us-irs-notices-irb-2009-47-pdf•Internal Revenue Bulletin 2009-47 (PDF rendition): IRS Notices
Internal Revenue Bulletin 2009-47 (PDF rendition): IRS Notices
us-irs-notices-irb-2009-47-pdfInternal Revenue Bulletin 2009-47 (PDF rendition): IRS NoticesGuidance
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Bulletin No. 200 9-47 November 23, 200 9 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX Rev. Rul. 2009–36, page 650. 2009 base period T-bill rate.The “base period T-bill rate” for the period ending September 30, 2009, is published as required by section 995(f) of the Code. REG–135005–07, page 681. Proposed regulations under section 1563 of the Code clarify which corporations are included in a controlled group of corpo- rations. The regulations clarify that a corporation that satisfies the controlled group rules for stock ownership and qualification is a member of such group, without regard to its status as a component member. EMPLOYEE PLANS Notice 2009–88, page 654. 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 November 2009; the 24-month average segment rates; the funding transitional segment rates applicable for November 2009; and the minimum present value transitional rates for October 2009. EXEMPT ORGANIZATIONS REG–155929–06, page 665. Proposed regulations under section 509 of the Code, required by the Pension Protection Act of 2006, provide rules for sup- porting organizations that are operated “in connection with” their supported organization(s) (called “Type III supporting orga- nizations”). The proposed regulations specify the information that Type III supporting organizations are required to provide their supported organizations. The proposed regulations also provide the criteria that Type III supporting organizations must satisfy in order to qualify as “functionally integrated.” For those Type III supporting organizations that do not qualify as function- ally integrated, the regulations require an annual payout equal to five percent of the fair market value of the organization’s non-exempt use assets, a payout requirement modeled on that imposed on private foundations under section 4942. (Continued on the next page) Announcements of Disbarments and Suspensions begin on page 683. Finding Lists begin on page ii. EXCISE TAX REG–155929–06, page 665. Proposed regulations under section 509 of the Code, required by the Pension Protection Act of 2006, provide rules for sup- porting organizations that are operated “in connection with” their supported organization(s) (called “Type III supporting orga- nizations”). The proposed regulations specify the information that Type III supporting organizations are required to provide their supported organizations. The proposed regulations also provide the criteria that Type III supporting organizations must satisfy in order to qualify as “functionally integrated.” For those Type III supporting organizations that do not qualify as function- ally integrated, the regulations require an annual payout equal to five percent of the fair market value of the organization’s non-exempt use assets, a payout requirement modeled on that imposed on private foundations under section 4942. ADMINISTRATIVE REG–160871–04, page 657. Proposed regulations under section 6501 of the Code relate to the exception to the general three-year period of limitations on assessment under section 6501(c)(10) for listed transactions that a taxpayer failed to disclose as required under section 6011. November 23, 20092009–47 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. 2009–47 I.R.B.November 23, 2009 November 23, 20092009–47 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 995.—Taxation of DISC Income to Shareholders 2009 base period T-bill rate.The “base period T-bill rate” for the period ending September 30, 2009, is published as required by section 995(f) of the Code. Rev. Rul. 2009–36 Section 995(f)(1) of the Internal Rev- enue Code provides that a shareholder of a DISC shall pay interest each taxable year in an amount equal to the product of the shareholder’s DISC-related deferred tax li- ability for the year and the “base period T-bill rate.” Under section 995(f)(4), the base period T-bill rate is the annual rate of interest determined by the Secretary to be equivalent to the average of the 1-year constant maturity Treasury yields, as pub- lished by the Board of Governors of the Federal Reserve System, for the 1-year pe- riod ending on September 30 of the calen- dar year ending with (or of the most recent calendar year ending before) the close of the taxable year of the shareholder. The base period T-bill rate for the period end- ing September 30, 2009, is 0.630 percent. Pursuant to section 6222 of the Code, interest must be compounded daily. The table below provides factors for com- pounding the base period T-bill rate daily for any number of days in the share- holder’s taxable year (including a 52–53 week accounting period) for the 2009 base period T-bill rate. To compute the amount of the interest charge for the shareholder’s taxable year, multiply the amount of the shareholder’s DISC-related deferred tax liability (as defined in section 995(f)(2)) for that year by the base period T-bill rate factor corresponding to the number of days in the shareholder’s taxable year for which the interest charge is being com- puted. Generally, one would use the factor for 365 days. One would use a different factor only if the shareholder’s taxable year for which the interest charge being determined is a short taxable year, if the shareholder uses the 52–53 week taxable year, or if the shareholder’s taxable year is a leap year. For the base period T-bill rates for the periods ending in prior years, see Rev. Rul. 2008–51, 2008–2 C.B. 1171; Rev. Rul. 2007–64, 2007–2 C.B. 953; Rev. Rul. 2006–54, 2006–2 C.B. 834; Rev. Rul. 2005–70, 2005–2 C.B. 919; Rev. Rul. 2004–99, 2004–2 C.B. 720; Rev. Rul. 2003–2, 2003–1 C.B. 251; Rev. Rul. 2002–68, 2002–2 C.B. 808; and Rev. Rul. 2001–56, 2001–2 C.B. 500. DRAFTING INFORMATION The principal author of this revenue rul- ing is Teresa B. Hughes of the Office of Associate Chief Counsel (International). For further information regarding this rev- enue ruling, contact Teresa B. Hughes at (202) 622–3850 (not a toll-free call). 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 1.000017260 2 .000034521 3 .000051782 4.000069043 5 .000086304 6 .000103566 7.00012 0828 8.000138091 9 .000155353 10.000172616 11.000189879 12.000 207143 13.000224407 14.000241671 15.000258935 16.000276200 17 .000293465 18.000310731 19.000327996 20 .000345262 21 .000362528 22 .000379795 23.000397062 24.000414329 25.000431596 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 26.000448864 27.000466132 28.000483400 29 .000500669 30 .000517938 31 .000535207 32 .000552477 33 .000569746 34 .000587016 35 .000604287 36 .000621558 37.000638 829 38 .000656100 39.000673371 40.000690643 41.000707916 42 .000725188 43.000742461 44 .000759734 45 .000777007 46.000794281 47 .000811555 48.000828829 49.000846104 50 .000863379 51.000880654 52 .000897929 53.000915205 54 .000932481 55.000949758 56 .000967034 57 .000984311 58.001001589 59 .001018866 60.001036144 61 .001053422 62.001070701 63.001087979 64 .001105258 65.001122538 2009–47 I.R.B.650November 23, 2009 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 66.001139817 67 .001157097 68.001174378 69 .001191658 70.001208939 71.001226220 72 .001243502 73.001260783 74 .001278065 75.001295348 76.001312630 77.001329913 78.001347196 79.001364480 80.001381764 81.001399048 82.001416332 83.001433617 84 .00145 0902 85 .001468187 86 .001485473 87 .001502759 88 .001520045 89 .00 1537332 90 .001554618 91 .001571906 92 .001589193 93.001606481 94.001623769 95.001641057 96 .001658346 97 .001675634 98.001692924 99.001710213 100 .001727503 101.001744793 102.001762083 103.001779374 104 .001796665 105.001813956 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 106.001831248 107 .001848540 108 .001865832 109.001883124 110.001900417 111.001917710 112 .001935004 113 .001952297 114 .001969591 115 .001986886 116.002004180 117 .002021475 118.002038770 119 .0020560 66 120.002073361 121 .002090658 122 .002107954 123 .002125251 124 .00214 2547 125.002159845 126.002177142 127.002194440 128.002211738 129.002229037 130 .002246335 131 .002263635 132.002280934 133.002298234 134 . 002315533 135 .002332834 136 .002350134 137 .002367435 138.002384736 139.002402038 140.002419339 141.002436641 142 .002453944 143.002471246 144 .002488549 145.002505853 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 146 .002523156 147 .002540460 148 .002557764 149 .002575068 150.002592373 151 .002609678 152 .002626983 153 .002644289 154.002661595 155 .002678901 156 .002696208 157.002713515 158 .002730822 159 .002748129 160 .002765437 161 .002782745 162 .002800053 163.002817362 164.002834671 165.002851980 166.002869289 167 .002886599 168.002903909 169.002921220 170 .002938530 171 .002955841 172 .002973153 173.002990464 174.003007776 175.003025088 176.003042401 177 .003059714 178.003077027 179.003094340 180 .003111654 181.003128968 182.003146282 183 .003163597 184.003180911 185 .003198227 November 23, 20096512009–47 I.R.B. 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 186 .003215542 187 .003232858 188 .003250174 189.003267490 190.003284807 191.003302124 192.003319441 193 .003336759 194 .003354077 195.003371395 196.003388713 197.003406032 198 .003423351 199.003440670 200 .003457990 201 .003475310 202.003492630 203 .003509951 204 .00352 7272 205.003544593 206 .003561914 207 .003579236 208 .003596558 209.003613881 210.003631203 211 .003648526 212 .003665849 213.003683173 214.003700497 215 .003717821 216 .003735145 217 .003752470 218 .003769795 219.003787120 220.003804446 221.003821772 222.003839098 223 .003856425 224 .003873752 225 .003891079 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 226.003908406 227 .003925734 228.003943062 229.003960390 230.003977719 231 .003995048 232.004012377 233.004029707 234.004047036 235 .004064367 236.004081697 237.004099028 238 .004116359 239.004133690 240 .004151022 241 .004168354 242 .004185686 243.004203018 244 .00422 0351 245 .004237684 246 .004255018 247 .004272351 248 .004289685 249.004307020 250.004324354 251 .004341689 252.004359025 253 .004376360 2 54 .004393696 255 .004411032 256 .004428368 257.004445705 258 .004463042 259 .004480379 260.004497717 261 .004515055 262 .004532393 263 .004549732 264 .004567070 265.004584410 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 266.004601749 267.004619089 268.004636429 269 .004653769 270.004671110 271 .004688450 272 .004705792 273.004723133 274 .004740475 275.004757817 276 .004775159 277 .004792502 278 .004809845 279.004827188 280 .004844532 281.004861876 282.004879220 283 .004896565 284.004913909 285.004931254 286.004948600 287 .004965946 288.004983292 289 .00 5000638 290 .005017984 291 .005035331 292 .005052678 293 .005070026 294 . 005087374 295.005104722 296 .005122070 297 .005139419 298 .005156768 299 .005174117 300 .005191467 301 .005208817 302 .005226167 303 .005243517 304 .005260868 305.005278219 2009–47 I.R.B.652November 23, 2009 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 306 .005295570 307 .005312922 308 .005330274 309 .005347626 310 .005364979 311 .005382332 312 .005399685 313 .005417039 314 .005434392 315.005451746 316 .005469101 317 .005486455 318 .005503810 319 .0055211 66 320 .005538521 321 .005555877 322 .005573233 323 .005590590 324 .00560 7946 325.005625304 326 .005642661 327 .005660019 328 .005677377 329 .00 5694735 330 .005712093 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 331 .005729452 332 .005746811 333 .005764171 334 .005781531 335.005798891 336 .005816251 337 .005833612 338 .005850973 339 .005868334 340 .005885696 341 .005903057 342 .005920420 343 .005937782 344 .0059551 45 345.005972508 346 .005989871 347 .006007235 348 .006024599 349.006041963 350.006059328 351 .006076693 352.006094058 353 .006111423 354 .006128789 355.006146155 2009 ANNUAL RATE, COMPOUNDED DAILY 0.630 PERCENT DAYSFACTOR 356.006163521 357 .006180888 358.006198255 359.006215622 360.006232990 361 .006250358 362.006267726 363 .006285094 364.006302463 365 .006319832 366.006337201 367 .006354571 368.006371941 369.006389311 370.006406682 371 .006424053 November 23, 20096532009–47 I.R.B. Part III. Administrative, Procedural, and Miscellaneous Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates Notice 2009–88 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 October 2009 is 5.76 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% November20096.44 5.80 6.44 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, 2007–2 C.B. 899, provides guidelines for determining the monthly corporate bond yield curve, the 24-month average corporate bond seg- ment rates, and the funding transitional segment rates used to compute the tar- get normal cost and the funding target. Pursuant to Notice 2007–81, the monthly corporate bond yield curve derived from October 2009 data is in Table I at the end of this notice. The spot first, second, and third segment rates for the month of Oc- tober 2009 are, respectively, 2.60, 5.58, and 6.07. The three 24-month average corporate bond segment rates applicable for November 2009 under the election of § 430(h)(2)(G)(iv) are as follows: First Segment Second Segment Third Segment 4.816.696.78 2009–47 I.R.B.654November 23, 2009 The transitional segment rates under § 430(h)(2)(G) applicable for November 2009, taking into account the corporate bond weighted average of 6.44 stated above, are as follows: For Plan Years Beginning in First Segment Second Segment Third Segment 2008 5.906.526.55 2009 5.35 6.616.67 The transitional rule of § 430(h)(2)(G) does not apply to plan years starting in 2010. Therefore, for a plan year starting in 2010 with a lookback month to November 2009, the funding segment rates are the three 24-month average corporate bond segment rates applicable for November 2009, listed above without blending for the transitional period. 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- bleinterestrateforamonthistheannual 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 October 2009 is 4.19 per- cent. The Service has determined this rate as the average of the daily determinations of yield for the reported days during Oc- tober 2009 on the 30-year Treasury bond maturing in August 2039. 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% November20094.363.93 4.58 MINIMUM PR ESENT VALUE SEGMENT RA TES Generall y 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 inter est rates are the monthly spot seg- ment rate s blended with the applicable rate under § 41 7(e)(3)(A)(ii)(II) as in effect for plan y ears beginning in 2007. Notice 2007–81 p rovides guidelines for determin- ing the min imum present value segment rates. Pur suant to that notice, the min- imum pres ent value transitional segment rates det ermined for October 2009, tak- ingintoa ccount the October 2009 30-year Treasury rate of 4.19 stated above, are as follows: For Plan Years Beginning in First Segment Second Segment Third Segment 20083.874.47 4.57 2009 3.554.75 4.94 20103.24 5.025.32 DRAFTIN G INFORMATION The prin cipal author of this notice is Tony Mon tanaro of the Employee Plans, Tax Exem pt and Government Entities Di- vision. Mr. Montanaro may be e-mailed at Retirem entPlanQuestions@irs.gov. November 23, 20096552009–47 I.R.B. Table I Monthly Yield Curve for October 2009 Derived from October 2009 Data Maturity YieldMaturity YieldMaturity YieldMaturity YieldMaturity Yield 0.5 1.11 20.5 6.03 40.5 6.07 60.5 6.09 80.5 6.11 1.01.4521.06.0341.06.0761.0 6.09 81.06.11 1.5 1.79 21.5 6.03 41.5 6.07 61.5 6.10 81.5 6.11 2.02.1422.06.0342.06.0762.06.1082.06.11 2.5 2.48 22.5 6.03 42.5 6.08 62.5 6.10 82.5 6.11 3.02.8123.06.0343.06.0863.06.1083.06.11 3.5 3.13 23.5 6.03 43.5 6.08 63.5 6.10 83.5 6.11 4.03.4224.06.0344.06.0864.06.1084.06.11 4.5 3.70 24.5 6.03 44.5 6.08 64.5 6.10 84.5 6.11 5.0 3.95 25.0 6.04 45.0 6.08 65.0 6.10 85.0 6.11 5.5 4.18 25.5 6.04 45.5 6.08 65.5 6.10 85.5 6.11 6.04.4026.06.0446.06.0866.06.1086.06.11 6.5 4.59 26.5 6.04 46.5 6.08 66.5 6.10 86.5 6.11 7.04.7627.06.0447.06.0867.06.1087.06.11 7.5 4.92 27.5 6.04 47.5 6.08 67.5 6.10 87.5 6.11 8.0 5.06 28.06.0448.06.0868.06.1088.06.11 8.55.1828.5 6.04 48.5 6.08 68.5 6.10 88.5 6.11 9.0 5.30 29.0 6.05 49.0 6.08 69.0 6.10 89.0 6.11 9.5 5.40 29.5 6.05 49.56.0869.56.1089.56.11 10.05.4930.06.0550.0 6.09 70.06.10 90.0 6.11 10.55.5730.56.0550.5 6.09 70.5 6.1090.56.11 11.0 5.64 31.0 6.0551.0 6.09 71.06.10 91.0 6.11 11.55.7131.56.0551.5 6.09 71.5 6.1091.56.11 12.0 5.76 32.0 6.0552.0 6.09 72.06.10 92.0 6.11 12.55.8132.5 6.06 52.5 6.09 72.5 6.1092.56.11 13.05.8533.06.0653.0 6.09 73.06.10 93.0 6.11 13.55.8833.5 6.06 53.5 6.09 73.5 6.1093.56.11 14.05.9134.06.06 54.0 6.09 74.06.10 94.0 6.11 14.5 5.94 34.5 6.06 54.5 6.09 74.5 6.1094.56.11 15.0 5.96 35.0 6.06 55.0 6.09 75.0 6.1095.06.11 15.5 5.97 35.5 6.06 55.5 6.09 75.5 6.1095.56.11 16.05.9936.06.0656.0 6.09 76.06.10 96.0 6.11 16.5 6.00 36.5 6.06 56.5 6.09 76.5 6.1096.56.11 17.06.0137.06.07 57.0 6.09 77.06.10 97.0 6.11 17.5 6.01 37.5 6.07 57.5 6.09 77.5 6.1097.56.11 18.06.0238.06.07 58.0 6.09 78.06.10 98.0 6.11 18.5 6.02 38.5 6.07 58.5 6.09 78.5 6.1098.56.11 19.0 6.03 39.0 6.0759.0 6.0979.0 6.11 99.0 6.11 19.56.0339.56.0759.56.0979.56.1199.56.11 20.06.0340.06.0760.0 6.09 80.06.11100.06.11 2009–47 I.R.B.656November 23, 2009 Part IV. Items o fGeneralInterest Notice of Prop osed Rulemaking Period of Limi tations on Assessment fo rListed Transaction sNotDisclosed Under Sectio n6011 REG–160871 –04 AGENCY: Inte rnal Revenue Service (IRS), Trea sury. ACTION: Not ice of proposed rulemaking. SUMMARY: Th is document contains proposed re gulations relating to the ex- ceptiontot he general three-year period of limitation s on assessment under section 6501(c)(1 0) of the Internal Revenue Code (Code) for listed transactions that a tax- payer fail ed to disclose as required under section 60 11. These regulations will affect taxpayer s who fail to disclose listed trans- actions i n accordance with section 6011. DATES: Wr itten or electronic comments and reque sts for a public hearing must be received by January 5, 2010. ADDRESSE S: Send submissions to: CC:PA:LP D:PR (REG–160871–04), room 5203, In ternal Revenue Service, P.O. Box 7604, Be n Franklin Station, Washing- ton, DC 2 0044. Submissions may be hand-de livered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC: PA:LPD:PR (REG–160871–04), Courie r’s Desk, Internal Revenue Ser- vice, 1 111 Constitution Avenue, NW, Washin gton, DC, or sent electroni- cally v ia the Federal eRulemaking Por- tal at http://www.regulations.gov(IRS REG–1 60871–04). FOR FU RTHER INFORMATION CONTA CT: Concerning the proposed regul ations, Audra M. Dineen at (202) 622–4 910; concerning submissions of comme nts and requests for a public hear- ing, Oluwafunmilayo Taylor of the Publi- cati ons and Regulations Branch at (202) 622– 7180 (not toll-free numbers). SUPPLEMENTAR Y INFORMATION: Paperwork Red uction Act The collectio n of information contained in this notic e of proposed rulemaking has been revi ewed and approved by the Office of Man agement and Budget in ac- cordance wit h the Paperwork Reduction Act of 1995 ( 44 U.S.C. 3507(d)) under control num ber 1545–1940. The col- lection of i nformation in these proposed regulation s is in §301.6501(c)–1(g)(5). This infor mation is required to provide theIRS,un der penalties of perjury, with the inform ation necessary to properly de- termine th e taxpayer’s applicable period of limitat ions. The collection of infor- mation in these proposed regulations is thesamea s the collection of information in Revenu e Procedure 2005–26, 2005–1 C.B. 965, which was previously reviewed and appr oved by the Office of Manage- ment and Budget under control number 1545–19 40. The collection of information in §301. 6501(c)–1(g)(6) is the same as the collect ion of information required under sectio n 6112. See §601.601(d)(2)(ii)(b). An agenc y may not conduct or sponsor, and a pe rson is not required to respond to, a collec tion of information unless it displays avalid control number assigned by the Of- fice of Management and Budget. Books o r records relating to a collection of info rmation must be retained as long as thei r contents may become material in the ad ministration of any internal revenue law. G enerally, tax returns and tax return infor mation are confidential, as required by 26 U .S.C. §6103. Back ground This document contains proposed amen dments to the Procedure and Ad- mini stration Regulations (26 CFR Part 301 ) under section 6501(c) relating to exc eptions to the period of limitations on a ssessment. Section 6501(a) provides tha t, except as otherwise provided, if a re- tur n is filed, tax with respect to that return mus t be assessed within 3 years from the la ter of the date the return was filed or the or iginal due date of the return. Section 65 01(c) contains several exceptions to the general three -year period of limitations on assessment. Section 6501( c)(10) was added to the Code by sectio n 814 of the American Jobs Creation Act o f 2004, Public Law 108–357 (118 Stat. 141 8, 1581 (2004)) (AJCA), enacted on Oct ober 22, 2004. Section 6501(c)(10) provides that, if a taxpayer fails to disc lose a listed transaction as re- quired under section 6011, the time to as- sess tax agai nst the taxpayer with respect to that tran saction will end no earlier than one year aft er the earlier of (1) the date on which the taxpayer furnishes the infor- mation requ ired under section 6011, or (2) thedateth at a material advisor furnishes to the Secr etary, upon written request, the informati on required under section 6112 with respe ct to the taxpayer related to the listed tra nsaction. Accordingly, if neither the taxpa yer nor a material advisor fur- nishes th e requisite information, the period of limita tions on assessment will remain open, and thus, the tax with respect to the listed t ransaction may be assessed at any time. Se ction 6501(c)(10) is effective for taxable years with respect to which the pe- riod of l imitations on assessment did not expire p rior to October 22, 2004. As noted , section 6501(c)(10) applies when a ta xpayer does not properly dis- close a listed transaction (as defined in sectio n 6707A(c)(2)) as required under sectio n 6011. Taxpayers are required under s ection 6011 and the regulations under s ection 6011 (collectively referred to as t he “section 6011 disclosure rules”) to dis close certain information regard- ing ea ch reportable transaction in which the ta xpayer participated. See Treas. Reg. § §1.6011–4; 20.6011–4; 25.6011–4; 31.6 011–4; 53.6011–4; 54.6011–4; and 56.6 011–4. Among the transactions that are r eportable are “listed transactions.” See T reas. Reg. §1.6011–4(b)(2). Un- der t he section 6011 disclosure rules, a lis ted transaction is a transaction that is the same as, or substantially similar to, a tra nsaction that the IRS has determined to b e a tax avoidance transaction and ide ntified by notice, regulation, or other for m of published guidance. Treas. Reg. §1 .6011–4(b)(2). Section 6707A(c)(2) in corporates the same definition of listed tr ansaction. For a list of transactions the November 23, 20096572009–47 I.R.B. IRS has identified as listed transactions, see Notice 2009–59, 2009–31 I.R.B. 170. See §601.601(d)(2). If the section 6011 disclosure rules re- quire a taxpayer to disclose a listed trans- action, the taxpayer must complete and file a disclosure statement in accordance with the section 6011 disclosure rules. The sec- tion 6011 disclosure rules currently require that Form 8886, “Reportable Transaction Disclosure Statement” (or successor form), be used as the disclosure statement and be completed in accordance with the instruc- tions to the form. The Form 8886 (or suc- cessor form) generally must be attached to the taxpayer’s original or amended tax re- turn for each taxable year for which a tax- payer participates in a listed transaction. Treas. Reg. §1.6011–4(e)(1). If a listed transaction results in a loss that is carried back to a prior year, Form 8886 (or suc- cessor form) must be attached to the tax- payer’s application for tentative refund or amended tax return for that prior year. The taxpayer also must send a copy of Form 8886 (or successor form) to the IRS Of- fice of Tax Shelter Analysis (OTSA), gen- erally at the same time that a disclosure statement pertaining to a particular listed transaction is first filed. Under the current rules, when a transaction is identified as a listed transaction after the date on which the taxpayer files a tax return (including an amended return) for a taxable year re- flecting the taxpayer’s participation in the listed transaction and before the end of the period of limitations for assessment of tax for any taxable year in which the taxpayer participated in the listed transaction, then the taxpayer must file Form 8886 (or suc- cessor form) with OTSA within 90 calen- dar days after the date the transaction be- came a listed transaction. If a taxpayer does not disclose its par- ticipation in a listed transaction in accor- dance with all of the requirements of the section 6011 disclosure rules and section 6501(c)(10) applies, then the time to assess tax related to the listed transaction will ex- pire no earlier than the earlier of (1) one year after the date on which the informa- tion described in section 6501(c)(10)(A) is provided, or (2) one year after the date on which the information described in section 6501(c)(10)(B) is provided. The IRS and Treasury Department is- sued Rev. Proc. 2005–26, 2005–1 C.B. 965, on April 25, 2005, to provide interim guidance on section 6501(c)(10). The revenue procedure prescribes how taxpay- ers and material advisors should disclose listed transactionsthat were not properly disclosed under section 6011 in order to start the one-year period under section 6501(c)(10). Taxpayers may continue to rely on Rev. Proc. 2005–26 until tempo- rary or final regulations are issued under section 6501(c)(10). See §601.601(d)(2). In that revenue procedure, the IRS and Treasury Department also requested com- ments concerning the procedures set forth in the revenue procedure, especially their application to partners and partnerships. One comment was received but it did not address the limitations period. Explanation of Provisions These proposed regulations provide rules reflecting the enactment of sec- tion 6501(c)(10) by the AJCA. They explain how to determine whether section 6501(c)(10) applies and, if so, the appli- cable period of limitations on assessment. As a preliminary matter, the effective date of section 6501(c)(10) limits its applica- tion to taxable years with respect to which the period of limitations on assessment was open on or after October 22, 2004 (the date the AJCA was enacted). Thus, for taxable years for which a return was due prior to October 22, 2004, an analysis under section 6501 must be conducted to determine if the period of limitations on assessment was open under the general three-year period or an exception other than section 6501(c)(10). 1.Application of Section 6501(c)(10). The general rule for applying section 6501(c)(10) is set forth in §301.6501(c)–1(g)(1) of these proposed regulations. The first step in analyzing whether section 6501(c)(10) applies is to determine whether the taxpayer failed to comply with any disclosure obligation un- der the section 6011 disclosure rules with respect to a listed transaction (as defined in section 6707A(c)(2)) for any taxable year. The IRS and Treasury Department have issued several regulations under sec- tion 6011, some of which apply only to certain types of taxpayers. The disclosure requirements also vary among the regula- tions. Therefore, particular attention must be paid to the effective dates of the various section 6011 disclosure rules in order to determine whether there was a disclosure obligation. If there was no obligation to disclose the listed transaction, or if the taxpayer complied with its disclosure obligations, then section 6501(c)(10) does not apply. If there was a disclosure obligation and a failure to disclose as required, then section 6501(c)(10) applies. Section 6501(c)(10) applies to all open years for which the taxpayer failed to disclose its participa- tion in the transaction as required under the section 6011 disclosure rules, even if the disclosures required under section 6011 were not due in, or with a return for, the year of participation but were due in a later year when the transaction was subsequently identified as a listed transaction. If section 6501(c)(10) applies because a taxpayer failed to disclose a listed transaction and the transaction is later removed from the category of listed transactions, section 6501(c)(10) will con- tinue to apply with respect to the tax years for which disclosure was required. If sec- tion 6501(c)(10) applies, then the period of limitations with respect to the listed transaction will remain open until at least the earlier of (1) one year after the date on which the taxpayer provides a dis- closure to satisfy section 6501(c)(10)(A) (as provided in §301.6501(c)–1(g)(5) de- scribed elsewhere in this preamble), or (2) one year after the date on which a material advisor provides the IRS with information concerning the taxpayer’s participation in the transaction sufficient to satisfy section 6501(c)(10)(B) (as pro- vided in §301.6501(c)–1(g)(6) described elsewhere in this preamble). If either paragraph (g)(5) or (g)(6) is satisfied, the period of limitations on assessment will end under the circumstances described in §301.6501(c)–1(g)(2) of these proposed regulations. Section 301.6501(c)–1(g)(2) of these proposed regulations also provides guid- ance on how section 6501(c)(10) interacts with the otherwise applicable period of limitations provided in the Internal Rev- enue Code. The proposed regulations confirm that section 6501(c)(10) does not operate to extend a limitations period that expired before the effective date of section 6501(c)(10) or before the date on which the failure to disclose occurs. In addition, a taxpayer or material advisor 2009–47 I.R.B.658November 23, 2009 cannot shorten any other applicable period of limitations on assessment by following the procedures to begin the one-year pe- riod provided under section 6501(c)(10), including, but not limited to, a limita- tions period that has been extended by agreement under section 6501(c)(4), or the limitations period described in section 6501(c)(1) relating to a false or fraudulent return. The terms “listed transaction,” “mate- rial advisor,” and “taxable year(s) to which the failure to disclose relates” are defined in §301.6501(c)–1(g)(3) of these proposed regulations by cross-reference to section 6707A and the relevant regulations under sections 6011 and 6111. Under section 6501(c)(10), the term “listed transaction” is defined by reference to section 6707A(c)(2), which defines a listed transaction as “a reportable transac- tion that is the same as, or substantially similar to, a transaction specifically iden- tified by the Secretary as a tax avoidance transaction for purposes of section 6011.” Although section 6707A was enacted by section 811 of the AJCA and is effec- tive for returns and statements due after October 22, 2004, and which were not filed before that date, its definition of “listed transactions” incorporates trans- actions identified as listed transactions in the section 6011 disclosure rules before section 6707A was enacted. Accordingly, any transactions that were listed transac- tions as of October 22, 2004, under the section 6011 disclosure rules are listed transactions under section 6707A and, thus, for purposes of section 6501(c)(10). Therefore, section 6501(c)(10) applies to transactions that were identified as listed transactions prior to October 22, 2004. The term “taxable year(s) to which the failure to disclose relates” identifies the years to which section 6501(c)(10) applies. Clarification is necessary because a tax- payer may participate in a listed transac- tion over multiple years, because a trans- action may be identified as a listed transac- tion after the taxpayer enters into the trans- action, and because the section 6011 dis- closure rules may require disclosure in a year in which the taxpayer did not partic- ipate in the listed transaction. The term “taxable year(s) to which the failure to dis- close relates” means each taxable year that the taxpayer participated (as defined by the regulations under section 6011) in a trans- action that was identified as a listed trans- action and for which there was no proper disclosure when required under the section 6011 disclosure rules. For these purposes, it does not matter whether the transaction was identified as a listed transaction be- fore or after the taxpayer filed a tax return for any taxable year in which the taxpayer participated in the transaction. On occa- sion, the section 6011 disclosure rule may require that a disclosure be filed in a tax- able year or with a tax return for a taxable year other than the taxable year in which the taxpayer participated in the listed trans- action. In those circumstances, the taxable year(s) to which the failure to disclose re- lates is not the taxable year in which the disclosure is required to be filed, but each taxable year that the taxpayer participated in the listed transaction. Section 301.6501(c)–1(g)(4) of these proposed regulations provides the rule for application of section 6501(c)(10) in the case of taxpayers who are partners in partnerships, shareholders in S cor- porations, or beneficiaries of trusts. If these taxpayers were required to disclose their participation in a listed transaction under the section 6011 disclosure rules, and failed to disclose, then the period of limitations on assessment with respect to each partner, shareholder, or beneficiary that failed to disclose will remain open under section 6501(c)(10) even if the part- nership, S corporation, or trust disclosed in accordance with the section 6011 dis- closure rules and even if another partner, shareholder, or beneficiary disclosed in accordance with the section 6011 disclo- sure rules. This rule is as adopted because the period of limitations on assessment is specific to each taxpayer. Consistent with the above rule, a failure to disclose by an entity will not cause section 6501(c)(10) to apply to all of the taxpayers who are partners, shareholders or beneficiaries of the entity. 2.One-Year Period Under Section 6501(c)(10). Guidance on the events that will start the one-year period under sec- tion 6501(c)(10) is provided in §301.6501(c)–1(g)(5) and (6) of these pro- posed regulations. a.Disclosures by taxpayers of required information. Under section 6501(c)(10)(A), if there is a failure to disclose information re- lated to a listed transaction as required under the section 6011 disclosure rules, the time to assess tax will end no earlier than one year after the date “the Secretary is furnished the information so required.” Section 301.6501(c)–1(g)(5)(i)(A)-(C) of these proposed regulations sets forth the general procedures for how to fur- nish the information to the IRS. These procedures are similar to the ones re- quired under the section 6011 disclosure rules because failure to comply with those rules triggers the application of section 6501(c)(10). Because the rules set forth in §301.6501(c)–1(g)(5)(i) generally concern annual returns, §301.6501(c)–1(g)(5)(ii) provides that the IRS may issue pub- lished guidance that prescribes alternative procedures to address particular listed transactions, if necessary, in the case of returns other than annual returns. Section 301.6501(c)–1(g)(5)(i)(A) of these proposed regulations provides that to begin the one-year period under section 6501(c)(10)(A) taxpayers must complete Form 8886 (or successor form) in accor- dance with the instructions to the form and these proposed regulations and submit the completed form with a cover letter (as described in §301.6501(c)–1(g)(5)(i)(B)) to OTSA. Under the procedures set forth in Revenue Procedure 2005–26, taxpayers were required to submit the completed form and cover letter both to OTSA and the Internal RevenueService Center where the taxpayer filed its original return in all cases and, if applicable, to an IRS exam- iner or Appeals officer. These proposed regulations simplify the procedures tax- payers need to follow by only requiring them to submit the information to one IRS office instead of two, unless the taxpayer also needs to submit a copy to an IRS examiner or Appeals officer, as discussed later in this Preamble. Taxpayers must complete the most cur- rent version of the form available at the time the taxpayer attempts to satisfy sec- tion 6501(c)(10). In other words, if the Form 8886 (or successor form) changes between the date that the taxpayer was re- quired to disclose the listed transaction un- der the section 6011 disclosure rules and November 23, 20096592009–47 I.R.B. the date that the taxpayer discloses the listed transaction for purposes of section 6501(c)(10), then the taxpayer must follow the rules in effect on the date of the section 6501(c)(10) disclosure. The taxpayer also must indicate on the form that the disclosure is for purposes of section 6501(c)(10) and the tax return(s) and taxable year(s) for which the taxpayer is making a section 6501(c)(10) disclo- sure. The section 6501(c)(10) disclosure will only be effective for the tax return(s) and taxable year(s) that the taxpayer spec- ifies he or she is attempting to disclose for purposes of section 6501(c)(10). Thus, for example, if a taxpayer failed to dis- close the taxpayer’s participation in a listed transaction in three taxable years but the taxpayer’s section 6501(c)(10) disclosure only specifies one taxable year, then the period of limitations on assessment for the other two taxable years will remain open under section 6501(c)(10). If the Form 8886 (or successor form) contains a line for that purpose, then taxpayers may use that line, so long as the line is completed in accordance with the instructions to the form. If no line is provided on the form, then the taxpayer must include on the top of Page 1 of the Form 8886, and each copy of the form, the following statement: “Sec- tion 6501(c)(10) Disclosure”followedby the tax return(s) and taxable year(s) for which the taxpayer is making a section 6501(c)(10) disclosure. This information is necessary to place the IRS on notice that the taxpayer is attempting to remedy its failure to properly disclose the listed trans- action and, thus, the one-year period will start to run with respect to the tax years identified. Because the IRS may have as little as one year to determine whether to conduct an examination and, if it does con- duct an examination, to determine whether any additional tax is due with respect to the listed transaction, it is important that the IRS receives proper notice that the one-year period has started. Taxpayers must submit a separate Form 8886 (or successor form) and cover let- ter (discussed elsewhere in this Preamble) for each listed transaction that the taxpayer did not properly disclose under the sec- tion 6011 disclosure rules. If the taxpayer participated in one listed transaction over multiple years, then the taxpayer may sub- mit one Form 8886 (or successor form), so long as the taxpayer indicates on the Form 8886 all of the tax returns and tax- able years for which the taxpayer is mak- ing a section 6501(c)(10) disclosure. If a taxpayer participated in more than one listed transaction, then the taxpayer must submit separate Forms 8886 (or successor form) for each listed transaction, unless the listed transactions are the same or substan- tially similar, in which case all the listed transactions may be reported on one Form 8886. Section 301.6501(c)–1(g)(5)(i)(B) of these proposed regulations provides the requirements for the cover letter. The cover letter must identify the tax return(s) and taxable year(s) for which the tax- payer is making a section 6501(c)(10) disclosure. In addition, the cover letter must include the statement provided in §301.6501(c)–1(g)(5)(i)(B) signed under penalties of perjury by the taxpayer and, if applicable, by the paidpreparer preparing the Form 8886. The cover letter is nec- essary because the Form 8886 does not currently contain a penalties-of-perjury statement or place for signature. A special rule for taxpayers un- der examination or Appeals consid- eration by the IRS is provided in §301.6501(c)–1(g)(5)(i)(C) of these pro- posed regulations. If the taxpayer wants to make a section 6501(c)(10) disclosure for a taxable year or a listed transaction under examination or Appeals consider- ation, then, in addition to the otherwise applicable filing obligations set forth in §301.6501(c)–1(g)(5)(i)(A), the taxpayer must submit a copy of the submission made under paragraph (g)(5)(i)(A) to the IRS examiner or Appeals officer exam- ining or considering the taxable year to which the section 6501(c)(10) disclosure relates. This rule is adopted to ensure that the IRS personnel who are consider- ing the taxpayer’s tax year(s) at issue are made aware as soon as possible that the one-year period under section 6501(c)(10) may have started to run, so that whatever action is necessary can be taken within the one-year period. Section301.6501(c)–1(g)(5)(i)(D) provides guidance concerning the date on which the taxpayer is considered to have furnished the information to the IRS to satisfy section 6501(c)(10)(A) and start the running of the one-year pe- riod. The one-year period under section 6501(c)(10)(A) will begin on the date that the taxpayer satisfies all the requirements set forth in §301.6501(c)–1(g)(5)(i)(A) through (C). If the required procedures are not completed on the same date, the one-year period will begin on the date that the last procedure is satisfied. For example, if a taxpayer mails a completed Form 8886 to OTSA but not to the IRS examiner or Appeals officer who is exam- ining or considering the taxable year to which the section 6501(c)(10) disclosure relates, the one-year period under section 6501(c)(10)(A) will not begin until both events occur. Informationprovidedunder §301.6501(c)–1(g)(5) is deemed furnished on the date the IRS receives the infor- mation. Section 7502 does not apply to the mailing of the information detailed in §301.6501(c)–1(g)(5), because the infor- mation is not required to be filed within aprescribedperiodoronorbeforea prescribed date. Taxpayers can determine the date the IRS receives the information by using a delivery service that provides a way to track delivery, such as U.S. registered or certified mail, express or pri- ority mail, or delivery confirmation from the U.S. post office or a private delivery service that provides tracking. Moreover, documentation from the post office or private delivery service showing the date the information was delivered to the IRS, together with evidence that the envelope was properly addressed to the office to whichtheinformationwasrequiredtobe sent, generally will be sufficient proof that the IRS received the information, unless the IRS can establish that it did not in fact receive the information. Separate delivery confirmation documentation should be obtained to establish receipt by OTSA and the appropriate IRS revenue agent or Appeals officer, if applicable. b.Disclosures by material advisors. Under section 6501(c)(10)(B), if a tax- payer fails to disclose information related to a listed transaction as required under the section 6011 disclosure rules, the time to assess tax will end no earlier than one year after the date “a material advisor meets the requirements of section 6112 with respect to a request by the Secretary under sec- tion 6112(b) relating to such transaction with respect to such taxpayer.” Section 6112 requires material advisors to main- 2009–47 I.R.B.660November 23, 2009 tain lists of advisees and other information with respect to reportable transactions, in- cluding listed transactions, and to furnish that information to the IRS upon request. The term “material advisor” is defined in §301.6111–3(b). The IRS and Treasury Department finalized regulations under section 6112 in T.D. 9352, 2007–2 C.B. 621, (72 FR 43154) published on August 3, 2007. Section 6112 and §301.6112–1 provide guidance relating to the prepara- tion, content, maintenance, retention, and furnishing of lists by material advisors. Section 6501(c)(10)(B) provides that a material advisor must satisfy the re- quirements of section 6112 to begin the one-year period. Information provided in response to another method of inquiry, such as an Information Document Request in a section 6700 investigation, will not begin the one-year period. In addition, §301.6501(c)–1(g)(6)(i) provides that the material advisor must furnish the infor- mation described in §301.6112–1(e) with respect to the taxpayer that failed to prop- erly disclose the listed transaction. Thus, if the material advisor furnishes the in- formation describedin §301.6112–1(e) for some, or even most, of its clients but not for a particular taxpayer that failed to properly disclose the listed transac- tion, then the assessment period for that taxpayer will remain open under section 6501(c)(10). Section 301.6501(c)–1(g)(6)(ii) of these proposed regulations clarifies that the one-year period will begin once the material advisor furnishes the information in response to an IRS request under section 6112, regardless of whether the material advisor provides the information within 20 business days of the IRS’s request as required by section 6708. If the material advisor furnishes the required informa- tion over the course of multiple days, the requirements of paragraph (g)(6) of this section will be deemed satisfied and the one-year period will begin on the date that the IRS is furnished the information that, together with prior information, sat- isfies the requirements of section 6112 and §301.6112–1 with respect to the taxpayer. The information is deemed furnished for purposes of section 6501(c)(10) on the date the material advisor is treated as sat- isfying the requirements of section 6112 under the rules applicable to that section. 3.Taxes that can be Assessed under Section 6501(c)(10). Section 6501(c)(10) allows the IRS to assess any tax with respect to a listed transaction for the taxable year(s) to which the failure to disclose relates. Section 301.6501(c)–1(g)(7) of these proposed regulations provides that taxes with re- spect to the listed transaction include, but are not limited to, (1) adjustments made to the tax consequences claimed on the return, (2) adjustments to any item to the extent the item is affected by the listed transaction even if it is unrelated to the listed transaction, and (3) interest and penalties that are related to the listed transaction or the adjustments made to the tax consequences (see I.R.C. §§6601(e)(1) and 6665(a)(2)). An example of an item affected by the listed transaction but not related to the listed transaction is the threshold for the medical expense deduc- tion under section 213 that varies if there is a change in an individual’s adjusted gross income. Examples of a penalty related to the adjustments made to the tax conse- quences are the accuracy-related penalties under sections 6662 and 6662A. An ex- ample of a penalty related to the listed transaction is the penalty under section 6707A for failure to file the disclosure statement reporting the taxpayer’s partici- pation in the listed transaction. 4.Examples. Section 301.6501(c)–1(g)(8) of these proposed regulations contains examples of the application of section 6501(c)(10) to various types of taxpayers participating in listed transactions. Additional examples illustrate the application of the one-year period under section 6501(c)(10), the co- ordination of section 6501(c)(10) with other limitations periods provided by the Internal Revenue Code, and tax that can be assessed with respect to a listed trans- action. Proposed Effective/Applicability Date When adopted as final regulations, these rules will apply to taxable years with respect to which the period of limitations on assessment did not expire before the date of publication of a Treasury decision adopting these rules as final regulations in theFederal Register. However, taxpayers may rely on these proposed regulations for taxable years with respect to which the pe- riod of limitations on assessment expired before the publication of the Treasury de- cision. Otherwise, Rev. Proc. 2005–26 continues to apply for taxable years to which these regulations do not apply and for which the period of limitations on as- sessment did not expire before April 8, 2005 — the effective date of Rev. Proc. 2005–26. Effect on Other Documents Upon the publication of final regu- lations under section 6501(c)(10) in the Federal Register, Rev. Proc. 2005–26, 2005–1 C.B. 965, will be superseded for taxable years with respect to which the period of limitations on assessment did not expire before the date of publication of a Treasury decision adopting these rules as final regulations in theFederal Register. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory as- sessment is not required. It also has been determined that section 553(b) of the Ad- ministrative Procedure Act (5 U.S.C. chap- ter 5) does not apply to these regulations. It is hereby certified that these regula- tions will not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flex- ibility Act (5 U.S.C. chapter 6). Section 6501(c)(10) applies when taxpayers fail to comply with the reporting requirements set forth in section 6011. The Treasury De- partment and the IRS do not know the ex- act number and types of taxpayers that fail to comply with those requirements. How- ever, although the Treasury Department and the IRS are aware that many tax avoid- ance transactions involve pass-through en- tities, when pass-through entities are uti- lized, the entities are not ultimately liable for the tax; rather, the taxpayers subject to section 6501(c)(10) will be the individuals and corporations owning, directly or indi- rectly, the interests in the pass-though en- tities. Therefore, the Treasury Department and the IRS have determined that these November 23, 20096612009–47 I.R.B. proposed regulations will not affect a sub- stantial number ofsmall entities. In addition, the Treasury Department and the IRS have determined that any impact on small entities resulting from these proposed regulations will not be significant. Most of the information re- quired under these proposed regulations is already required by other regulations or forms, namely §1.6011–4, §301.6112–1, and Form 8886, “Reportable Transaction Disclosure Statement.” The only new in- formationrequiredtobesubmittedtothe IRS is a cover letter, which must contain a reference to the tax returns and taxable year(s) at issue and a statement signed under penalty of perjury. The cover letter should take minimal time and expense to prepare. Therefore, the additional re- quirement of the cover letter should not significantly increase the burden on tax- payers. Based on these facts, the Treasury Department and the IRS have determined that these proposed regulations will not have a significant economic impact on a substantial number of small entities. Pur- suant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be 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) 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 written comments. If a public 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 Audra M. Dineen of the Office of the Associate ChiefCounsel (Procedure and Administration). ***** Proposed Amen dments 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 in part as fol- lows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.6501(c)–1 is amended by adding paragraph (g) to read as follows: §301.6501(c)–1 Exceptions to general period of limitations on assessment and collection. ***** (g)Listed transactions—(1)In general. If a taxpayer is required to disclose a listed transaction under section 6011 and the reg- ulations under section 6011 and does not do so in the time and manner required, then the time to assess any tax attributable to that listed transaction for the taxable year(s) to which the failure to disclose re- lates (as defined in paragraph (g)(3)(iii) of this section) will not expire before the ear- lier of one year after the date on which the taxpayer makes the disclosure described in paragraph (g)(5) of this section or one year after the date on which a material advisor makes a disclosure described in paragraph (g)(6) of this section. (2)Limitations period if paragraph (g)(5) or (g)(6) is satisfied.If one of the disclosure provisions described in para- graphs (g)(5) or (g)(6) of this section is satisfied, then the tax attributable to the listed transaction may be assessed at any time before the expiration of the limita- tions period that would have otherwise applied under this section (determined without regard to paragraph (g)(1) of this section) or the period ending one year after the date that one of the disclosure provisions described in paragraphs (g)(5) or (g)(6) of this section was satisfied, whichever is later. If both disclosure pro- visions are satisfied, the one-year period will begin on the earlier of the dates on which the provisions were satisfied. Para- graph (g)(1) of this section does not apply to any period of limitations on assessment that expired before the date on which the failure to disclose the listed transaction under section 6011 occurred. (3)Definitions—(i)Listed transaction. The termlisted transactionmeans a trans- action described in section 6707A(c)(2) of the Code and §1.6011–4(b)(2) of this chap- ter. (ii)Material advisor.Thetermma- terial advisormeans a person described in section 6111(b)(1) of the Code and §301.6111–3(b) of this chapter. (iii)Taxable year(s) to which the fail- ure to disclose relates.Thetaxable year(s) to which the failure to disclose relatesare each taxable year that the taxpayer par- ticipated (as defined under section 6011 and the regulations under section 6011) in a transaction that was identified as a listed transaction and the taxpayer failed to disclose the listed transaction as required under section 6011. If the taxable year in which the taxpayer participated in the listed transaction is different from the tax- able year in which the taxpayer is required to disclose the listed transaction under sec- tion 6011, the taxable year(s) to which the failure to disclose relates are each taxable year that the taxpayer participated in the transaction. (4)Application of paragraph with re- spect to pass-through entities. In the case of taxpayers who are partners in partner- ships, shareholdersin S corporations, or beneficiaries of trusts and are required to disclose a listed transaction under section 6011 and the regulations under section 6011, paragraph (g)(1) of this section will apply to a particular partner, shareholder, or beneficiary if that particular taxpayer does not disclose within the time and in the form and manner provided by section 6011 and §1.6011–4(d) and (e), regardless of whether the partnership, S corporation, or trust or another partner, shareholder, or beneficiary discloses in accordance with section 6011 and the regulations under section 6011. Similarly, because para- graph (g)(1) of this section applies on a taxpayer-by-taxpayer basis, the failure of a partnership, S corporation, or trust that has a disclosure obligation under sec- tion 6011 and does not disclose within the time or in the form and manner pro- vided by §1.6011–4(d) and (e) will not 2009–47 I.R.B.662November 23, 2009 cause paragraph (g)(1) of this section to apply automatically to all the partners, shareholders or beneficiaries of the en- tity. Instead, the application of paragraph (g)(1) of this section will be determined based on whether the particular taxpayer satisfied their disclosure obligation under section 6011 and the regulations under section 6011. (5)Taxpayer’s disclosure of a listed transaction that taxpayer did not prop- erly disclose under section 6011—(i)In general—(A)Method of disclosure.The taxpayer must complete the most cur- rent version of Form 8886, “Reportable Transaction Disclosure Statement”(or successor form), available on the date the taxpayer attempts to satisfy this paragraph in accordance with §1.6011–4(d) (in effect on that date) and the instructions to that form. The taxpayer must indicate on the Form 8886 that the form is being submit- ted for purposes of section 6501(c)(10) and the tax return(s)and taxable year(s) for which the taxpayer is making a sec- tion 6501(c)(10) disclosure. The section 6501(c)(10) disclosure will only be ef- fective for the tax return(s) and taxable year(s) that the taxpayer specifies he or she is attempting to disclose for purposes of section 6501(c)(10). If the Form 8886 contains a line for this purpose then the taxpayer must complete the line in accor- dance with the instructions to that form. Otherwise, the taxpayer must include on the top of Page 1 of the Form 8886, and each copy of the form, the following state- ment: “Section 6501(c)(10) Disclosure” followed by the tax return(s) and taxable year(s) for which the taxpayer is making a section 6501(c)(10) disclosure. For ex- ample, if the taxpayer did not properly disclose its participation in a listed trans- action the tax consequences of which were reflected on the taxpayer’s Form 1040 for the 2005 taxable year, the taxpayer must include the following statement: “Section 6501(c)(10) Disclosure; 2005 Form 1040” on the form. The taxpayer must submit the properly completed Form 8886 and a cover letter, which must be completed in accordance with the requirements set forth in paragraph (g)(5)(i)(B) of this sec- tion, to the Office of Tax Shelter Analysis (OTSA). The taxpayer is permitted, but not required, to file an amended return with the Form 8886 and cover letter. Sepa- rate Forms 8886 and separate cover letters must be submitted for each listed transac- tion the taxpayer did not properly disclose under section 6011. If the taxpayer partic- ipated in one listed transaction over mul- tiple years, the taxpayer may submit one Form 8886 (or successor form) and cover letter and indicate on that form all of the tax returns and taxable years for which the taxpayer is making a section 6501(c)(10) disclosure. If a taxpayer participated in more than one listed transaction, then the taxpayer must submit separate Forms 8886 (or successor form) for each listed transaction, unless the listed transactions are the same or substantially similar, in which case all the listed transactions may be reported on one Form 8886. (B)Cover letter. A cover letter to which a Form 8886 is to be attached must iden- tify the tax return(s) and taxable year(s) for which the taxpayer is making a section 6501(c)(10) disclosure and include the fol- lowing statement signed under penalties of perjury by the taxpayer and if the Form 8886 is prepared by a paid preparer, the Form 8886 must be signed under penalties of perjury by the paid preparer as well: Under penalties of perjury, I declare that I have examined this reportable transaction disclosure statement and, to the best of my knowledge and belief, this reportable transaction disclosure statement is true, correct, and complete. Declaration of preparer (other than tax- payer)isbasedonallinformationof which the preparer has any knowledge. (C)Taxpayer under examination or Ap- peals consideration. A taxpayer making a disclosure under paragraph (g)(5) of this section with respect to a taxable year un- der examination or Appeals consideration by the IRS must satisfy the requirements of paragraphs (g)(5)(i)(A) and (B) of this section and also submit a copy of the sub- mission to the IRS examiner or Appeals of- ficer examining or considering the taxable year(s) to which the disclosure under para- graph (g) of this section relates. (D)Date the one-year period will begin to run if paragraph (g)(5) satisfied.Un- less an earlier expiration is provided for in paragraph (g)(6) of this section, the time to assess tax under paragraph (g) of this section will not expire before one year af- ter the date on which the Secretary is fur- nished the information from the taxpayer that satisfies all the requirements of para- graphs (g)(5)(i)(A) and (B) of this section and, if applicable, paragraph (g)(5)(i)(C) of this section. If the taxpayer does not satisfy all of the requirements on the same date, the one-year period will begin on the date that the IRS is furnished the informa- tion that, together with prior disclosures of information, satisfies the requirements of paragraph (g)(5) of this section. For pur- poses of paragraph (g)(5) of this section, the information is deemed furnished on the date the IRS receives the information. (ii)Exception for returns other than an- nual returns. The IRS may prescribe al- ternative procedures to satisfy the require- ments of this paragraph (g)(5) in a revenue procedure, notice, or other guidance pub- lished in the Internal Revenue Bulletin for circumstances involving returns other than annual returns. (6)Material advisor’s disclosure of a listed transaction not properly disclosed by a taxpayer under section 6011—(i) Method of disclosure. Inresponsetoa written request of the IRS under section 6112, a material advisor with respect to a listed transaction must furnish to the IRS the information described in section 6112 and §301.6112–1(b) in the form and mannerprescribedbysection6112and §301.6112–1(e). If the information the material advisor furnishes identifies the taxpayer as a person who engaged in the listed transaction, regardless of whether the material advisor provides the informa- tion before or after the taxpayer’s failure to disclose the listed transaction under section 6011, then the requirements of this paragraph (g)(6) will be satisfied for that taxpayer. The requirements of this para- graph (g)(6) will be considered satisfied even if the material advisor furnishes the information required under section 6112 to the IRS after the date prescribed in sec- tion 6708 or published guidance relating to section 6708. (ii)Date the one-year period will begin if paragraph (g)(6) is satisfied.Unlessan earlier expiration is provided for in para- graph (g)(5) of this section, the time to as- sess tax under paragraph (g) of this section will expire one year after the date on which the material advisor satisfies the require- mentsofparagraph(g)(6)(i)ofthissection with respect to the taxpayer. For purposes of paragraph (g)(6) of this section, infor- mation is deemed to be furnished on the date that, in response to a request under section 6112, the IRS receives the informa- November 23, 20096632009–47 I.R.B. tion from a material advisor that satisfies the requirements of paragraph (g)(6)(i) of this section with respect to the taxpayer. (7)Tax assessable under this section. If the period of limitations on assessment for a taxable year remains open under this section, the Secretary has authority to as- sess any tax with respect to the listed trans- action in that year. This includes, but is not limited to, adjustments made to the tax consequences claimed on the return plus interest, additions to tax, additional amounts, and penalties that are related to the listed transaction or adjustments made to the tax consequences. This also includes any item to the extent the item is affected by the listed transaction even if it is un- related to the listed transaction. An ex- ample of an item affected by, but unre- lated to, a listed transaction is the thresh- old for the medical expense deduction un- der section 213 that varies if there is a change in an individual’s adjusted gross in- come. An example of a penalty related to the listed transaction is the penalty under section 6707A for failure to file the dis- closure statement reporting the taxpayer’s participation in the listed transaction. Ex- amples of penalties related to the adjust- ments made to the tax consequences are the accuracy-related penalties under sec- tions 6662 and 6662A. (8)Examples. The rules of paragraph (g) of this section are illustrated by the following examples: Example 1.No requirement to disclose under section 6011. P, an individual, is a partner in a partnership that entered into a transaction in 2001 that was the same as or substantially similar to the transaction identified as a listed transaction in Notice 2000–44, 2000–2 C.B. 255. P claimed a loss from the transaction on his Form 1040 for the tax year 2001. P filed the Form 1040 prior to June 14, 2002. P did not disclose his participation in the listed transaction because P was not required to disclose the transaction under the applicable section 6011 regulations (T.D. 8961, 2001–2 C.B. 194). Although the transaction was a listed transaction and P did not disclose the transaction, P had no obligation to include on any return or statement any information with respect to a listed transaction within the meaning of sec- tion 6501(c)(10) because T.D. 8961 only applied to corporations, not individuals. Accordingly, section 6501(c)(10) does not apply. Example 2.Taxable year to which the failure to disclose relates when transaction is identified as a listed transaction after taxpayer files a tax return for that year. (i) In January 2009, A, a calendar year tax- payer, enters into a transaction that at the time is not a listed transaction. A reports the tax consequences from the transaction on its individual income tax re- turn for 2009 timely filed on April 15, 2010. The time for the IRS to assess tax against A under the general three-year period of limitations for A’s 2009 taxable year would expire on April 15, 2013. A only partici- pated in the transaction in 2009. On March 1, 2012, the IRS identifies the transaction as a listed transac- tion. A does not file the Form 8886 with OTSA by May 30, 2012. (ii) The period of limitations on assessment for A’s 2009 taxable year was open on the date the trans- action was identified as a listed transaction. Under the applicable section 6011 regulations (T.D. 9350, 2007–2 C.B. 607), A must disclose its participation in the transaction by filing a completed Form 8886 with OTSA on or before May 30, 2012, which is 90 days after the date the transaction became a listed transac- tion. A did not disclose the transaction as required. A’s failure to disclose relates to taxable year 2009 even though the obligation to disclose did not arise until 2012. Section 6501(c)(10) operates to keep the period of limitations on assessment open for the 2009 taxable year with respect to the listed transaction until at least one year after the date A satisfies the require- ments of paragraph (g)(5) of this section or a material advisor satisfies the requirements of paragraph (g)(6) of this section with respect to A. Example 3.Requirements of paragraph (g)(6) satisfied. Same facts asExample 2, except that on April 5, 2013, the IRS hand delivers to Advisor J, whoisamaterialadvisor,asection6112requestre- lated to the listed transaction. Advisor J furnishes the required list with all the information required by sec- tion 6112 and §301.6112–1, including all the infor- mation required with respect to A, to the IRS on May 13, 2013. The submission satisfies the requirements of paragraph (g)(6) even though Advisor J furnishes the information outside of the 20-business-day period provided in section 6708. Accordingly, under section 6501(c)(10), the period of limitations with respect to A’s taxable year 2009 will end on May 13, 2014, one year after the IRS received the required information, unless the period of limitations remains open under another exception. Any tax for the 2009 taxable year not attributable to the listed transaction must be as- sessedbyApril15,2013. Example 4.Requirements of paragraph (g)(5) also satisfied. Same facts asExamples 2 and 3,ex- cept that on May 23, 2013, A files a properly com- pleted Form 8886 and signed cover letter with OTSA both identifying that the section 6501(c)(10) disclo- sure relates to A’s Form 1040 for 2009. A satisfied the requirements of paragraph (g)(5) of this section as of May 23, 2013. Because the requirements of paragraph (g)(6) were satisfied first as described in Example 3, under section 6501(c)(10) the period of limitations will end on May 13, 2014 (one year after the requirements of paragraph (g)(6) were satisfied) instead of May 23, 2014 (one year after the require- ments of paragraph (g)(5) were satisfied). Any tax for the 2009 taxable year not attributable to the listed transaction must be assessed by April 15, 2013. Example 5.Period to assess tax remains open under another exception. Same facts asExamples 2, 3, and 4, except that on April 1, 2013, A signed Form 872, consenting to extend, without restriction, its period of limitations on assessment for taxable year 2009 under section 6501(c)(4) until July 15, 2014. In that case, although under section 6501(c)(10) the period of limitations would otherwise expire on May 13, 2014, the IRS may assess tax with respect to the listed transaction at any time up to and including July 15, 2014, pursuant to section 6501(c)(4). Section 6501(c)(10) can operate to extend the assessment period but cannot shortenany other applicable as- sessment period. Example 6 .Requirements of (g)(5) not satisfied. In 2009, X, a corporation, enters into a listed transac- tion. On March 15, 2010, X timely files its 2009 Form 1120, reporting the tax consequences from the trans- action. X does not disclose the transaction as required under section 6011 when it files its 2009 return. The failure to disclose relates to taxable year 2009. On February 12, 2014, X completes and files a Form 8886 with respect to the listed transaction with OTSA but does not submit a cover letter, as required. The requirements of paragraph (g)(5) of this section have not been satisfied. Therefore, the time to assess tax against X with respect to the transaction for taxable year 2009 remains open under section 6501(c)(10). Example 7.Taxable year to which the failure to disclose relates when transaction is identified as a listed transaction after first year of participation.(i) On December 30, 2003, Y, a corporation, enters into a transaction that at the timeis not a reportable trans- action. On March 15, 2004, Y timely files its 2003 Form 1120, reporting the tax consequences from the transaction. On April 1, 2004, the IRS issues No- tice 2004–31 that identifies the transaction as a listed transaction. Y also reports tax consequences from the transaction on its 2004 Form 1120, which it timely filed on March 15, 2005. Y did not attach a completed Form 8886 to its 2004 Form 1120 and did not send a copy of the form to OTSA. The general three-year period of limitations on assessment for Y’s 2003 and 2004 taxable years would expire on March 15, 2007, and March 17, 2008, respectively. (ii) The period of limitations on assessment for Y’s 2003 taxable year was open on the date the transaction was identified as a listed transac- tion. Under the applicable section 6011 regulations (T.D. 9108, 2004–1 C.B. 429), Y should have disclosed its participation in the transaction with its next filed return, which was its 2004 Form 1120, but Y did not disclose its participation. Y’s failure to disclose with the 2004 Form 1120 relates to taxable years 2003 and 2004. Section 6501(c)(10) operates to keep the period of limitations on assessment open for the 2003 and 2004 taxable years with respect to the listed transaction until at least one year after the date Y satisfies the requirements of paragraph (g)(5) of this section or a material advisor satisfies the requirements of paragraph (g)(6) of this section with respect to Y. Example 8.Section 6501(c)(10) applies to keep one partner’s period of limitations on assessment open. T and S are partners in a partnership, TS, that enters into a listed transaction in 2010. T and S each receive a Schedule K–1 from TS on April 11, 2011. On April 15, 2011, TS, T and S each file their 2010 returns. Under the applicable section 6011 regula- tions, TS, T, and S each are required to disclose the transaction. TS attaches a completed Form 8886 to its 2010 Form 1065 and sends a copy of Form 8886 to OTSA. Neither T nor S files a disclosure statement with their respective returns nor sends a copy to OTSA on April 15, 2011. On May 17, 2011, T timely files a completed Form 8886 with OTSA pursuant to §1.6011–4(e)(1). T’s disclosure is timely because T received the Schedule K–1 within 10 calendar days 2009–47 I.R.B.664November 23, 2009 before the due date of the return and, thus, T had 60 calendar days to file Form 8886 with OTSA. TS and T properly disclosed the transaction in accordance with the applicable regulations under section 6011, but S did not. S’s failure to disclose relates to taxable year 2010. The time to assess tax with respect to the transaction against S for 2010 remains open under section 6501(c)(10) even though TS and T disclosed the transaction. Example 9.Section 6501(c)(10) satisfied before expiration of three-year period of limitations under section 6501(a). Same facts asExample 8, except that on August 27, 2012, S satisfies the requirements of paragraph (g)(5) of this section. No material advi- sor satisfied the requirements of paragraph (g)(6) of this section with respect to S on a date earlier than August 27, 2012. Under section 6501(c)(10), the pe- riod of time in which the IRS may assess tax against S with respect to the listed transaction would expire no earlier than August 27, 2013, one year after the date S satisfied the requirements of paragraph (g)(5). As the general three-year period of limitations on as- sessment under section 6501(a) does not expire until April 15, 2014, the IRS will have until that date to as- sess any tax with respect to the listed transaction. Example 10.No section 6112 request.B,acal- endar year taxpayer, entered into a listed transaction in 2010. B did not comply with the applicable dis- closure requirements under section 6011 for taxable year 2010; therefore, section 6501(c)(10) applies to keep the period of limitations on assessment open with respect to the tax related to the transaction until at least one year after B satisfies the requirements of paragraph (g)(5) of this section or a material advisor satisfies the requirements of paragraph (g)(6) of this section with respect to B. In June 2011, the IRS con- ducts a section 6700 investigation of Advisor K, who is a material advisor to B with respect to the listed transaction. During the course of the investigation, the IRS obtains the name, address, and TIN of all of Advisor K’s clients who engaged in the transaction, including B. The information provided does not sat- isfy the requirements of paragraph (g)(6) with respect to B because the information was not provided pur- suanttoasection6112request. Therefore,thetime to assess tax against B with respect to the transac- tion for taxable year 2010 remains open under section 6501(c)(10). Example 11.Section 6112 request but the require- ments of paragraph (g)(6) are not satisfied with re- spect to B. Same facts asExample 10, except that on January 2, 2014, the IRS sends by certified mail a sec- tion 6112 request to Advisor L, who is another mate- rial advisor to B with respect to the listed transaction. Advisor L furnishes some of the information required under section 6112 and §301.6112–1 to the IRS for inspection on January 13, 2014. The list includes in- formation with respect to many clients of Advisor L, but it does not include any information with respect to B. The submission does not satisfy the requirements of paragraph (g)(6) of this section with respect to B. Therefore, the time to assess tax against B with re- spect to the transaction for taxable year 2010 remains open under section 6501(c)(10). Example 12.Section 6112 submission made be- fore taxpayer failed to disclose a listed transaction. Advisor M, who is a material advisor, advises C, an individual, in 2010 with respect to a transaction that is not a reportable transaction at that time. C files its return claiming the tax consequences of the transac- tion on April 15, 2011. The time for the IRS to assess tax against C under the general three-year period of limitations for C’s 2010 taxable year would expire on April 15, 2014. The IRS identifies the transaction as a listed transaction on November 1, 2013. On Decem- ber 5, 2013, the IRS hand delivers to Advisor M a sec- tion 6112 request related to the transaction. Advisor M furnishes the information to the IRS on December 30, 2013. The information contains all the required information with respect to Advisor M’s clients, in- cluding C. C does not disclose the transaction on or before January 30, 2014, as required under section 6011 and the regulations under section 6011. Advi- sor M’s submission under section 6112 satisfies the requirements of paragraph (g)(6) of this section even though it occurred prior to C’s failure to disclose the listed transaction. Thus, under section 6501(c)(10), the period of limitations to assess tax against C with respect to the listed transaction will end on Decem- ber 30, 2014 (one year after the requirements of para- graph (g)(6) of this section were satisfied), unless the period of limitations remains open under another ex- ception. Example 13.Transaction removed from the category of listed transactions after taxpayer failed to disclose. D, a calendar year taxpayer, entered into a listed transaction in 2011. D did not comply with the applicable disclosure requirements under section 6011 for taxable year 2011; therefore, section 6501(c)(10) applies to keep the period of limitations on assessment open with respect to the tax related to the transaction until at least one year after D satisfies the requirements of paragraph (g)(5) of this section or a material advisor satisfies the requirements of paragraph (g)(6) of this section with respect to D. In 2016, the IRS removes the transaction from the category of listed transactions because of a change in law. Section 6501(c)(10) continues to apply to keep the period of limitations on assessment open for D’s taxable year 2011. Example 14.Taxes assessed with respect to the listed transaction. (i) F, an individual, enters into a listed transaction in 2009. F files its 2009 Form 1040 on April 15, 2010, but does not disclose his participa- tion in the listed transaction in accordance with sec- tion 6011 and the regulations under section 6011. F’s failure to disclose relates to taxable year 2009. Thus, section 6501(c)(10) applies to keep the period of lim- itations on assessment open with respect to the tax related to the listed transaction for taxable year 2009 until at least one year after the date F satisfies the re- quirements of paragraph (g)(5) of this section or a ma- terial advisor satisfies the requirements of paragraph (g)(6) of this section with respect to F. (ii) On July 1, 2014, the IRS completes an exam- ination of F’s 2009 taxable year and disallows the tax consequences claimed as a result of the listed trans- action. The disallowance of a loss increased F’s ad- justed gross income. Due to the increase of F’s ad- justed gross income, certain credits, such as the child tax credit, and exemption deductions were disallowed or reduced because of limitations based on adjusted gross income. In addition, F now is liable for the al- ternative minimum tax. The examination also uncov- ered that F claimed two deductions on Schedule C to which F was not entitled. Under section 6501(c)(10), the IRS can timely issue a statutory notice of defi- ciency (and assess in due course) against F for the deficiency resulting from (1) disallowing the loss, (2) disallowing the credits and exemptions to which F was not entitled based on F’s increased adjusted gross income, and (3) being liable for the alternative min- imum tax. In addition, the IRS can assess any in- terest and applicable penalties related to those ad- justments, such as the accuracy-related penalty under sections 6662 and 6662A and the penalty under sec- tion 6707A for F’s failure to disclose the transaction as required under section 6011 and the regulations un- der section 6011. The IRS cannot, however, pursuant to section 6501(c)(10), assess the increase in tax that would result from disallowing the two deductions on F’s Schedule C because those deductions are not re- lated to, or affected by, the adjustments concerning the listed transaction. (9)Effective/applicability date.The rules of this paragraph (g) apply to taxable years with respect to which the period of limitations on assessment did not ex- pire before the date of publication of the Treasury decision adopting these rules as final regulations in theFederal Register. However, taxpayers may rely on the rules of this paragraph (g) for taxable years with respect to which the period of limitations on assessment expired before the date of publication of the Treasury decision. If an individual does not choose to rely on the rules of this paragraph (g), Rev. Proc. 2005–26, 2005–1 C.B. 965, will continue to apply to taxable years with respect to which the period of limitations on assess- ment expired on or after April 8, 2005, and before the date of publication of the Treasury decision adopting these rules as final regulations in theFederal Register. LindaE.Stiff, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on October 6, 2009, 8:45 a.m., and published in the issue of the Federal Register for October 7, 2009, 74 F.R. 55127) Notice of Proposed Rulemaking Payout Requirements for Type III Supporting Organizations That Are Not Functionally Integrated REG–155929–06 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. November 23, 20096652009–47 I.R.B. SUMMARY: This document contains pro- posed regulations regarding the require- ments to qualify as a Type III support- ingorganizationthatisoperatedincon- nection with one or more supported orga- nizations. The regulations reflect changes to the law made by the Pension Protection Act of 2006. The regulations will affect Type III supporting organizations and their supported organizations. DATES: Written or electronic comments and requests for a public hearing must be received by December 23, 2009. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–155929–06), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washing- ton, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–155929–06), 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–155929–06). FOR FURTHER INFORMATION CONTACT: Concerning the pro- posed regulations, Philip T. Hackney or Don R. Spellmann at (202) 622–1124; concerning submissions of comments and requests for a public hearing, Richard A. Hurst at (202) 622–7180 (not toll-free numbers) or Richard.A.Hurst@irscounsel.treas.gov. SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Manage- ment and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Bud- get, Attn: Desk Officer for the Depart- ment of the Treasury, Office of Informa- tion and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Rev- enue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washing- ton, DC 20224. Comments on the col- lection of information should be received by November 23, 2009. Comments are specifically requested concerning: Whether the proposed collection of in- formation is necessary for the proper per- formance of the functions of the Internal Revenue Service, including whether the information will have practical utility; The accuracy of the estimated burden associated with the proposed collection of information; How the quality, utility, and clarity of the information to be collected may be en- hanced; How the burden of complying with the proposed collection of information may be minimized, including through forms of in- formation technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide informa- tion. The collection of information in this proposed regulation is in Prop. Reg. §1.509(a)–4(i)(2). The collection of infor- mation flows from section 509(f)(1)(A), which requires a Type III supporting organization to provide to each of its sup- ported organizations such information as the Secretary may require to ensure that the Type III supporting organization is responsive to the needs or demands of its supported organization(s). The likely recordkeepers are Type III supporting or- ganizations. Estimated total annual reporting bur- den: 8,400 hours. Estimated average annual burden hours per recordkeeper: Two hours. Estimated number of recordkeepers: 4,200. Estimated frequency of collection of such information: Annual. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Of- fice of Management and Budget. Books or records relating to a collection of informa- tion must be retained as long as their con- tents may become material in the adminis- tration of any internal revenue law. Gen- erally, tax returns and return information are confidential, as required by 26 U.S.C. 6103. Background An organization described in section 501(c)(3) of the Internal Revenue Code (Code) is classified as either a private foundation or a public charity. To be clas- sified as a public charity, an organization must meet the requirements of section 509(a)(1), (2), (3), or (4). Organizations described in section 509(a)(3) are known as supporting organizations. Such organi- zations achieve their status by providing support to one or more organizations de- scribedinsection509(a)(1)or(2),which in this context are referred to as supported organizations. To meet the requirements of section 509(a)(3), an organization must satisfy an organizational test, an operational test, a relationship test, and a disqualified per- son control test. The organizational and operational tests require that the support- ing organization be organized and at all times thereafter operated exclusively for the benefit of, to perform the functions of, or to conduct the purposes of one or more supported organizations. The relationship test requires the supporting organization to establish one of three types of relationships with one or more supported organizations. Finally, the disqualified person control test requires that the supporting organization not be controlled directly or indirectly by certain disqualified persons. Although each of these tests is a necessary require- ment for an organization to establish that it qualifies as a supporting organization, this notice of proposed rulemaking (NPRM) focuses primarily on the relationship test. Three Types of Supporting Organizations Treas. Reg. §1.509(a)–4(f)(2) provides that a supporting organization must main- tain one of three types of structural or op- erational relationships with its supported organization(s). A supporting organiza- tion that is operated, supervised or con- trolled by one or more supported organi- zations is commonly known as a Type I supporting organization. The relationship of a Type I supporting organization with its supported organization(s) is compara- ble to that of a corporate parent-subsidiary relationship. A supporting organization that is supervised or controlled in connec- tion with one or more supported organiza- tions is commonly known as a Type II sup- 2009–47 I.R.B.666November 23, 2009 porting organization. The relationship of a Type II supporting organization with its supported organization(s) is comparable to a corporate brother-sister relationship. A supporting organization that is operated in connection with one or more supported or- ganizations is commonly known as a Type III supporting organization. This NPRM focuses primarily on Type III supporting organizations. Qualification Requirements for Type III Supporting Organizations Prior to Enactment of the Pension Protection Act of 2006, Public Law 109–280 (120 Stat. 780 (2006)) (PPA) Prior to the enactment of the PPA, the regulations under section 509(a)(3) gener- ally provided that an organization is “oper- ated in connection with” one or more sup- ported organizations if it meets a “respon- siveness test” and an “integral part test.” Responsiveness Test Treas. Reg. §1.509(a)–4(i)(2)(i) pro- vides that an organization meets the re- sponsiveness test if the organization is responsive to the needs or demands of its supported organizations. Treas. Reg. §1.509(a)–4(i)(2)(ii) provides three ways that a supporting organization may demon- strate responsiveness to a supported or- ganization: (1) the supported organization appoints or elects one or more of the offi- cers, directors, or trustees of the supporting organization; (2) one or more members of the governing body of the supported organization serve as officers, directors, or trustees of, or hold other important of- fices in, the supporting organization; or (3) the officers, directors, or trustees of the supporting organization maintain a close continuous working relationship with the officers, directors, or trustees of the sup- ported organization. In all three cases, the relationship must result in the supported organization having a significant voice in the investment policies of the supporting organization, the timing and the manner of making grants, the selection of the grant recipients of the supporting organization, and direction over the use of the income or assets of the supporting organization. The existing regulations also provide an alternative means for charitable trusts to satisfy the responsiveness test. Under Treas. Reg. §1.509(a)–4(i)(2)(iii), a sup- porting organization is responsive if: (1) it is a charitable trust under State law, (2) each specified supported organization is a named beneficiary under the charitable trust’s governing instrument, and (3) each beneficiary organization has the power to enforce the trust and compel an account- ing under State law. In the case of an organization that was supporting one or more supported organi- zations before November 20, 1970, Treas. Reg. §1.509(a)–4(i)(1)(ii) provides that additional facts and circumstances, such as a historic and continuing relationship between the supporting organization and its supported organization(s), also may be taken into account to establish compliance with the responsiveness test. Integral Part Test Treas. Reg. §1.509(a)–4(i)(3)(i) pro- vides that a supporting organization meets the integral part test by maintaining a sig- nificant involvement in the operations of one or more supported organizations that are dependent upon the supporting organ- ization for the type of support which it provides. Under the existing regulations, there are two alternative ways to meet the integral part test: (1) the “but for” test under Treas. Reg. §1.509(a)–4(i)(3)(ii); or (2) the “attentiveness” test under Treas. Reg. §1.509(a)–4(i)(3)(iii). Treas. Reg. §1.509(a)–4(i)(3)(ii) states that the “but for” test is satisfied if “the ac- tivities engaged in [by the supporting or- ganization] for or on behalf of the sup- ported organizations are activities to per- form the functions of, or to carry out the purposes of, such organizations, and, but for the involvement of the supporting or- ganization, would normally be engaged in by the supported organizations them- selves.” The “attentiveness” test under Treas. Reg. §1.509(a)–4(i)(3)(iii) requires a supporting organization to: (1) make pay- ments of substantially all of its income to or for the use of one or more supported organizations, (2) provide enough support to one or more supported organizations to ensure the attentiveness of such organiza- tion(s) to the operations of the supporting organization; and (3) pay a substantial amount of the total support of the support- ingorganizationtothosesupportedorgani- zations that meet the attentiveness require- ment. Rev. Rul. 76–208, 1976–1 C.B. 161 (see §601.601(d)(2)(ii)(b)), provides that the phrase “substantially all of its income” in Treas. Reg. §1.509(a)–4(i)(3)(iii) means at least 85 percent of adjusted net income. PPA Changes to Qualification Requirements for Type III Supporting Organizations The PPA made five changes to the re- quirements an organization must meet to qualify as a Type III supporting organiza- tion: (1) It removed the alternative test for charitable trusts as a means of meeting the responsiveness test; (2) It required the Secretary of the Trea- sury to set a new payout requirement for organizations that are not functionally inte- grated (generally, those organizations that met the integral part test by satisfying the attentiveness test under the existing regu- lations) to ensure that such organizations pay a “significant amount” to their sup- ported organizations; (3) It provided that a Type III support- ing organization must annually provide to each of its supported organizations such in- formation as the Secretary may require to ensure that the supporting organization is responsive to the needs or demands of its supported organization(s); (4) It prohibited a Type III support- ingorganizationfromsupportinganysup- ported organization not organized in the United States; and (5) It prohibited a Type I or Type III supporting organization from accepting a gift or contribution from a person who, together with certain related persons, di- rectly or indirectly controls the governing body of a supported organization of the Type I or Type III supporting organization. Notice 2006–109 On December 18, 2006, the Treasury Department and the IRS released No- tice 2006–109, 2006–2 C.B. 1121, (see §601.601(d)(2)(ii)(b)), which alerted tax- payers to the new supporting organization rules enacted by the PPA; provided interim guidance, including reliance standards for private foundations making grants to supporting organizations; and solicited November 23, 20096672009–47 I.R.B. comments regarding the new supporting organization requirements. Fifteen com- ments and numerous phone calls were received in response to the request for comments contained in Notice 2006–109. Advanced Notice of Proposed Rulemaking (ANPRM) On August 2, 2007, the Treasury Department and the IRS issued an ANPRM titled “Payout Requirements for Type III Supporting Organizations that Are Not Functionally Integrated” (Reg–155929–06, 72 FR 148). The ANPRM described proposed rules to implement the PPA changes to the Type III supporting organization requirements, and solicited comments regarding those proposed rules. In the ANPRM, the Treasury Depart- ment and the IRS proposed that all Type III supporting organizations would be required to meet the responsiveness test under Treas. Reg. §1.509(a)–4(i)(2)(ii). In addition, the Treasury Department and the IRS proposed that Type III supporting organizations that are functionally inte- grated would be required to meet: (A) the “but for” test in existing Treas. Reg. §1.509(a)–4(i)(3)(ii); (B) an expenditure test resembling the section 4942(j)(3)(A) qualifying distributions test for private operating foundations; and (C) an assets test resembling the section 4942(j)(3)(B) alternative assets test for private operat- ing foundations. However, the Treasury Department and the IRS indicated that an exception would be provided for cer- tain Type III supporting organizations that oversee or facilitate the operation of an integrated system, such as certain hospital systems. The ANPRM stated that such organizations would be classified as func- tionally integrated as long as they satisfied the responsiveness and “but for” tests un- der the existing regulations. The ANPRM proposal provided that a non-functionally integrated Type III sup- porting organization would be required to make an annual payout equal to the annual payout required from a private non-operat- ing foundation (generally, five percent of the fair market value of non-exempt-use assets). The Treasury Department and the IRS also proposed a limitation on the num- ber of supported organizations a non-func- tionally integrated Type III supporting or- ganization could support. The IRS received over 40 comments and numerous phone calls in response to the ANPRM. After consideration of all comments received, the Treasury Depart- mentandtheIRSareissuingthisNPRM regarding the new qualification require- ments for Type III supporting organiza- tions. The major areas of comment in re- sponse to the ANPRM are discussed in the preamble under Explanation of Provisions. Explanation of Provisions Summary of Proposed Criteria to Qualify as a Type III Supporting Organization The proposed regulations provide that every Type III supporting organi- zation must: (1) satisfy the notification requirement set forth under Prop. Reg. §1.509(a)–4(i)(2); (2) meet the respon- siveness test set forth under Prop. Reg. §1.509(a)–4(i)(3); and (3) demonstrate that it is an integral part of one or more supported organizations. A Type III sup- porting organization demonstrates that it is an integral part of a supported organization by satisfying either the requirements for functionally integrated Type III support- ing organizations set forth in Prop. Reg. §1.509(a)–4(i)(4), or the requirements for non-functionally integrated Type III sup- porting organizations set forth in Prop. Reg. §1.509(a)–4(i)(5). Further, as set forth in Prop. Reg. §1.509(a)–4(i)(10), a Type III supporting organization may not support a supported organization that is organized outside of the United States. Finally, as set forth in Prop. Reg. §1.509(a)–4(f)(5), Type I and Type III supporting organizations are prohibited from accepting a gift or contribution from a person who, together with certain related persons, directly or indirectly controls the governing body of a supported organiza- tion of the Type I or Type III supporting organization. Requirement to Notify Supported Organizations Prop. Reg. §1.509(a)–4(i)(2) imple- ments section 509(f)(1)(A) of the Code, which provides that a Type III supporting organization must provide to each of its supported organizations such information as the Secretary may require to ensure that the supporting organization is responsive to the needs or demands of the supported organization. The Treasury Department and the IRS requested comments in the ANPRM on the type of information a Type III support- ing organization should be required to pro- vide to its supported organizations. One commentator recommended that the pro- posed regulations adopt a recommenda- tion of the Panel on the Nonprofit Sec- tor, which suggested requiring Type III supporting organizations to provide annu- ally to their supported organizations: (1) a copy of governing documents, includ- ing those filed with Form 1023, “Appli- cation for Recognition of Exemption Un- der Section 501(c)(3) of the Internal Rev- enue Code,” and any updates; (2) a copy of Form 990, “Return of Organization Ex- empt From Income Tax;” and (3) an an- nual report of activities, including a nar- rative, financial detail, and a description of the support provided (including how it was calculated or determined) and a pro- jection of support to be provided in the subsequent year. Panel on the Nonprofit Sector, Strengthening Transparency, Gov- ernance, Accountability of Charitable Or- ganizations (June 2005), at 45. Another commentator recommended that the proposed regulations require only that the Form 990 be distributed to the “lead” supported organization. This commentator argued that any additional requirement would impose too much ad- ditional administrative burden and cost on the charitable sector. The comment also suggested allowing the notification to be provided electronically. The proposed regulations require that each taxable year, a Type III supporting organization must provide to each of its supported organizations: (A) a written notice addressed to a principal officer of the supported organization identifying the supporting organization and describing the amount and type of support it provided to the supported organization in the past year; (B) a copy of the supporting organ- ization’s most recently filed Form 990; and (C) a copy of the supporting organi- zation’s governing documents, including any amendments. Copies of governing documents need only be provided once. The proposed regulations provide that the required notice and documents may be de- livered by electronic media. Organizations 2009–47 I.R.B.668November 23, 2009 must satisfy the notification requirement to qualify as a Type III supporting organi- zation and should retain proof of delivery in their records. Responsiveness Test The proposed regulations provide that all Type III supporting organizations, including those organized as charita- ble trusts, must meet the responsive- ness test under existing Treas. Reg. §1.509(a)–4(i)(2)(ii). The ANPRM proposed to apply the re- sponsiveness test to all Type III support- ing organizations and to remove the spe- cial rule for charitable trusts. In response to the ANPRM, commentators argued that the PPA did not require imposition of the general responsiveness test on charitable trusts, and that the test could be difficult to satisfy because of state-law fiduciary re- quirements on trusts. Thus, a commentator recommended the development of an alter- nate charitable trust test based on facts and circumstances. One commentator recommended ex- empting trusts managed by institutional trustees from the responsiveness test. The commentator stated that institutional trustees employ strict rules to manage trusts, thereby making abuse of these trusts highly unlikely. Another commentator recommended transition relief for trusts in existence on the date the PPA was en- acted similar to that provided in Treas. Reg. §1.509(a)–4(i)(4) for trusts estab- lished before November 20, 1970, which would apply to a trust with a lengthy and continuous history of distributions, and no discretion to vary the beneficiaries or the amount of distributions. The proposed regulations require that all Type III supporting organizations demonstrate the necessary relationship be- tween its officers, directors or trustees and those of the supported organization, and show that this relationship results in the officers, directors or trustees of the sup- ported organization having a significant voice in the operations of the supporting organization. The proposed regulations do not adopt a special rule for trusts. The Treasury Department and the IRS believe that requiring charitable trusts to meet the responsiveness test set forth in these proposed regulations is consistent with Congress’ intent in the PPA. The Treasury Department and the IRS expect that some charitable trusts will be able to demonstrate that they meet the require- ments of the responsiveness test. The proposed regulations provide examples that illustrate factors that could lead to a conclusion that a supporting organization organized as a trust is responsive to the needs of a supported organization. Ad- ditionally, the Treasury Department and the IRS request comments regarding a specific responsiveness rule for trusts that would be consistent with the existing re- sponsiveness test and the Congressional intent behind section 1241 of the PPA, which removed the alternative trust test in the regulations. Integral Part Test — Functionally Integrated Type III Supporting Organizations The proposed regulations provide that a Type III supporting organization is func- tionally integrated if it either: (1) engages in activities substantially all of which di- rectly further the exempt purposes of the supported organization(s) to which it is re- sponsive by performing the functions of, or carrying out the purposes of, such sup- ported organization(s) and that, but for the involvement of the supporting organiza- tion, would normally be engaged in by the supported organization(s); or (2) is the par- ent of each of its supported organizations. The ANPRM proposed requiring an organization to meet not only the “but for” test under existing Treas. Reg. §1.509(a)–4(i)(3)(ii), but also two addi- tional tests — an expenditure test and an assets test — in order to qualify as a func- tionally integrated Type III supporting or- ganization. In general, commentators said that the additional tests were unduly re- strictive and more burdensome than those proposed for non-functionally integrated Type III supporting organizations. These commentators argued that the ANPRM’s expenditure test was arbitrary and that Congress did not authorize the Secretary to impose a payout requirement on func- tionally integrated organizations. Many commentators highlighted differences be- tween a Type III supporting organization and a private operating foundation that warrant treating these types of organiza- tions differently, including the fact that a supporting organization is dedicated to specific organizations and that those spec- ified organizations rely on the supporting organization for consistent support. Many commentators recommended exempting certain types of organiza- tions from the proposed requirements for functionally integrated Type III support- ing organizations, such as long-standing supporting organizations and support- ing organizations that support govern- mental agencies, religious organizations, and grant-making organizations. Sev- eral commentators recommended that the proposed regulations take into account the historic and continuing relationship of “long-standing” organizations with their supported organizations. Addition- ally, many commentators requested an exemption for supporting organizations of governmental entities, contending that these organizations are not subject to abuse because of their connection to a governmental entity. These commenta- tors argued that supporting organizations choose a Type III structure to ensure that funds are dedicated long-term to a specific purpose, and removed from the appropria- tion process of the government. In formulating the criteria in the pro- posed regulations, the Treasury Depart- ment and the IRS also noted the suggestion in the Joint Committee on Taxation’s Tech- nical Explanation of the PPA that “substan- tially all of the activities of [a function- ally integrated Type III supporting organ- ization] should be activities in direct fur- therance of the functions or purposes of supported organizations.” Staff of the Joint Committee on Taxation, Technical Expla- nation of H.R. 4, The “Pension Protection Act of 2006” (Aug. 3, 2006), at 360 n.571 (Technical Explanation). In the Technical Explanation, the Joint Committee on Tax- ation also expressed concern that “the cur- rent regulatory standards for satisfying the integral part test not by reason of a pay- out are not sufficiently stringent to ensure that there is a sufficient nexus between the supporting and supported organizations.” Technical Explanation at 360 n.571. The Treasury Department and the IRS believe that a sufficient nexus exists be- tween a supporting organization and its supported organization(s) where the sup- porting organization engages in activities that directly further the exempt purposes of the supported organization(s) and that would otherwise be conducted by the sup- November 23, 20096692009–47 I.R.B. ported organization itself. Accordingly, the proposed regulations provide that a Type III supporting organization is func- tionally integrated if it either: (1) engages in activities (a) substantially all of which directly further the exempt purposes of the supported organization(s) to which it is re- sponsive by performing the functions of, or carrying out the purposes of, such sup- ported organization(s) and (b) that, but for the involvement of the supporting organi- zation, would normally be engaged in by the supported organization(s); or (2) is the parent of each of its supported organiza- tions. The Treasury Department and the IRS request comments on how guidance might clarify the application of the “sub- stantially all” test in this context. The pro- posed regulations do not adopt the expen- diture test and the assets test described in the ANPRM. The proposed regulations provide that a supporting organization directly fur- thers the exempt purposes of its supported organization by holding or managing ex- empt-use assets but does not directly fur- ther such exempt purposes by fundraising, grantmaking, or investing and manag- ing non-exempt-use assets. The Treasury Department and the IRS believe that fundraising, grantmaking, and investing and managing non-exempt-use assets do not alone establish a sufficient nexus be- tween a supporting organization and its supported organization. Further, the Trea- sury Department and the IRS believe that an organization that does not engage in activities that directly further a exempt purpose will achieve a sufficient nexus with its supported organization(s) only if it distributes a significant amount to its sup- ported organizations, as Congress directed in the PPA. The Treasury Department and the IRS recognize the unique circumstances of a governmental entity whose assets are subject to the appropriations process of a federal, state, local orIndian tribal govern- ment and that therefore organizes a Type III supporting organization to remove assets from the appropriations process of the government. The proposed reg- ulations therefore provide an exception under which a supporting organization that supports a single governmental entity may treat investing and managing non-ex- empt-use assets as activities that directly further an exempt purpose, so long as a substantial part of the supporting organ- ization’s total activities directly furthers the exempt purposes of such governmental entity. The proposed regulations specifically require that a functionally integrated Type III supporting organization’s activities di- rectly further the exempt purposes of those supported organizations with respect to which the supporting organization meets the responsiveness test under Prop. Reg. §1.509(a)–4(i)(3). The Treasury Depart- ment and the IRS request comments on this requirement. The proposed regulations provide that a supporting organization will be treated as the parent of a supported organization if the supporting organization exercises a substantial degree of direction over the policies, programs, and activities of the supported organization, and the majority of the officers, directors, or trustees of the supported organization is appointed or elected, directly or indirectly, by the gov- erning body, members of the governing body, or officers of the supporting organ- ization acting in their official capacity. Thus, the supporting organization could qualify as a parent of a second-tier (or lower) subsidiary. The classification of a parent supporting organization as func- tionally integrated is intended to apply to supporting organizations that oversee or facilitate the operation of an integrated system, such as hospital systems. The proposed regulations provide ex- amples that illustrate the requirements for functionally integrated Type III supporting organizations. Integral Part Test-Non-Functionally Integrated Type III Supporting Organizations The proposed regulations provide that a Type III supporting organization is non- functionally integrated if it satisfies a dis- tribution requirement equal to five percent of the fair market value of non-exempt-use assets and an attentiveness requirement. Section 1241(d)(1) of the PPA directed the Secretary of the Treasury to promul- gate new regulations on a payout require- ment for non-functionally integrated Type III supporting organizations, based on in- come or assets, in order to ensure that these supporting organizations pay a significant amount to their supported organizations. The ANPRM proposal required an annual payout of five percent of the fair market value of non-exempt-use assets. Many commentators said that this payout rate was too high and would erode an organi- zation’s assets over time. The commenta- tors said that a Type III supporting organi- zation provides long-term consistent sup- port to specific organizations, while pri- vate foundations may pay out to whomever they choose. Further, a supporting organi- zation maintains a governance relationship with its supported organization(s) in a way that a private foundation does not. Com- mentators argued that because of these dif- ferences, the private foundation payout re- quirement should not be imposed on a sup- porting organization. Imposing a five per- cent payout, these commentators contend, would jeopardize the ability of supporting organizations to provide the kind of consis- tent, reliable, long-term support supported organizations have come to expect. Commentators suggested a number of alternative payout rates. Many of them also recommended allowing an averaging of assets over a period of years for pur- poses of calculating the payout amount. The ANPRM proposed to limit the number of organizations a non-function- ally integrated Type III supporting organ- ization can support to no more than five. The ANPRM further provided that Type III supporting organizations in existence before the date regulations are proposed may support more than five organizations, as long as the supporting organization pays 85 percent of its support to organizations towhichthesupportingorganizationis responsive. Many commentators asked that the proposed regulations not include the limi- tation on the number of supported organi- zations a non-functionally integrated Type III supporting organization can support, arguing that such a rule is arbitrary. In particular, commentators pointed out that the original Senate bill associated with supporting organizations, contained in the Tax Increase Prevention and Reconcili- ation Act of 2005, Public Law 109–222 (120 Stat. 345 (2005)), limited the number of organizations a supporting organization could support to five, but that Congress ultimately did not enact such a limitation. One commentator suggested that the proposed regulations adopt a rule that one-third of a non-functionally integrated 2009–47 I.R.B.670November 23, 2009 Type III supporting organization’s re- quired distribution must go to a supported organization that is attentive to the sup- porting organization and to which the supporting organization is responsive. Commentators recommended provid- ing a transition period for the payout requirement to allow organizations suf- ficient time either to modify governing instruments or to sell assets. A number of commentators suggested that the proposed regulations exempt Type III supporting organizations that (1) have no continuing involvement of donors or their family in the governance of the or- ganization; and (2) before the date of en- actment of PPA, had distributed to or for the benefit of its supported organizations an amount equal to or greater than the amounts transferred to the organization for which charitable deductions were allowed. Under the proposed regulations, to qualify as a non-functionally integrated Type III supporting organization, an or- ganization must meet a distribution re- quirement and an attentiveness require- ment. The proposed regulations set the distribution requirement for non-func- tionally integrated Type III supporting organizations at five percent of non-ex- empt-use assets, and retain the concept of attentiveness that is in the current regu- lations. The proposed regulations do not adopt the five organization limit described in the ANPRM. Distribution Requirement To satisfy the distribution requirement of Prop. Reg. §1.509(a)–4(i)(5)(ii), a Type III supporting organization that is not functionally integrated must distribute, with respect to each taxable year, to or for the use of its supported organizations, amounts equaling or exceeding five per- cent of the aggregate fair market value of its non-exempt-use assets (the annual dis- tributable amount), on or before the last day of such taxable year. The annual dis- tributable amount is determined based on asset values measured over the preceding taxable year. Thus, for example, a Type III supporting organization that is not func- tionally integrated would determine its an- nual distributable amount for its 2012 tax- able year, which must be distributed on or before the last day of the organization’s 2012 taxable year, based on asset values measured over its 2011 taxable year. A Type III supporting organization that is not functionally integrated is not required to distribute any amount in its first year of ex- istence. The proposed regulations generally draw from the regulations under section 4942 for principles on valuation, timing, and carryovers. However, the proposed regulations do not permit set-asides, which count towards a private foundation’s distribution requirement under section 4942(g)(2). While Congress statutorily provided that set-asides constitute qualify- ing distributions for private foundations, Congress made no such statutory provision for supporting organizations. Rather, in the PPA, it directed that a payout require- ment be implemented for non-functionally integrated Type III supporting organiza- tions that would result in a prompt, robust flow of support to supported organizations. The Treasury Department and the IRS re- quest comments on whether set-asides are necessary and consistent with Congres- sional intent in determining whether Type III supporting organizations that are not functionally integrated have distributed their annual distributable amount. The proposed regulations also provide a slightly different rule regarding the carry- over of excess distributions than is appli- cable to private foundations. Under sec- tion 4942(i), a private foundation that dis- tributes more than its distributable amount may carry forward that excess amount for five years. However, when calculating qualifying distributions in a future year un- der section 4942, amounts paid out in the future year count first towards the required distributable amount, and any amount car- ried forward is not “used” in the future year to the extent that the organization made qualifying distributions in that fu- ture year. These proposed regulations re- verse the ordering rule and first count any excess amount carriedforward toward the non-functionally integrated Type III sup- porting organization’s annual distributable amount, followed by amounts paid out in the later year. The proposed regulations provide a rea- sonable cause exception for failure to meet the distribution requirement applicable to non-functionally integrated Type III sup- porting organizations. Under the excep- tion, an organization that fails to meet the distribution requirement will not be clas- sified as a private foundation in the tax- able year for which it fails to meet such distribution requirement, if the organiza- tion establishes to the satisfaction of the Secretary that: (1) the failure was due solely to an incorrect valuation of assets, a ministerial error, or unforeseen events or circumstances that are beyond the or- ganization’s control; (2) the failure was due to reasonable cause and not to willful neglect; and (3) the distribution require- ment is met within 180 days after the date the incorrect valuation or ministerial er- ror was or should have been discovered, or 180 days after the organization is first able to make its required payout notwith- standing the unforeseen event or circum- stances. The reasonable cause exception applies only to the distribution require- ment of Prop. Reg. §1.509(a)–4(i)(5)(ii), and not to the attentiveness requirement of Prop. Reg. §1.509(a)–4(i)(5)(iii). The Treasury Department and the IRS request comments regarding the reasonable cause exception for the distribution requirement. The proposed regulations also provide for an emergency temporary reduction in the annual distributable amount. Under Prop. Reg. §1.509(a)–4(i)(5)(ii)(D), the Secretary may provide by publication in the Internal Revenue Bulletin for a tempo- rary reduction in the annual distributable amount in the case of a disaster or emer- gency. The Treasury Department and the IRS are aware that some supporting organiza- tions impacted by the distribution require- ment contained in these proposed regula- tions may be heavily invested in assets that are not readily marketable. The Treasury Department and the IRS request comments regarding the need for a transition rule for non-functionally integrated Type III sup- porting organizations whose assets, as of the effective date of these regulations, con- sist predominantly (in any event more than one-half) of assets that are not readily mar- ketable. Attentiveness Requirement These proposed regulations modify the attentiveness requirement in exist- ing Treas. Reg. §1.509(a)–4(i)(3)(iii) to provide that an organization must dis- tribute one-third or more of its annual distributable amount to one or more sup- ported organizations that are attentive to November 23, 20096712009–47 I.R.B. the supporting organization and with re- spect to which the supporting organization meets the responsiveness test under Prop. Reg. §1.509(a)–4(i)(3). The proposed regulations provide that to demonstrate that a supported organiza- tion is attentive, a supporting organization must either: (1) provide 10 percent or more of the supported organization’s total sup- port; (2) provide support that is necessary to avoid the interruption of the carrying on of a particular function or activity of the supported organization; or (3) provide an amount of support that based on all the facts and circumstances is a sufficient part of a supported organization’s total support. Consequences of Failure to Meet Requirements A Type III supporting organization that fails to meet the requirements of these pro- posed regulations, once they are published as final or temporary regulations, will be classified as a private foundation. Once classified as a private foundation, the sec- tion 507 rules regarding termination of pri- vate foundation status apply. The Treasury Department and the IRS request comments on whether exceptions or special rules un- der section 507 are needed for Type III sup- porting organizationsthat are reclassified as private foundations as a result of the changes in the PPA. Transition and Other Relief Provisions Responsiveness Test The proposed regulations continue to provide that additional facts and circum- stances, such as a historic and continuing relationship with a supported organization, may be taken into account in establishing compliance with the responsiveness test for organizations that were operating prior to November 20, 1970. Integral Part Test The proposed regulations provide a transition rule for Type III supporting or- ganizations in existence on the date these regulations are published in theFederal Registeras final or temporary regula- tions. Under the transition rule, such organizations that met and continue to meet the requirements of existing Treas. Reg. §1.509(a)–4(i)(3)(ii) (i.e.,anorgan- ization that meets the integral part test by satisfying the “but for” test) will be treated as meeting the requirements of a functionally integrated Type III support- ingorganizationsetforthinProp. Reg. §1.509(a)–4(i)(4) until the first day of the organization’s first taxable year beginning after the date these proposed regulations are published as final or temporary regu- lations. The proposed regulations also provide that Type III supporting organizations in existence on the date these regulations are published in theFederal Registeras fi- nal or temporary regulations that met and continue to meet the requirements of exist- ing Treas. Reg. §1.509(a)–4(i)(3)(iii) will be treated as meeting the requirements of a non-functionally integrated Type III sup- porting organization set forth in Prop. Reg. §1.509(a)–4(i)(5) until the first day of the organization’s second taxable year begin- ning after the date these proposed regula- tions are published as final or temporary regulations. Such organizations will be re- quired to value their assets in accordance with Prop. Reg. §1.509(a)–4(i)(8) in the first taxable year beginning after final or temporary regulations are published, and to meet all of the requirements of Prop. Reg. §1.509(a)–4(i)(5)(i) in the second taxable year beginning after the publica- tion of these regulations as final or tem- porary regulations and for all succeeding taxable years. For example, if the Treasury Depart- ment and the IRS publish these regulations as final or temporary regulations any time in 2010, a calendar-year non-func- tionally integrated Type III supporting organization must: (1) in 2010, meet all of the requirements of existing Treas. Reg. §1.509(a)–4(i)(3)(iii) (i.e., distribute to its supported organizations substan- tially all of its income in accord with the existing regulations); (2) in 2011, meet all of the requirements of current Treas. Reg. §1.509(a)–4(i)(3)(iii) and value its assets according to Prop. Reg. §1.509(a)–4(i)(8); and (3) in 2012, meet all of the requirements of Prop. Reg. §1.509(a)–4(i)(5)(i), including the distri- bution requirement. The proposed regulations also retain the exception from the integral part test for pre-November 20, 1970 trusts that meet certain other requirements found in current Treas. Reg. §1.509(a)–4(i)(4). The Treasury Department and the IRS request comments on whether additional transition relief is needed. The proposed regulations eliminate current Treas. Reg. §1.509(a)–4(i)(1)(iii), whichprovidesanexceptionfromthe integral part test if an organization can establish that: (1) it met the payout re- quirement under current Treas. Reg. §1.509(a)–4(i)(3)(iii)(a) for any five-year period; (2) it cannot meet such payout requirement for its current taxable year solely because the amount received by one or more of the supported organizations is no longer sufficient to satisfy the atten- tiveness requirement; and (3) there has been a historic and continuing relationship of support between such organizations be- tween the end of the five-year period and the taxable year in question. The Treasury Department and the IRS believe that the breadth of this exception is inconsistent with Congress’ intent in mandating a pay- out requirement in the PPA. Regulations under Section 4943 This NPRM also includes proposed reg- ulations under section 4943 that provide two transition rules to address excess busi- ness holdings for Type III supporting or- ganizations affected by the PPA. The PPA applied the section 4943 excess business holdings excise tax to non-functionally in- tegrated Type III supporting organizations. However, it provided that in calculating the “present holdings” of Type III sup- porting organizations in existence on Au- gust 17, 2006 (the date of enactment of the PPA), the transition rules that applied to private foundations in 1969, when sec- tion 4943 was first enacted, would apply. These transition rules effectively allow af- fected organizations additional time to dis- pose of certain business holdings. The proposed regulations provide tran- sition relief to a private foundation that qualified as a Type III supporting organ- ization under section 509(a)(3) immedi- ately before August 17, 2006, and that was reclassified as a private foundation un- der section 509(a) on or after August 17, 2006, solely as a result of the rules enacted by Section 1241 of the PPA. Thus, under the proposed regulations, the present hold- ings of such private foundations will be de- termined using the same rules that apply 2009–47 I.R.B.672November 23, 2009 to Type III supporting organizations under section 4943(f)(7). In addition, the Treasury Department and the IRS believe that pre-November 20, 1970 trusts that are exempted from the integral part test under current regulations and these proposed regulations should not be subject to the excess business holdings excise tax that applies to non-functionally integrated Type III supporting organiza- tions. Therefore, the proposed regulations under section 4943 provide that a Type III supporting organization created as a trust before November 20, 1970, that meets the requirements of current Treas. Reg. §1.509(a)–4(i)(4) and Prop. Reg. §1.509(a)–4(i)(9), will be treated as a “functionally integrated Type III support- ing organization” for purposes of section 4943(f)(3)(A). Reliance on Prior Guidance In Notice 2006–109, the Treasury De- partment and the IRS provided guidance to private foundations regarding determi- nations of the public charity status of a section 501(c)(3) organization when mak- ing grants. In particular, because a grant to a non-functionally integrated Type III supporting organization is not considered a qualifying distribution under section 4942, and is considered a taxable expenditure un- less expenditure responsibility is exercised under section 4945, the notice provided criteria for determining whether a Type III supporting organization is functionally in- tegrated and allowed private foundations to rely on those criteria for purposes of sec- tions 4942 and 4945. Commentators to the ANPRM requested that the Treasury De- partment and the IRS permit private foun- dations to continue to rely on the guidance in Notice 2006–109 on private foundation grantmaking until the IRS issues determi- nation letters addressing functionally inte- grated status. Private foundations can continue to rely on the grantor reliance standards of section 3.0 of Notice 2006–109 until these pro- posed regulations are published as final or temporary regulations. In addition, the IRS stated in a Septem- ber 24, 2007 memorandum from the Di- rector of Exempt Organizations Rulings and Agreements that it would issue func- tionally integrated Type III supporting or- ganization determinations to organizations that meet the requirements for functionally integrated organizations set forth in the ANPRM. As of the date of the publication in theFederal Registerof this notice of proposed rulemaking, the IRS will issue a functionally integrated Type III supporting organization determination only to organizations that meet the requirements of Prop. Reg. §1.509(a)–4(i)(4). An organization that received a determination that it qualified as a functionally integrated Type III supporting organization under the ANPRM can continue to rely on such determination letter until final or temporary regulations are published in theFederal Register,solongas the organization continues to meet the requirements of either the ANPRM or Prop. Reg. §1.509(a)–4(i)(4). An organization that receives a determination that it is a functionally integrated Type III supporting organization under either the ANPRM or these proposed regulations will be required to meet the requirements established in final or temporary regulations as of the first taxable year beginning after final or temporary regulations are published in the Federal Register. Effective Date The proposed regulations will apply to taxable years beginning after the date these rules are published in theFederal Register as final or temporary 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 assessment is not required. It is hereby certified that this regulation will not have a significant economic impact on a sub- stantial number of small entities. This certification is based on the fact that this regulation will not impact a substantial number of small entities. Based on IRS Statistics of Income data for 2005, there are over 1.4 million organizations that qualify as exempt from federal income tax under section 501(c)(3). Approxi- mately 13,000 of the 1.4 million exempt organizations reported as supporting orga- nizations; approximately 4,200 supporting organizations reported as Type III sup- porting organizations; and it is expected that some fraction of the 4,200 Type III supporting organizations may be classi- fied as non-functionally integrated Type III supporting organizations. Thus, the number of organizations affected by this regulation will not be substantial. The collection of information in this regulation that is subject to the Regulatory Flexi- bility Act will impose a minimal burden upon the affected organizations. All of the information required to be delivered is information that the organization is al- ready required to maintain. Further, the distribution requirement in Prop. Reg. §1.509(a)–4(i)(5)(ii)for non-functionally integrated Type III supporting organiza- tions does not have a significant economic impact. A non-functionally integrated Type III supporting organization that fails to satisfy the distribution requirement of Prop. Reg. §1.509(a)–4(i)(5)(ii) would be reclassified as a private non-operating foundation and as such, would be required under section 4942 to distribute amounts equal to five percent of the aggregate fair market value of non-exempt-use assets. In addition, as a private non-operating foun- dation, the organization would be subject to additional regulatory requirements and excise taxes that do not apply to non-func- tionally integrated Type III supporting organizations. Accordingly, a Regulatory Flexibility Analysisunder the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, this regulation has been sub- mitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Request for Comments Before these proposed regulations are adopted as final or temporary regulations, consideration will be given to any writ- ten (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The Treasury Depart- ment and the IRS request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public in- spection 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 November 23, 20096732009–47 I.R.B. the public hearing will be published in the Federal Register. Drafting Information The principal authors of these proposed regulations are Philip T. Hackney and Don R. Spellmann, Office of the Chief Counsel (Tax-Exempt and Government Entities). However, other personnel from the Treasury Department and the IRS participated in their development. ***** Proposed Amendments to the Regulations Accordingly, 26 CFR parts 1 and 53 are proposed to be amended as follows: Part 1—Income Taxes Par. 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.509(a)–4 is amended by: 1. The term “publicly supported organ- ization” is removed and replaced by the term “supported organization” wherever it appears. 2. Paragraphs (a)(5) and (i) are revised. 3. New paragraphs (a)(6) and (f)(5) are added. The revisions and additions read as fol- lows: §1.509(a)–4 Supporting organizations. (a) * * * (5) For purposes of this section, the term “supporting organization” means ei- ther an organization described in section 509(a)(3) or an organization seeking sec- tion 509(a)(3) status, depending upon its context. (6) For purposes of this section, the term “supported organization” means an organization described in section 509(a)(1) or (2)— (i) For whose benefit the supporting or- ganization is organized and operated, or (ii) With respect to which the support- ing organization performs the functions, or carries out the purposes. ***** (f) * * * (5)Organizations controlled by donors. An organization shall not be considered to be operated, supervised, or controlled by, or operated in connection with, one or more supported organizations, if such or- ganization accepts any gift or contribution from any person (other than an organiza- tion described in section 509(a)(1), (2) or (4)) who— (i) Directly or indirectly controls, either alone or together with persons described in paragraph (f)(5)(ii) or (iii) of this section, a supported organization supported by such supporting organization; (ii) Is a member of the family (deter- mined under section 4958(f)(4)) of an in- dividual described in paragraph (f)(5)(i) of this section; or (iii) Is a 35-percent controlled entity (as defined in section 4958(f)(3) by sub- stituting “persons described in paragraph (f)(5)(i) or (ii) of this section” for “per- sons described in subparagraph (A) or (B) of paragraph (1)” in paragraph (A)(i) thereof). ***** (i)Meaning of “operated in connection with”—(1)General Rule. Except as oth- erwise provided in paragraphs (f)(5) and (i)(10) of this section, a supporting organ- izationisoperatedinconnectionwithone or more supported organizations only if it satisfies— (i) The notification requirement in para- graph (i)(2) of this section; (ii) The responsiveness test, which is set forth in paragraph (i)(3) of this section; and (iii) The integral part test, which is set forth in paragraphs (i)(4) and (i)(5) of this section. An organization is an integral part of a supported organization if it is signif- icantly involved in the operations of the supported organization and the supported organization is dependent upon the sup- porting organization for the type of sup- port the supporting organization provides. An organization can demonstrate that it is an integral part of a supported organiza- tion only if it satisfies either the require- ments for functionally integrated Type III supporting organizations set forth in para- graph (i)(4) of this section or the require- ments for non-functionally integrated Type III supporting organizations set forth in paragraph (i)(5) of this section. (2)Notification requirement. Each tax- able year, the supporting organization must provide to each of its supported organiza- tions— (i) A written notice addressed to a prin- cipal officer of the supported organization indicating the type and amount of support provided by the supporting organization to the supported organization in the past year; (ii) A copy of the supporting organiza- tion’s most recentlyfiled Form 990, “Re- turn of Organization Exempt From Income Tax,” or other return required to be filed under section 6033; and (iii) A copy of the supporting organ- ization’s governing documents, including its charter or trust instrument and bylaws, and any amendments to such documents. Copies of governing documents need not be provided in a given year if such docu- ments have previously been provided and have not subsequently been amended. (iv)Electronic media. Notification may be provided by electronic media. (v)Due date. The required notifica- tions shall be postmarked or electronically transmitted by the last day of the 5 th month after the close of the supporting organiza- tion’s tax year. (3)Responsiveness test. (i) A support- ing organization meets the responsiveness test if it is responsive to the needs or de- mands of a supported organization. Ex- cept as provided in paragraph (i)(3)(v) of this section, a supporting organization is responsive to the needs or demands of a supported organization if it satisfies the requirements of paragraphs (i)(3)(ii) and (i)(3)(iii) of this section. (ii) A supporting organization satis- fies the requirements of this paragraph (i)(3)(ii) if: (A) One or more officers, directors, or trustees of the supporting organization are elected or appointed by the officers, direc- tors, trustees, or membership of the sup- ported organization; (B) One or more members of the gov- erning bodies of the supported organiza- tion are also officers, directors, or trustees of, or hold other important offices in, the supporting organization; or (C) The officers, directors, or trustees of the supporting organization maintain a close and continuous working relationship with the officers, directors, or trustees of the supported organization. (iii) By reason of paragraphs (i)(3)(ii)(A), (i)(3)(ii)(B), or (i)(3)(ii)(C) 2009–47 I.R.B.674November 23, 2009 of this section, the officers, directors or trustees of the supported organization have a significant voice in the investment poli- cies of the supporting organization, the timing of grants, the manner of making them, and the selection of recipients by such supporting organization, and in oth- erwise directing the use of the income or assets of such supporting organization. (iv)Examples. The provisions of this paragraph (i)(3) may be illustrated by the following examples: Example (1). X, an organization described in sec- tion 501(c)(3), is a trust created under the last will and testament of Decedent. The trustee of X is a bank (Trustee). Under the trust instrument, X supports M, a private university described in section 509(a)(1). The trust instrument provides that Trustee has discre- tion regarding the timing and amount of distributions consistent with the Trustee’s fiduciary duties. Repre- sentatives of Trustee and an officer of M have quar- terly face to face meetings, at which they discuss M’s projected needs for the university and ways in which M would like X to use its income and invest its as- sets. Additionally, Trustee communicates regularly with the officer of M regarding X’s investments and plans for distributions from X. Trustee provides the officer of M with quarterly investment statements, the information required under paragraph (i)(2) of this section, and an annual accounting statement. Based on these facts, X meets the responsiveness test of this paragraph (i)(3). Example (2). Y is an organization described in section 501(c)(3) and is organized as a trust under state law. The trustee of Y is a bank, Trustee. Y supports charities P, Q and R, each an organization described in section 509(a)(1). Y makes annual cash payments to P, Q and R. Once a year, Trustee sends to P, Q, and R the cash payment, the information re- quired under paragraph (i)(2) of this section, and an accounting statement. Trustee has no other commu- nication with P, Q or R. Y does not meet the respon- siveness test of this paragraph (i)(3). (v)Exception for Pre-November 20, 1970 Organizations. In the case of a sup- porting organization that was supporting or benefiting a supported organization be- fore November 20, 1970, additional facts and circumstances, such as a historic and continuing relationship between the orga- nizations, may be taken into account, in addition to the factors described in para- graph (i)(3)(ii) of this section, to establish compliance with the responsiveness test. (4)Integral part test — functionally integrated Type III supporting organiza- tion—(i)General rule. A supporting or- ganization meets the integral part test as a functionally integrated Type III supporting organization if it satisfies either paragraph (i)(4)(i)(A) or paragraph (i)(4)(i)(B) of this section. (A) The supporting organization en- gages in activities: (1) substantially all of which directly further the exempt purposes of the sup- ported organization(s) to which the sup- porting organization is responsive, by per- forming the functions of, or carrying out the purposes of, such supported organiza- tion(s); and (2) that, but for the involvement of the supporting organization, would normally be engaged in by the supported organiza- tion(s). (B) The supporting organization is the parent of each of its supported organiza- tions. For purposes of the integral part test, a supporting organization is the parent of a supported organization if the supporting organization exercises a substantial degree of direction over the policies, programs, and activities of the supported organiza- tion and a majority of the officers, direc- tors, or trustees of the supported organiza- tion is appointed or elected, directly or in- directly, by the governing body, members of the governing body, or officers (acting in their official capacity) of the supporting organization. (ii) “Directly further.” Holding title to exempt-use property and managing exempt-use property are activities that di- rectly further the exempt purposes of the supported organization within the meaning of paragraph (i)(4)(i)(A) of this section. Except as provided in paragraph (i)(4)(iii) of this section, fundraising, investing and managing non-exempt-use property, and making grants (whether to the sup- ported organization or to third parties) are not activities that directly further the exempt purposes of the supported organ- ization within the meaning of paragraph (i)(4)(i)(A) of this section. (iii)Governmental Entity Exception.A supporting organization may treat the in- vestment and management of non-exempt- use assets and the making of grants di- rectly to a supported organization as activ- ities that directly further the exempt pur- poses of a supported organization if: (A) Such activities are conducted on behalf of a supported organization whose assets are subject to the appropriation process of a federal, state, local or Indian tribal government for purposes or pro- grams unrelated to the exempt purposes of the supported organization; (B) The supporting organization sup- ports only one supported organization; and (C) A substantial part of the support- ing organization’s total activities directly furthers the exempt purpose(s) of its sup- ported organization andare activities other than fundraising, grantmaking, and invest- ing and managing non-exempt-use assets. (iv)Examples. The provisions of this paragraph (i)(4) may be illustrated by the following examples. In eachexample,the supporting organization meets the require- ments of paragraphs (i)(2) and (i)(3) of this section. Example 1. N, an organization described in sec- tion 501(c)(3), is the parent organization of a health- care system consisting of two hospitals (Q and R) and an outpatient clinic (S), each of which is described in section 509(a)(1), and a taxable subsidiary (T). N is the sole member of each of Q, R, and S. Under the charter and bylaws of each of Q, R, and S, N appoints all members of the board ofdirectors of each corpora- tion. N engages in the overall coordination and super- vision of the healthcare system’s exempt subsidiary corporations Q, R, and S in approval of their budgets, strategic planning, marketing, resource allocation, se- curing tax-exempt bond financing, and community education. N also manages and invests assets that serve as endowments of Q, R and S. Based on these facts, N qualifies as a functionally integrated Type III supporting organization under paragraph (4)(i)(B) of this section. Example 2. V, an organization described in sec- tion 501(c)(3), is organizedas a supporting organiza- tiontoL,achurchdescribedinsection509(a)(1).L transferred to V title to the buildings in which L con- ducts religious services, Bible study and community enrichment programs. Substantially all of V’s activi- ties consist of holding and managing these buildings. But for the activities of V, L would normally engage in these same activities. Based on these facts, V sat- isfies the activities and but for requirements of para- graph (4)(i)(A) of this section and therefore qualifies as a functionally integrated Type III supporting or- ganization. Example 3. O is a nonprofit publishing organi- zation described in section 501(c)(3). It does all of the publishing and printing for the eight churches of a particular denomination located in a particular geo- graphic region, each of which is described in section 509(a)(1). Control of O is vested in a five-man Board of Directors, which includes an official from one of the churches and four lay members of the congrega- tions of that denomination. The officers of O main- tain a close and continuing working relationship with each of the eight churches for whom it publishes and prints materials and as a result of such relationship, each of the eight churcheshas a significant voice in the operations of O. O does no other printing or pub- lishing. O publishes all of the churches’ religious as well as secular tracts and materials. All of O’s ac- tivities directly further the exempt purposes of sup- ported organizations to which it is responsive. Ad- ditionally, but for the activities of O, the churches would normally publish these materials themselves. Based on these facts, O qualifies as a functionally in- November 23, 20096752009–47 I.R.B. tegrated Type III supporting organization under para- graph (4)(i)(A) of this section. Example 4. M, an organization described in sec- tion 501(c)(3), was created by B, an individual, to provide scholarships for students of a private sec- ondary school, U, an organization described in sec- tion 509(a)(1). U establishes the scholarship criteria, publicizes the scholarship program, solicits and re- views applications, and selects the scholarship recip- ients. M invests its assets and disburses the funds for scholarships to the recipients selected by U. Based on these facts, M is not a functionally integrated Type III supporting organization. Example 5. J, an organization described in section 501(c)(3), is a supporting organization to community foundation G, an organization described in section 509(a)(1). In addition to maintaining field-of-inter- est funds, sponsoring donor advised funds, and gen- eral grant-making activities, G also engages in activi- ties to beautify and maintain local parks. J’s activities consist of maintaining all of the local parks in the area of community foundation G by activities such as es- tablishing and maintaining trails, planting trees and removing trash. But for the activities of J, G would normally engage in these efforts to beautify and main- tain the local parks. Based on these facts, J qualifies as a functionally integrated Type III supporting or- ganization under paragraph (4)(i)(A) of this section. Example 6. W, an organization described in sec- tion 501(c)(3), is organized as a supporting organiza- tion to Z, a public university in state D described in section 509(a)(1). Z is the sole named supported or- ganization in W’s articles of incorporation. Under the laws of state D, assets under Z’s control are subject to the appropriation process for any state D purpose by an action of the state D legislature. Z transfers the intellectual property developed by Z’s science de- partment to W for patenting and licensing, including making the property available to the public. The roy- alties generated by the licenses are shared among Z, the original researcher, and W. W invests and man- ages its share of the royalties and other income gen- erated by the patenting and licensing of the intellec- tual property to build an endowment to support Z. W also conducts further research on scientific pro- cesses developed at Z and makes the results of this research available to the public. W’s research activi- ties make up a substantial part of W’s total activities. But for the activities of W, Z would normally con- duct the research engaged in by W and manage the royalties from the intellectual property generated at Z. W’s activities of investing and managing its share of royalties and other income are not considered ac- tivities that directly further the exempt purposes of Z under paragraph (i)(4)(ii) of this section. However, because Z’s assets are subject to the appropriation process of state D for purposes unrelated to Z’s ex- empt purposes, Z is W’s sole supported organization, and a substantial part of W’s activities directly further Z’s exempt purposes, W qualifies for the exception in paragraph (i)(4)(iii) of this section. Accordingly, based on these facts, W qualifies as a functionally in- tegrated Type III supporting organization under para- graph (4)(i)(A) of this section. Example 7. P, an alumni association described in section 501(c)(3), was formed to promote a spirit of loyalty among graduates of Y University, a public university in state E described in section 509(a)(1), and to effect united action in promoting the general welfare of Y. Y is the sole named supported organi- zation in P’s articles of incorporation. Under the laws of state E, Y’s assets are subject to the appropriation process for any state E purpose. P manages an en- dowment created by gifts from the alumni. A spe- cial committee of Y’s governing board meets with P and makes recommendations as to the allocation of P’s program of gifts and scholarships to the university and its students. More than a substantial part of P’s activities, however, consist of maintaining records of alumni and publishing a bulletin to keep alumni aware of the activities of the university. But for the activities of P, Y would normally engage in these same activities. P’s endowment management activ- ities are not considered activities that directly further the exempt purposes of Y under paragraph (i)(4)(ii) of this section. However, because Y’s assets are subject to the appropriation process of state E for purposes unrelated to Y’s exempt purposes, Y is P’s sole sup- ported organization, and a substantial part of P’s ac- tivities directly further Y’s exempt purposes, P qual- ifies for the exception in paragraph (i)(4)(iii) of this section. Accordingly, based on these facts, P qualifies as a functionally integrated Type III supporting or- ganization under paragraph (4)(i)(A) of this section. (5)Integral part test — non-function- ally integrated Type III supporting organ- ization—(i) A supporting organization meets the integral part test as a non-func- tionally integrated Type III supporting organization if it satisfies either: (A) The distribution requirement of paragraph (i)(5)(ii) of this section and the attentiveness requirement of paragraph (i)(5)(iii) of this section; or (B) The pre-1970 trust requirements of paragraph (i)(9) of this section. (ii)Distribution requirement.(A)The supporting organization must distribute, with respect to each taxable year, to or for the use of one or more supported organi- zations, amounts equaling or exceeding the supporting organization’s annual dis- tributable amount for such year, as defined in paragraph (i)(5)(ii)(B) of this section, on or before the last day of such taxable year. (B)Annual distributable amount.Ex- cept as provided in paragraphs (i)(5)(ii)(C) and (i)(5)(ii)(D) of this section, the annual distributable amount for a taxable year is: (1) five percent of the excess of the ag- gregate fair market value of all non-ex- empt-use assets (determined under para- graph (i)(8) of this section) over the ac- quisition indebtedness with respect to such non-exempt-use assets, determined under section 514(c)(1) without regard to the tax- able year in which the indebtedness was in- curred; increased by (2) amounts received or accrued as re- payments of amounts which were taken into account by the organization to meet the distribution requirement imposed in paragraph (i)(5)(ii)(A) of this section for any taxable year; increased by (3) amounts received or accrued from the sale or other disposition of property to the extent that the acquisition of such prop- erty was taken into account by the organi- zation to meet the distribution requirement imposed in paragraph (i)(5)(ii)(A) of this section for any taxable year; and reduced by (4) the amount of taxes imposed on the supporting organization for such taxable year under subtitle A of the Code. (C)First taxable year of existence.The annual distributable amount for the first taxable year an organization is treated as a non-functionally integrated Type III sup- porting organization is zero. (D)Emergency temporary reduction. The Secretary may provide by publica- tion in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b)ofthischapter)for a temporary reduction in the annual dis- tributable amount in the case of a disaster or emergency. (E)Reasonable cause exception.An organization that fails to meet the distri- bution requirement of paragraph (i)(5)(ii) of this section will not be classified as a private foundation in the taxable year for which it fails to meet such distribution re- quirement, if the organization establishes to the satisfaction of the Secretary that: (1) The failure was due solely to an in- correct valuation of assets, a ministerial er- ror, or unforeseen events or circumstances that are beyond the organization’s control, (2) The failure was due to reasonable cause and not to willful neglect, and (3) The distribution requirement is met within 180 days after the date the incor- rect valuation or ministerial error was or should have been discovered, or 180 days after the organization is first able to make its required payout notwithstanding the un- foreseen event or circumstances. (iii)Attentiveness requirement.(A) General rule. A non-functionally inte- grated Type III supporting organization must distribute one-third or more of its annual distributable amount to one or more supported organizations that are at- tentive to the operations of the supporting organization and to which the supporting organization is responsive under para- graph (i)(3) of this section. 2009–47 I.R.B.676November 23, 2009 (B) Except as provided in paragraph (i)(5)(iii)(C) of this section, a supported organization is attentive to the operations of the supporting organization if the sup- porting organization distributes annually to such supported organization an amount of support that represents a sufficient part of the supported organization’s to- tal support. A supporting organization must meet the requirements of para- graphs (i)(5)(iii)(B)(1), (i)(5)(iii)(B)(2), or (i)(5)(iii)(B)(3)ofthissectiontodemon- strate that it is attentive. If a supporting organization makes payments to, or for the use of, a particular department or school of a university, hospital or church, the total support of the department or school shall be substituted for the total support of the beneficiary organization. (1) The supporting organization dis- tributes annually to the supported organ- ization an amount that is 10 percent or more of the supported organization’s total support. (2) The amount of support received from the supporting organization is nec- essary to avoid the interruption of the carrying on of a particular function or activity. The support is necessary if the supporting organization or the supported organization earmarks the support for a particular program or activity, even if such program or activity is not the supported organization’s primary program or activity so long as such program or activity is a substantial one. (3) Based on the consideration of all pertinent factors, including the number of supported organizations, the length and na- ture of the relationship between the sup- ported organization and supporting organ- ization and the purpose to which the funds are put, the amount of support is a suffi- cient part of a supported organization’s to- tal support. Normally the attentiveness of a supported organization is motivated by reason of the amounts received from the supporting organization. Thus, the more substantial the amount involved, in terms of a percentage of the supported organiza- tion’s total support, the greater the likeli- hood that the required degree of attentive- ness will be present. However, in deter- mining whether the amount received from the supporting organization is sufficient to ensure the attentiveness of the supported organization to the operations of the sup- porting organization (including attentive- ness to the nature and yield of such sup- porting organization’s investments), evi- dence of actual attentiveness by the sup- ported organization is of almost equal im- portance. A supported organization is not considered to be attentive solely because it has enforceable rights against the support- ing organization under state law. (C)Distribution to donor-advised fund does not establish attentiveness. Notwith- standing paragraphs (i)(5)(iii)(A) and (i)(5)(iii)(B) of this section, a supported organization will not be considered at- tentive to the operations of a supporting organization with respect to any amount received from the supporting organization that is held by the supported organization in a donor advised fund described in sec- tion 4966(d)(2). (iv) Paragraph (5)(iii)(B)(2)ofthissec- tion is illustrated byexamples 1and2and paragraph (5)(iii)(B) of this section is illus- trated byexamples 3and4: Example 1. K, an organization described in sec- tion 501(c)(3), annually pays over an amount equal to five percent of its assets to L, a museum described in section 509(a)(2). K meetsthe responsiveness test described in paragraph (i)(3) of this section with re- spect to L. In recent years,L has earmarked the in- come received from K to underwrite the cost of carry- ing on a chamber music series consisting of 12 perfor- mances a year that are performed for the general pub- lic free of charge at its premises. The chamber music series is not L’s primary activity. L could not con- tinue the performances without K’s support. Based on these facts, K meets the requirements of paragraph (i)(5)(iii)(B)(2)ofthissection. Example 2. M, an organization described in sec- tion 501(c)(3), pays annually an amount equal to five percent of its assets to the Law School of N Univer- sity, an organization described in section 509(a)(1). M meets the responsiveness test described in para- graph(i)(3)ofthissectionwithrespecttoN.Mhas earmarked the income paid over to N’s Law School to endow a chair in International Law. Without M’s continued support, N could not continue to maintain this chair. Based on these facts, M meets the require- ments of paragraph (i)(5)(iii)(B)(2)ofthissection. Example 3. R is a charitable trust created under the will of B, who died in 1969. R’s purpose is to hold assets as an endowment for S, a hospital, T, a uni- versity, and U, a national medical research organiza- tion (all organizations described in section 509(a)(1) and specifically named in the trust instrument), and to distribute all of the income each year in equal shares among the three named beneficiaries. Each year, R pays an amount equal to five percent of its assets to each of S, T, and U. Such payments are less than one percent of each organization’s total support. Based on these facts, R does not meet the attentiveness re- quirement of paragraph (i)(5)(iii)(B). However, be- cause B died prior to November 20, 1970, R could, upon meeting all of the requirements of paragraph (i)(9) of this section, be considered as meeting the re- quirements of paragraph (i)(5)(i)(B) of this section. Example 4. O is an organization described in sec- tion 501(c)(3). O is organized to support five private universities, V, W, X, Y and Z, each of which is de- scribed in section 509(a)(1). O meets the responsive- ness test under paragraph (i)(3) of this section only as to V. Each year, O distributes five percent of the fair market value of its non-exempt-use assets in equal amounts to the five universities. O distributes annu- ally more than 10 percent of the total annual support of V and W. Based on these facts O does not meet the requirements of paragraph (i)(5)(iii) of this sec- tion. Although both V and W are attentive to the op- erations of O under paragraph (i)(5)(iii)(B)(1)ofthis section, O is only responsive to V. Accordingly, O distributes only one-fifth (i.e., less than the required one-third) of its annual distributable amount to sup- ported organization(s) that are both attentive to O and to which O is also responsive under paragraph (i)(3) of this section. (6)Distributions. For purposes of this paragraph (i)(6), the amount of a distri- bution made to a supported organization is the fair market value of such property as of the date such distribution is made. The amount of a distribution will be de- termined solely on the cash receipts and disbursements method of accounting de- scribed in section 446(c)(1). Distributions that count toward the distribution require- ment imposed in paragraph (i)(5)(ii)(A) of this section shall include: (i) any amount paid to a supported or- ganization to accomplish its exempt pur- poses, (ii) any amount paid to acquire an as- set used (or held for use) to carry out the exempt purposes of the supported organi- zation(s), and (iii) any amount expended by the sup- porting organization for reasonable and necessary administrative expenses. (7)Carryover of excess amounts—(i) In general. If with respect to any taxable year, an excess amount, as defined in para- graph (i)(7)(ii) of thissection, is created, such excess amount may be used to reduce the annual distributable amount in any of the five taxable years immediately follow- ing the taxable year in which the excess amount is created (the “carryover period”). An excess amount created in a taxable year cannot be carried over beyond the succeed- ing five taxable years. With respect to any taxable year to which an excess amount is carried over, in determining whether an ex- cess amount is created in that taxable year, the annual distributable amount is reduced first to the extent of any excess amounts carried over and then to the extent of dis- tributions made in that taxable year. November 23, 20096772009–47 I.R.B. (ii)Excess amount. An excess amount is created for any taxable year beginning after the effective date of these regulations if the total distributions made by a sup- portingorganizationtoitssupportedor- ganization(s) for such taxable year exceeds the supporting organization’s annual dis- tributable amount for such taxable year, as defined in paragraph (i)(5)(ii)(B) of this section, determined without regard to this paragraph. (8)Valuation of assets—(i)Gen- eral rules. (A) For purposes of deter- mining the organization’s annual dis- tributable amount, as defined in paragraph (i)(5)(ii)(B) of this section, the determi- nation of the fair market value of the non-exempt-use assets shall be made in the year preceding the year of the required distribution under paragraph (i)(5)(ii)(A) of this section. The aggregate fair market value of all non-exempt-use assets of a supporting organization is the sum of: (1) The average of the fair market val- ues on a monthly basis of securities for which market quotations are readily avail- able (within the meaning of paragraph (i)(8)(iii)(A)(1)ofthissection); (2) The average of the support- ing organization’s cash balances on a monthly basis (less the same amount of cash balances excluded under paragraph (i)(8)(i)(C)(2)(iv)ofthissection)fromthe computation of the annual distributable amount); and (3) The fair market value of all other as- sets (except those assets described in para- graph (i)(8)(i)(B) or paragraph (i)(8)(i)(C) of this section) for the period of time dur- ing the taxable year for which such assets are held by the supporting organization. (B)Certain assets excluded. For pur- poses of this paragraph, the non-exempt- use assets taken into account in determin- ing the annual distributable amount de- scribed in paragraph (i)(5)(ii)(B) of this section shall not include the following: (1) Any future interest (such as a vested or contingent remainder, whether legal or equitable) of a supporting organization in the income or corpus of any real or per- sonal property, other than a future inter- est created by the supporting organization after August 17, 2006, until all interven- ing interests in, and rights to the actual possession or enjoyment of, such property have expired, or, although not actually re- duced to the supporting organization’s pos- session, until such future interest has been constructively received by the supporting organization, as where it has been credited to the supporting organization’s account, set apart for the supporting organization, or otherwise made available so that the sup- porting organization may acquire it at any time or could have acquired it if notice of intention to acquire had been given; (2) The assets of an estate until such time as such assets are distributed to the supporting organization or, due to a pro- longed period of administration, such es- tate is considered terminated for Federal income tax purposes by operation of Treas. Reg. §1.641(b)–3(a); (3) Any present interest of a support- ing organization in any trust created and funded by another person; (4) Any pledge to the supporting organ- ization of money or property (whether or not the pledge may be legally enforced); and (5) Any assets used (or held for use) to carry out the exempt purposes of the supported organization(s). (C)Assets used (or held for use) to carry out the exempt purposes of the sup- ported organization(s)—(1)In general. For purposes of paragraph (i)(8)(i)(B)(5) of this section, an asset is “used (or held for use) to carry out the exempt purposes of the supported organization(s)” only if the asset is actually used by the support- ing organization in activities that carry out the exempt purposes of its supported organization(s), or if the supporting organ- ization owns the asset and establishes to the satisfaction of the Commissioner that its immediate use for such exempt purpose is not practical (based on the facts and circumstances of the particular case) and that definite plans exist to commence such use on behalf of its supported organiza- tion(s) within a reasonable period of time. Consequently, assets that are held for the production of income or for investment (for example, stocks, bonds, interest-bear- ing notes, endowment funds, or, generally, leased real estate) are not being used (or held for use) to carry out the exempt pur- poses of the supported organization(s), even though the income from such assets is used to carry out such exempt purposes. Whether an asset is held for the production of income or for investment rather than used (or held for use) by the supporting organization to carry out the exempt pur- poses of the supported organization(s) is a question of fact. For example, an office building used for the purpose of providing offices for employees engaged in the man- agement of endowment funds is not being used (or held for use) by the supporting organization to carry out the exempt pur- poses of the supported organization(s). However, where property is used both to carry out the exempt purposes of the supported organization(s) and for other purposes, if the former use represents 95 percent or more of the total use, such property shall be considered to be used ex- clusively to carry out an exempt purpose of the supported organization(s). If the use of such property to carry out the exempt purposes of the supported organization(s) represents less than 95 percent of the total use, reasonable allocation between such use and other use must be made for pur- poses of this paragraph. Property acquired by the supporting organization to be used to carry out the exempt purposes of the supported organization(s) may be con- sidered as used (or held for use) to carry out such exempt purposes even though the property, in whole or in part, is leased for a limited period of time during which arrangements are made for its conversion to the use for which it was acquired, pro- vided such income-producing use of the property does not exceed a reasonable pe- riod of time. Generally, one year shall be deemed to be a reasonable period of time for purposes of the immediately preceding sentence. Where the income-producing use continues beyond a reasonable period of time, the property shall not be deemed to be used by the supporting organization to carry out the exempt purposes of the supported organization(s), but, instead, as of the time the income-producing use be- comes unreasonable, such property shall be treated as disposed of within the mean- ing of paragraph (i)(5)(ii)(B)(3)ofthis section to the extent that the acquisition of the property was taken into account by the organization to meet the distribu- tion requirement imposed in paragraph (i)(5)(ii)(A) of this section for any taxable year. If, subsequently, the property is used by the supporting organization to carry out the exempt purposes of the supported organization(s), a distribution to its sup- ported organization(s) in the amount of its then fair market value, determined in accordance with the rules contained in this 2009–47 I.R.B.678November 23, 2009 paragraph (i)(8), shall be deemed to have been made as of the time such exempt purpose use begins. (2)Illustrations. Examples of assets that are “used (or held for use) to carry out the exempt purposes of the supported or- ganization(s)” include, but are not limited to, the following: (i) Administrative assets, such as office equipment and supplies that are used by employees or consultants of the supporting organization, to the extent such assets are devoted to and used directly in the admin- istration of the supporting organization’s activities that carry out the exempt pur- poses of the supported organization(s). (ii) Real estate or the portion of a build- ingusedbythesupportingorganizationdi- rectly in its activities to carry out the ex- empt purposes of the supported organiza- tion(s). (iii) Physical facilities used in the sup- porting organization’s activities to carry out the exempt purposes of the supported organization(s), such as paintings or other works of art owned by the supporting or- ganization that are on public display, fix- tures and equipment in classrooms, and research facilities and related equipment, which under the facts and circumstances serve a useful purpose in the conduct of such exempt purpose activities. (iv) The reasonable cash balances nec- essary to cover current administrative ex- penses and other normal and current dis- bursements directly connected to the sup- porting organization’s activities to carry out the exempt purposes of the supported organization(s). Thereasonable necessary cash balances will generally be deemed to be an amount, computed on an annual ba- sis, equal to one and one-half percent of the fair market value of all of the support- ing organization’s assets, other than assets used or held for use to carry out the ex- empt purposes of the supported organiza- tion(s), without regard to this paragraph (i)(8)(i)(C)(2)(iv). However, if the Com- missioner is satisfied that under the facts and circumstances an amount in addition to such one and one-half percent is neces- sary for payment of such expenses and dis- bursements, then such additional amount may also be excluded from the amount of assets described in paragraph (i)(5)(ii)(B) of this section. All remaining cash bal- ances, including amounts necessary to pay any tax imposed by section 511 or sec- tion 4943, are to be included in the assets described in paragraph (i)(5)(ii)(B) of this section. (v) Any property leased by the support- ing organization incarrying out the ex- empt purposes of its supported organiza- tion(s) at no cost (or at a nominal rent) to the lessee, such as the leasing of reno- vated apartments to low-income tenants at a low rental as part of the lessor-supporting organization’s program for rehabilitating a blighted portion of the community. (ii)Valuation of assets — timing.For purposes of determining the annual dis- tributable amount for a taxable year, the supporting organization’s assets are to be valued over the preceding taxable year. (iii)Valuation of assets—(A)Certain securities.(1) For purposes of this para- graph, a supporting organization may use any reasonable method to determine the fair market value on a monthly basis of securities for which market quotations are readily available, as long as such method is consistently used. (2) For purposes of this paragraph, mar- ket quotations are readily available if a se- curity is: (i)ListedontheNewYorkStockEx- change, the American Stock Exchange, or any city or regional exchange in which quotations appear ona daily basis, in- cluding foreign securities listed on a recognized foreign national or regional exchange; (ii) Regularly traded in the national or regional over-the-counter market, for which published quotations are available; or (iii) Locally traded, for which quota- tions can readily be obtained from estab- lished brokerage firms. (3) For purposes of this paragraph, if the supporting organization can show that the value of securities determined on the basis of market quotations as provided by para- graph (i)(8)(iii)(A)(2)ofthissection,does not reflect the fair market value thereof be- cause: (i) The securities constitute a block of securities so large in relation to the volume of actual sales on the existing market that it could not be liquidated in a reasonable time without depressing the market; (ii) The securities are securities in a closely held corporation and sales are few or of a sporadic nature; and/or (iii) The sale of the securities would re- sult in a forced or distress sale because the securities could not be offered to the public for sale without first being registered un- der the Securities Act of 1933 or because of other factors, then the price at which the securities could be sold as such outside the usual market, as through an underwriter, may be a more accurate indication of value than market quotations. On the other hand, if the securities to be valued represent a controlling interest, either actual or effec- tive, in a going business, the price at which other lots change hands may have little re- lation to the true value of the securities. No decrease in the fair market value of any given class of securities determined on the basis of market quotations as provided by paragraph (i)(8)(iii)(A)(2)ofthissection shall be allowed except as authorized by this paragraph, and no such decrease shall in the aggregate exceed 10 percent of the fair market value of such class of securi- ties so determined on the basis of market quotations and without regard to this para- graph. (4) In the case of securities described in paragraph (i)(8)(iii)(A)(2 ) of this sec- tion, that are held in trust for, or on behalf of, a supporting organization by a bank or other financial institution that values such securities periodically by use of a com- puter, a supporting organization may deter- mine the correct value of such securities by use of such computer pricing system, pro- vided the Commissioner has accepted such computer pricing system as a valid method for valuing securities for Federal estate tax purposes. (B)Cash. In order to determine the amount of a supporting organization’s cash balances, the supporting organization shall value its cash on a monthly basis by aver- aging the amount of cash on hand as of the first day of each month and as of the last day of each month. (C)Common trust funds. If a support- ing organization owns a participating in- terest in a common trust fund (as defined in section 584) established and adminis- tered under a plan providing for the pe- riodic valuation of participating interests during the fund’s taxable year and the re- porting of such valuations to participants, the value of the supporting organization’s interest in the common trust fund based upon the average of the valuations reported to the supporting organization during its November 23, 20096792009–47 I.R.B. taxable year will ordinarily constitute an acceptable method of valuation. (D)Other assets.(1) Except as otherwise provided in paragraph (i)(8)(iii)(D)(2) of this section, the fair market value of assets other than those de- scribed in paragraphs (i)(8)(iii)(A) through (i)(8)(iii)(C) of this section, shall be de- termined annually. Thus, the fair market value of securities other than those de- scribed in paragraph (i)(8)(iii)(A) of this section shall be determined in accordance with this paragraph (i)(8)(iii)(D)(1). If, however, a supporting organization owns voting stock of an issuer of unlisted secu- rities and has, or together with disqualified persons or another supporting organization has, effective control of the issuer (within the meaning of §53.4943–3(b)(3)(ii)), then to the extent that the issuer’s assets consist of shares of listed securities issues, such assets shall be valued monthly on the basis of market quotations or in accordance with section 4942(e)(2)(B),if applicable. Thus, for example, if a supporting organization and a disqualified person together own all of the unlisted voting stock of a holding company that in turn holds a portfolio of securities of issues that are listed on the New York Stock Exchange, in determin- ing the net worth of the holding company, the underlying portfolio securities are to be valued monthly by reference to mar- ket quotations for their issues unless a decrease in such value is authorized in ac- cordance with section 4942(e)(2)(B). Such determination may be made by employees of the supporting organization or by any other person without regard to whether such person is a disqualified person with respect to the supporting organization. A valuation made pursuant to the provi- sions of this paragraph, if accepted by the Commissioner, shall be valid only for the taxable year for which it is made. A new valuation made in accordance with these provisions is required for the succeeding taxable year. (2) If the requirements of this paragraph are met, the fair market value of any inter- est in real property, including any improve- ments thereon, may be determined on a five-year basis. Such value must be de- termined by means of a certified, indepen- dent appraisal made in writing by a qual- ified person who is neither a disqualified person with respect to, nor an employee of, the supporting organization. The appraisal is certified only if it contains a statement at the end thereof to the effect that, in the opinion of the appraiser, the values placed on the assets appraised were determined in accordance with valuation principles reg- ularly employed in making appraisals of such property using all reasonable valua- tion methods. The supporting organization shall retain a copy of the independent ap- praisal for its records. If a valuation made pursuant to the provisions of this para- graph in fact falls within the range of rea- sonable values for the appraised property, such valuation may be used by the sup- porting organization for the taxable year for which the valuation is made and for each of the succeeding four taxable years. Any valuation made pursuant to the pro- visions of this paragraph may be replaced during the five-year period by a subse- quent five-year valuation made in accor- dance with the rules set forth in this para- graph (i)(8)(iii)(D)(2), or with an annual valuation made in accordance with para- graph (i)(8)(iii)(D)(1) of this section, and the most recent such valuation of such as- sets shall be used in computing the sup- porting organization’s annual distributable amount. A valuation made in accordance with this paragraph must be made no later than the last day of the first taxable year for which such valuation is applicable. A valuation, if properly made in accordance with the rules set forth in this paragraph, will not be disturbed by the Commissioner during the five-year period for which it ap- plies even if the actual fair market value of such property changes during such period. (3) For purposes of this paragraph (i)(8)(iii)(D)(3), commonly accepted methods of valuation must be used in making an appraisal. Valuations made in accordance with the principles stated in the regulations under section 2031 consti- tute acceptable methods of valuation. The term “appraisal,” as used in this paragraph (i)(8)(iii)(D)(3), means a determination of fair market value and is not to be construed in a technical sense peculiar to particular property or interests therein, such as, for example, mineral interests in real property. (E)Definition of “securities”.For purposes of this paragraph (i)(8)(iii)(E), the term “securities” includes, but is not limited to, common and preferred stocks, bonds, and mutual fund shares. (F)Valuation date.(1) In the case of an asset that is required to be valued on an annual basis as provided in paragraph (i)(8)(iii)(D)(1) of this section, such asset maybevaluedasofanydayinthesupport- ing organization’s taxable year to which such valuation applies, provided the sup- porting organization follows a consistent practice of valuing such asset as of such date in all taxable years. (2) A valuation described in paragraph (i)(8)(iii)(D)(2)ofthissectionmaybe made as of any day in the first taxable year of the supporting organization to which such valuation is to be applied. (G)Assets held for less than a tax- able year. For purposes of this paragraph (i)(8)(iii)(G), any asset described in para- graph (i)(8)(i)(A) of this section that is held by a supporting organization for only part of a taxable year shall be taken into ac- count for purposes of determining the sup- porting organization’s annual distributable amount for such taxable year by multiply- ing the fair market value of such asset (as determined pursuant to paragraph (i)(8) of this section) by a fraction, the numerator of which is the number of days in such taxable year that the supporting organiza- tion held such asset and the denominator of which is the number of days in such tax- able year. (9)Exception to integral part test for certain trusts. A trust (whether or not ex- empt from taxation under section 501(a)) that on November 20, 1970, met and continues to meet the requirements of paragraphs (i)(9)(i) through (i)(9)(v) of this section, shall be treated as meeting the requirements of the integral part test (whether or not it meets the requirements of paragraph (i)(4) or paragraph (i)(5) of this section) if for taxable years beginning after October 16, 1972, the trustee of such trust makes annual written reports to all of the beneficiary supported organizations with respect to such trust setting forth a description of the assets of the trust, in- cluding a detailed list of the assets and the income produced by such assets. A trust organization that meets the requirements of this paragraph may request a ruling that it is described in section 509(a)(3) in such manner as the Commissioner may prescribe. (i) All the unexpired interests in the trust are devoted to one or more pur- poses described in section 170(c)(1) or (2)(B) and a deduction was allowed with respect to such interests under sections 2009–47 I.R.B.680November 23, 2009 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), 2522, or corresponding pro- visions of prior law (or would have been allowed such a deduction if the trust had not been created before 1913); (ii) The trust was created prior to November 20, 1970, and did not receive any grant, contribution, bequest or other transfer on or after such date. For purpose of this paragraph (i)(9)(ii), a split-interest trust described in section 4947(a)(2) that was created prior to November 20, 1970, was irrevocable on such date, and that becomes a charitabletrust described in section 4947(a)(1) after such date shall be treated as having been created prior to such date; (iii) The trust is required by its govern- ing instrument to distribute all of its net income currently to a designated benefi- ciary supported organization. Where more than one beneficiary supported organiza- tion is designated in the governing instru- ment of a trust, all of the net income must be distributable and must be distributed currently to each of such beneficiary orga- nizations in fixed shares pursuant to such governing instrument. For purposes of this paragraph (i)(9)(iii), the governing instru- ment of a charitable trust shall be treated as requiring distribution to a designated bene- ficiary organization where the trust instru- ment describes the charitable purpose of the trust so completely that such descrip- tion can apply to only one existing ben- eficiary organization and is of sufficient particularity as to vest in such organiza- tion rights against the trust enforceable in a court possessing equitable powers; (iv) The trustee of the trust does not have discretion to vary either the benefi- ciaries or the amounts payable to the ben- eficiaries. For purposes of this paragraph (i)(9)(iv), a trustee shall not be treated as having such discretion where the trustee has discretion to make payments of prin- cipal to the single section 509(a)(1) or (2) organization that is currently entitled to re- ceive all of the trust’s income or where the trust instrument provides that the trustee may cease making income payments to a particular charitable beneficiary in the event of certain specific occurrences, such as the loss of exemption under section 501(c)(3) or classification under section 509(a)(1) or (2) by the beneficiary or the failure of the beneficiary to carry out its charitable purpose properly; and (v) None of the trustees would be dis- qualified persons within the meaning of section 4946(a) (other than foundation managers under section 4946(a)(1)(B)) with respect to the trust if such trust were treated as a private foundation. (10)Foreign supported organizations. A supporting organization is not operated in connection with one or more supported organizations if it supports any supported organization organized outside of the United States. (11)Transition rules—(i) A Type III supporting organization in existence on the effective date of these regulations that met and continues to meet the requirements of Treas. Reg. §1.509(a)–4(i)(3)(ii), as in effect prior to the date these regulations are published as final or temporary regu- lations, will be treated as meeting the re- quirements of paragraph (i)(4)(i) of this section until the first day of the organiza- tion’s first taxable year beginning after the date these regulations are published as fi- nal or temporary regulations. (ii) A Type III supporting organiza- tion in existence on the effective date of these regulations that met and continues to meet the requirements of Treas. Reg. §1.509(a)–4(i)(3)(iii), as in effect prior to the date these regulations are published as final or temporary regulations, will be treated as meeting the requirements of paragraph (i)(5)(i) of this section until the first day of its second taxable year beginning after the effective date of these regulations. Beginning in the first taxable year beginning aftertheeffectivedateof these regulations, such organizations must value their assets according to paragraph (i)(8) of this section. Beginning in the second taxable year beginning after the ef- fective date of these regulations (and in all succeeding taxable years), these organiza- tions must meet all of the requirements of paragraph (i)(5)(i) of this section. (iii) For the first taxable year after the effective date of these regulations, the an- nual distributable amount for Type III sup- porting organizations that are not function- ally integrated is zero. (12)Effective/applicability date.These regulations are effective on the date of pub- lication of the Treasury decision adopting these rules as final or temporary regula- tions. ***** Part 53—FOUNDATION AND SIMILAR EXCISE TAXES Par. 3. The authority citation for part 53 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 4. In §53.4943–11, section head- ing is revised and paragraphs (f) and (g) are added to read as follows: §53.4943–11 Effective/Applicability date. ***** (f) Special transitional rule for pri- vate foundations that qualified as Type III supporting organizations before August 17, 2006. The present holdings of a pri- vate foundation that qualified as a Type III supporting organization under section 509(a)(3) immediately before August 17, 2006, and that was reclassified as a pri- vate foundation under section 509(a) on or after August 17, 2006, solely as a result of the rules enacted by section 1241 of the Pension Protection Act of 2006, Public Law 109–280 (120 Stat. 780), will be determined using the same rules that apply to Type III supporting organizations under section 4943(f)(7). (g) Special transitional rule for Type III supporting organizations created as trusts before November 20, 1970. A trust that qualifies as a Type III supporting organization under section 509(a)(3) and meets the requirements of Treas. Reg. §1.509(a)–4(i)(9) will be treated as a “functionally integrated Type III support- ing organization” for purposes of section 4943(f)(3)(A). LindaE.Stiff, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on September 23, 2009, 8:45 a.m., and published in the issue of the Federal Register for September 24, 2009, 74 F.R. 48672) Notice of Proposed Rulemaking Clarification of Controlled Group Qualification Rules REG–135005–07 AGENCY: Internal Revenue Service (IRS), Treasury. November 23, 20096812009–47 I.R.B. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains a proposed regulation to clarify which corporations are includedinacontrolled group of corporations. The regulation clarifies that a corporation that satisfies the controlled group rules for stock own- ership and qualification is a member of such group, without regard to its status as a component member. DATES: Written or electronic comments and request for a public hearing must be received by December 28, 2009. ADDRESSES: Send submissions to: CC:PA:LPD:PR(REG–135005–07), room 5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Wash- ington, 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–135005–07), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically viatheFederaleRulemaking Portal atwww.regulations.gov(IRS REG–135005–07). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Grid Glyer (202) 622–7930; concerning submissions of comments, Oluwafunmilayo Taylor (202) 622–7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background Section 1563(a) defines four types of controlled groups of corporations. This definition is relevant for purposes of allo- cating certain tax benefits under section 1561, as well as other provisions of the Internal Revenue Code that incorporate the concept of a controlled group of cor- porations. In order for a corporation to be included in one of these controlled groups under section 1563(a), it must satisfy the stock ownership test for that type of group. In addition, other rules in section 1563 may also apply in order to determine whether a corporation satisfies the appli- cable stock ownership test. For example, section 1563(c) excludes certain stock of a corporation (for example, nonvoting stock that is limited and preferred as to dividends) from the definition of stock, section 1563(d) determines when to take into account the stock owned by a corpora- tion, and section 1563(e) determines when stock of a corporation is constructively owned. Section 1563(b) describes which cor- porations are “component members” of a section 1563(a) controlled group of corpo- rations for purposes of section 1561 and section 1563, in part by excluding certain corporations under section 1563(b)(2). For example, certain special purpose corporations, such as tax-exempt corpora- tions, are treated as excluded members and not as component members. See sections 1563(b)(2)(B) through 1563(b)(2)(E). Notwithstanding that a corporation is not a “component member,” however, the IRS has consistently taken the position that the determination of whether a corporation is included in a controlled group under section 1563(a) is determined without ap- plying section 1563(b). Explanation of Provisions The Treasury Department and the IRS propose to amend §1.1563–1 to clarify that an excluded member of a controlled group, such as a corporation described in sections 1563(b)(2)(B) through 1563(b)(2)(E), is nevertheless a member of the group. Specifically, the proposal will add para- graph (a)(1)(ii) to §1.1563–1 and anEx- ampleto §1.1563–1(b)(4). Section 1563 was originally promul- gated to limit the use of the tax bene- fititemsdescribedinsection1561bythe component members of a controlled group as defined in section 1563. S. Rep. No. 88–830 at 150 (1964), 1964–1 (Part 2) CB 502, 654. However, since then, certain other statutory and regulatory provisions have referenced the controlled group rules of section 1563 for other purposes. Some of these provisions adjust the definition of a controlled group to state that certain pro- visions of section 1563 do not apply. For example, section 41(f)(1)(A)(i) provides that, in determining the amount of the credit for increasing research ac- tivities under section 41, all members of the same controlled group shall be treated as a single taxpayer. Section 41(f)(5)(B) provides that the term “controlled group of corporations” has the same meaning given to such term by section 1563(a), ex- cept that the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. The effect of not applying section 1563(a)(4) is to treat two or more life insurance companies, which would otherwise be treated as members of a separate life insurance controlled group, each as a member of a controlled group de- scribed in section 1563(a)(1)–(3) (Section 1563(e)(3)(B) deals with an application of the constructive ownership rules; however, because that application is not relevant to the issue being addressed in this preamble, it will not be further discussed.). However, section 41(f)(5) and similar provisions make no reference to subsection (b) of section 1563. Section 1563(b), among other things, defines which corporations are “component members” and “excluded members” for purposes of section 1561 and section 1563. Nevertheless, some taxpayers have argued that a corporation that is an “excluded member” within the meaning of section 1563(b)(2) cannot, as a consequence, be a “member” of a sec- tion 1563(a) controlled group generally. This line of argument tends to equate a corporation’s membership generally with such corporation’s status as a component member. The Treasury Department and the IRS disagree with such arguments and believe that an excluded member under section 1563(b)(2), while not a component mem- ber of a controlled group under section 1563(b)(1), is nevertheless a member of a controlled group under section 1563(a). See also §1.414(b)–1(a). This position is supported by the clear language of the statute. Section 1563(b)(2) provides, in the introductory text, that a “corporation which is amemberof a con- trolled group of corporations . . . shall be treated as an excluded member of such group . . .”. Moreover, this position is also supported by the legislative his- tory for sections 1561 and 1563, which states that “the determination of the cor- porations included within a parent–sub- sidiary controlled group, or a brother–sis- ter controlled group, is made without re- gard to the type of corporation involved.” S. Rep. No. 88–830 at 152 (1964), 1964–1 (Part 2) CB 505, 656; see also H.R. Rep. 88–749 at A201–202 (1963), 1964–1 (Part 2) CB 248, 449–450 (providing examples where an “excluded member” is treated as 2009–47 I.R.B.682November 23, 2009 a member of a controlled group of corpo- rations). Compare section 1504(a)(1)(A) (affiliated group comprised of includible corporations only).Therefore, this pro- posed regulation clarifies that a corpora- tion identified in section 1563(b)(2) as an excluded member of a controlled group is nevertheless a member of such group for purposes of section 1563(a). Accord- ingly, a corporation whose stock is held by such an excluded member may be treated as a component member of the controlled group of corporations. Finally, this proposed regulation further illustrates that an excluded member of a controlled group is treated as a member of suchgroupbyaddinganexampledemon- strating that a controlled group can consist solely of excluded members. 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 this 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) this regulation has been sub- mitted to the Chief Counsel for Advocacy of the Small BusinessAdministration for comment on its impact on small business. Comments and Requests for Public Hearing Before this proposed regulation is adopted as a final regulation, considera- tion will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Depart- ment request comments on the clarity of the proposed regulation and how it can be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be sched- uled if requested in writing by any person that timely submits written or electronic 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 In formation The principal author of this regulation is Grid Glyer of the Office of Associate Chief Counsel (Corporate). However, other per- sonnel from the IRS and the Treasury De- partment participated in its development. ***** Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1563–1 is amended by: 1. Redesignating paragraph (a)(1)(ii) as paragraph (a)(1)(iii) and adding paragraph (a)(1)(ii). 2. AddingExample 4to paragraph (b)(4). 3. Adding a sentence at the end of para- graph (e). The additions to read as follows: §1.1563–1 Definition of controlled group of corporations and component members and related concepts. (a) * * * (ii)Special rules. In determining whether a corporation is included in a controlled group of corporations, section 1563(b) shall not be taken into account. For rules defining a component member of a controlled group of corporations, includ- ing rules defining an excluded member and an additional member, see section 1563(b) and paragraph (b) of this section. **** (b) * * * (4) * * * Example 4. Individual A owns all of the stock of corporations X, Y and Z. Each of these corporations is an S corporation. X, Y, and Z are each members of a brother–sister controlled group, even though each such corporation is treated as an excluded member of such group. See §1.1563–1(b)(2)(ii)(C). ***** (e) * * * Paragraph (a)(1)(ii) of this section applies to taxable years beginning on or after the date of publication in the Federal Registerof the Treasury decision adopting these rules as final regulations. LindaE.Stiff, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on September 28, 2009, 8:45 a.m., and published in the issue of the Federal Register for September 29, 2009, 74 F.R. 49829) Announcement of Disciplinary Sanctions From the Office of Professional Responsibility Announcement 2009-84 TheOfficeofProfessionalResponsi- bility (OPR) announcesrecent disciplinary sanctions involving attorneys, certified public accountants, enrolled agents, en- rolled actuaries, enrolled retirement plan agents, and appraisers. These individuals are subject to the regulations governing practice before the Internal Revenue Ser- vice (IRS), which are set out in Title 31, Code of Federal Regulations, Part 10, and which are published in pamphlet form as Treasury Department Circular No. 230. The regulations prescribe the duties and restrictions relating to such practice and prescribe the disciplinary sanctions for violating the regulations. The disciplinary sanctions to be im- posed for violation of the regulations are: Disbarred from practice before the IRS—An individual who is disbarred is November 23, 20096832009–47 I.R.B. not eligible to represent taxpayers before the IRS. Suspended from practice before the IRS—An individual who is suspended is not eligible to represent taxpayers before the IRS during the term of the suspension. Censured in practice before the IRS—Censure is a public reprimand. Un- like disbarment or suspension, censure does not affect an individual’s eligibility to represent taxpayers before the IRS, but OPR may subject the individual’s future representations to conditions designed to promote high standards of conduct. Monetary penalty—A monetary penalty may be imposed on an individual who engages in conduct subject to sanc- tion or on an employer, firm, or entity if the individual was acting on its behalf and if it knew, or reasonably should have known, of the individual’s conduct. Disqualification of appraiser—An appraiser who is disqualified is barred from presenting evidence or testimony in any administrative proceeding before the Department of the Treasury or the IRS. Under the regulations, attorneys, cer- tified public accountants, enrolled agents, enrolled actuaries, and enrolled retirement plan agents may not assist, or accept assis- tance from, individuals who are suspended or disbarred with respect to matters consti- tuting practice (i.e., representation) before the IRS, and they may not aid or abet sus- pended or disbarred individuals to practice before the IRS. Disciplinary sanctions are described in these terms: Disbarred by decision after hearing, Suspended by decision after hearing, Censured by decision after hearing, Monetary penalty imposed after hear- ing, and Disqualified after hearing—An administrative law judge (ALJ) conducted an evidentiary hearing upon OPR’s com- plaint alleging violation of the regulations and issued a decision imposing one of these sanctions. After 30 days from the issuance of the decision, in the absence of an appeal, the ALJ’s decision became the final agency decision. Disbarred by default decision, Sus- pended by default decision, Censured by default decision, Monetary penalty im- posed by default decision, and Disqual- ified by default decision—An ALJ, after findingthatnoanswertoOPR’scomplaint had been filed, granted OPR’s motion for a default judgment and issued a decision im- posing one of these sanctions. Disbarment by decision on appeal, Suspended by decision on appeal, Cen- sured by decision on appeal, Monetary penalty imposed by decision on ap- peal, and Disqualified by decision on appeal—The decision of the ALJ was appealed to the agency appeal authority, acting as the delegate of the Secretary of the Treasury, and the appeal authority issued a decision imposing one of these sanctions. Disbarred by consent, Suspended by consent, Censured by consent, Mone- tary penalty imposed by consent, and Disqualified by consent—In lieu of a disciplinary proceeding being instituted or continued, an individual offered a con- sent to one of these sanctions and OPR accepted the offer. Typically, an offer of consent will provide for: suspension for an indefinite term; conditions that the individual must observe during the sus- pension; and the individual’s opportunity, after a stated number of months, to file with OPR a petition for reinstatement af- firming compliance with the terms of the consent and affirming current eligibility to practice (i.e., an active professional license or active enrollment status). An enrolled agent or an enrolled retirement plan agent may also offer to resign in order to avoid a disciplinary proceeding. Suspended by decision in expedited proceeding, Suspended by default de- cision in expedited proceeding, Sus- pended by consent in expedited pro- ceeding—OPR instituted an expedited proceeding for suspension (based on cer- tain limited grounds, including loss of a professional license and criminal convic- tions). OPR has authority to disclose the grounds for disciplinary sanctions in these situations: (1) an ALJ or the Secretary’s delegate on appeal has issued a decision on or after September 26, 2007, which was theeffectivedateofamendmentstothe regulations that permit making such deci- sions publicly available; (2) the individual has settled a disciplinary case by signing OPR’s “consent to sanction” form, which requires consenting individuals to admit to one or more violations of the regulations and to consent to the disclosure of the in- dividual’s own return information related to the admitted violations (for example, failure to file Federal income tax returns); or (3) OPR has issued a decision in an expedited proceeding for suspension. Announcements of disciplinary sanc- tions appear in the Internal Revenue Bul- letin at the earliest practicable date. The sanctions announced below are alphabet- ized first by the names of states and sec- ond by the last names of individuals. Un- less otherwise indicated, section numbers (e.g., §10.51) refer to the regulations. City & StateNameProfessionalDisciplinary SanctionEffective Date(s) Designation Louisiana ShreveportBlackman, Jr., Gordon N. AttorneySuspended by default decision in expedited proceeding under § 10.82 (conviction under 26 U.S.C. § 7203, failure to file income tax return) Indefinite from October 30, 2008 2009–47 I.R.B.684November 23, 2009 City & StateNameProfessionalDisciplinary SanctionEffective Date(s) Designation Maryland BaltimoreGisriel, Michael U.AttorneySuspended by default decision in expedited proceeding under §10.82 (attorney disbarment) Indefinite from October 30, 2008 Massachusetts NorwellPalmer, Andrew P.AttorneySuspended by default decision in expedited proceeding under §10.82 (suspension of attorney license) Indefinite from October 30, 2008 New Jersey TeaneckBekritsky, StanleyCPASuspended by decision in expedited proceeding under § 10.82 (conviction under 18 U.S.C. § 371, conspiracy to defraud the United States by impeding and impairing the IRS & aiding and abetting the filing of a false partnership tax return) Indefinite from November 2, 2008 SomersetFink, Edward M.AttorneySuspended by default decision in expedited proceeding under § 10.82 (attorney disbarment) Indefinite from October 30, 2008 TeaneckMatthews, Sam S.AttorneySuspended by default decision in expedited proceeding under § 10.82 (attorney disbarment) Indefinite from October 30, 2008 New York St. JamesHytner, James T.AttorneySuspended by default decision in expedited proceeding under § 10.82 (suspension of attorney license) Indefinite from October 30, 2008 Garden CityKrupnick, Sheldon M. AttorneySuspended by default decision in expedited proceeding under § 10.82 (suspension of attorney license) Indefinite from October 30, 2008 Cold Spring Harbor Woghin, Steven M.AttorneySuspended by default decision in expedited proceeding under § 10.82 (attorney disbarment) Indefinite from October 30, 2008 November 23, 20096852009–47 I.R.B. City & StateNameProfessionalDisciplinary SanctionEffective Date(s) Designation North Carolina FayettevilleRwejuna, Israel W.CPASuspended by default decision in expedited proceeding under §10.82 (revocation of CPA license) Indefinite from October 30, 2008 2009–47 I.R.B.686November 23, 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. November 23, 2009i2009–47 I.R.B. Numerical Finding List 1 Bulletins 2009–27 through 2009–47 Announcements: 2009-56, 2009-28 I.R.B.145 2009-57, 2009-29 I.R.B.158 2009-58, 2009-29 I.R.B.158 2009-59, 2009-29 I.R.B.158 2009-60, 2009-30 I.R.B.166 2009-61, 2009-33 I.R.B.246 2009-62, 2009-33 I.R.B.247 2009-63, 2009-33 I.R.B.248 2009-64, 2009-36 I.R.B.319 2009-65, 2009-36 I.R.B.319 2009-66, 2009-37 I.R.B.364 2009-67, 2009-38 I.R.B.388 2009-68, 2009-38 I.R.B.388 2009-69, 2009-40 I.R.B.475 2009-70, 2009-41 I.R.B.499 2009-71, 2009-40 I.R.B.475 2009-72, 2009-41 I.R.B.500 2009-73, 2009-41 I.R.B.500 2009-74, 2009-42 I.R.B.537 2009-75, 2009-42 I.R.B.537 2009-76, 2009-45 I.R.B.627 2009-77, 2009-43 I.R.B.567 2009-78, 2009-44 I.R.B.594 2009-79, 2009-46 I.R.B.628 2009-80, 2009-46 I.R.B.646 2009-81, 2009-46 I.R.B.647 2009-83, 2009-46 I.R.B.647 2009-84, 2009-47 I.R.B.683 Notices: 2009-51, 2009-28 I.R.B.128 2009-55, 2009-31 I.R.B.170 2009-57, 2009-29 I.R.B.147 2009-58, 2009-30 I.R.B.163 2009-59, 2009-31 I.R.B.170 2009-60, 2009-32 I.R.B.181 2009-61, 2009-32 I.R.B.181 2009-62, 2009-35 I.R.B.260 2009-63, 2009-34 I.R.B.252 2009-64, 2009-36 I.R.B.307 2009-65, 2009-39 I.R.B.413 2009-66, 2009-39 I.R.B.418 2009-67, 2009-39 I.R.B.420 2009-68, 2009-39 I.R.B.423 2009-69, 2009-35 I.R.B.261 2009-70, 2009-34 I.R.B.255 2009-71, 2009-35 I.R.B.262 2009-72, 2009-37 I.R.B.325 2009-73, 2009-38 I.R.B.369 2009-74, 2009-38 I.R.B.370 2009-75, 2009-39 I.R.B.436 Notices— Continued: 2009-76, 2009-43 I.R.B.554 2009-77, 2009-40 I.R.B.449 2009-78, 2009-40 I.R.B.452 2009-79, 2009-40 I.R.B.454 2009-81, 2009-40 I.R.B.455 2009-82, 2009-41 I.R.B.491 2009-83, 2009-44 I.R.B.588 2009-84, 2009-44 I.R.B.592 2009-85, 2009-45 I.R.B.598 2009-86, 2009-46 I.R.B.629 2009-87, 2009-46 I.R.B.630 2009-88, 2009-47 I.R.B.654 Proposed Regulations: REG-140492-02, 2009-43 I.R.B.559 REG-159704-03, 2009-46 I.R.B.632 REG-160871-04, 2009-47 I.R.B.657 REG-152166-05, 2009-32 I.R.B.183 REG-112994-06, 2009-28 I.R.B.144 REG-127270-06, 2009-42 I.R.B.534 REG-155929-06, 2009-47 I.R.B.665 REG-135005-07, 2009-47 I.R.B.681 REG-136563-07, 2009-41 I.R.B.497 REG-108045-08, 2009-43 I.R.B.557 REG-113289-08, 2009-33 I.R.B.244 REG-116614-08, 2009-42 I.R.B.536 REG-130200-08, 2009-31 I.R.B.174 REG-139068-08, 2009-43 I.R.B.558 Revenue Procedures: 2009-30, 2009-27 I.R.B.27 2009-31, 2009-27 I.R.B.107 2009-32, 2009-28 I.R.B.142 2009-33, 2009-29 I.R.B.150 2009-34, 2009-34 I.R.B.258 2009-35, 2009-35 I.R.B.265 2009-36, 2009-35 I.R.B.304 2009-37, 2009-36 I.R.B.309 2009-38, 2009-37 I.R.B.362 2009-39, 2009-38 I.R.B.371 2009-40, 2009-39 I.R.B.438 2009-41, 2009-39 I.R.B.439 2009-42, 2009-40 I.R.B.459 2009-43, 2009-40 I.R.B.460 2009-44, 2009-40 I.R.B.462 2009-45, 2009-40 I.R.B.471 2009-46, 2009-42 I.R.B.507 2009-47, 2009-42 I.R.B.524 2009-50, 2009-45 I.R.B.617 2009-51, 2009-45 I.R.B.625 Revenue Rulings: 2009-18, 2009-27 I.R.B.1 2009-19, 2009-28 I.R.B.111 2009-20, 2009-28 I.R.B.112 Revenue Rulings— Continued: 2009-21, 2009-30 I.R.B.162 2009-22, 2009-31 I.R.B.167 2009-23, 2009-32 I.R.B.177 2009-24, 2009-36 I.R.B.306 2009-25, 2009-38 I.R.B.365 2009-26, 2009-38 I.R.B.366 2009-27, 2009-39 I.R.B.404 2009-28, 2009-39 I.R.B.391 2009-29, 2009-37 I.R.B.322 2009-30, 2009-39 I.R.B.391 2009-31, 2009-39 I.R.B.395 2009-32, 2009-39 I.R.B.399 2009-33, 2009-40 I.R.B.447 2009-34, 2009-42 I.R.B.502 2009-35, 2009-44 I.R.B.568 2009-36, 2009-47 I.R.B.650 Tax Conventions: 2009-79, 2009-46 I.R.B.628 Treasury Decisions: 9452, 2009-27 I.R.B.1 9453, 2009-28 I.R.B.114 9454, 2009-32 I.R.B.178 9455, 2009-33 I.R.B.239 9456, 2009-33 I.R.B.188 9457, 2009-41 I.R.B.482 9458, 2009-43 I.R.B.547 9459, 2009-41 I.R.B.480 9460, 2009-44 I.R.B.584 9461, 2009-41 I.R.B.488 9462, 2009-42 I.R.B.504 9463, 2009-40 I.R.B.442 9465, 2009-43 I.R.B.542 9466, 2009-43 I.R.B.551 9468, 2009-44 I.R.B.570 1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin 2009–26, dated June 29, 2009. 2009–47 I.R.B.iiNovember 23, 2009 Finding List of Current Actions on Previously Published Items 1 Bulletins 2009–27 through 2009–47 Announcements: 2006-93 Superseded by Ann. 2009-62, 2009-33 I.R.B.247 Notices: 2002-3 Modified and superseded by Notice 2009-68, 2009-39 I.R.B.423 2004-67 Supplemented and superseded by Notice 2009-59, 2009-31 I.R.B.170 2006-70 Obsoleted by T.D. 9453, 2009-28 I.R.B.114 2006-109 Superseded in part by Rev. Proc. 2009-32, 2009-28 I.R.B.142 2007-7 Modified by Notice 2009-82, 2009-41 I.R.B.491 2008-30 Amplified and clarified by Notice 2009-75, 2009-39 I.R.B.436 2008-43 Obsoleted by REG-113289-08, 2009-33 I.R.B.244 2009-28 Clarified by Notice 2009-69, 2009-35 I.R.B.261 2009-31 Amplified by Rev. Proc. 2009-43, 2009-40 I.R.B.460 2009-42 Amplified by Rev. Proc. 2009-43, 2009-40 I.R.B.460 Proposed Regulations: REG-130200-08 Hearing cancelled by Ann. 2009-81, 2009-46 I.R.B.647 Revenue Procedures: 97-27 Clarified and modified by Rev. Proc. 2009-39, 2009-38 I.R.B.371 97-49 Modified and superseded by Rev. Proc. 2009-31, 2009-27 I.R.B.107 Revenue Procedures— Continued: 2002-44 Superseded by Rev. Proc. 2009-44, 2009-40 I.R.B.462 2002-59 Superseded by Rev. Proc. 2009-41, 2009-39 I.R.B.439 2005-63 Modified by Rev. Proc. 2009-39, 2009-38 I.R.B.371 2007-44 Modified by Rev. Proc. 2009-36, 2009-35 I.R.B.304 2007-65 Modified by Ann. 2009-69, 2009-40 I.R.B.475 2008-34 Superseded by Rev. Proc. 2009-46, 2009-42 I.R.B.507 2008-38 Superseded by Rev. Proc. 2009-30, 2009-27 I.R.B.27 2008-44 Superseded by Rev. Proc. 2009-35, 2009-35 I.R.B.265 2008-52 Amplified, clarified, and modified by Rev. Proc. 2009-39, 2009-38 I.R.B.371 2008-59 Superseded by Rev. Proc. 2009-47, 2009-42 I.R.B.524 2008-65 Modified by Rev. Proc. 2009-33, 2009-29 I.R.B.150 2009-16 Modified by Rev. Proc. 2009-33, 2009-29 I.R.B.150 2009-39 Modified by Ann. 2009-67, 2009-38 I.R.B.388 Revenue Rulings: 74-346 Superseded by Rev. Rul. 2009-34, 2009-42 I.R.B.502 75-190 Superseded by Rev. Rul. 2009-34, 2009-42 I.R.B.502 75-398 Superseded by Rev. Rul. 2009-34, 2009-42 I.R.B.502 Revenue Rulings— Continued: 75-526 Superseded by Rev. Rul. 2009-34, 2009-42 I.R.B.502 2009-22 Corrected by Ann. 2009-74, 2009-42 I.R.B.537 2009-29 Corrected by Ann. 2009-74, 2009-42 I.R.B.537 Treasury Decisions: 9456 Corrected by Ann. 2009-73, 2009-41 I.R.B.500 1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2009–1 through 2009–26 is in Internal Revenue Bulletin 2009–26, dated June 29, 2009. November 23, 2009iii2009–47 I.R.B. 2009–47 I.R.B.November 23, 2009 November 23, 20092009–47 I.R.B. INTERNAL REVENUE BULLETIN The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin- tendent of Documents when their subscriptions must be renewed. CUMULATIVE BULLETINS The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the Superintendent of Documents. ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Select Businesses. Under Businesses Topics, select More Topics. Then select Internal Revenue Bulletins. INTERNAL REVENUE BULLETINS ON CD-ROM Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders) or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January. HOW TO ORDER Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance, detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to six weeks, plus mailing time, for delivery. WE WELCOME COMMENTS ABOUT THE INTERNAL REVENUE BULLETIN If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page (www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Internal Revenue Service W ashington,DC20224 Official Business Penalty for Private Use, $300
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