declares
a dividend pursuant to which the share-
holders may elect to receive either money
or stock of the distributing corporation
of equivalent value, the amount of the
distribution of the stock received by any
shareholder electing to receive stock will
be considered to equal the amount of the
money which could have been received
instead.
SECTION 3. SCOPE AND
APPLICATION
The Internal RevenueService will treat
a distribution of stock by a corporation that
qualifiesasaRICorasaREITunderpart
I or II, respectively, of subchapter M of the
Code as a distribution of property to which
section 301 applies by reason of section
305(b), and the amount of such distribution
of stock will be considered to equal the
amount of the money which could have
been received instead, if —
(1) The distribution is made by the cor-
poration to its shareholders with respect to
its stock;
(2) Stock of the corporation is publicly
traded on an established securities market
in the United States;
(3) The distributionis declared with re-
spect to a taxable year ending on or before
December 31, 2009;
(4) Pursuant to such declaration each
shareholder may elect to receive the share-
January 26, 20093562009–4 I.R.B.

holder’s entire entitlement under the decla-
ration in either money or stock of the dis-
tributing corporation of equivalent value
subject to a limitation on the amount of
money to be distributed in the aggregate to
all shareholders (the “Cash Limitation”),
provided that—
(a) such Cash Limitation is not less than
10% of the aggregate declared distribution,
and
(b) if too many shareholders elect to
receive money, each shareholder electing
to receive money will receive apro rata
amount of money corresponding to the
shareholder’s respective entitlement under
the declaration, but in no event will any
shareholder electing to receive money re-
ceive less than 10% of the shareholder’s
entire entitlement under the declaration in
money;
(5) The calculation of the number of
shares to be received by any shareholder
will be determined, as close as practicable
to the payment date, based upon a formula
utilizing market prices that is designed to
equate in value the number of shares to be
received with the amount of money that
could be received instead. For purposes
of applying subsection (4) of this Section
3, the value of the shares to be distributed
shall be determined by using the formula
described in the preceding sentence; and
(6) With respect to any shareholder par-
ticipating in a dividend reinvestment plan
(“DRIP”), the DRIP applies only to the ex-
tent that, in the absence of the DRIP, the
shareholder would have received the dis-
tribution in money under subsection (4) of
this Section 3.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2008–68 is amplified and
superseded.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective
with respect to distributions declared on
or after January 1, 2008.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue
procedure is T. Ian Russell of the Office of
Associate Chief Counsel (Corporate). For
further information regarding this revenue
procedure, contact T. Ian Russell at (202)
622–7550 (not a toll-free call).
2009–4 I.R.B.357January 26, 2009

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Section 6707 a
nd the Failure
to Furnish Inf
ormation
Regarding Re
portable
Transaction
s
REG–160872–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations under section 6707 of
the Internal RevenueCode (Code), which
provide the rules relating to the assessment
of penalties against material advisors who
fail to timely file a true and complete re-
turn required under section 6111(a). The
regulations implement the amendments to
section 6707 by the American Jobs Cre-
ation Act and promote material advisors’
compliance with the regulations under sec-
tion 6111. These regulations affect mate-
rial advisors responsible for disclosing re-
portable transactions under section 6111.
DATES: Written or electronic comments
and request for a public hearing must be
received by March 23, 2009.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–160872–04), room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–160872–04),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, N.W.,
Washington, DC, 20224, or sent elec-
tronically via the Federal eRulemaking
Portal athttp://www.regulations.gov(IRS
REG–160872–04).
FOR FU
RTHER INFORMATION
CONT
ACT: Matthew S. Cooper,
(202
) 622–4940 (not a toll-free num-
ber)
; concerning submissions of com-
ment
s and requests for a public hear-
ing,
Oluwafunmilayo Taylor of the
Publications
andRegulationBranchat
(202) 622–718
0 (not toll-free numbers).
SUPPLEMENTAR
Y INFORMATION:
Background
This document
contains proposed
amendments to
the Procedure and Admin-
istration Reg
ulations (26 CFR Part 301)
under sectio
n 6707 of the Internal Revenue
Code. Sectio
n 6707 was originally added
totheCodeby
section 141(b) of the Tax
Reform Act of
1984, Public Law 98–369,
98 Stat. 494
. At that time, section 6707
imposed a pe
nalty for failing to timely
register a t
ax shelter or for filing false or
incomplete
information with respect to the
tax shelter
registration. Treasury Regu-
lation §30
1.6707–1T was issued shortly
after sect
ion 6707 became law.
The Americ
an Jobs Creation Act of
2004, Publ
ic Law 108–357, 118 Stat.
1418, (AJC
A) was enacted on October 22,
2004. AJCA
section 816 amended section
6707 to imp
ose a penalty on a material
advisor w
ho is required to file a return
under sec
tion 6111(a) with respect to any
reportab
le transaction, and who fails to file
a timely r
eturn or who files a return with
false or
incomplete information with re-
spect to
the reportable transaction. Section
6707, as
amended, is effective for returns
due afte
r October 22, 2004. The amount
of the pe
nalty for failing to timely file or
filing
a return with false or incomplete
inform
ation with respect to any reportable
transa
ction other than a listed transaction
is $50,
000. For listed transactions, the
amount
of the penalty is the greater of (1)
$200,
000, or (2) 50 percent of the gross
incom
e derived by the material advisor
with r
espect to aid, assistance, or advice
that t
he material advisor provides with
respe
ct to the listed transaction before the
date t
he return is filed under section 6111.
If th
e penalty is imposed with respect to a
list
ed transaction and the failure or action
subj
ect to the penalty was intentional, the
pena
lty is the greater of (1) $200,000, or
(2) 7
5 percent of the gross income derived
by t
he material advisor with respect to
aid
, assistance, or advice that the material
adv
isor provides with respect to the listed
tra
nsaction before the date the return is
fil
ed under section 6111. The provisions
of section 670
7A(d) regarding rescission
of the penalty
apply to any penalty as-
sessed under s
ection 6707.
To implement t
he pertinent provi-
sions of the AJ
CA, the IRS and Treasury
Department is
sued interim guidance on
section 6111 i
n Notice 2004–80, 2004–2
C.B. 963, Dec
ember 13, 2004; Notice
2005–17, 200
5–1 C.B. 606, February
22, 2005; Not
ice 2005–22, 2005–1 C.B.
756, March 21
, 2005; and Notice 2006–6,
2006–1 C.B.
385, January 30, 2006 (see
§601.601(d
)(2)(ii)(b)). These notices
provided gu
idance to a material advisor
required to
file a return under section
6111, incl
uding rules regarding the date
by which th
e material advisor must file
the return
and the information the mate-
rial advis
or must include on the return.
Subsequen
tly, the IRS and Treasury De-
partment
proposed amendments to the
rules rel
atingtothedisclosureofre-
portable
transactions by material advisors
under sec
tion 6111 (see Prop. Treas. Reg.
§301.61
11–3, 71 FR 64501) and final-
ized tho
se proposed regulations as T.D.
9351, 20
07–38 I.R.B. 616, in theFederal
Registe
r(72 FR 43157). The IRS and
Treasur
y Department are now proposing
rules r
elating to the AJCA amendments to
sectio
n 6707.
Rev. Pr
oc. 2007–21, 2007–9 I.R.B.
613, wh
ich was published on February 26,
2007, p
rovides guidance to persons against
whom a p
enalty under section 6707 or
6707A i
s assessed regarding procedures
for re
questing that the Commissioner of
the In
ternal Revenue Service rescind all or
aport
ion of these penalties with respect to
arepo
rtable transaction other than a listed
trans
action.
Expla
nation of Provisions
These
proposed regulations provide
rule
s reflecting the AJCA amendments to
the s
ection 6707 penalty for the failure
to ti
mely file a return under section 6111
or fo
r filing a return with false or incom-
plet
e information regarding reportable
tran
sactions. The scope of the changes
to t
he section 6707 penalty provisions by
the
AJCA necessitates a change to the
tem
porary regulations promulgated under
for
mer section 6707.
January 26, 20093582009–4 I.R.B.

Under these proposed revisions, a
penalty under section 6707 may be as-
sessed against each material advisor re-
quired to file a return under section 6111
who fails to file a timely return in ac-
cordance with §301.6111–3(e) or files
a return with false or incomplete infor-
mation. Accordingly, if more than one
material advisor is responsible for filing a
return under section 6111 with respect to
the same reportable transaction, a separate
penalty under section 6707 may be as-
sessed against each material advisor who
fails to timely file a return or files a return
with false or incomplete information.
Additionally, §301.6707–1(b)(4) of
these proposed regulations provides that
incomplete informationmeans a Form
8918,“Material Advisor Disclosure State-
ment”(or successor form), filed with the
IRS that does not provide the informa-
tion required under §301.6111–3(d). A
return will not be considered incomplete
when the information not provided on the
Form 8918 (or successor form) is imma-
terial or was not provided due to mistake
or accident after the exercise of reason-
able care. The proposed regulations also
provide that material advisors who com-
plete the form to the best of their ability
and knowledge after the exercise of rea-
sonable efforts to obtain the information
will not be considered to have filed an
incomplete form within the meaning of
this section. A Form 8918 (or successor
form), however, will be considered inten-
tionally incomplete (and, in the case of a
listed transaction, subject to the increased
penalty imposed by section 6707(b)) when
it omits information required to be pro-
vided under §301.6111–3(d) and contains
a statement that the omitted information
will be provided upon request.
False informationunder proposed
§301.6707–1(b)(5) means information
provided on a Form 8918 (or successor
form) to the IRS that is untrue or incor-
rect when the Form 8918 (or successor
form) was filed. Information filed with
the IRS will not be considered false when
the return contains untrue or incorrect in-
formation by mistake or accident after the
exercise of reasonable care or when the
untrue or incorrect information is immate-
rial.
Under proposed §301.6707–1(b)(6),
the failure to timely file or the submission
of false or incomplete information is in-
tentional if the material advisor knew of
the obligation to file a return under section
6111, and knowingly did not timely file
a return with the IRS; or filed a return
knowing that it was false or incomplete. In
the case of a listed transaction, the failure
to timely file a true and complete return
will not be considered intentional if the
material advisor remedies this failure by
filing a true and complete return with the
IRS prior to the earlier of the date that any
taxpayer files a Form 8886 identifying
the material advisor with respect to the
reportable transaction in question or the
date the IRS contacts the material advi-
sor concerning the reportable transaction.
This rule is intendedto encourage mate-
rial advisors to correct material defects in
their compliance with section 6111, and
recognizes that by voluntarily correct-
ing material defects the material advisors
demonstrate an intent to comply with sec-
tion 6111.
The proposed regulations in
§301.6707–1(c)(2) state that a separate
penalty may be assessed against each ma-
terial advisor for its own failure to timely
file the required return. If multiple ma-
terial advisors (all with filing obligations
under section 6111) enter into a designa-
tion agreement (within the meaning of
§301.6111–3(f)) designating one material
advisor to file the required return on behalf
of all parties to the agreement, the section
6707 penalty may be imposed upon each
party to the agreement if the material
advisor designated to file the return either
fails to timely file a return or files a return
with false or incomplete information.
In the case of a listed transaction, if
the designated material advisor fails to
timely file a true and complete return, a
nondesignated material advisor will not be
considered to have intentionally violated
its obligations under section 6111 unless
the nondesignated material advisor knew
or should have known that the designated
material advisor would fail to timely file
a true and complete return.
Section 301.6707–1(d) of these pro-
posed regulations provides several exam-
ples illustrating thepotential application
of the section 6707 penalty. Included
are examples showing that the gross in-
come derived by the material advisor
will be determined in accordance with
§301.6111–3(b)(3)(ii) for purposes of cal-
culating the amount of the penalty with
respect to a listed transaction.
Section 301.6707–1(e) of these pro-
posed regulations restates the existing
authority of the Secretary to prescribe
the procedures to request rescission of a
section 6707 penalty with respect to a non-
listed reportable transaction by revenue
procedure or other guidance published in
the Internal Revenue Bulletin. Rev. Proc.
2007–21 describes the procedures for re-
questing rescission of a penalty assessed
under section 6707, including the deadline
by which a person must request rescission;
the information the person must provide
in the rescission request; the factors that
weigh in favor of and against granting
rescission; where the person must submit
the rescission request; and the rules gov-
erning requests for additional information
from the person requesting rescission.
These proposed regulations provide
factors that the Commissioner (or the
Commissioner’s delegate) should take
into account during the determination
whether to rescind all or a portion of
any penalty imposed under section 6707.
The proposed regulations generally adopt
the list of factors stated in Rev. Proc.
2007–21, which factors are consistent with
the legislative history of section 6707.
See H.R. Conf. Rep. No. 755, 108
th
Cong., 2d Sess. at 599 (2004). The factors
identified in these proposed regulations
do not represent an exclusive list, and
no single factor will be determinative
of whether to grant rescission in any
particular case. Rather, the Commissioner
(or the Commissioner’s delegate) will
consider and weigh all relevant factors,
regardless of whether the factor is included
in this list, and will generally favor
rescission when the relevant factors and
circumstances suggest that sustaining
assessment of the penalty is against equity
and good conscience.
One additional factor identified in the
temporary regulations recently promul-
gated under section 6707A as weighing
in favor of granting rescission that is not
proposed to be adopted for purposes of
rescission of the penalty under section
6707 is the extent to which the penalty
assessed is disproportionately larger than
the tax benefit received. The material ad-
visor does not receive a tax benefit from
the reportable transaction, but rather bene-
fits from the transaction through the gross
2009–4 I.R.B.359January 26, 2009

income derived for aiding, assisting, or
advising on the transaction. The threshold
of gross income for status as a material
advisor under section 6111 in the case
of a reportable transaction is $50,000 if
substantially all of the tax benefits from
the transaction are provided to natural
persons (looking through any partner-
ships, S corporations, or trusts). For all
other nonlisted reportable transactions, the
threshold amount is $250,000. The gross
income levels necessary to be treated as
a material advisor substantially ensure
that any penalty imposed upon a material
advisor under section 6707 will not be
disproportionate to the benefit received by
the material advisor.
Because it is the policy of the IRS to
administer penalties in a manner that pro-
motes voluntary compliance with the tax
laws, the fact that a material advisor vol-
untarily files the form required under sec-
tion 6111 prior to the earlier of: (i) the date
that any taxpayer files a Form 8886 iden-
tifying the material advisor with respect
to the reportable transaction in question or
(ii) the date the IRS contacts the material
advisor concerning the reportable transac-
tion will weigh strongly in favor of rescis-
sion. See IRS Policy Statement 20–1 (June
29, 2004).
The proposed regulations mirror Rev.
Proc. 2007–21 in providing that a rescis-
sion request is not the appropriate forum to
contest whether the elements necessary to
support a penalty under section 6707 exist.
That question is for the examining agent,
the IRS Office of Appeals, and the courts.
A rescission determination is based on the
premise that a violation of section 6707
exists but, nonetheless, the penalty should
be rescinded (or abated). Accordingly,
the proposed regulations provide that the
Commissioner (or the Commissioner’s
delegate) will not consider whether the
material advisor in fact failed to comply
with section 6111. Furthermore, these
regulations provide that the Commissioner
(or the Commissioner’s delegate) will not
take into consideration doubt as to liability
for, or collectibility of, the penalties in de-
termining whether to rescind the penalty.
Proposed Effective Date
These regulations are proposed to apply
to returns the due date of which is after the
date the Treasury decision adopting these
rules as final regulations is published in the
Federal Register.
Special Analyses
It has been determined that these regu-
lations are not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section553(b)oftheAdministrativePro-
cedure Act (5 U.S.C. chapter 5) does not
apply to this regulation and because the
regulation does not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, this regula-
tion has been submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on the impact
on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and Treasury Department request
comments on the substance of the pro-
posed regulations, as well as on the clar-
ity of the proposed rules and how they
can be made easier to understand. All
comments submitted by the public will be
made available for public inspection and
copying. A public hearing will be sched-
uled if requested in writing by any person
that timely submits comments. If a pub-
lic hearing is scheduled, notice of the date,
time, and place for the public hearing will
be published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Matthew S. Cooper of the Office
of the Associate ChiefCounsel (Procedure
and Administration).
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR Part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6707–1 is added to
read as follows:
§301.6707–1 Failure to furnish
information regarding reportable
transactions.
(a)In general. A material advisor who
is required to file a return under section
6111(a) with respect to any reportable
transaction, who fails to file a timely re-
turn in accordance with§301.6111–3(e) or
who files a return with false or incomplete
information with respect to the reportable
transaction, will be subject to a penalty.
The amount of the penalty for failing to
timely file or filing a false or incomplete
return with respect to any reportable trans-
action other than a listed transaction is
$50,000. The amount of the penalty with
respect to a failure relating to any listed
transaction is the greater of $200,000 or
50 percent of the gross income derived by
the material advisorwith respect to aid,
assistance, or advice that is provided with
respect to the listed transaction before
the date the return is filed under section
6111. If the failure or action subject to the
penalty is with respect to a listed trans-
action and is intentional, the penalty is
the greater of $200,000 or 75 percent of
the gross income derived by the material
advisor with respect to aid, assistance,
or advice that is provided with respect to
the listed transaction before the date the
return is filed under section 6111. For
purposes of calculating the amount of the
penalty with respect to a listed transaction,
the gross income derived by the material
advisor will be determined in accordance
with §301.6111–3(b)(3)(ii).
(b)Definitions—(1)Reportable trans-
action. The term “reportable transaction”
is defined in §1.6011–4(b)(1) of this chap-
ter.
(2)Listed transaction. The term “listed
transaction” is defined in section 6707A(c)
of the Code and §1.6011–4(b)(2) of this
chapter.
(3)Material Advisor.Theterm
“material advisor” is defined in sec-
January 26, 20093602009–4 I.R.B.

tion 6111(b)(1) of the Code and
§301.6111–3(b).
(4)Incomplete information. For pur-
poses of this section,incomplete informa-
tionmeans a Form 8918,“Material Ad-
visor Disclosure Statement”(or succes-
sor form), filed with the IRS that does
not provide the information required under
§301.6111–3(d). Information filed with
the IRS will not be considered incomplete
when the information not provided on the
Form 8918 (or successor form) is imma-
terial or was not provided due to mistake
or accident after the exercise of reason-
able care. A material advisor who com-
pletes the form to the best of their abil-
ity and knowledge after the exercise of
reasonable effort to obtain the information
will not be considered to have filed in-
complete information within the meaning
of this section. A Form 8918 (or succes-
sor form) will be considered to provide
incomplete information when it omits in-
formation required to be provided under
§301.6111–3(d) and contains a statement
that the omitted information will be pro-
vided upon request. For listed transac-
tions, a Form 8918 (or successor form) that
omits information required to be provided
under §301.6111–3(d) and contains a state-
ment that the omitted information will be
provided upon request will be considered
an intentional submission of a return with
incomplete information within the mean-
ing of paragraph (b)(6) of this section.
(5)False information. For purposes of
this section,false informationmeans infor-
mation provided on a Form 8918 (or suc-
cessor form) filed with the IRS that is un-
true or incorrect when the Form 8918 (or
successor form) was filed. False informa-
tion does not include information provided
on a Form 8918 (or successor form) filed
with the IRS that is immaterial or that is
untrue or incorrect due to a mistake or ac-
cident after the exercise of reasonable care.
(6)Intentional. For purposes of this
section, the failure to timely file a return
or the submission of a return with false or
incomplete information isintentionalif—
(i) The material advisor knew of the
obligation to file a return and knowingly
did not timely file a return with the IRS; or
(ii) The material advisor filed a return
knowing that it was false or incomplete.
(7)Derive. The term “derive” is de-
fined in §301.6111–3(c)(3).
(c)Assessment of penalty—(1)Individ-
ual liability. If there is more than one ma-
terial advisor who is responsible for fil-
ing a return under section 6111 with re-
spect to the same reportable transaction, a
separate penalty under section 6707 may
be assessed against each material advisor
who fails to timely file or files a false
or incomplete return. The determination
of whether the failure or action subject
to the penalty is intentional will also be
made individually for each material ad-
visor with respect to the same reportable
transaction. The higher penalty will not
apply to any material advisor whose failure
to file timely or whose furnishing of false
or incomplete information is unintentional.
The failure to timely file a return, or fil-
ing a return with false or incomplete infor-
mation, will be considered unintentional if
the material advisor subsequently files a
true and complete return prior to the earlier
of the date that any taxpayer files a Form
8886,“Reportable Transaction Disclosure
Statement”(or successor form), identify-
ing the material advisor with respect to the
reportable transaction in question or the
date the IRS contacts the material advisor
concerning the reportable transaction.
(2)Designation agreements.Amate-
rial advisor who is required to file a return
undersection6111andwhoisapartytoa
designation agreement within the meaning
of §301.6111–3(f) is subject to a penalty
under section 6707 if the designated ma-
terial advisor fails to timely file a return
or files a return with false or incomplete
information. In the case of a listed trans-
action, if the designated material advisor
fails to timely file a return, or files a re-
turn with false or incomplete information,
the nondesignated material advisor who is
a party to the designation agreement will
not be treated as intentionally failing to
file the return, or intentionally filing a re-
turn with false or incomplete information,
unless the nondesignated material advisor
knew or should have known that the desig-
nated material advisor would fail to timely
file a true and complete return.
(d)Examples. The rules of paragraphs
(a) through (c) of this section are illustrated
by the following examples:
Example 1. Advisor A becomes a material
advisor as defined under section 6111(b) and
§301.6111–3(b) in the fourth quarter of 2009 with
respect to a reportable transaction other than a listed
transaction, and AdvisorB also becomes a material
advisor in the same quarter with respect to the same
reportable transaction. Subsequently, Advisors A
and B fail to timely file the Form 8918. Because the
section 6707 penalty applies to each material advisor
independently, Advisors A and B each are subject to
a penalty of $50,000.
Example 2.SameasExample 1, except that Advi-
sor B timely filed the Form 8918 with the IRS Office
of Tax Shelter Analysis (OTSA). Advisors A and B
did not enter into a designation agreement. Accord-
ingly, only Advisor A is subject to a $50,000 penalty.
Example 3. Advisor C becomes a material advi-
sor to Client X on January 5, 2009, with respect to
a listed transaction. Advisor C derives $400,000 in
gross income from his advice to Client X because he
expects to receive that amount from Client X, even
though he has not yet received that amount. Advi-
sor C unintentionally does not file a Form 8918. On
January 5, 2010, Advisor C becomes a material advi-
sor to Client Y with respect to the same type of listed
transaction. The gross income Advisor C expects to
receive from his advice to Client Y is $100,000. Ad-
visor C does not become a material advisor with re-
spect to any other client and unintentionally does not
file a Form 8918. Advisor C is subject to a penalty of
$250,000 (50 percent of the gross income he derived)
under section 6707.
Example 4.SameasExample 3, except that Ad-
visor C files the Form 8918 on November 15, 2009,
which is beyond the date prescribed for filing the dis-
closure statement. Advisor C is subject to a $200,000
penalty under section 6707 because, as of the date he
filed the Form 8918, the gross income Advisor C had
received or expected to receive with respect to advice
relating to the listed transaction did not include gross
income for advice to Client Y.
Example 5.SameasExample 3, except that Ad-
visor C files the Form 8918 on February 15, 2010,
which is beyond the date prescribed for filing the dis-
closure statement. Advisor C is subject to a $250,000
penalty under section 6707 because, as of the date he
filed the Form 8918, the gross income Advisor C had
received or expected to receive with respect to ad-
vice relating to the listed transaction included gross
income for advice to Client X and Client Y.
Example 6. Advisor D becomes a material
advisor as defined under section 6111(b) and
§301.6111–3(b) in the first quarter of 2009 with
respect to a reportable transaction other than a listed
transaction. Advisor D does not file a Form 8918 by
April 30, 2009. The transaction is then identified as
a listed transaction in published guidance on July 7,
2009. Advisor D knew that it had a new obligation to
file a Form 8918 by October 31, 2009, and intention-
ally fails to file the Form 8918. Advisor D is subject
to only one penalty, in the amount of the greater
of $200,000 or 75 percent of the gross income he
derived from the transaction, for intentionally failing
to disclose the listed transaction in accordance with
§301.6111–3(d)(1) and (e).
(e)Rescission authority—(1)In gen-
eral.The Commissioner (or the Commis-
sioner’s delegate) may rescind the section
6707 penalty if—
(i) The violation relates to a reportable
transaction that is not a listed transaction
and
2009–4 I.R.B.361January 26, 2009

(ii) Rescinding the penalty would pro-
mote compliance with the requirements of
the Internal Revenue Code and effective
tax administration.
(2)Requesting rescission. The Secre-
tary may prescribe the procedures for a
material advisor to request rescission of a
section 6707 penalty by revenue procedure
or other guidance published in the Internal
Revenue Bulletin.
(3)Factors that weigh in favor of grant-
ing rescission.In determining whether
rescission would promote compliance with
the requirements of the Code and effective
tax administration, the Commissioner (or
the Commissioner’s delegate) will take
into account the following list of factors
that weigh in favor of granting rescission.
This is not an exclusive list and no single
factor will be determinative of whether
to grant rescission in any particular case.
Rather, the Commissioner (or the Com-
missioner’s delegate) will consider and
weigh all relevant factors, regardless of
whether the factor is included in this list.
(i) The material advisor, upon becom-
ing aware that it failed to properly disclose
a reportable transaction, filed a complete
and proper, albeit untimely, Form 8918 (or
successor form). This factor will weigh
strongly in favor of rescission provided
that the material advisor files the form re-
quired under section 6111 prior to the ear-
lier of the date that any taxpayer files a
Form 8886 identifying the material advisor
with respect to the reportable transaction
in question or the date the IRS contacts the
material advisor concerning the reportable
transaction.
(ii) The material advisor’s failure to
properly disclose the reportable transac-
tion was due to an unintentional mistake
of fact that existed despite the material
advisor’s reasonable attempts to ascertain
the correct facts with respect to the trans-
action.
(iii) The material advisor has an estab-
lished history of properly disclosing other
reportable transactions and complying
with other tax laws, including compliance
with any requests made by the IRS under
section 6112, if applicable.
(iv) The material advisor demonstrates
that the failure to include on any return or
statement any information required to be
disclosed under section 6111 arose from
events beyond the material advisor’s con-
trol.
(v) The material advisor cooperates
with the IRS by providing timely infor-
mation with respect to the transaction
at issue that the Commissioner (or the
Commissioner’s delegate) may request in
consideration of the rescission request. In
considering whether a material advisor co-
operates with the IRS, the Commissioner
(or the Commissioner’s delegate) will take
into account whether the material advi-
sor meets the deadlines described in Rev.
Proc. 2007–21 (or successor document)
(see §601.601(d)(2)(ii)(b)) for complying
with requests for additional information.
(vi) Assessment of the penalty weighs
against equity andgood conscience, in-
cluding whether the material advisor
demonstrates that there was reasonable
cause for, and the material advisor acted
in good faith with respect to, the failure
to timely file or to include on any return
any information required to be disclosed
under section 6111. An important factor
in determining reasonable cause and good
faith is the extent of the material advi-
sor’s efforts to determine whether there
was a requirement to file the return re-
quired under section 6111. The presence
of reasonable cause, however, will not
necessarily be determinative of whether to
grant rescission.
(4)Absence of favorable factors weighs
against rescission. The absence of facts
establishing the factors described in para-
graph (e)(3) of this section weighs against
granting rescission. The absence of any
one of these factors, however, will not
necessarily be determinative of whether to
grant rescission.
(5)Factors not considered. In deter-
mining whether to grant rescission, the
Commissioner (or the Commissioner’s
delegate) will not consider doubt as to lia-
bility for, or collectibility of, the penalties.
(f)Effective/applicability date.The
rules of this section apply to returns the
due date for which is after the date the
Treasury decision adopting these rules as
final regulations is published in theFed-
eral Register.
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 19,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 22, 2008, 73 F.R. 78254)
Notice of Proposed
Rulemaking
Withholding Under Internal
RevenueCodeSection3402(t)
REG–158747–06
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations relating to withholding
under section 3402(t) of the Internal Rev-
enue Code (Code). The proposed regu-
lations reflect changes in the law made
by the Tax Increase Prevention and Rec-
onciliation Act of 2005 that require Fed-
eral, State, and local government entities
to withhold income tax when making pay-
ments to persons providing property or ser-
vices. These proposed regulations provide
guidance to assist the government entities
in complying with section 3402(t). The
regulations also provide certain guidance
to persons receiving payments for property
or services from government entities. This
document also contains proposed amend-
ments to regulations under sections 3406,
6011, 6051, 6071, and 6302 of the Code.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 5, 2009.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–158747–06), room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–158747–06),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC, or sent electroni-
cally via the Federal eRulemaking Por-
tal athttp://www.regulations.gov/(IRS
REG–158747–06).
FOR FURTHER INFORMATION
CONTACT: Concerning these proposed
regulations, Jean Casey, (202) 622–6040;
concerning submissions of comments or
to request a public hearing, Richard Hurst
atRichard.A.Hurst@irscounsel.treas.gov
or (202) 622–7180 (not toll-free numbers).
January 26, 20093622009–4 I.R.B.

SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR Part 31 under sec-
tion 3402(t) of the Code. This document
also contains proposed amendments to
26 CFR Part 31 under sections 3406, 6011,
6051, 6071, and 6302 of the Code.
Section 3402(t) of the Code was added
by section 511 of the Tax Increase Pre-
vention and Reconciliation Act of 2005,
Public Law 109–222 (TIPRA), 120 Stat.
345, which was enacted into law on May
17, 2006. Section 3402(t)(1) provides
that the Government of the United States,
every State, every political subdivision
thereof, and every instrumentality of the
foregoing (including multi-State agen-
cies) making any payment to any person
providing any property or services (in-
cluding any payment made in connection
with a government voucher or certificate
program which functions as a payment
for property or services) shall deduct and
withhold from such payment a tax in an
amount equal to 3 percent of such pay-
ment. Under the statute, section 3402(t)
applies to payments made after December
31, 2010.
Exceptions to section 3402(t) withhold-
ing are contained in section 3402(t)(2).
Section 3402(t)(2) provides that section
3402(t) withholding shall not apply to any
payment—
(A) Except as provided in section
3402(t)(2)(B), which is subject to with-
holding under any other provision of
chapter 24 (Collection of Income Tax at
Source on Wages, sections 3401 through
3406) or chapter 3 (Withholding of Tax on
Nonresident Aliens and Foreign Corpora-
tions, sections 1441 through 1464) of the
Code;
(B) Which is subject to withholding un-
der section 3406 (backup withholding) and
from which amounts are being withheld
under such section;
(C)Ofinterest;
(D) For real property;
(E) To any government entity subject to
the requirements of section 3402(t)(1), any
tax-exempt entity, or any foreign govern-
ment;
(F) Made pursuant to a classified or
confidential contract described in section
6050M(e)(3);
(G) Made by a political subdivision of
a State (or any instrumentality thereof)
which makes less than $100,000,000 of
such payments annually;
(H) Which is in connection with a pub-
lic assistance or public welfare program
for which eligibility is determined by a
needs or income test; and
(I) To any government employee not
otherwise excludable with respect to his or
her services as an employee.
Section 3402(t)(3) provides for the co-
ordination of section 3402(t) with other
Code sections. Section 3402(t)(3) pro-
vides that, for purposes of sections 3403
and3404andforpurposesofsomuchof
subtitle F (except section 7205) as relates
to chapter 24, payments to any person for
property or services which are subject to
withholding shall be treated as if such pay-
ments were wages paid by an employer to
an employee.
The legislative history in connection
with section 3402(t)indicates that “[t]he
withholding requirement applies regard-
less of whether the government entity
making such payment is the recipient of
the property or services.” H.R. Conf. Rep.
No. 109–455, 109th Cong., 2d Sess. at
300 (2006). Further, the conference report
also provides, with respect to the exception
provided by section 3402(t)(2)(H), that
“payments under government programs
to provide health care or other services
that are not based on the needs or income
of the recipients are subject to withhold-
ing, including programs where eligibility
is based on the age of the beneficiary.”
H.R. Conf. Rep. No. 109–455 at page
301. In addition, with respect to section
3402(t)(2)(A), the conference report states
that section 3402(t) withholding “does
not apply to payments of wages or to
any other payment with respect to which
mandatory (e.g., U.S.-source income of
foreign taxpayers) or voluntary (e.g.,un-
employment benefits) withholding applies
under present law.” H.R. Conf. Rep. No.
109–455 at page 301. The origins of the
provision indicate that it was conceived
to address tax noncompliance. See also,
“Options to Improve Tax Compliance and
Reform Tax Expenditures” (JCS–2–05),
Joint Committee on Taxation, Jan. 27,
2005.
Notice 2008–38, 2008–13 I.R.B. 683,
published by the IRS on March 31, 2008,
invited public comments regarding guid-
ance under section 3402(t). In particular,
Notice 2008–38 requested comments on
the application of section 3402(t) to credit
cards and payment cards, payments to
payees not subject toUnited States tax-
ation, passthrough entities in which a
government entity is a partner or owner,
government contractors and subcontrac-
tors, andde minimispayments. The
notice also requested comments on when
and how amounts withheld under section
3402(t) should be transmitted to the IRS.
See §601.601(d)(2)(ii)(b).
Many comments were received in re-
sponse to Notice 2008–38, and the com-
ments were taken into consideration in de-
veloping the proposed regulations.
Explanation of Provisions
The proposed regulations provide rules
about which government entities are sub-
ject to the requirement of section 3402(t)
withholding, which payments are subject
to section 3402(t) withholding (and which
are excepted from such withholding),
when withholding is required on such pay-
ments, and how government entities pay
and report the tax to the IRS. The proposed
regulations also include transition rules
providing relief from liability for the tax
imposed by section 3402(t) with respect
to payments under existing contracts. The
proposed regulations also provide tempo-
rary relief from penalties and interest if
a government entity makes a good faith
effort but fails to withhold on payments as
required under section 3402(t).
The regulations provide guidance pri-
marily on what government entities need
to do to comply so that they can make
timely preparations. The Treasury Depart-
ment and IRS anticipate issuing further
guidance to address questions raised by
taxpayers who expect to receive payments
subject to section 3402(t) withholding
from government entities including, but
not limited to, how to claim credits and
how to claim the benefit of statutory ex-
emptions from withholding under section
3402(t). Although some commenters re-
quested that the Treasury Department and
IRS issue guidance exempting payments
from withholding where the 3-percent rate
for withholding prescribed under section
3402(t) is expected to exceed either the
profit margin in the taxpayer’s industry or
theincometaxthetaxpayerwillowefor
2009–4 I.R.B.363January 26, 2009

reasons particular to the taxpayer’s busi-
ness, the Treasury Department and IRS
have determined that exemptions of this
type would be contrary to the requirements
of the statute. Commenters also requested
that they be permitted to credit amounts
withheld under section 3402(t) against
Federal taxes other than income taxes,
such as employment taxes. Consistent
with the statute’s purpose of addressing
income tax noncompliance, the Treasury
Department and IRS propose to allow
credits to be claimed only against income
tax.
Government Entities Subject to Section
3402(t)
Section 3402(t)(1) applies to “the Gov-
ernment of the United States, every State,
every political subdivision thereof, and
every instrumentality of the foregoing.”
Section 3402(t) does not restrict the term
the Government of the United Statesin
any manner. Therefore, the entire Fed-
eral government, including the executive
branch, the legislative branch, and the
judicial branch, is subject to the require-
ments of section 3402(t). Thus, Congress,
the Administrative Office of the United
States Courts, the Executive Office of the
President, Federal agencies, and all other
components of the Federal government are
included in the definition of Government
of the United States and are required to
withhold under section 3402(t).
The termStateincludes the District of
Columbia. See section 7701(a)(10) of the
Code. For purposes of section 3402(t), the
termStatedoes not include Indian tribal
governments. Section 7871(a) prescribes
when an Indian tribal government is to be
treated as a State under the Code, and sec-
tion 7871(a) does not provide that Indian
tribal governments will be treated as States
for purposes of section 3402(t). Conse-
quently, the termpolitical subdivisionalso
does not include a subdivision of an Indian
tribal government. See section 7871(a)
and (d). Accordingly, because Indian tribal
governments and their subdivisions are not
among the listed government entities sub-
ject to section 3402(t), payments by Indian
tribal governments and their subdivisions
are not subject to the withholding require-
ments of section 3402(t).
The definition ofpolitical subdivision
in the proposed regulations follows the
definition in the section 103 regulations.
Section 1.103–1(b) of the Income Tax
Regulations provides, in part, that the term
political subdivisiondenotes any division
of any State or local government unit that
is a municipal corporation or that has been
delegated the right to exercise part of the
sovereign power of the unit.
Although the Code makes references
to government instrumentalities in multi-
ple sections, the Code and regulations do
not currently provide a definition of instru-
mentality. In Rev. Rul. 57–128, 1957–1
C.B. 311, the IRS adopted a six-factor test
for use in determining what is an instru-
mentality of a State or a political subdi-
vision thereof for purposes of an excep-
tion from the requirement to pay tax under
the Federal Insurance Contributions Act
(FICA). The factors are: (1) whether the
organization is used for a government pur-
pose and performs a government function;
(2) whether performance of its function is
on behalf of one or more States or politi-
cal subdivisions; (3) whether there are any
private interests involved, or whether the
States or political subdivisions involved
have the powers and interests of an owner;
(4) whether control and supervision of the
organization is vested in public author-
ity or authorities; (5) if express or im-
plied statutory or other authority is nec-
essary for the creation and/or use of such
an instrumentality, and whether such au-
thority exists; and (6) the degree of finan-
cial autonomy and the source of its op-
erating expenses. A number of revenue
rulings published by the IRS illustrate the
application of this test. See, for exam-
ple, Rev. Rul. 65–26, 1965–1 C.B. 444;
Rev. Rul. 65–196, 1965–2 C.B. 388; and
Rev. Rul. 69–453, 1969–2 C.B. 182. See
§601.601(d)(2)(ii)(b). The Treasury De-
partment and IRS invite comments on use
of the same or a similar test for purposes
of section 3402(t).
Persons Subject to Withholding Under
Section 3402(t)
Section 3402(t) applies to government
payments to “persons” providing any
property or services. Section 7701(a)(1)
of the Code provides that, when used in
the Code, where not otherwise distinctly
expressed or manifestly incompatible with
the intent thereof, the termpersonshall be
construed to mean and include an individ-
ual, a trust, estate, partnership, association,
company, or corporation. Because no al-
ternative definition ofpersonis provided
in section 3402(t), the definition in sec-
tion 7701(a)(1) and the regulations under
section 7701(a)(1) applies. Therefore,
section 3402(t) withholding can apply
to payments for property or services to
individuals, trusts, estates, partnerships,
associations, companies, or corporations.
Payments Subject toSection 3402(t)
Withholding
The proposed regulations provide that
a payment subject to withholding arises
when the government entity or its pay-
ment administrator pays a person for pro-
viding property or services. Under the
proposed rules, the withholding require-
ments of section 3402(t) will not apply to
any payment that is less than the payment
threshold amount, which is $10,000. The
Treasury Department and IRS are propos-
ing this payment threshold of $10,000 be-
cause the burden of withholding on smaller
transactions is likely to be substantial and
outweigh the benefits of increased with-
holding. This threshold corresponds to a
minimum withholding of $300.
Under the proposed rules, multiple pay-
ments made by a government entity to
any person generally would not be aggre-
gated in determining whether the payment
threshold amount has been met. How-
ever, the proposed regulations provide an
anti-abuse rule to ensure that the payment
thresholdisnotmanipulatedtoavoidthe
required withholding. If a government en-
tity divides a payment into two or more
separate payments primarily to avoid the
payment threshold for one or more pay-
ments, the separate payments would be
treated as one payment made on the date
that the first payment was made for pur-
poses of this rule. For example, if a gov-
ernment entity is scheduled to make a con-
tractual payment to a person for landscap-
ing services of $15,000 on July 2, 2011,
but divides the payment into payments of
$7,000 and $8,000 made on July 1, 2011,
and July 2, 2011, respectively, the gov-
ernment entity would be treated as having
made a single payment of $15,000 on July
1, 2011. This anti-abuse rule would not ap-
ply if the primary reason for division into
separate payments is unrelated to section
3402(t).
January 26, 20093642009–4 I.R.B.

If a government entity makes a single
payment of $10,000 or more to any person
for more than one property or service pro-
vided by that person, the government en-
tity would be required to withhold on the
payment. For example, if a person bills
a government entity $5,000 each day for
seven days for services provided each day,
but the government entity makes one pay-
ment of $35,000 in satisfaction of these
bills, the payment threshold is applied to
the $35,000 payment.
Many commenters requested guidance
on how the requirements of section 3402(t)
apply to prime contractors and subcontrac-
tors. Under the proposed rules, if a gov-
ernment entity or its payment administra-
tor makes a payment to a person that is sub-
ject to withholding under section 3402(t),
no subsequent transfer of cash or property
by that person to another person is treated
as a payment for section 3402(t) purposes.
Thus, if the government entity enters into a
contract with a prime contractor for prop-
erty and services, and that prime contrac-
tor separately contracts with subcontrac-
tors for delivery of certain property and
services, then withholding under section
3402(t) applies only to payments by the
government entity or its payment adminis-
trator to the prime contractor, and does not
apply to successive payments by the prime
contractor to its subcontractors.
The proposed regulations apply to pay-
ments made by the government entity or
its payment administrator. For purposes
of the proposed regulations, apayment ad-
ministratoris any person that acts with re-
spect to a payment solely as an agent for a
government entity by making the payment
on behalf of the government entity to a per-
son providing property or services to, or on
behalf of, the government entity. Transfers
of funds from a government entity to a pay-
ment administrator to be used by the pay-
ment administrator, on the government en-
tity’s behalf, to pay persons for providing
property or services are not payments sub-
ject to withholding under section 3402(t).
However, if the government entity pays
the payment administrator a fee for its ser-
vices, the government entity would treat
the fee as a payment subject to withhold-
ing. The government entity is liable for the
withholding required and responsible for
all related reporting regardless of whether
the government entity or its payment ad-
ministrator makes the payment and regard-
less of when the payment for property or
services is made under this section.
Credit Card Payments
Many commenters questioned how the
requirements of section 3402(t) apply to
payments made by government credit card
or payment card. Under the proposed reg-
ulations, when a government entity or its
payment administrator uses a credit card or
payment card to pay a person for providing
property or services, payment occurs at the
point of sale when the government credit
card or payment card is tendered and not
when the government entity pays the credit
card company. The government entity is
liable for the withholding and reporting as-
sociated with the payment, and this liabil-
ityisnottransferredtoanyotherpartyin-
volved in the credit card or payment card
transaction, including, but not limited to,
the acquiring bank, the issuing bank, or
the credit card association. (The acquiring
bank may be separately required to report
amounts it pays under new section 6050W,
which was enacted as part of the Housing
Assistance Tax Act of 2008, Div. C of Pub-
lic Law 110–289.)
Section 3402(t)(2)(A)—Payments
Subject to Withholding Under
Chapter 3 or Chapter 24 and Section
3402(t)(2)(B)—Payments from Which
Backup Withholding Is Withheld
Section 3402(t)(2)(A) provides an ex-
ception from the requirement of section
3402(t) for amounts that are subject to
withholding under some other provision of
chapter 3 or chapter 24 (other than section
3406). Thus, payments that are subject
to withholding under the wage withhold-
ing regime or the regime for withholding
of tax on nonresident aliens and foreign
corporations are exempt from withhold-
ing under section 3402(t). Furthermore,
consistent with the legislative history,
amounts for which the payee may elect
withholding are exempt from withhold-
ing under section 3402(t), regardless of
whether the payee in fact makes such an
election. These payments include: (1) un-
employment compensation as defined in
section 85(b) (section 3402(p)(2)); (2) so-
cial security benefits as defined in section
86(d) (section 3402(p)(1)(C)(i)); (3) any
payment referred to in the second sentence
of section 451(d) that is treated as insur-
ance proceeds, relating to certain disaster
payments received under the Agricultural
Act of 1949, as amended, or Title II of the
Disaster Assistance Act of 1988 (section
3402(p)(1)(C)(ii)); (4) any amount that
is includible in gross income under sec-
tion 77(a), relating to amounts received as
loans from the Commodity Credit Corpo-
ration that the taxpayer has elected to treat
as income (section 3402(p)(1)(C)(iii));
and (5) any payment of an annuity to an
individual.
A special rule applies for payments
subject to backup withholding. Section
3402(t)(2)(B) provides that a payment
that is subject to 28 percent withholding
under section 3406 (backup withholding)
is not excepted from the requirement of 3
percent withholding under section 3402(t)
unless backup withholding is actually be-
ing deducted from the payment. Thus, if
backup withholding is required with re-
spect to a payment made by a government
entity and the government entity performs
backup withholding on the payment, sec-
tion 3402(t) does not apply. If the gov-
ernment entity fails to backup withhold
on such a payment, the government entity
would remain liable for backup withhold-
ing regardless of whether it imposed with-
holding under section 3402(t) with respect
to the payment. Proposed amendments to
the regulations under section 3406 clarify
that if backup withholding is required,
withholding under section 3402(t) is not
required.
Under the proposed regulations, pay-
ments made to nonresident aliens or for-
eign individuals that are exempt from
United States taxation pursuant to a treaty
would be exempt from withholding under
section 3402(t) because such payments
are subject to withholding absent applica-
tion of the treaty. Specifically, absent a
treaty, United States source fixed or de-
terminable, annual or periodical (FDAP)
income paid to a nonresident alien indi-
vidual or foreign corporation is subject
to withholding under chapter 3, except
for income that is effectively connected
with a U.S. trade or business (other than
compensation for personal services) pur-
suant to sections 1441 and 1442. Relevant
examples of FDAP include salaries, com-
pensation and emoluments.
Imposing a new withholding require-
ment on nonresident aliens and foreign
2009–4 I.R.B.365January 26, 2009

corporations that owe no United States tax
would serve no purpose. Foreign persons
that are exempt from withholding under
sections 1441 and 1442 by reason of an
income tax treaty are not the source of the
tax noncompliance problem that section
3402(t) was enacted to address. Further,
our existing documentation procedures
are intended to ensure that those claim-
ing treaty benefits are in fact entitled to
treaty benefits. See, for example, Form
W–8BEN, “Certificate of Foreign Status
of Beneficial Owner for United States Tax
Withholding,”and Form 8233, “Exemp-
tion From Withholding on Compensation
for Independent (and Certain Depen-
dent) Personal Services of a Nonresident
Alien Individual.”Accordingly, the pro-
posed regulations under section 3402(t)
provide that the “subject to withholding
under chapter 3” exception in section
3402(t)(2)(A) applies to payments with
respect to which a foreign person claims a
zero rate of tax under an income tax treaty.
Thus, if a foreign person furnishes docu-
mentation establishing entitlement to an
exemption from withholding under chap-
ter 3 by reason of an income tax treaty,
government entities would not be required
to withhold under section 3402(t) from
payments to such person.
Section 3402(t)(2)(C)—Interest
Section 3402(t)(2)(C) provides that
payments of interest are exempt from
withholding. The proposed regulations
do not provide a definition of interest.
The Treasury Department and IRS request
comments concerning whether a definition
of interest is needed and if so, what that
definition should be.
Section 3402(t)(2)(D)—Payments for Real
Property
Section 3402(t)(2)(D) provides that
payments for real property are not subject
to section 3402(t). Because the exception
is not limited to payments for fee own-
ership, the proposed regulations provide
that payments for real property include
payments for leasing real property and
leasehold improvements.
Commenters asked whether real prop-
erty included payments made under con-
tracts for the construction of buildings or
other public works. Neither the statute it-
self nor the legislative history defines “real
property” for purposes of section 3402(t).
The proposed regulations adopt the po-
sition that payments for the construction
of buildings or public works are not pay-
ments for real property excepted by sec-
tion 3402(t)(2)(D). Payments for the con-
struction of a building are payments for
services to build the building and personal
property to be used in the construction of
the building rather than payments for real
property. This position is consistent with
statutes governing construction contracts
of the Federal government. See, for ex-
ample, 40 USC 3131–3134 (the “Miller
Act”).
Section 3402(t)(2)(E)—Payments to
Government Entities Subject to Section
3402(t), Tax-Exempt Organizations, and
Foreign Governments
Section 3402(t)(2)(E) provides excep-
tions from section 3402(t) withholding for
payments to any government entity subject
to the requirements of section 3402(t)(1),
payments to any tax-exempt entity, and
payments to any foreign government. The
determination of whether an entity is a
government entity such that payments it
receives are exempt parallels the deter-
mination whether the entity is a govern-
ment entity required to withhold on pay-
ments it makes. Thus, if a government
entity is required to withhold under sec-
tion 3402(t)(1), payments to that govern-
ment entity are not subject to withhold-
ing under section 3402(t). The proposed
regulations also clarify that, even if no
withholding is required on payments from
a government entity because the govern-
ment entity qualifies for the exception of
section 3402(t)(2)(G) for political subdi-
visions and instrumentalities making total
payments of less than $100 million (dis-
cussed later in this preamble), payments to
that government entity are not subject to
withholding.
The proposed regulations define the
termtax-exempt entityfor purposes of
section 3402(t)(2)(E) as any organization
exempt from federal income tax under sec-
tion 501(a) as an organization described in
section 501(c), 501(d), or section 401(a).
Section 3402(t)(2)(F)—Payments Made
Pursuant to a Classified or Confidential
Contract
Section 3402(t)(2)(F) provides an ex-
ception from section 3402(t) withholding
for payments made pursuant to a classified
or confidential contract described in sec-
tion 6050M(e)(3). Section 6050M(e)(3)
describes a contract between a Federal ex-
ecutive agency and another person if—
(A) The fact of the existence of such
contract or the subject matter of such
contract has been designated and clearly
marked or clearly represented, pursuant to
the provisions of Federal law or an Execu-
tive order, as requiring a specific degree of
protection against unauthorized disclosure
for reasons of national security, or
(B) The head of such Federal executive
agency (or his designee), pursuant to regu-
lations issued by such agency, determines,
in writing, that filing the required return
under section 6050M (related to informa-
tion returns required to be filed by any Fed-
eral executive agency with respect to per-
sons receiving contracts) would interfere
with the effective conduct of a confidential
law enforcement or foreign counterintelli-
gence activity.
Section 3402(t)(2)(G)—The Exception
for Political Subdivisions and
Instrumentalities Making Total Payments
Under $100,000,000
Section 3402(t)(2)(G) provides that
payments made by certain smaller govern-
ment entities are not subject to withhold-
ing under section 3402(t). Specifically,
a political subdivision of a State (or any
instrumentality thereof) that makes less
than $100,000,000 of payments for prop-
erty or services annually (other than for
payroll or of another type exempt from
withholding under these proposed regu-
lations) is not required to withhold under
section 3402(t) on any of its payments.
The proposed regulations provide a sim-
ple rule for determining before each year
starts whether the exception provided by
section 3402(t)(2)(G) applies to a given
political subdivision or instrumentality.
The determination would be based on
the payments made during the account-
ing year of the political subdivision or
instrumentality ending with or within the
second preceding calendar year. For ex-
January 26, 20093662009–4 I.R.B.

ample, to determine whether the political
subdivision or instrumentality is subject
to withholding with respect to payments
made in 2011, the proposed regulations
would look to whether payments made
by the political subdivision or instrumen-
tality for its accounting year ending with
or within the calendar year 2009 equaled
or exceeded $100,000,000. For this pur-
pose, the accounting year is considered
to be the year used by the political sub-
division or instrumentality to keep its
accounting books and determine budgets.
In most cases, political subdivisions and
instrumentalities would be able to make a
reasonably accurate estimate whether the
exception applies before the end of the
accounting year ending in 2009 based on
budgetary projections. However, in cases
where the payments are expected to be
near the $100,000,000 threshold, the time
between the end of the accounting year
in 2009, when a definitive determination
could be made, and December 31, 2010,
should give the political subdivision or
instrumentality sufficient time to prepare
for withholding under section 3402(t) for
payments made in 2011.
In determining whether the political
subdivision or instrumentality has made
$100,000,000 of total payments, the pro-
posed regulations would require that all
payments for property and services made
during the accounting year be considered
with the exception of those payments
qualifying for any of the exceptions pro-
vided by §31.3402(t)–4(a) through (l) of
the proposed regulations. For this pur-
pose, payments that are less than the
$10,000 payment threshold count toward
the $100,000,000 test.
This exception provided by section
3402(t)(2)(G) does not apply to the United
States Government, States, or instrumen-
talities of the United States Government
or States.
The Treasury Department and IRS
request comments on the application of
section 3402(t)(2)(G), particularly with
regard to whether the rules for determining
whether the exception applies would pro-
vide adequate time to modify systems for
compliance with section 3402(t), whether
a special rule should be considered allow-
ing the averaging of multiple accounting
years for political subdivisions and in-
strumentalities that have unusually high
expenditures in a given accounting year,
and whether the determination of total
payments under the proposed regulations
is practicable.
Section 3402(t)(2)(H)—Payments in
Connection with a Public Welfare or
Public Assistance Plan
Section 3402(t)(2)(H) provides an ex-
ception from section 3402(t) withholding
for any payment in connection with a pub-
lic assistance or public welfare program
for which eligibility is determined by a
needs or income test. The proposed reg-
ulations adopt a broad definition ofin con-
nection withto include payments made to
third parties under a public assistance or
public welfare program for the benefit of
the recipient of benefits under the program.
The proposed regulations also are consis-
tent with the legislative history in provid-
ing that a program for which eligibility is
determined under a needs or income test
does not include a program under which el-
igibility is based on age only (for example,
Medicare). The proposed regulations pro-
vide that, for purposes of this exception,
a program providing disaster relief to vic-
tims of a natural or other disaster is consid-
ered to be a program for which eligibility
is determined under a needs test.
Section 3402(t)(2)(I)—Payments to a
Government Employee with Respect to
Services as an Employee
Section 3402(t)(2)(I) provides an ex-
ception from section 3402(t) withholding
for payments to any government employee
not otherwise excludable with respect to
the employee’s services as an employee.
The proposed regulations broadly inter-
pret this exception to exclude from section
3402(t) withholding any form of compen-
sation that is paid to the employee or on
the employee’s behalf. For example, the
proposed regulations exclude employer
contributions to employee benefit and
deferred compensation plans as well as
employee contributions to such plans.
This exception applies to any payments by
an employer for fringe benefits or deferred
compensation to, or for the benefit of, an
employee.
The proposed regulations provide that
the section 3402(t)(2)(I) exclusion from
section 3402(t) withholding also applies
to: (a) travel reimbursements paid by a
government entity to a government em-
ployee under accountable plans within
the meaning of section 62(c) for the in-
dividual employee’s travel, lodging, and
meal expenses; and (b) the government
employee’s payments to third parties that
provide travel, lodging, and meals that
are reimbursable under such travel re-
imbursement plans. Most payments for
individual travel, lodging, and meal ex-
penses would fall beneath the $10,000
payment threshold. Nevertheless, this ex-
ception may be significant in determining
whether the government entity making the
payments qualifies for the exception under
section 3402(t)(2)(G) for political subdivi-
sions of a State (or their instrumentalities)
making payments under $100,000,000,
as payments under section 3402(t)(2)(I)
are excluded when calculating the total
amount of payments.
Section 31.3401(a)–4(a) of the Em-
ployment Tax Regulations provides that
if a reimbursement or other expense al-
lowance arrangement meets the require-
ments of section 62(c) and §1.62–2 and
the expenses are substantiated within a
reasonable period of time, payments made
under the arrangement that do not exceed
the substantiated expenses are treated as
paid under an accountable plan and are
not wages. Thus, these payments would
qualify for the exception under section
3402(t)(2)(I).
By comparison, if the travel reimburse-
ment or payment by the employer is not
paid under an accountable plan, the re-
imbursement would be treated as paid
under a nonaccountable plan. Payments
to the employee under a nonaccountable
plan are includible in gross income and
wages and subject to income tax with-
holding under section 3402(a). Thus, such
payments would be excepted from with-
holding under section 3402(t) by section
3402(t)(2)(A).
Exception for Certain Payments Received
by Nonresident Alien Individuals and
Foreign Corporations
In general, in the case of a nonresi-
dent alien individual or a foreign corpo-
ration (foreign person), sections 872(a)
and 882(b) provide that gross income for
United States income tax purposes con-
sists of (1) gross income derived from
sources within the United States; and
2009–4 I.R.B.367January 26, 2009

(2) gross income derived from sources
outside the United States (foreign source
income), but only if it is effectively
connected with a trade or business within
the United States. The source of income
is determined under sections 861 through
865. The source of income derived
from the performance of services is the
place where the services are performed
as provided in sections 861(a)(3) and
862(a)(3), whereas the source of income
from the purchase and sale of inventory
property (other than unprocessed timber)
is the location where the sale takes
place as described in §1.861–7(c) of the
Income Tax Regulations (see also sections
861(a)(6) and 862(a)(6)). Therefore, if a
foreign person provides services or sells
inventory property in a foreign country,
it will have no United States income tax
liability with respect to the income earned
from providing the services or selling
the property—even to a United States
government entity—provided that the
income is not effectively connected with
the conduct of a trade or business within
the United States.
Accordingly, the proposed regulations
exclude such payments made to foreign
persons from 3-percent withholding un-
der section 3402(t). For administrative
reasons, subjecting these foreign source
payments to withholding under section
3402(t) would be unduly burdensome to
the foreign persons receiving such pay-
ments and the IRS. The foreign persons,
most of whom are not presently United
States income tax filers, would have to get
taxpayer identification numbers (TINs)
and file refund claims. Likewise, the IRS
would have to issue TINs, process the
claims, and refund all of the funds col-
lected. Withholding on foreign source
payments to foreign persons has no poten-
tial to reduce tax noncompliance because
the potential income resulting from the
payments is not subject to United States
income taxation. Procedures to be fol-
lowed by government entities and foreign
persons for purposes of claiming this ex-
ception from section 3402(t) withholding
will be issued at a later date.
Exception for Payments to Indian Tribal
Governments
Indian tribal governments are not sub-
ject to United States income tax. Subject-
ing payments made by government entities
to Indian tribal governments to withhold-
ing under section 3402(t) would be un-
duly burdensome for the same reasons dis-
cussed above with respect to certain pay-
ments made to foreign persons. Therefore,
the proposed regulations except these pay-
ments from 3-percent withholding under
section 3402(t).
Deposits and Reporting of Amounts
Withheld Under Section 3402(t)
In determining rules for reporting
amounts withheld under section 3402(t),
the Treasury Department and IRS have
considered the administrative burden on
government entities imposed by reporting,
the need for payees to receive timely and
accurate information about the amounts
withheld, and the need for IRS systems to
process the information reported. Many
comments reflected a preference for using
an existing system and adapting current
forms and procedures to accommodate
section 3402(t) withholding, rather than
creating a new system and forms for such
withholding. The commenters indicated
that using an existing system would ease
compliance by government entities and
would ease the processing of the payment
and reporting of such tax.
The Treasury Department and IRS be-
lieve the existing procedure for reporting
nonwage withholding on Form 945,“An-
nual Return of Withheld Federal Income
Tax,”and reporting payments subject to
withholding on Form 1099–MISC,“Mis-
cellaneous Income,”with slight modifi-
cations to existing forms, would provide
the most satisfactory method of payment
and reporting. Because most government
entities have a system for issuing Form
1099–MISC, using this system with mod-
ifications for reportingsection3402(t)
withholding should ease compliance. Ad-
ditionally, using Form 1099–MISC would
give payees the information they need to
timely file their income tax returns claim-
ing credit for the withholding. Because
this system would be similar to the system
used currently for reporting and paying
nonwage income tax withholding, the IRS
would be able to process the withholding
timely and on a cost-effective basis.
Accordingly, the proposed amendments
to the regulations under section 6011
provide that payors required to withhold
amounts under section 3402(t) must file
Form 945 reporting the amounts withheld.
Proposed amendmentsto the regulations
under section 6302 further provide that the
amounts withheld under section 3402(t)
must be deposited and reported in the
same manner as other nonwage withheld
amounts, such as withholding on gam-
bling winnings and pensions. Pursuant
to existing regulations, such amounts are
treated as if they were employment taxes
for purposes of the deposit rules, but are
subject to special rules for determining the
payor’s deposit schedule, as provided in
§31.6302–4.
Additionally, proposed amendments to
regulations under section 6051 provide
that payors required to withhold amounts
under section 3402(t) must file informa-
tion returns and furnish payee statements
on Form 1099–MISC reporting such pay-
ments and tax withheld. Because this
reporting would be done pursuant to regu-
lations under section 6051, the exceptions
provided in the regulations under section
6041 relating to Form 1099 would not
apply (for example, the exception for pay-
ments to corporations).
Payments for Jury Duty, Utilities, and
Fuel Surcharges
Commenters asked whether jury duty
pay is subject to withholding under section
3402(t). Jury duty pay generally will not
meet the $10,000 payment threshold pro-
vided in the proposed regulations. No spe-
cial rule for jury duty pay is provided.
Commenters also requested guidance
about utility payments. Rates for utility
services are generally prescribed through a
State regulatory process. Commenters ex-
pressed concern about the consequences of
paying something less than the regulato-
rily prescribed rate to the utility. In fact,
utility companies—like all persons receiv-
ing payments subject to withholding un-
der section 3402(t)—would be paid the full
amount charged, albeit in the form of a
combination of a cash payment and a de-
posit of tax made to the IRS. Therefore, un-
less otherwise excepted, utility payments
are subject to withholding under section
3402(t) on the same basis as payments for
other property and services.
Commenters also requested that fuel
surcharges be exempted from withhold-
ing, arguing that a fuel surcharge provided
January 26, 20093682009–4 I.R.B.

under a contract is merely a cost recov-
ery mechanism used to garner the lowest
possible rates for the government by con-
trolling volatile cost components in bid
calculations. Although the use of sepa-
rately stated charges for certain costs may
well serve this purpose in contracting,
section 3402(t) provides no exception for
fuel surcharges or any other separately
stated cost item. Section 3402(t) requires
withholding on payments made regardless
of how the payee may apply them against
costs. Therefore, the proposed regulations
do not provide an exception for payments
allocated to fuel surcharges or any other
separately stated costs.
Application of Section 3402(t) to
Passthrough Entities
Commenters requested guidance with
respect to the application of section
3402(t) where either the payor or the
payee is a partnership or S corporation
(“passthrough entities”). With respect to
payments from a passthrough entity, the
proposed regulations provide that such
payments are not generally subject to
withholding under section 3402(t) unless
80 percent or more of the passthrough
entity is owned by government entities
that are required to withhold under section
3402(t)(1). With respect to payments to
a passthrough entity,the proposed reg-
ulations provide that such payments are
generally subject to withholding under
section 3402(t) unless 80 percent or more
of the passthrough entity is owned by per-
sons described in section 3402(t)(2)(E)
(government entities required to with-
hold under section 3402(t)(1), tax-exempt
entities, and foreign governments). An
80-percent threshold is consistent with
similar thresholds in various areas of
the tax law. See, for example, section
775(b)(3) and §§1.414(c)–2(b)(2) and
301.7701(i)–1(d)(3)(i)(A). The proposed
regulations also provide that, as a general
rule, whether a passthrough entity is sub-
ject to section 3402(t) is determined on the
first day of the entity’s taxable year. The
Treasury Department and IRS believe that
this general rule simplifies compliance and
administration by requiring one annual
determination of whether a passthrough
entity’s payments are subject to withhold-
ing under section 3402(t). However, the
proposed regulations provide that any ma-
nipulation of the ownership percentage
with an intent to avoid application of sec-
tion 3402(t) would be recharacterized as
appropriate to reflectthe actual ownership
percentage.
Effective Date and Transition Relief for
Existing Contracts
The proposed regulations provide that
the regulations will generally be effective
for payments made after the later of De-
cember 31, 2010, or the date that is 6
months after the publication of final reg-
ulations. Commenters questioned whether
section 3402(t) would apply to payments
made under contracts in existence prior to
the effective date of section 3402(t). They
noted that many government entities are
party to multi-year contracts. These con-
tracts did not contemplate the withhold-
ing of income tax from payments under the
contracts. Future contracts can address the
withholding requirement and its effect on
the contractor’s cash flow. Accordingly,
the proposed regulations provide that pay-
ments made under written binding con-
tracts in effect on the later of December
31, 2010, or the date that is 6 months af-
ter the publication of final regulations are
not subject to withholding under section
3402(t), unless such contract is materially
modified. Payments pursuant to contracts
entered into after the later of December 31,
2010, or the date that is 6 months after the
publication of final regulations will be sub-
ject to section 3402(t).
Under the proposed regulations, if there
is a material modification to an existing
contract after the later of the effective date
of the legislation or six months after the
issuance of final regulations under section
3402(t), the contractwould cease to be an
existing contract for purposes of this tran-
sition relief and payments under the con-
tract would become subject to the with-
holding requirements of section 3402(t).
The Treasury Department and IRS are con-
sidering whether contracts that contain the
option of renewal should be considered
new contracts as of the date of renewal.
The final regulations may provide that a
contract that is renewable as of a certain
date is treated as a new contract on the first
date the contract is renewed. The Treasury
Department and IRS request comments on
how option terms in contracts, including,
but not limited to, options to renew, should
affect the transition relief for payments un-
der written binding contracts.
Credit Against Income Tax
The Treasury Department and IRS
received numerous comments from tax-
payers expecting to receive payments
subject to section 3402(t) withholding.
Most of these comments asked how tax-
payers would take the credit for the section
3402(t) withholding. Section 31 provides
the general crediting rule for withhold-
ing of income tax. Specifically, section
31(a)(1) provides that “[t]he amount with-
held as tax under chapter 24 shall be
allowed to the recipient of the income
as a credit against the tax imposed by
this subtitle.” Chapter 24 includes section
3402(t), and section 31(a)(1) is in subtitle
A, income taxes. Thus, by its terms, sec-
tion 31(a)(1) applies to persons who have
had income tax withheld from a payment
pursuant to section 3402(t) and allows a
credit against income tax only.
Section 31(a)(2) provides the general
rule on the timing of the allowance of the
credit: “The amount so withheld during
any calendar year shall be allowed as a
credit for the taxable year beginning in
such calendar year. If more than one tax-
able year begins in a calendar year, such
amount shall be allowed as a credit for
the last taxable year so beginning.” Thus,
absent a special rule, the rule of section
31(a)(2) generally applies for purposes of
withholdings required under chapter 24,
which includes section 3402(t).
Section 31(c) provides a special rule
solely for backup withholding. Under sec-
tion 31(c), any credit allowed by section
31(a) for backup withholding under sec-
tion 3406 must be allowed for the taxable
year of the recipient of the income in which
the income is received. Congress did not
provide a similar exception for the timing
of the credit for section 3402(t) withhold-
ing. Section 31(c) is limited by its terms to
section 3406 withholding only. Thus, the
general rule of section 31(a)(2) applies to
section 3402(t) withholding rather than the
special rule of section 31(c).
The effect of section 31(a)(2) is that
fiscal year taxpayers may be entitled to
take credit for withholding under section
3402(t) only in a taxable year subsequent
to the taxable year in which the amount
was withheld. For example, if amounts
2009–4 I.R.B.369January 26, 2009

were withheld under section 3402(t) from
a June 30 fiscal year taxpayer during the
period from January 1, 2011, to June 30,
2011, the taxpayer will be entitled to take
credit for the withheld tax on its income
tax return for the fiscal year ending June
30, 2012, rather than its income tax return
for the fiscal year ending June 30, 2011.
The Treasury Department and IRS rec-
ognize that, in the case of fiscal year tax-
payers, the application of the rule in sec-
tion 31(a)(2) requiring that the credit be
takeninthesecondoftwopossibletax-
able years may be burdensome for taxpay-
ers. The Treasury Department and IRS re-
quest comments on what impact the timing
rule in section 31(a)(2) described above for
income tax credits will have on taxpay-
ers that have tax withheld under section
3402(t).
Crediting Against Estimated Income Tax
Liability
Taxpayers may take into account the
income tax withheld under section 3402(t)
and allowed as a credit under section 31
in determining estimated tax liability pur-
suant to sections 6654 and 6655. With
respect to individual taxpayers, section
6654(g)(1) provides that, for purposes of
determining the application of the penalty
for an individual’s failure to pay estimated
tax, the amount of the credit allowed un-
der section 31 for the taxable year shall
be deemed a payment of estimated tax.
As with other income tax withheld, an
individual recipient may account for in-
come tax withheld in computing estimated
income tax liability on Form 1040–ES,
“Estimated Tax for Individuals.”Because
most individuals are calendar year tax-
payers, the section 3402(t) withholding
would generally be treated as a payment of
estimated tax for the same calendar year,
and the individual’s liability for other pay-
ments of estimated tax for that year would
be reduced. However, if the individual is
a fiscal year taxpayer, the individual may
not take into account the withholding for
estimated tax purposes until the fiscal year
that begins in the calendar year in which
the tax is withheld.
Similar rules apply to corporate taxpay-
ers. In determining the amount of esti-
mated tax required to be paid to avoid the
section 6655 penalty applicable to corpo-
rations for failure to pay estimated tax,
section 6655(g)(1)(B) provides in effect
that credits against tax under section 31
are taken into account. Thus, corporate
taxpayers can also take into account the
amount of credit allowed under section
31(a) in determining income tax liability
and in computing estimated income tax li-
ability. As with individual taxpayers, cor-
porate taxpayers on a fiscal year could
have the problem of delay in taking ac-
count of the credit if withholding occurs in
the part of the calendar year before the be-
ginning of the fiscal year that begins in that
calendar year.
Credit Against Employment Taxes or
Other Taxes
Many commenters requested that tax-
payers be allowed to take credit for section
3402(t) withholding with respect to em-
ployment taxes or other taxes. The statute
directs that crediting follow the rules under
section 31(a), which provide for crediting
against income tax. Where the statute per-
mits income tax payments to be treated as
employment tax payments, orvice versa,
it makes specific provision for that treat-
ment. See, for example, section 3507(d)
(providing for the treatment of advance
payments of the earned income credit as
payments of the income tax withholding
and FICA liability of the employer); sec-
tion 3510(b) (providing that domestic em-
ployment taxes are treated as taxes due
for estimated tax purposes under section
6654); and section 31(b) (providing for the
crediting against income tax of the special
refund of social security tax under section
6413(c) applicable when an employee re-
ceives wages from two or more employers
in excess of the social security tax contri-
bution and benefit base). The Code does
not provide for withholding under section
3402(t) to be treated as payments of the
taxpayer’s employment tax liability.
Rate of Income Tax Withholding
Some taxpayers requested that the
Treasury Department and IRS provide for
lower withholding rates for taxpayers with
lower profit margins or lower marginal
income tax rates. The statute provides
for a uniform 3-percent rate of withhold-
ing. Thus, the proposed regulations apply
withholding at the 3-percent rate to all
payments for services and property from
which withholding under section 3402(t)
is required to be made.
Liability for Section 3402(t) Withholding
in the Event of Failure to Withhold
If a government entity fails to withhold
the tax imposed by section 3402(t), section
3403 applies. Under section 3402(t)(3)
and section 3403, the government entity is
generally liable for the payment of the tax
to the IRS unless it can prove that the payee
has paid its income tax liability.
Section 3403 provides that the em-
ployer shall be liable for the payment of
tax required to be deducted and withheld
under chapter 24, and shall not be liable
to any person for the amount of any such
payment.
Section 31.3403–1 of the Employment
Tax Regulations provides that every em-
ployer required to deduct and withhold the
tax under section 3402 from the wages of
an employee is liable for the payment of
such tax whether or not it is collected from
the employee by the employer. If, for ex-
ample, the employer deducts less than the
correct amount of tax, or if the employer
fails to deduct any part of the tax, the em-
ployer is nevertheless liable for the cor-
rect amount of the tax. Section 3402(t)(3)
provides that for purposes of section 3403,
payments to any person for property or ser-
vices that are subjectto withholding under
section 3402(t) are treated as if such pay-
ments were wages paid by an employer to
an employee.
Thus, sections 3402(t)(3) and 3403 es-
tablish the liability of the government en-
tity for the amount of the tax imposed by
section 3402(t) if it fails to withhold.
However, section 3402(d) provides
an exception to the entity’s liability for
income tax withholding in certain cases.
Under this exception, if the entity required
to withhold fails to do so, and thereafter
the tax is paid, the tax will not be collected
from the entity that failed to withhold.
Thus, for purposes of section 3402(t),
the government entity generally will be
liable if it fails to withhold unless it is
able to demonstrate, consistent with IRS
procedures, that the taxpayer reported the
amounts that were subject to withholding
on its income tax return and paid the in-
come tax due.
January 26, 20093702009–4 I.R.B.

Transition Rule for Penalties and Interest
on Underpayments
The proposed regulations provide a
special transition rule for a government
entity’s liability for interest and penalties
with respect to the failure to pay the tax
on payments for property and services
made before January 1, 2012. Under the
transition rule, a government entity would
not be liable for penalties and interest with
respect to liability for withholding im-
posedbysection3402(t),onpaymentsfor
property or services made before January
1, 2012, if the entity made a good faith
effort to comply with the requirements of
section 3402(t). However, this transition
rule would not provide relief from liability
for the amount of tax required to be with-
held under section 3402(t).
Proposed Effective Date
These regulations are proposed to apply
to payments made after the later of Decem-
ber 31, 2010, or six months after the date
of publication of final regulations. In addi-
tion, the regulations will not apply to pay-
ments under contracts existing on the later
of December 31, 2010, or six months after
the date of publication of final regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to this regulation, and
because the regulation does not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
this regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are timely submitted to the IRS.
All comments will be available for public
inspection and copying. A public hearing
will be scheduled if requested in writing by
anypersonthattimelysubmitswrittenor
electronic comments. If a public hearing
is scheduled, notice of the date, time, and
place for the hearing will be published in
theFederal Register.
Drafting Information
The principal author of these proposed
regulations is A. G. Kelley, Office of the
Division Counsel/Associate Chief Coun-
sel(TaxExemptandGovernmentEnti-
ties). However, other personnel from the
IRS and the Treasury Department partici-
pated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 31 is pro-
posed to be amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. The following §§31.3402(t)–0,
31.3402(t)–1, 31.3402(t)–2, 31.3402(t)–3,
31.3402(t)–4 and 31.3402(t)–5 are added,
§31.3402(t)–6 is added and reserved, and
31.3402(t)–7 is added to read as follows:
§31.3402(t)–
0 Outline of the Government
withholding r
egulations.
This section lists paragraphs contained
in §§31.3402(t)–1 through 31.3402(t)–5,
and §31.3402(t)–7.
§31.3402(t)–1 Withholding requirement
on certain payments made by government
entities.
(a) In general.
(b) Special rules.
(c) Deposit and reporting requirements.
(d) Effective/applicability date.
§31.3402(t)–2 Government entities
required to withhold under section
3402(t).
(a) In general.
(b) Government of the United States.
(c) State.
(d) Political Subdivision.
(e) [Reserved].
(f) Possessions of the United States.
(g) Passthrough entities.
(h) Small entity exception.
(i) Effective/applicability date.
§31.3402(t)–3 Payments subject to
withholding.
(a) In general.
(b) Payment threshold of $10,000.
(c) No withholding on successive pay-
ments.
(d) Payments made through a payment
administrator or to a contractor.
(e) Payments by credit card or payment
card.
(f) Examples.
(g) Effective/applicability date.
§31.3402(t)–4 Certain payments excepted
from withholding.
(a) Payments subject to withholding un-
der chapter 3 or chapter 24 (other than sec-
tion 3406).
(b) Payments subject to withholding un-
der section 3406 with backup withholding
deducted.
(c) [Reserved].
(d) Payments for real property.
(e) Payments to government entities,
tax-exempt organizations, and foreign
governments.
(f) Payments made pursuant to a classi-
fied or confidential contract.
(g) Exception for political subdivisions
or instrumentalities thereof making less
than $100,000,000 of payments for prop-
erty or services annually.
(h) Payments made in connection with
a public assistance or public welfare pro-
gram.
(i) Payments made to any government
employee with respect to his or her ser-
vices.
(j) Payments received by nonresident
alien individuals and foreign corporations.
(k) Payments to Indian tribal govern-
ments.
2009–4 I.R.B.371January 26, 2009

(l) Payments in emergency or disaster
situations.
(m) Effective/applicability date.
§31.3402(t)–5 Application to passthrough
entities.
(a) In general.
(b) Definitions.
(c) Payments from a passthrough entity.
(d) Payments to a passthrough entity.
(e) Effective/applicability date.
§31.3402(t)–6 Crediting of tax withheld
under section 3402(t).
[Reserved].
§31.3402(t)–7 Effective date and
transition rules.
(a) General rule.
(b) Exception for payments made under
existing written binding contracts.
(c) Good faith exception for interest and
penalties on payments before January 1,
2012.
§31.3402(t)–1 Withholding requirement
on certain payments made by government
entities.
(a)In general. Except as provided in
§§31.3402(t)–3(b) and 31.3402(t)–4, the
Government of the United States, every
State, every politicalsubdivision thereof,
and every instrumentality of the forego-
ing (including multi-State agencies) mak-
ing any payment to any person providing
any property or services shall deduct and
withhold from such payment a tax in an
amount equal to 3 percent of such pay-
ment.
(b)Special rules. See §31.3402(t)–2 for
government entities required to withhold
under this section, §31.3402(t)–3 for what
constitutes a payment to a person for prop-
erty or services and when such payment is
deemed to occur for purposes of this sec-
tion, and §31.3402(t)–4 for payments that
are excepted from withholding under this
section.
(c)Deposit and reporting requirements.
See §31.6302–4 for deposit requirements
with respect to withholding under sec-
tion 3402(t). See §§31.6011(a)–4(b) and
31.6051–5 for the reporting requirements
with respect to withholding under section
3402(t).
(d)Effective/applicability date.(1)Ex-
cept as provided in paragraph (d)(2) of this
section, this section is effective for pay-
ments by the Government of the United
States, every State, every political subdivi-
sion thereof, and everyinstrumentality of
the foregoing (including multi-State agen-
cies) to any person providing property or
services made after the later of December
31, 2010, or the date that is 6 months af-
ter the date of publication in theFederal
Registerof final regulations under section
3402(t).
(2) Payments made under a written
binding contract that was in effect on the
later of December 31, 2010, or the date
that is 6 months after the publication in the
Federal Registerof final regulations un-
der section 3402(t), are not subject to the
withholding requirements of this section.
The preceding sentence does not apply to
payments made underany contract that
is materially modified after the later of
December 31, 2010, or the date that is
6 months after the date of publication in
theFederal Registerof final regulations
under section 3402(t).
§31.3402(t)–2 Government entities
required to withhold under section
3402(t).
(a)In general.The requirement
to withhold under section 3402(t) and
§31.3402(t)–1(a) applies to the Govern-
ment of the United States (see paragraph
(b) of this section) and every State (see
paragraph (c) of this section), as well as
instrumentalities ofthe foregoing. The
requirement also applies to political sub-
divisions of every State (see paragraph (d)
of this section), and their instrumentali-
ties, unless the small entity exception of
§31.3402(t)–4(g) applies.
(b)Government of the United States.
The Government of the United States in-
cludes the legislative branch, the judicial
branch, and the executive branch, and all
components of the United States Govern-
ment. Thus, departments and agencies are
included within the definition of United
States Government.
(c)State.ThetermStateincludes the
District of Columbia. However, an In-
dian tribal government is not considered a
State for purposes of section 3402(t) and
§31.3402(t)–1(a). See section 7871(a).
(d)Political subdivision.The termpo-
litical subdivisionfor purposes of section
3402(t) and §31.3402(t)–1(a) is defined as
a political subdivision within the meaning
of §1.103–1(b) of this chapter, except that
a subdivision of an Indian tribal govern-
ment is not considered a political subdivi-
sion. See section 7871(a) and (d).
(e) [Reserved].
(f)Possessions of the United States.
For purposes of section 3402(t) and
§31.3402(t)–1(a), the government of a
possession or territory of the United States
is not treated as a government entity sub-
ject to the withholding requirements of
section 3402(t)(1).
(g)Passthrough entities.See
§31.3402(t)–5(c) for the treatment of pay-
ments from certain passthrough entities as
subject to the withholding requirements of
§31.3402(t)–1.
(h)Small entity exception.See
§31.3402(t)–4(g) for the exception
from the withholding requirements of
§31.3402(t)–1 for political subdivisions
and instrumentalities thereof making less
than $100,000,000 of payments for prop-
erty or services annually.
(i)Effective/applicability date.This
section is effective the later of January
1, 2011, or the date that is 6 months af-
ter the date of publication in theFederal
Registerof final regulations under section
3402(t).
§31.3402(t)–3 Payments subject to
withholding.
(a)In general.A payment is sub-
ject to withholding for purposes of
§§31.3402(t)–1 through 31.3402(t)–7
when paid by a government entity to any
person, as defined in §301.7701–6(a)
of this chapter, for property or services.
If, however, the government entity uses
a payment administrator to pay a per-
son for property or services, payment
occurs when the payment administrator
pays such person. The government entity
subject to the withholding requirements
of §31.3402(t)–1 is liable for the with-
holding required and responsible for all
related reporting regardless of whether the
government entity or its payment admin-
istrator makes the payment for property or
services.
(b)Payment threshold of $10,000—(1)
In general.The termpayment thresh-
January 26, 20093722009–4 I.R.B.

oldmeans an amount equal to $10,000.
The withholding requirements of
§31.3402(t)–1 will not apply to any pay-
ment that is less than the payment thresh-
old. Whether a payment is equal to or in
excess of the payment threshold is deter-
mined when the payment is made.
(2)Payment threshold applied per pay-
ment. If a government entity makes a sin-
gle payment to a person for property or ser-
vices combining charges for more than one
transaction with the person, the determi-
nation of whether the payment threshold
provided by paragraph (b)(1) of this sec-
tion applies will be based on the amount of
the single payment, rather than the amount
attributable to each separate transaction.
Thus, if a government entity makes a sin-
gle payment of $10,000 or more to a per-
son, the government entity will be required
to withhold on the payment, even if the
payment is for more than one property or
service. The same rule applies if a gov-
ernment entity enters into multiple trans-
actions with a single person, each of which
would result in a payment of less than
$10,000 if paid separately, but elects to
make a single payment covering all the
transactions such that the aggregated pay-
ment is $10,000 or more. Under these cir-
cumstances, the government entity is re-
quired to withhold on the aggregated pay-
ment.
(3)Anti-abuse rule.If a government
entity or payment administrator divides
a payment or payments to any person
for property or services into two or more
payments primarily to avoid the $10,000
payment threshold provided in paragraph
(b)(1) of this section on one or more of
these payments, the divided payments will
be treated as a single payment made on
the date that the first of these payments is
made.
(c)No withholding on successive pay-
ments. If a government entity or its pay-
ment administrator makes a payment that
is subject to the withholding requirements
of §31.3402(t)–1 to a person, no subse-
quent transfer of cash or property from that
payment by such person to another person
is treated as a payment subject to with-
holding for purposes of §§31.3402(t)–1
through 31.3402(t)–7.
(d)Payments made through a payment
administrator or to a contractor—(1)Def-
inition—For purposes of this section—
(i) Apayment administratoris any per-
son that acts with respect to a payment
solely as an agent for a government en-
tity by making the payment on behalf of
the government entity to a person provid-
ing property or services to, or on behalf of,
the government entity.
(ii) A payment administrator is treated
as a person providing property or services
for purposes of the withholding require-
ments of section 3402(t) to the extent it re-
ceives a fee from the government entity for
its services as a payment administrator for
the government entity.
(2)Payments to a contractor.If a per-
son provides property or services to a gov-
ernment entity under a contract and is not
a payment administrator, the person, who
is in privity with the government entity,
is treated as the person providing prop-
erty or services subject to withholding un-
der section 3402(t) for all payments re-
ceived from the government entity, regard-
less of whether some payments the person
receives relate to invoices for property or
services provided by subcontractors.
(3)Application of payment threshold.
Where a government entity uses a payment
administrator to make a payment, the de-
termination of whether the payment meets
the payment threshold is made at the time
the payment administrator makes the pay-
ment to the person providing property or
services. If a government entity makes one
transfer of funds to a payment administra-
tor that is composed of a fee to compen-
sate the payment administrator for its ser-
vices and other funds that are to be paid
to persons providing property or services,
the determination of whether the payment
threshold is met on the portion that is the
feeismadeatthetimeofthetransferof
funds to the payment administrator.
(e)Payments by credit card or payment
card.For purposes of section 3402(t), a
payment made by a government entity by
credit card or payment card to a person for
property or services occurs when the credit
card or payment card is tendered at the
point of sale. The government entity is li-
able for withholding under section 3402(t)
and reporting associated with such with-
holding. See section 6050W of the Inter-
nal Revenue Code for separate reporting
obligations imposed on the acquiring bank
of the person receiving payment by credit
card or payment card.
(f)Examples.This section is illustrated
by the following examples:
Example 1. (i) Prime contractorXhas a con-
tract with a government entity to provide services
and property to the government entity.Xcontracts
with numerous subcontractors to provide services and
property in connection with the contract. While the
engagement of any particular subcontractor is subject
to approval by the government entity, the subcontrac-
tors are not parties to the contract betweenXand the
government entity, and the government entity is not
a party to the contracts betweenXand subcontrac-
tors. Under its contract with the government entity,
Xsubmits an invoice for $48,000 for providing ser-
vices and property to the government entity, includ-
ing charges for services and property provided by two
subcontractors,MandN. The invoice reflects charges
of $16,000 forMand $2,000 forN. The government
entity paysXthe entire amount of the invoice in one
payment of $48,000.XpaysMforM’s billed portion
of the invoice in a single payment of $16,000, andX
paysNforN’s billed portion of the invoice in a single
payment of $2,000.
(ii) Under the facts of thisExample 1,Xis the per-
son providing property or services to, or for the bene-
fit of, the government entity with respect to the entire
amount of the $48,000 payment under the invoice,
including the charges for services or property pro-
vided by its subcontractorsMandN.Xis not a pay-
ment administrator (as defined in paragraph (d)(1)(i)
of this section) becauseXis not making payments
solely as an agent of the government entity to per-
sons providing property or services. Instead,Xmakes
payments to subcontractorsMandNpursuant toX’s
separate contracts with these subcontractors to which
the government entity is not a party. Therefore, un-
der paragraphs (a) and (d)(2) of this section, the en-
tire amount of the $48,000 payment toXunder the
invoice, including the charges for services and prop-
erty provided by its subcontractorsMandN,isthe
payment subject to withholding for purposes of sec-
tion 3402(t).
(iii) Under paragraph (b)(1) of this section, the
determination whether the payment meets the pay-
ment threshold is based on the entire amount of the
payment from the government entity toX. Withhold-
ing under section 3402(t) applies to the government
entity’s $48,000 payment toXbecause the payment
meets the payment threshold and is not otherwise ex-
cepted from section 3402(t) withholding. Thus, the
payment is subject to withholding of 3 percent, or
$1440.
(iv) Payments made byXto the subcontractors,
MandN, are not payments by the government entity
or its payment administrator. Thus,X’s $16,000 pay-
ment toMandX’s $2,000 payment toNfor services
or property under the contract are not subject to with-
holding under section 3402(t). See paragraphs (c) and
(d)(2) of this section.
(v) The government entity is liable for the $1440
withholding required under section 3402(t) on its
payment toXand is responsible for the related report-
ing required under §31.6051–5. See paragraph (a) of
this section.Xis the person receiving the payment
for purposes of reporting under §31.6051–5. Thus,
the government entity is responsible for providing
Xwith a Form 1099 including the entire amount of
the payment ($48,000) and the entire amount of the
withholding ($1440).
2009–4 I.R.B.373January 26, 2009

Example 2.(i)Zhas a contract with a govern-
ment entity to make payments as an agent of the gov-
ernment entity to persons providing services or prop-
erty to, or on behalf of, the government entity. The
only servicesZprovides under the contract are its ser-
vices in acting as an agent for the government entity
in making payments to persons providing property or
services to, or on behalf of, the government. The gov-
ernment entity transfers funds of $71,000 toZ,which
includes a fee of $1,000 toZfor its services as an
agent under the contract.Zthen makes payments of
the $70,000 remainder of the funds to persons provid-
ing property or services to, or on behalf of, the gov-
ernment entity, including a single payment of $18,000
toPand a single payment of $7,000 toR.
(ii) Under the facts of thisExample 2,Zis a pay-
ment administrator (as defined in paragraph (d)(1)(i)
of this section) becauseZmakes payments solely as
an agent for the government entity to persons provid-
ing property or services to, or on behalf of, the gov-
ernment entity. Under paragraphs (a) and (d) of this
section,Zis not treated as a person providing prop-
erty or services with respect to $70,000 of the transfer
of funds (the amount of the funds to be paid to per-
sons providing property or services to, or on behalf
of, the government entity). BecauseZis not treated
as a person providing property or services with re-
spect to this $70,000 portion of the funds, this portion
of the transfer of funds by the government entity to
Zis not subject to withholding under section 3402(t)
when transferred toZ.
(iii) Under paragraph (d)(1)(ii) of this section, the
payment administrator is treated as a person provid-
ing property or services with respect to the portion
of the $71,000 fund transfer that is a fee for its ser-
vices as a payment administrator, or $1,000. Under
paragraph (d)(3) of this section, the determination of
whether the payment threshold is met with respect to
the fee portion of the payment from the government
entity toZis made at the time of the payment from
the government entity toZ. Because the $1,000 fee
portion of the payment falls beneath the $10,000 pay-
ment threshold, withholding under section 3402(t) is
not required with respect to that portion of the pay-
ment.
(iv)PandRare persons providing services or
property to, or on behalf of, the government entity
with respect to the payments they receive fromZ.
(v) Withholding is required under section 3402(t)
on the payment byZ, a payment administrator, to a
person providing property or services to, or on be-
half of, a government entity provided the payment
meets the payment threshold and is not otherwise ex-
cepted. Under paragraph (d)(3) of this section, the de-
termination of whether the payment threshold is met
on the paymentZmakes to a person providing prop-
erty or services is made at the timeZpays the per-
son providing property or services. Under the facts
of thisExample 2,Z’s payment toPof $18,000 meets
the payment threshold, and therefore withholding of
$540 under section 3402(t) applies.Z’s payment to
R
of $7,000 does not meet the payment threshold, and
therefore, no withholding under section 3402(t) is re-
quired.
(vi) The government entity, notZ, is liable for
any withholding required under section 3402(t) on the
payments fromZto persons providing property or ser-
vices. Also, the government entity, notZ, is respon-
sible for any reporting required under §31.6051–5 on
the payment fromZto persons providing property
or services. See paragraph (a) of this section. Each
person providing property or services with respect to
which withholding is required, notZ, is the person
receiving the payment for purposes of the reporting
required under §31.6051–5 if withholding under sec-
tion 3402(t) applies. Thus, the government entity is
responsible for issuingPa Form 1099 reflecting the
amount of the payment fromZtoPof $18,000 and
the amount of withholding of $540.
(g)Effective/applicability date.This
section is effective for payments by the
Government of the United States, every
State, every politicalsubdivision thereof,
and every instrumentality of the forego-
ing (including multi-State agencies) to
any person providing property or services
made after the later of December 31, 2010,
or the date that is 6 months after the date
of publication in theFederal Registerof
final regulations under section 3402(t).
§31.3402(t)–4 Certain payments excepted
from withholding.
(a)Payments subject to withholding un-
der chapter 3 or chapter 24 (other than
section 3406)—(1)In general.Payments
are excepted from withholding under sec-
tion §31.3402(t)–1(a) if they are subject to
withholding under chapter 3 of the Inter-
nal Revenue Code (Code) or under sec-
tions 3401 through 3405 of the Code (other
than section 3402(t)).
(2)Payments subject to withholding un-
der chapter 3. Payments subject to with-
holding under chapter 3 include those pay-
ments that are subject to, but exempt from,
withholding under chapter 3 on the ground
that the payments are exempt from United
States income tax pursuant to an income
tax convention to which the United States
is a party.
(3)Payments subject to withholding at
election of payee. For purposes of this
exception from section 3402(t), payments
for which the payee may elect withhold-
ing are exempt from withholding under
§31.3402(t)–1(a) regardless of whether
the payee in fact makes such an election.
These payments include—
(i) Unemployment compensation as
defined in section 85(b) (see section
3402(p)(2));
(ii) Social security benefits as de-
fined in section 86(d) (see section
3402(p)(1)(C)(i));
(iii) Any payment referred to in the
second sentence of section 451(d) that is
treated as insurance proceeds, relating to
certain disaster payments received under
the Agricultural Act of 1949, as amended,
or Title II of the Disaster Assistance Act
of 1988 (see section 3402(p)(1)(C)(ii));
(iv) Any amount that is includible in
gross income under section 77(a), relating
to amounts received as loans from the
Commodity Credit Corporation that the
taxpayer has elected to treat as income
(see section 3402(p)(1)(C)(iii)); and
(v) Any payment of an annuity to an
individual.
(b)Payments subject to withholding un-
der section 3406 with backup withhold-
ing deducted. A payment is not subject
to withholding under section 3402(t) if the
payment is subject to withholding under
section 3406, relating to backup withhold-
ing, and if backup withholding is actually
being withheld from such payment.
(c) [Reserved].
(d)Payments for real property.Pay-
ments for real property are not sub-
ject to the withholding requirements of
§31.3402(t)–1. For purposes of this excep-
tion, the termpayments for real property
includes the purchase and the leasing of
real property. However, payments for the
construction of buildings or other public
works projects, such as bridges or roads,
are not payments for real property.
(e)Payments to government entities,
tax-exempt organizations, and foreign
governments—(1)Government entities.
Payments are not subject to withholding
under section 3402(t) if the payments
are made to government entities that
are subject to the withholding require-
ments of section 3402(t)(1) pursuant to
§31.3402(t)–2. For purposes of this ex-
ception, payments togovernment entities
that qualify for the exception for polit-
ical subdivisions and instrumentalities
making less than $100,000,000 of pay-
ments for property and services annually,
as provided by section 3402(t)(2)(G) and
paragraph (g) of this section, are treated as
payments to government entities that are
subject to the withholding requirements of
section 3402(t)(1).
(2)Tax-exempt organizations.Pay-
ments to an organization that is exempt
from taxation under section 501(a) as an
organization described in section 501(c),
501(d), or 401(a) are not subject to with-
holding under section 3402(t).
(3)Foreign governments.Payments
to foreign governments are not subject to
January 26, 20093742009–4 I.R.B.

withholding under section 3402(t). For
purposes of this paragraph (e), a govern-
ment of a possession or territory of the
United States is treated as a foreign gov-
ernment.
(f)Payments made pursuant to a clas-
sified or confidential contract.Payments
made pursuant to a classified or con-
fidential contract described in section
6050M(e)(3) are not subject to withhold-
ing under section 3402(t).
(g)Exception for political subdivisions
or instrumentalities thereof making less
than $100,000,000 of payments for prop-
erty or services annually—(1)In general.
Section 3402(t) withholding is not re-
quired on payments made by a political
subdivision of a State (or any instrumen-
tality of a political subdivision of a State)
that makes less than $100,000,000 of pay-
ments for property or services annually.
(2)Determination of whether an entity
is a political subdivision of a State.The
determination of whether an entity is a po-
litical subdivision of a State is made under
§31.3402(t)–2(d).
(3)Determination of whether a political
subdivision or instrumentality makes less
than $100,000,000 of payments for prop-
erty or services annually.The determina-
tion of whether the exception provided by
paragraph (g)(1) of this section applies is
made for each calendar year. For purposes
of any calendar year, the determination of
whether a political subdivision or instru-
mentality makes less than $100,000,000
of payments for property or services annu-
ally is based on the total payments made
by the entity for property or services in
the entity’s accounting year ending with
or within the second preceding calendar
year. For purposes of this paragraph (g),
payments that would have qualified for
the exceptions from withholding under
§31.3402(t)–4(a) through (l) had these
regulations been in effect shall not be in-
cluded in calculating the total payments
made. However, payments that would
have been excepted from withholding only
because such payments were less than the
$10,000 payment threshold contained in
§31.3402(t)–3(b) are included in calcu-
lating the total payments for purposes of
this paragraph (g). Also, payments that
were not subject to withholding under sec-
tion 3402(t) solely based on the effective
date rules or transition rules contained
in §31.3402(t)–1(d), §31.3402(t)–2(i),
§31.3402(t)–3(g),§31.3402(t)–4(m),
§31.3402(t)–5(e), or §31.3402(t)–7 are
included in calculating total payments
for purposes of this paragraph (g). For
purposes of this determination, the ac-
counting year refers to the fiscal year
(consisting of 12 months) or calendar year
used by the government entity in setting
its budgets and keeping its accounting
books. If a political subdivision or in-
strumentality was not in existence in the
second preceding calendar year or if no
12-month accounting year exists ending
in the second preceding calendar year, the
determination of whether this exception
applies for a calendar year shall be based
on the total payments as projected for the
accounting year consisting of 12 months
ending in that calendar year.
(4)Example. (i) Government entityX,which
qualifies as a political subdivision or instrumentality
thereof for the calendar years 2011 and 2012, uses a
fiscal year ending June 30 to determine its budgets
and to keep its accounting books. During its fiscal
year ending June 30, 2009,Xmade payments to per-
sons for property and services of $200,000,000, in-
cluding $102,000,000 of payments that would have
been excepted under §31.3402(t)–4(a) through (l) if
section 3402(t) had been in effect.
(ii) During its fiscal year ending June 30, 2010,
Xmade payments for property and services of
$210,000,000, including $106,000,000 that would
have been excepted under §31.3402(t)–4(a) through
(l) if section 3402(t) had been in effect. In addition,
during the fiscal year ending June 30, 2010,Xmade
$15,000,000 of payments that were below the pay-
ment threshold of $10,000 in §31.3402(t)–3(b) if
section 3402(t) had been in effect.
(iii) For the calendar year 2011,Xdetermines
whether it is eligible for the exception provided by
this paragraph (g) based on the total paymentsXmade
for its accounting year ending June 30, 2009. Be-
cause total payments for this purpose exclude pay-
ments that would be excepted under §31.3402(t)–4(a)
through (l), total payments were $200,000,000 less
$102,000,000, or $98,000,000. Therefore, for calen-
dar year 2011,Xwould qualify for the exception pro-
vided by this paragraph (g), and would not be required
to withhold under section 3402(t).
(iv) For the calendar year 2012,Xdetermines
whether it is eligible for the exception provided
by this paragraph (g) based on the total payments
it made for its accounting year ending June 30,
2010. Because total payments for this purpose
exclude payments that would have been excepted
under §31.3402(t)–4(a) through (l), but include pay-
ments below the payment threshold of $10,000 pro-
vided under §31.3402(t)–3(b), total payments were
$210,000,000 less $106,000,000, or $104,000,000.
Therefore, for calendar year 2012,Xwould not
qualify for the exception provided by this paragraph
(g) and would be required to withhold under section
3402(t).
(h)Payments made in connection with
a public assistance or public welfare pro-
gram—(1)In general.Section 3402(t)
withholding shall not apply to payments
made in connection with a public assis-
tance or public welfare program for which
eligibility is determined by a needs or in-
come test.
(2)Needs or income test.Eligibility for
a public assistance or public welfare pro-
gram is not considered to be determined
by a needs or income test if eligibility for
the program is based solely on the age of
the beneficiary. A public assistance pro-
gram providing disaster relief to victims
of a natural or other disaster is consid-
ered to be a program for which eligibil-
ity is determined under a needs test. Pay-
ments under government programs to pro-
vide health care or other services that are
not based on the needs or income of the re-
cipient are subject to section 3402(t) with-
holding, including programs where eligi-
bility is based on the age of the beneficiary.
(3)Payments to third parties.The ex-
ception provided by this paragraph (h) also
applies to payments made to third parties
to provide benefits tobeneficiaries under
a public assistance or public welfare pro-
gram for which eligibility is determined by
a needs or income test.
(i)Payments made to any government
employee with respect to his or her ser-
vices. Section 3402(t) withholding shall
not apply to payments made to any gov-
ernment employee with respect to his or
her services as an employee of the gov-
ernment. This exception applies to con-
tributions to deferred compensation plans
on behalf of an employee, contributions
to employee benefit plans on behalf of an
employee, fringe benefits provided to em-
ployees, and payments to employees under
accountable plans for the individual travel
expenses of the employee. This excep-
tion also applies to payments made by the
government employee under accountable
plans to providers of the employee’s travel,
meals, and lodging when the government
employee is traveling on government busi-
ness.
(j)Payments received by nonresident
alien individuals and foreign corporations.
Section 3402(t) withholding shall not ap-
ply to any payment received by a non-
resident alien individual or foreign corpo-
ration (foreign person) for providing ser-
vices or property if the payment is derived
from sources outside the United States, as
determined under sections 861, 862, 863,
2009–4 I.R.B.375January 26, 2009

and 865, and is not effectively connected
with the conduct of a trade or business
within the United States by the foreign per-
son.
(k)Payments to Indian tribal govern-
ments.Section 3402(t) withholding shall
not apply to any payment made to an In-
dian tribal government or its political sub-
divisions.
(l)Payments in emergency or disaster
situations.The Secretary may provide
by publication in the Internal Revenue
Bulletin (see §601.601(d)(2)(ii)(b)ofthis
chapter) for additional exceptions from
section 3402(t) withholding for certain
payments made in an emergency or dis-
aster situation if the Secretary determines
that withholding from the payments would
impede a government entity’s efforts to
respond to the emergency or disaster.
(m)Effective/applicability date.This
section is effective for payments by the
Government of the United States, every
State, every politicalsubdivision thereof,
and every instrumentality of the forego-
ing (including multi-State agencies) to
any person providing property or services
made after the later of December 31, 2010,
or the date that is 6 months after the date
of publication in theFederal Registerof
final regulations under section 3402(t).
§31.3402(t)–5 Application to passthrough
entities.
(a)In general.This section sets forth
rules that provide that section 3402(t)(1)
does not apply to payments made by
passthrough entities except as described in
paragraph (c) of this section. In addition,
the rules provide that section 3402(t)(1)
applies to payments made to passthrough
entities except as described in paragraph
(d) of this section.
(b)Definitions. The following defini-
tions set forth the meaning of certain terms
for purposes of this section:
(1)Passthrough entity.Theterm
passthrough entitymeans a partnership
(for Federal income tax purposes) or an
S corporation.
(2)Owner.Thetermownermeans a
partner (for Federal income tax purposes)
or an S corporation shareholder.
(3)Ownership percentage.Theterm
ownership percentagemeans an owner’s
interest, as a percentage, in partnership
profits or capital (whichever is greater) in
the case of a partnership, or an owner’s
interest, as a percentage, in S corporation
stock in the case of an S corporation.
(4)Testing day.Thetermtesting day
refers to the first day of a passthrough en-
tity’s taxable year.
(c)Payments from a passthrough en-
tity—(1)General rule. Section 3402(t)(1)
shall not apply to payments made by
passthrough entities during the taxable
year, except as provided in paragraph
(c)(2) of this section.
(2)Exception. Section 3402(t)(1) shall
apply to any payment during the taxable
year from a passthrough entity if the aggre-
gate ownership percentage held, directly
or indirectly, in the entity on the testing
day by government entities described in
section 3402(t)(1) is at least 80 percent.
For purposes of this paragraph (c)(2), any
manipulation of the ownership percentage
with an intent to avoid application of sec-
tion 3402(t) will be recharacterized as ap-
propriate to reflectthe actual ownership
percentage.
(d)Payments to a passthrough en-
tity—(1)General rule. Section 3402(t)(1)
shall apply to payments made to
passthrough entities during the taxable
year, except as provided in paragraph
(d)(2) of this section.
(2)Exception. Section 3402(t)(1) shall
not apply to any payment during a tax-
able year to a passthrough entity if the
aggregate ownership percentage held, di-
rectly or indirectly, in the entity on the
testing day by persons described in sec-
tion 3402(t)(2)(E) isat least 80 percent.
For purposes of this paragraph (d)(2), any
manipulation of the ownership percentage
with an intent to avoid application of sec-
tion 3402(t) will be recharacterized as ap-
propriate to reflectthe actual ownership
percentage.
(e)Effective/applicability date.This
section is effective for payments by the
Government of the United States, every
State, every politicalsubdivision thereof,
and every instrumentality of the forego-
ing (including multi-State agencies) to
any person providing property or services
made after the later of December 31, 2010,
or the date that is 6 months after the date
of publication in theFederal Registerof
final regulations under section 3402(t).
§31.3402(t)–6 Crediting of tax withheld
under section 3402(t).
[Reserved].
§31.3402(t)–7 Effective date and
transition rules.
(a)General Rule. Except as provided in
paragraph (b) of this section, the require-
ment to withhold under §31.3402(t)–1(a)
applies to payments made after the later of
December 31, 2010, or the date that is 6
months after the date of publication in the
Federal Registerof final regulations un-
der section 3402(t).
(b)Exception for payments made un-
der existing written binding contracts.
Payments made under a written binding
contract that was in effect on the later
of December 31, 2010, or the date that
is 6 months after the date of publication
in theFederal Registerof final regu-
lations under section 3402(t), are not
subject to the withholding requirements
in §31.3402(t)–1. Thepreceding sentence
does not apply to payments made under
any contract that is materially modified
after the later of December 31, 2010, or
the date that is 6 months after the date
of publication in theFederal Registerof
final regulations under section 3402(t).
(c)Good faith exception for interest and
penalties on payments made before Jan-
uary 1, 2012.Government entities that
make a good faith effort to comply with
the provisions of these regulations will not
be liable for penalties and interest with
respect to income tax withholding under
section 3402(t) that the government entity
failed to withhold from payments made be-
fore January 1, 2012. However, this provi-
sion shall not relieve the government entity
of liability for income tax that it failed to
withhold. See, however, §31.3402(d)–1.
Par. 3. Section 31.3406(g)–2 is
amended by adding paragraphs (h) and (i)
to read as follows:
§31.3406(g)–2 Exception for reportable
payment for which withholding is
otherwise required.
*****
(h)Certain payments made by govern-
ment entities. A government entity that
is required to withhold both on reportable
payments pursuant to section 3406(a) and
on certain payments pursuant to section
January 26, 20093762009–4 I.R.B.

3402(t), must comply with the withhold-
ing requirements of section 3406, and not
section 3402(t), with respect to a payment
to which both types of withholding would
apply. Pursuant to section 3402(t)(2)(B),
withholding under section 3402(t) shall
not apply if amounts are being withheld
under section 3406 with respect to a pay-
ment. If a government entity fails to with-
hold as required under section 3406, the
payment will not be deemed to be subject
to withholding under another provision of
the Code for purposes of this paragraph
(h). Thus, even if the government entity
withholds on such payment pursuant to
section 3402(t), it will remain liable for
the amount required to be withheld under
section 3406.
(i)Effective/applicability date.Para-
graph (h) relating to certain payments
made by government entities applies to
payments made by government entities
under section 3402(t) made after the later
of December 31, 2010, or the date that is
6 months after the date of publication in
theFederal Registerof final regulations
under section 3402(t).
Par. 4. Section 31.6011(a)–4 is
amended by adding paragraphs (b)(6) and
(d) to read as follows:
§31.6011(a)–4 Returns of income tax
withheld.
*****
(b) * * *
(6) Certain payments made by govern-
ment entities subject to withholding under
section 3402(t).
*****
(d)Effective/applicability date. Para-
graph (b)(6) relating to certain payments
made by government entities subject to
withholding under section 3402(t) applies
to payments made by government entities
under section 3402(t) made after the later
of December 31, 2010, or the date that is 6
months after the date of publication in the
Federal Registerof final regulations un-
der section 3402(t).
Par. 5. Section 31.6051–5 is added to
read as follows:
§31.6051–5 Statement and information
return required in case of withholding by
government entities.
(a)Statements required from govern-
ment entities.Every government entity re-
quired to deduct and withhold tax under
section 3402(t) must furnish to the payee a
written statement containing the informa-
tion required by paragraph (d) of this sec-
tion.
(b)Information returns required from
government entities. Every government
entity required to furnish a payee statement
under paragraph (a) of this section must
file a duplicate of such statement with the
Secretary. Such duplicate shall constitute
an information return.
(c)Prescribed form. The prescribed
form for the statement required by this sec-
tion is Form 1099–MISC,“Miscellaneous
Income.”
(d)Information required. Each state-
ment on Form 1099–MISC must show the
following—
(1) The name, address, and taxpayer
identification number of the person receiv-
ing the payment subject to withholding un-
der section 3402(t);
(2) The amount of the payment with-
held upon;
(3) The amount of tax deducted and
withheld under section 3402(t);
(4) The name, address, and taxpayer
identification number of the government
entity filing the form;
(5) A legend stating that such amount
is being reported to the Internal Revenue
Service; and
(6) Such other information as is re-
quired by the form.
(e)Time for furnishing statements.The
statement must be furnished to the payee
no later than January 31 of the year follow-
ing the calendar year in which the payment
subject to withholding was made.
(f)Cross references. For provisions re-
lating to the time for filing the informa-
tion returns required by this section and
to extensions of the time for filing, see
§§31.6071(a)–1(a)(3) and 1.6081–1(b)(3),
respectively. For penalties applicable to
failure to file information returns and fur-
nish payee statements, see sections 6721
through 6724.
(g)Effective/applicability date.This
section is effective on the later of January
1, 2011, or the date that is 6 months af-
ter the date of publication in theFederal
Registerof final regulations under section
3402(t).
Par. 6. Section 31.6071(a)–1 is
amended by revising paragraph (a)(3)(i)
to read as follows:
§ 31.6071(a)–1 Time for filing returns and
other documents.
*****
(3)Informati
on returns—(i)General
rule. Each inf
ormation return in respect of
wagesasdefin
ed in the Federal Insurance
Contribution
s Act or of income tax with-
held from wage
s which is required to be
made under §3
1.6051–2 or of income tax
withheld fro
m payments by government
entities as r
equired under §31.6051–5
shall be file
d on or before the last day of
February (M
arch 31 if filed electronically)
of the year f
ollowing the calendar year
for which it
is made, except that, if a tax
return unde
r §31.6011(a)–5(a) is filed as
afinalret
urnforaperiodendingpriorto
December 3
1, the information statement
shall be fi
led on or before the last day of
the second
calendar month following the
period for
which the tax return is filed.
*****
Par. 7. Section 31.6302–1 is amended
by adding paragraph (e)(1)(iii)(E) and re-
vising paragraph (n) to read as follows:
§31.6302–1. Federal tax deposit rules for
withheld income taxes and taxes under
the Federal Insurance Contributions Act
(FICA) attributable to payments made
after December 31, 1992.
*****
(e)***(1
)***
(iii) * * *
(E) Certa
in payments made by govern-
ment enti
ties under section 3402(t); and
*****
(n)Effective/applicability date.Ex-
cept for the deposit of employment taxes
attributable to payments made by gov-
ernment entities under section 3402(t),
§§31.6302–1 through 31.6302–3 ap-
ply with respect to the deposit of em-
ployment taxes attributable to payments
made after December 31, 1992. Section
31.6302–1(e)(1)(iii)(E) applies with re-
spect to the deposit of employment taxes
attributable to payments made by govern-
ment entities under section 3402(t) made
2009–4 I.R.B.377January 26, 2009

after the later of December 31, 2010, or
the date that is 6 months after the date
of publication in theFederal Registerof
final regulations under section 3402(t).
Par. 8. Section 31.6302–4 is amended
by revising paragraph (b)(5) and adding
paragraphs (b)(6) and (e) to read as fol-
lows:
§31.6302–4 Federal tax deposit rules
for withheld income taxes attributable
to nonpayroll payments made after
December 31, 1993.
*****
(b) * * *
(5) Amounts withheld under section
3406, relating to backup withholding with
respect to reportable payments; and
(6) Amounts withheld under section
3402(t), relating to certain payments made
by government entities.
*****
(e)Effective/applicability date. Para-
graph (b)(6) relating to certain payments
made by government entities applies to
payments made by government entities un-
der section 3402(t) made after the later of
December 31, 2010, or the date that is 6
months after the date of publication in the
Federal Registerof final regulations un-
der section 3402(t).
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 4,
2008, 8:45 a.
̇
m., and published in the issue of the Federal
Register for December 5, 2008, 73 F.R. 74082)
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Guidance Regarding the
Treatment of Stock of a
Controlled Corporation Under
Section 355(a)(3)(B)
REG–150670–07
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9435) giving guidance regarding the
distribution of stock of a controlled corpo-
ration acquired in a transaction described
in section 355(a)(3)(B) of the Internal
Revenue Code. This action is necessary
in light of amendments to section 355(b).
The text of those regulations also serves
as the text of these proposed regulations.
These regulations willaffect corporations
and their shareholders.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 16, 2009.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–150670–07), 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–150670–07),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC 20224, or sent elec-
tronically via the Federal eRulemak-
ing Portal atwww.regulations.gov(IRS
REG–150670–07).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Russell P. Subin, (202)
622–7790; concerning submission of com-
ments and/or requests for a public hearing,
Oluwafunmilayo (Funmi) Taylor, (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in this issue of
the Bulletin amend the Income Tax Reg-
ulations (26 CFR part 1) under section
355(a)(3)(B) regarding the distribution
of stock of a controlled corporation ac-
quired in a transaction described in section
355(a)(3)(B). The temporary regulations
revise §1.355–2(g) to reflect issues arising
under section 355(b)(3), as enacted by the
Tax Increase Prevention and Reconcili-
ation Act of 2005, Public Law 109–222
(120 Stat. 345), and modified by the Tax
Technical Corrections Act of 2007, Pub-
lic Law 110–172 (121 Stat. 2473, 2476).
The text of those regulations also serves
as the text of these proposed regulations.
The preamble to the temporary regulations
explains the amendments.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It is hereby cer-
tified that these regulations will not have a
significant economic impact on a substan-
tial number of small entities. This certi-
fication is based on the fact that section
355(a)(3)(B) generally applies to parent-
subsidiary groups of corporations, which
tend to be larger businesses, and that these
regulations primarily grant relief from the
application of section 355(a)(3)(B) in cer-
tain situations. Therefore, a Regulatory
Flexibility Analysisunder the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, these regu-
lations have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies)orelectroniccom-
ments that are submitted timely to the IRS.
The IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. As described in the preamble
to the temporary regulations, comments
are also requested regarding the overall
approach taken in these proposed rules,
including the extent to which the defini-
tion of a taxable transaction should be the
same under section 355(a)(3)(B) and sec-
tion 355(b), and whether the exception for
acquisitions from affiliates should be the
same under those sections. Comments are
also requested regarding the need for fu-
ture guidance described in sections 4.A.
January 26, 20093782009–4 I.R.B.

and 4.B. of such preamble, relating to pre-
decessors of distributing corporations, ac-
quisitions involving corporations that join
the distributing corporation’s separate af-
filiated group, predecessors of controlled
corporations, acquisitions involving cor-
porations that join the controlled corpora-
tion’s separate affiliated group, the appli-
cation ofDunn Trust v. Commissioner,
86 T.C. 745 (1986), and the treatment of
stock issuances by the controlled corpora-
tion to the distributing corporation. Com-
ments are also requested regarding the po-
tential application of the hot stock rule
to redemptions of controlled corporation
stock described in section 4.C. of such pre-
amble. With respect to redemptions, com-
ments are specifically requested regard-
ing the circumstances under which section
355(a)(3)(B) should apply.
All comments will be available for pub-
lic inspection and copying. A public hear-
ing will be scheduled if requested in writ-
ing by any person that timely submits writ-
ten comments. If a public hearing is sched-
uled, notice of the date, time, and place for
the public hearing will be published in the
Federal Register.
Drafting Information
The principal author of these regula-
tions is Russell P. Subin of the Office
of Associate Chief Counsel (Corporate).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.355–2(g) and (i) also issued
under 26 U.S.C. 355(b)(3)(D). * * *
Par. 2. Section 1.355–2 is amended
by revising paragraph (g) and adding para-
graph (i) to read as follows:
§1.355–2 Limitations.
*****
(g) [The text of the proposed amend-
ments to §1.355–2(g) is the same as the
text of §1.355–2T(g) published elsewhere
in this issue of the Bulletin].
*****
(i) [The text of the proposed amend-
ments to §1.355–2(i) is the same as the
text of §1.355–2T(i) published elsewhere
in this issue of the Bulletin].
Steve T. Miller,
(Acting) Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 12,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 15, 2008, 73 F.R. 75979)
Notice of Proposed
Rulemaking
Conduit Financing
Arrangements
REG–113462–08
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations relating to conduit
financing arrangements issued under the
authority granted by section 7701(l) of the
Internal Revenue Code (Code). The pro-
posed regulations apply to multiple-party
financing arrangements that are effected
through disregarded entities, and are nec-
essary in order to determine which of those
arrangements should be recharacterized
under section 7701(l) and Treas. Reg.
§1.881–3.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 23, 2009.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–113462–08), In-
ternal Revenue Service, room 5205, PO
Box 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to CC:PA:LPD:PR (REG–113462–08),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, N.W.,
Washington, DC 20224, or sent elec-
tronically via the Federal eRulemak-
ing Portal atwww.regulations.govIRS
REG–113462–08).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Quyen Huynh at (202)
622–3880 or John H. Seibert at (202)
622–3860; concerning submissions of
comments, Oluwafunmilayo Taylor, at
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 7701(l) of the Code autho-
rizes the Secretary to prescribe regula-
tions recharacterizing any multiple-party
financing transaction as a transaction di-
rectly among any two or more of such
parties where the Secretary determines
that such recharacterization is appropriate
to prevent the avoidance of any tax im-
posed by the Code. In Treasury decision
8611, 1995–2 C.B. 286 [60 FR 40997],
published August 10, 1995, the Treasury
Department and the Internal Revenue
Service (IRS) issuedimplementing regula-
tions under Treas. Reg. §1.881–3 relating
to conduit financing arrangements pur-
suant to the authority granted by section
7701(l).
In general, §1.881–3 allows the IRS
to disregard the participation of one or
more intermediate entities in a financing
arrangement where such entities are acting
as conduit entities, and to recharacterize
the financing arrangement as a transaction
directly between the remaining parties to
the financing arrangement for purposes
of imposing tax under sections 871, 881,
1441 and 1442 of the Code. Section
1.881–3(a)(2)(i)(A) of the regulations de-
fines a financing arrangement to mean a
series of financing transactions by which
oneperson(thefinancing entity) advances
money or other property, or grants rights
to use property, and another person (the
financed entity) receives money or other
property, or rights to use property, if the
advance and receipt are effected through
one or more other persons (intermedi-
ate entities). Except in cases to which
§1.881–3(a)(2)(i)(B) (special rule for re-
lated parties) applies, the regulations apply
2009–4 I.R.B.379January 26, 2009

only if financing transactions as defined
in §1.881–3(a)(2)(ii) link the financing
entity, each of the intermediate entities,
and the financed entity.
Since the publication of §1.881–3
on August 10, 1995, the Treasury De-
partment and IRS issued the so-called
“check-the-box” regulations, under
§§301.7701–1 through 301.7701–3, ef-
fective January 1, 1997 (T.D. 8697,
1997–1 C.B. 215 [61 FR 66854]). Section
301.7701–3 provides, in part, that an en-
tity that is not classified as a corporation
and that has a single owner may elect to
be disregarded as an entity separate from
its owner (a disregarded entity).
The Treasury Department and IRS are
aware that issues have arisen regarding
the proper treatment of disregarded enti-
ties under §1.881–3. These proposed reg-
ulations clarify that a disregarded entity is
a person for purposes of §1.881–3. Thus,
transactions that a disregarded entity en-
ters into will be taken into account for pur-
poses of determining whether a financing
arrangement exists.
The Treasury Department and IRS
are continuing to study conduit financ-
ing arrangements and may issue separate
guidance to address the treatment under
§1.881–3 of certain hybrid instruments.
Specifically, the Treasury Department and
IRS are studying transactions where a
financing entity advances cash or other
property to an intermediate entity in ex-
change for a hybrid instrument that is
treated as debt under the laws of the for-
eign jurisdiction where the intermediate
entity is resident and is not treated as debt
for U.S. federal tax purposes. The issue
under consideration is whether such in-
struments should constitute a financing
transaction under §1.881–3(a)(2)(ii)(A)
and part of a financing arrangement within
the meaning of §1.881–3(a)(2)(i)(A).
No inference should be drawn from the
approaches described in this preamble re-
garding the treatment of such instruments
under current law, including judicial doc-
trines with respect to conduit financing
transactions.
One possible approach is to treat all
transactions involving such hybrid instru-
ments between a financing entity and an
intermediate entity as financing transac-
tions under §1.881–3(a)(2)(ii)(A). Com-
ments are requested on this approach, in-
cluding whether and to what extent a con-
nection or relationship between the issuer
and recipient of the hybrid instrument (for
example, an equity ownership percentage)
should be required in order to treat such in-
struments as financing transactions.
Another possible approach is to add ad-
ditional factors to consider in determin-
ing when stock in a corporation (or other
similar interest in a partnership or trust)
may constitute a financing transaction un-
der §1.881–3(a)(2)(ii)(B). The additional
factors would focus on whether, based on
the facts and circumstances surrounding
the stock (or other similar interest in a part-
nership or trust), the financing entity had
sufficient legal rights to, or other practi-
cal assurances regarding, the payment re-
ceived by the intermediate entity to treat
the stock as a financing transaction. Some
possible factors to indicate the presence of
a financing transaction might include:
(1) Intent of the parties to pay all or
substantially all payments received by the
intermediate entity to the financing entity;
(2) History of payment of amounts re-
ceived by the intermediate entity to the fi-
nancing entity; and
(3) Precedence of the obligees over
other creditors regarding the payment of
interest and principal, currently or in bank-
ruptcy.
Comments are requested concerning
other possible approaches and any addi-
tional factors that theTreasury Department
and IRS should consider in expanding
the conduit financing regulations under
§1.881–3.
Explanation of Provisions
Section 1.881–3(a)(2)(i)(C) of the pro-
posed regulations provides that for pur-
poses of this section, the termpersonin-
cludes a business entity that is disregarded
as an entity separate from its single mem-
ber owner under §§301.7701–1 through
301.7701–3. Because a disregarded entity
is a person, any transaction that it enters
into will be taken into account for purposes
of determining whether a conduit financ-
ing arrangement exists.
Theseproposedregulations
alsomodifytheparenthetical
in§1.881–3(a)(2)(ii)(A)(2)and
§1.881–3(a)(2)(ii)(B)(1). The proposed
regulations also correct a typographical
error in §1.881–3(a)(3)(ii)(B) of the
final regulations and update titles and
cross-references in the final regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It is hereby cer-
tified that this regulation will not have a
significant economic impact on a substan-
tial number of small entities. Accordingly,
a regulatory flexibility analysis is not re-
quired. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of pro-
posed rulemaking has been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies)orelectroniccom-
ments that are submitted timely to the IRS.
All comments will be available for public
inspection and copying. A public hearing
will be scheduled if requested in writing
by any person that timely submits written
comments. If a public hearing is sched-
uled, notice of the date, time, and place for
the public hearing will be published in the
Federal Register.
Drafting Information
The principal author of these regula-
tions is Paul J. Carlino, Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.881–3 is amended by:
January 26, 20093802009–4 I.R.B.

1. Removing the language “district di-
rector” throughout this section and adding
“director of field operations” in its place.
2.Removing the language
“§1.1441–3(j)” throughout this section
and adding “§1.1441–3(g)” in its place.
3.Removing the language
“§1.1441–7(d)” throughout this section
and adding “§1.1441–7(f)” in its place.
4. In the last sentence of paragraph
(a)(3)(ii)(B), removing the second “fi-
nanced” and adding “financing” in its
place.
5.Removing the parenthetical
language “(or a similar interest in a
partnership or trust)” in paragraphs
(a)(2)(ii)(A)(2) and (a)(2)(ii)(B)(1)and
adding “(or a similar interest in a partner-
ship, trust, or other person)” in its place.
6. Adding a new paragraph (a)(2)(i)(C).
7. In paragraph (e), redesignatingEx-
amples3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13,
14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24,
and25asExamples4, 5, 6, 7, 8, 9, 10, 11,
12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22,
23, 24, 25, and 26, respectively.
8. Adding a newExample 3in para-
graph (e).
9. Adding a new sentence at the end of
paragraph (f).
The additions read as follows:
§1.881–3 Conduit financing
arrangements.
*****
(a) * * *
(2) * * *
(i) * * *
(C)Treatment of disregarded entities.
For purposes of this section, the termper-
sonincludes a business entity that is disre-
garded as an entity separate from its sin-
gle member owner under §§301.7701–1
through 301.7701–3.
*****
(e)Examples.***
Example 3.Participation of a disregarded inter-
mediate entity. (i) The facts are the same as inExam-
ple 2, except that, in addition, FS is an entity that is
disregarded as an entity separate from its owner, FP,
under §301.7701–3. Under paragraph (a)(2)(i)(C) of
this section, FS is a person and therefore may itself
be an intermediate entity that is linked by financing
transactions to other persons in a financing arrange-
ment. The DS note held by FS and the FS note held by
FP are financing transactions within the meaning of
paragraph (a)(2)(ii) of this section, and together con-
stitute a financing arrangement within the meaning of
paragraph (a)(2)(i) of this section.
*****
(f)Effective/applicability date.***
Paragraph (a)(2)(i)(C) of this section is
effective for payments made on or after
the date of publication of the Treasury de-
cision adopting these regulations as final
regulations in theFederal Register.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 19,
2008, 8:45 a.m., and published in the issue of the Federal
Register for December 22, 2008, 73 F.R. 78252)
2009–4 I.R.B.381January 26, 2009

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
January 26, 2009i2009–4 I.R.B.

Numerical Finding List
1
Bulletins 2009–1 through 2009–4
Announcements:
2009-1, 2009-1 I.R.B.242
Notices:
2009-1, 2009-2 I.R.B.250
2009-2, 2009-4 I.R.B.344
2009-3, 2009-2 I.R.B.250
2009-4, 2009-2 I.R.B.251
2009-5, 2009-3 I.R.B.309
2009-6, 2009-3 I.R.B.311
2009-7, 2009-3 I.R.B.312
2009-8, 2009-4 I.R.B.347
Proposed Regulations:
REG-160872-04, 2009-4 I.R.B.358
REG-158747-06, 2009-4 I.R.B.362
REG-150670-07, 2009-4 I.R.B.378
REG-113462-08, 2009-4 I.R.B.379
Revenue Procedures:
2009-1, 2009-1 I.R.B.1
2009-2, 2009-1 I.R.B.87
2009-3, 2009-1 I.R.B.107
2009-4, 2009-1 I.R.B.118
2009-5, 2009-1 I.R.B.161
2009-6, 2009-1 I.R.B.189
2009-7, 2009-1 I.R.B.226
2009-8, 2009-1 I.R.B.229
2009-9, 2009-2 I.R.B.256
2009-10, 2009-2 I.R.B.267
2009-11, 2009-3 I.R.B.313
2009-12, 2009-3 I.R.B.321
2009-13, 2009-3 I.R.B.323
2009-14, 2009-3 I.R.B.324
2009-15, 2009-4 I.R.B.356
Revenue Rulings:
2009-1, 2009-2 I.R.B.248
2009-2, 2009-2 I.R.B.245
Treasury Decisions:
9434, 2009-4 I.R.B.339
9435, 2009-4 I.R.B.333
9436, 2009-3 I.R.B.268
9437, 2009-4 I.R.B.341
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin
2008–52, dated December 29, 2008.
2009–4 I.R.B.iiJanuary 26, 2009

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2009–1 through 2009–4
Notices:
2001-55
Modified by
Notice 2009-1, 2009-2 I.R.B.250
2007-54
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
2008-11
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
2008-12
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
Rev. Proc. 2009-11, 2009-3 I.R.B.313
2008-13
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
List of forms modified and superseded by
Rev. Proc. 2009-11, 2009-3 I.R.B.313
Modified and clarified by
Notice 2009-5, 2009-3 I.R.B.309
2008-46
Obsoleted by
T.D. 9436, 2009-3 I.R.B.268
Rev. Proc. 2009-11, 2009-3 I.R.B.313
Revenue Procedures:
2007-17
Superseded by
Rev. Proc. 2009-14, 2009-3 I.R.B.324
2007-71
Modified by
Notice 2009-3, 2009-2 I.R.B.250
2008-1
Superseded by
Rev. Proc. 2009-1, 2009-1 I.R.B.1
2008-2
Superseded by
Rev. Proc. 2009-2, 2009-1 I.R.B.87
2008-3
Superseded by
Rev. Proc. 2009-3, 2009-1 I.R.B.107
2008-4
Superseded by
Rev. Proc. 2009-4, 2009-1 I.R.B.118
2008-5
Superseded by
Rev. Proc. 2009-5, 2009-1 I.R.B.161
Revenue Procedures— Continued:
2008-6
Superseded by
Rev. Proc. 2009-6, 2009-1 I.R.B.189
2008-7
Superseded by
Rev. Proc. 2009-7, 2009-1 I.R.B.226
2008-8
Superseded by
Rev. Proc. 2009-8, 2009-1 I.R.B.229
2008-9
Superseded by
Rev. Proc. 2009-9, 2009-2 I.R.B.256
2008-61
Superseded by
Rev. Proc. 2009-3, 2009-1 I.R.B.107
2008-68
Amplified and superseded by
Rev. Proc. 2009-15, 2009-4 I.R.B.356
Revenue Rulings:
65-286
Obsoleted by
T.D. 9435, 2009-4 I.R.B.333
76-54
Obsoleted by
T.D. 9435, 2009-4 I.R.B.333
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–27 through 2008–52 is in Internal Revenue Bulletin 2008–52, dated December 29,
2008.
January 26, 2009iii2009–4 I.R.B.

INDEX
Internal Revenue Bulletins 2009–1 through
2009–4
The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parenthesis refers to the Internal Revenue Bulletin in which the item
may be found and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Determination letters, issuing procedures (RP 6) 1,189
Full funding limitations, weighted average interest rates, seg-
ments rates for:
January 2009 (Notice 2) 4,344
Interim guidance under section 457A relating to deferred com-
pensation of nonqualified entities (Notice 8) 4,347
Letter rulings:
And determination letters, areas which will not be issued
from:
Associates Chief Counsel and Division Counsel (TE/GE)
(RP 3) 1,107
Associate Chief Counsel (International) (RP 7) 1,226
And general information letters, procedures (RP 4) 1,118
User fees, request for letter rulings (RP 8) 1,229
Penalties:
Categories of tax returns and claims for refund, tax return
preparer penalty under section 6694 (RP 11) 3,313
Tax return preparer (TD 9436) 3,268
Qualified retirement plans:
Covered compensation tables, permitted disparity (RR 2) 2,
245
Section 403(b) plans, written plan requirement (Notice 3) 2,
250
Regulations:
26 CFR 1.6060–1, amended; 1.6107–1, revised; 1.6109–2,
amended; 1.6694–0 thru –4, revised; 1.6695–1, –2, revised;
1.6696–1, revised; 54.6060–1, added; 54.6107–1, added;
54.6109–1, added; 54.6694–1 thru –4, added; 54.6695–1,
added; 54.6696–1, added; 54.7701–1, added; tax return pre-
parer penalties under sections 6694 and 6695 (TD 9436) 3,
268
Technical advice to IRS employees (RP 5) 1,161
EMPLOYMENT TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Penalties:
Categories of tax returns and claims for refund, tax return
preparer penalty under section 6694 (RP 11) 3,313
Tax return preparer (TD 9436) 3,268
Proposed Regulations:
26 CFR 31.3402(t)–0 thru –6, added and reserved;
31.3402(t)–7, added;31.3406(g)–2, amended;
31.6011(a)–4, amended; 31.6051–5, added; 31.6071(a)–1,
amended; 31.6302–1, –4, amended; withholding under
section 3402(t) (REG–158747–06) 4,362
Qualification to file Form 944, Employer’s ANNUAL Federal
Tax Return, or request to file Form 941, Employer’s QUAR-
TERLY Federal Tax Return (RP 13) 3,323
Regulations:
26 CFR 31.6060–1, added; 31.6107–1, added; 31.6109–2,
added; 31.6694–1 thru –4, added; 31.6695–1, added;
31.6696–1, added; 31.7701–1, added; tax return preparer
penalties under sections 6694 and 6695 (TD 9436) 3,268
Technical Advice Memoranda (TAMs) (RP 2) 1,87
Withholding on payments by government entities for property
and services (REG–158747–06) 4,362
ESTATE TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Penalties:
Categories of tax returns and claims for refund, tax return
preparer penalty under section 6694 (RP 11) 3,313
Tax return preparer (TD 9436) 3,268
Regulations:
26 CFR 20.6060–1, added; 20.6107–1, added; 20.6109–1,
added; 20.6694–1 thru –4, added; 20.6695–1, added;
20.6696–1, added; 20.7701–1, added; 26.6060–1, added;
26.6107–1, added; 26.6109–1, added; 26.6694–1 thru –4,
added; 26.6695–1, added; 26.6696–1, added; 26.7701–1,
added; tax return preparer penalties under sections 6694
and 6695 (TD 9436) 3,268
Technical Advice Memoranda (TAMs) (RP 2) 1,87
EXCISE TAX
Credits, calculation of volume of denaturants in alcohol for fuel
credits (Notice 6) 3,311
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Penalties:
Categories of tax returns and claims for refund, tax return
preparer penalty under section 6694 (RP 11) 3,313
Tax return preparer (TD 9436) 3,268
2009–4 I.R.B.ivJanuary 26, 2009

EXCISE TAX—Cont.
Regulations:
26 CFR 40.6060–1, added; 40.6107–1, added; 40.6109–1,
added; 40.6694–1 thru –4, added; 40.6695–1, added;
40.6696–1, added; 40.7701–1, added; 41.6060–1,
added; 41.6107–1, added; 41.6109–2, added; 41.6694–1
thru –4, added; 41.6695–1, added; 41.6696–1, added;
41.7701–1, added; 44.6060–1, added; 44.6107–1,
added; 44.6109–1, added; 44.6694–1 thru –4, added;
44.6695–1, added; 44.6696–1, added; 44.7701–1,
added; 55.6060–1, added; 55.6107–1, added; 55.6109–1,
added; 55.6694–1 thru –4, added; 55.6695–1, added;
55.6696–1, added; 55.7701–1, added; 156.6060–1, added;
156.6107–1, added; 156.6109–1, added; 156.6694–1
thru –4, added; 156.6695–1, added; 156.6696–1, added;
156.7701–1, added; 157.6060–1, added; 157.6107–1,
added; 157.6109–1, added; 157.6694–1 thru –4, added;
157.6695–1, added; 157.6696–1, added; 157.7701–1,
added; 301.7701–15, amended; tax return preparer penal-
ties under sections 6694 and 6695 (TD 9436) 3,268
Technical Advice Memoranda (TAMs) (RP 2) 1,87
EXEMPT ORGANIZATIONS
Annual notice to donors regarding pending and settled declara-
tory judgment suits (Ann 1) 1,242
Letter rulings:
And determination letters:
Areas which will not be issued from Associates Chief
Counsel and Division Counsel (TE/GE) (RP 3) 1,107
Exemption application determination letter rulings under
sections 501 and 521 (RP 9) 2,256
And general information letters, procedures (RP 4) 1,118
User fees, request for letter rulings (RP 8) 1,229
Penalties:
Categories of tax returns and claims for refund, tax return
preparer penalty under section 6694 (RP 11) 3,313
Tax return preparer (TD 9436) 3,268
Regulations:
26 CFR 1.6060–1, amended; 1.6107–1, revised; 1.6109–2,
amended; 1.6694–0 thru –4, revised; 1.6695–1, –2, revised;
1.6696–1, revised; 53.6060–1, added; 53.6107–1, added;
53.6109–1, added; 53.6694–1 thru –4, added; 53.6695–1,
added; 53.6696–1, added; 53.7701–1, added; 56.6060–1,
added; 56.6107–1, added; 56.6109–1, added; 56.6694–1
thru –4, added; 56.6695–1, added; 56.6696–1, added;
56.7701–1, added; tax return preparer penalties under
sections 6694 and 6695 (TD 9436) 3,268
Technical advice to IRS employees (RP 5) 1,161
Tuition programs, modification to Notice 2001-55 (Notice 1) 2,
250
GIFT TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Penalties:
Categories of tax returns and claims for refund, tax return
preparer penalty under section 6694 (RP 11) 3,313
Tax return preparer (TD 9436) 3,268
Regulations:
26 CFR 25.6060–1, added; 25.6107–1, added; 25.6109–1,
added; 25.6694–1 thru –4, added; 25.6695–1, added;
25.6696–1, added; 25.7701–1, added; tax return preparer
penalties under sections 6694 and 6695 (TD 9436) 3,268
Technical Advice Memoranda (TAMs) (RP 2) 1,87
INCOME TAX
Annual notice to donors regarding pending and settled declara-
tory judgment suits (Ann 1) 1,242
Conduit financing arrangements (REG–113462–08) 4,379
Corporations:
Creditor continuity of interest (TD 9434) 4,339
Transaction of interest, controlled foreign corporation (CFC),
subpart F income partnership blocker (Notice 7) 3,312
Treatment of stock of a controlled corporation under section
355(a)(3)(B) (TD 9435) 4,333; (REG–150670–07) 4,378
Disclosure or use of information by preparers of returns (TD
9437) 4,341
Employer-provided vehicles, cents-per-mile valuation rule, max-
imum vehicle values, 2009 (RP 12) 3,321
Interest:
Investment:
Federal short-term, mid-term, and long-term rates for:
January 2009 (RR 1) 2,248
Interim guidance under section 457A relating to deferred com-
pensation of nonqualified entities (Notice 8) 4,347
Interim standards under section 6694(a) (Notice 5) 3,309
Letter rulings:
And determination letters, areas which will not be issued
from:
Associates Chief Counsel and Division Counsel (TE/GE)
(RP 3) 1,107
Associate Chief Counsel (International) (RP 7) 1,226
And information letters issued byAssociate Offices, determi-
nation letters issued by Operating Divisions (RP 1) 1,1
Money market fund, certain payments received from its invest-
ment advisor to maintain per share net asset value of $1.00 (RP
10) 2,267
Penalties:
Categories of tax returns and claims for refund, tax return
preparer penalty under section 6694 (RP 11) 3,313
Tax return preparer (TD 9436) 3,268
Pre-Filing Agreement (PFA) program, extended (RP 14) 3,324
January 26, 2009v2009–4 I.R.B.

INCOME TAX—Cont.
Proposed Regulations:
26 CFR 1.355–2, amended; guidance regarding the treat-
ment of stock of a controlled corporation under section
355(a)(3)(B) (REG–150670–07) 4,378
26 CFR 1.881–3, amended; conduit financing arrangements
(REG–113462–08) 4,379
26 CFR 301.6707–1, added; section 6707 and the failure
to furnish information regarding reportable transactions
(REG–160872–04) 4,358
Regulations:
26 CFR 1.355–0 thru –2, amended; 1.355–0T, –2T, added;
guidance regarding the treatment of stock of a controlled
corporation under section 355(a)(3)(B) (TD 9435) 4,333
26 CFR 1.368–1, amended; creditor continuity of interest (TD
9434) 4,339
26 CFR 1.6060–1, amended; 1.6107–1, revised; 1.6109–2,
amended; 1.6694–0 thru –4, revised; 1.6695–1, –2, re-
vised; 1.6696–1, revised; 301.7701–15, amended; 602.101,
amended; tax return preparer penalties under sections 6694
and 6695 (TD 9436) 3,268
26 CFR 301.7216–3, amended; 301.7216–3T, removed;
amendments to the section 7216 regulations - disclosure or
use of information by preparers of returns (TD 9437) 4,341
Section 6707 and the failure to furnish information regarding re-
portable transactions (REG–160872–04) 4,358
Stocks:
Section 305 REIT distributions of stock (RP 15) 4,356
Treatment of stock of a controlled corporation under section
355(a)(3)(B) (TD 9435) 4,333; (REG–150670–07) 4,378
Technical Advice Memoranda (TAMs) (RP 2) 1,87
Transferred basis, reorganization acquisition (Notice 4) 2,251
SELF-EMPLOYMENT TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Technical Advice Memoranda (TAMs) (RP 2) 1,87
2009–4 I.R.B.viJanuary 26, 2009

January 26, 20092009–4 I.R.B.

2009–4 I.R.B.January 26, 2009

January 26, 20092009–4 I.R.B.

INTERNAL REVENUE BULLETIN
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