Internal Revenue Bulletin 2014-42 (PDF rendition): IRS Notices

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

# Internal Revenue bulletin
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## HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

## INCOME TAX

Notice 2014-52, page 712.

This notice describes regulations that the IRS and the Treasury
Department will issue with respect to inversions and related
transactions.

### Notice 2014-57, page 723.

This notice provides the 2014-2015 special per diem rates
for taxpayers to use in substantiating the amount of ordinary
and necessary business expenses incurred while traveling
away from home. The notice includes (1) the special transpor-
tation industry rate, (2) the rate for the incidental expenses only
deduction, and (3) the rates and list of high-cost localities for
the high-low substantiation method.

## ADMINISTRATIVE

Notice 2014-57, page 723.

This notice provides the 2014-2015 special per diem rates
for taxpayers to use in substantiating the amount of ordinary
and necessary business expenses incurred while traveling
away from home. The notice includes (1) the special transpor-
tation industry rate, (2) the rate for the incidental expenses only
deduction, and (3) the rates and list of high-cost localities for
the high-low substantiation method.

## EMPLOYEE PLANS

### T.D. 9695, page 707.

This treasury decision contains final regulations relating to the
requirements for filing certain employee retirement benefit plan
statements, returns, and reports on magnetic media. The term
magnetic media includes electronic filing, as well as other
magnetic media specifically permitted under applicable regu-
lations, revenue procedures, publications, forms, instructions,
or other guidance on the IRS gov Internet website. These
regulations affect plan administrators and employers maintain-
ing retirement plans that are subject to various employee
benefit plan reporting requirements under the Internal Revenue
Code.

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

Department of the Treasury
Internal Revenue Service

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## The IRS Mission

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

## Introduction

The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

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

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.

Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

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

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

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

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

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

The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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

### Section 6057 .- Annual registration, etc.

26 CFR 301.6057-3: Employee Retirement Benefit
Plan Returns Required on Magnetic Media

T.D. 9695

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301

### Employee Retirement Benefit Plan Returns Required on Magnetic Media

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final Regulations.

SUMMARY: This document contains fi-
nal regulations relating to the require-
ments for filing certain employee retire-
ment benefit plan statements, returns, and
reports on magnetic media. The term mag-
netic media includes electronic filing, as
well as other magnetic media specifically
permitted under applicable regulations,
revenue procedures, publications, forms,
instructions, or other guidance on the IRS-
.gov Internet website. These regulations
affect plan administrators and employers
maintaining retirement plans that are sub-
ject to various employee benefit reporting
requirements under the Internal Revenue
Code (Code).

DATES: Effective Date: These regula-
tions are effective September 29, 2014.

Applicability Date: For dates of appli-
cability, see §§ 301.6057-3(f), 301.6058-
2(f), and 301.6059-2(f).

FOR FURTHER INFORMATION
CONTACT: William Gibbs or Pamela Ki-
nard at (202) 317-6799 (not a toll-free
number).

### SUPPLEMENTARY INFORMATION:

#### Background

This document contains amendments
to 26 CFR part 301. On August 30, 2013,
a notice of proposed rulemaking (REG-
111837-13) relating to the requirements
for filing certain employee retirement ben-
efit plan statements, returns, and reports
on magnetic media was published in the
Federal Register (78 FR 53704). The
proposed regulations provide that a plan
administrator (or, in certain situations, an
employer maintaining a plan) required by
the Code or regulations to file at least 250
returns during the calendar year that in-
cludes the first day of the plan year must
use magnetic media to file certain state-
ments, returns, and reports required under
sections 6057, 6058, and 6059 of the
Code. Comments responding to the notice
of proposed rulemaking were received.
No public hearing was requested or held.
After consideration of all the comments,
the proposed regulations are adopted as
modified by this Treasury decision.

#### Summary of Comments and Explanation of Revisions

I. Use of FIRE System for Filing Form
8955-SSA

The proposed regulations under section
6057 provide that a registration statement
required under section 6057(a) or a noti-
fication required under section 6057(b)
must be filed on magnetic media if the
filer is required by the Code or regulations
to file at least 250 returns during the cal-
endar year that includes the first day of the
plan year. Magnetic media is defined as
electronic filing or other media specifically
permitted under applicable regulations, rev-
enue procedures, publications, forms, in-
structions, or other guidance on the IRS.gov
Internet website. See § 601.601(d)(2)(ii)(b)
of this chapter.

The form used to satisfy the requirement
to file the registration statement under sec-
tion 6057 is Form 8955-SSA, "Annual Reg-
istration Statement Identifying Separated
Participants with Deferred Vested Benefits."

The preamble to the proposed regulations
noted that many filers of the Form 8955-
SSA already voluntarily file electronically
with the IRS, but did not identify the system
currently used to file electronically.

Commenters expressed concern that
not identifying the "Filing Information
Returns Electronically" (FIRE) system as
the system currently used to file the Form
8955-SSA electronically could imply that
the use of the FIRE system is not (or, in
the near future, will not be) an acceptable
system to file the Form 8955-SSA elec-
tronically. In response to this concern, the
Department of the Treasury and the IRS
confirm that the FIRE system is an accept-
able electronic system to file the Form
8955-SSA. If, in the future, the IRS re-
places the FIRE system with another elec-
tronic filing system, sufficient time will be
provided to filers of the Form 8955-SSA
to accommodate programming and other
implementation needs.

Commenters also stated that certain as-
pects of the FIRE system need improve-
ment, including the lack of an efficient
batch processing system and costs associ-
ated with using the system. The specific
requirements of the FIRE system are out-
side the scope of these regulations, but
comments on possible FIRE system im-
provements have been forwarded to the
staff at the IRS responsible for the FIRE
system.

##### II. Application of the E-file Mandate to One-Participant Plans

The proposed regulations under section
6058 provide that a return required under
section 6058 must be filed on magnetic
media if the filer is required by the Code
or regulations to file at least 250 returns
during the calendar year that includes the
first day of the plan year. The preamble to
the proposed regulations noted that filers
of the Form 5500, "Annual Return/Report
of Employee Benefit Plan," and Form
5500-SF, "Short Form Annual Return/
Report of Small Employee Benefit Plan,"
are already required, pursuant to Depart-
ment of Labor (DOL) rules, to file these
returns electronically through the comput-

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erized ERISA Filing Acceptance System
(EFAST2). The preamble to the proposed
regulations also noted that, while elec-
tronic filing is not available for the Form
5500-EZ, "Annual Return of One-
Participant (Owners and their Spouses)
Retirement Plan," certain filers that would
otherwise file the Form 5500-EZ on pa-
per may instead file the Form 5500-SF
electronically through EFAST2.

One commenter asked whether the pro-
posed regulations impose additional filing
obligations, other than the requirement to
file electronically, on one-participant
plans that meet the 250-return threshold
for mandatory electronic filing. In partic-
ular, the commenter asked whether a one-
participant plan would now be required to
file an actuarial report under section 6059
when filing the Form 5500-SF in lieu of a
paper Form 5500-EZ.

In response to this comment, the De-
partment of the Treasury and the IRS con-
firm that a one-participant plan (or a for-
eign plan) required to file electronically
must use the Form 5500-SF to file the
information required on the Form 5500-
EZ, but will not be required to attach to
the filing a Schedule SB, "Single-Employer
Defined Benefit Plan Actuarial Informa-
tion," or Schedule MB, "Multiemployer
Defined Benefit Plan and Certain Money
Purchase Plan Actuarial Information."

##### III. Economic Hardship Waiver

As noted in the proposed regulations,
the Commissioner may waive the require-
ment to file electronically in cases of un-
due economic hardship. Because the De-
partment of the Treasury and the IRS
believe that electronic filing will not im-
pose significant burdens on the taxpayers
covered by these regulations, the Com-
missioner anticipates granting waivers of
the electronic filing requirement in only
exceptional cases. The Department of the
Treasury and the IRS anticipate issuing
guidance that will set forth procedures
whereby a taxpayer may request a hard-
ship waiver for electronically filing the
Form 8955-SSA and the Form 5500 se-
ries. The Department of the Treasury and
the IRS anticipate that the guidance would
not provide hardship waiver procedures
for any electronic filing requirement for a
form that a filer is already required to file

electronically, such as Form 5500 and
Form 5500-SF, which filers are already
required to file electronically through
EFAST2.

#### IV. Request to Extend Proposed Effective Date

Commenters requested that the effec-
tive date of these regulations be extended
from the effective date set forth in the
proposed regulations. The proposed regu-
lations provided that they would be effec-
tive for plan years that begin on or after
January 1, 2014, but only for filings with
a filing deadline (not taking into account
extensions) after December 31, 2014.
With respect to the filing requirements
under section 6057, commenters specifi-
cally requested that the IRS confirm that
the use of the existing FIRE system will
satisfy the electronic filing requirement
for the Form 8955-SSA through 2016.
Because there is no current plan to change
the electronic system used to file the Form
8955-SSA prior to the end of calendar
year 2016, and significant changes to the
form itself are not anticipated, these reg-
ulations generally retain the proposed ef-
fective date for section 6057 filings. How-
ever, the regulations do provide an
extended effective date for plans with
short 2014 plan years by providing that
these regulations only apply to filings with
a filing deadline on or after July 31, 2015.
For example, a plan with a short 2014 plan
year ending November 30, 2014, would
have a filing deadline of June 30, 2015,
and thus would not be required to file
electronically for that plan year.

With respect to the filing requirements
under sections 6058 and 6059, these reg-
ulations extend the effective date by 12
months, so that the regulations generally
apply to returns and actuarial reports re-
quired to be filed for plan years that begin
on or after January 1, 2015, but only for
filings with a filing deadline (not taking
into account extensions) after December
31, 2015. As announced in the proposed
regulations, the IRS anticipates adding
items on the Form 5500 and Form
5500-SF relating solely to Code require-
ments and intends to provide an optional
paper-only form containing those Code-
related items for use by small filers. It is
anticipated that the form will be available

to satisfy the filing requirements with re-
spect to the 2015 plan year.

V. Certain Delinquent Filers Required
to File on Paper

Notice 2014-35 (2014-23 IRB 1072)
provides administrative relief from IRS
penalties under sections 6652(d), 6652(e),
and 6692 for a failure to file timely in
accordance with annual reporting require-
ments under sections 6047(e), 6057, 6058,
and 6059. This administrative relief from
IRS penalties applies to late filers that
satisfy the requirements of the Delinquent
Filer Voluntary Compliance Program
("DFVC Program") administered by
DOL. In order to be eligible for relief
from the IRS penalties for a plan year, the
late filer, within a certain time period after
completing the filing under the DFVC
Program, must file on paper with the IRS
any delinquent Form 8955-SSA for the
plan year.

Similarly, Revenue Procedure 2014-32
(2014-23 IRB 1073) establishes a pilot
program providing administrative relief
for late filers of the Form 5500-EZ. In
general, in order to receive relief from IRS
penalties, the late filer must submit a com-
plete Form 5500-EZ, including all re-
quired schedules and attachments, for
each plan year for which the late filer is
seeking penalty relief. A complete return
for a plan year consists of a signed, filled-
out paper version of the Form 5500-EZ
for that plan year.

Although the Department of the Trea-
sury and IRS generally encourage filers to
file electronically whenever possible, the
IRS currently does not have the capability
to accept electronic filing of a delinquent
Form 8955-SSA or Form 5500-EZ.
Thus, a delinquent filing of a Form 8955-
SSA or Form 5500-EZ that complies with
the paper filing requirements in Notice
2014-35 and Rev. Proc. 2014-32, is ex-
cluded from the electronic filing require-
ments under these regulations. The IRS
will announce those statements and re-
turns that are excluded from electronic
filing under these regulations in its publi-
cations, forms, and instructions.

#### Effective Date

The regulations apply to employee re-
tirement benefit plan statements and noti-

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fications required to be filed under section
6057 for plan years that begin on or after
January 1, 2014, but only for filings with
a filing deadline (not taking into account
extensions) on or after July 31, 2015.

For employee retirement benefit plan
returns and reports required to be filed
under sections 6058 and 6059, the regula-
tions apply for plan years that begin on or
after January 1, 2015, but only for filings
with a filing deadline (not taking into ac-
count extensions) after December 31,
2015.

#### Special Analyses

It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been deter-
mined that 5 U.S.C. 533(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. In
addition, it is hereby certified that any
collection of information contained in this
regulation will not have a significant eco-
nomic impact on a substantial number of
small entities, and therefore no flexibility
analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is required. Pur-
suant to section 7805(f) of the Internal
Revenue Code, these regulations have
been submitted to the Office of Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comments on its
impact on small businesses.

The certification is based on the fact
that §§ 301.6057-1, 301.6058-1, and
301.6059-1 currently require filing with
the IRS of information under sections
6057, 6058, and 6059 in accordance with
applicable forms, schedules, and accom-
panying instructions. The regulations
merely require that this information be
filed electronically by persons required to
file at least 250 returns for the calendar
year, consistent with section 6011(e)(2)(A),
which provides that, in prescribing regu-
lations providing standards for determin-
ing which returns must be filed on mag-
netic media or in other machine-readable
form, the Secretary shall not require any
person to file returns on magnetic media
unless the person is required to file at least
250 returns during the calendar year.
Many small entities are unlikely to file
250 returns or more during the calendar

year. Filers of the Form 5500 and Form
5500-SF are already required to file the
returns electronically through EFAST2
pursuant to DOL regulations. In addition,
many filers of the Form 8955-SSA al-
ready voluntarily file electronically with
the IRS through the use of the FIRE sys-
tem.

Further, if a taxpayer's operations are
computerized, reporting in accordance
with the regulations should be less costly
than filing on paper. The Department of
the Treasury and the IRS have determined
that taxpayers should be able to comply at
a reasonable cost with the requirement in
these regulations to file employee retire-
ment statements, returns, and reports on
magnetic media. In addition, the regula-
tions provide that the IRS may waive the
electronic filing requirements upon a
showing of economic hardship.

#### Drafting Information

The principal authors of these regula-
tions are William Gibbs and Pamela R.
Kinard, Office of Division Counsel/Asso-
ciate Chief Counsel (Tax Exempt and
Government Entities). However, other
personnel from the IRS and the Treasury
Department participated in the develop-
ment of these regulations.

* * * * *

#### Amendments to the Regulations

Accordingly, 26 CFR part 301 is
amended as follows:

Part 301-PROCEDURE AND
ADMINISTRATION

Par. 1. The authority for part 301 con-
tinues to read in part as follows:

Authority: 26 U.S.C. 7508* * *

Par. 2. Section 301.6057-3 is added to
read as follows:

§ 301.6057-3 Required use of magnetic
media for filing requirements relating to
deferred vested retirement benefit.

(a) Magnetic media filing requirements
under section 6057. A registration state-
ment required under section 6057(a) or a
notification required under section
6057(b) with respect to an employee ben-
efit plan must be filed on magnetic media
if the filer is required by the Internal Rev-

enue Code or regulations to file at least
250 returns during the calendar year that
includes the first day of the plan year.
Returns filed on magnetic media must be
made in accordance with applicable reve-
nue procedures, publications, forms, in-
structions, or other guidance on the IRS-
.gov Internet website. In prescribing
revenue procedures, publications, forms,
instructions, or other guidance on the IRS-
.gov Internet website, the Commissioner
may direct the type of magnetic media
filing. See § 601.601(d)(2)(ii)(b) of this
chapter.

(b) Economic hardship waiver. The
Commissioner may waive the require-
ments of this section in cases of undue
economic hardship. The principal factor in
determining hardship will be the amount,
if any, by which the cost of filing the
registration statements or notifications on
magnetic media in accordance with this
section exceeds the cost of filing the reg-
istration statements or notifications on
other media. A request for a waiver must be
made in accordance with applicable pub-
lished guidance, publications, forms, in-
structions, or other guidance on the IRS.gov
Internet website. See § 601.601(d)(2)(ii)(b)
of this chapter. The waiver will specify
the type of filing (that is, a registration
statement or notification under section
6057) and the period to which it applies.
In addition, the waiver will be subject to
such terms and conditions regarding the
method of filing as may be prescribed by
the Commissioner.

(c) Failure to file. If a filer required to
file a registration statement or other noti-
fication under section 6057 fails to file the
statement or other notification on mag-
netic media when required to do so by this
section, the filer is deemed to have failed
to file the statement or other notification.
See section 6652(d) for the amount im-
posed for the failure to file a registration
statement or other notification required
under section 6057. In determining
whether there is reasonable cause for the
failure to file the registration statement or
notification under section 6057,
§ 301.6652-3(b) and rules similar to the
rules in § 301.6724-1(c)(3)(ii) (regarding
undue economic hardship related to filing
information returns on magnetic media)
will apply.

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(d) Meaning of terms. The following def-
initions apply for purposes of this section.

(1) Magnetic media. The term mag-
netic media means electronic filing, as
well as other media specifically permitted
under applicable regulations, revenue pro-
cedures, or publications, forms, instruc-
tions, or other guidance on the IRS.gov
Internet website. See § 601.601(d)(2)(ii)(b)
of this chapter.

(2) Registration statement required un-
der section 6057(a). The term registration
statement required under section 6057(a)
means a Form 8955-SSA (or its succes-
sor).

(3) Notification required under section
6057(b). The term notification required
under section 6057(b) means either a
Form 8955-SSA (or its successor) or a
return in the Form 5500 series (or its
successor).

(4) Determination of 250 returns-(i)
In general. For purposes of this section, a
filer is required to file at least 250 returns
if, during the calendar year that includes
the first day of the plan year, the filer is
required to file at least 250 returns of any
type, including information returns (for
example, Forms W-2 and Forms 1099),
income tax returns, employment tax re-
turns, and excise tax returns.

(ii) Definition of filer. For purposes of
this section, the term filer means the plan
administrator within the meaning of sec-
tion 414(g). If the plan administrator
within the meaning of section 414(g) is
the employer, the special rules in
§ 1.6058-2(d)(3)(iii) will apply.

(e) Example. The following example
illustrates the provisions of paragraph
(d)(4) of this section:

Example. In 2015, P, the plan administrator of
Plan B, is required to file 252 returns (including
Forms 1099-R, "Distributions From Pensions, An-
nuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc .; " Form 8955-SSA, "An-
nual Registration Statement Identifying Separated
Participants with Deferred Vested Benefits;" Form
5500, "Annual Return/Report of Employee Benefit
Plan;" and Form 945, "Annual Return of Withheld
Federal Income Tax"). Plan B's plan year is the
calendar year. Because P is required to file at least
250 returns during the 2015 calendar year, P must file
the 2015 Form 8955-SSA for Plan B electronically.

(f) Effective/applicability date. This
section is applicable for registration state-
ments and other notifications required to
be filed under section 6057 for plan years
that begin on or after January 1, 2014, but

only for filings with a filing deadline (not
taking into account extensions) on or after
July 31, 2015.

Par. 3. Section 301.6058-2 is added to
read as follows:

§ 301.6058-2 Required use of magnetic
media for filing requirements relating to
information required in connection with
certain plans of deferred compensation.

(a) Magnetic media filing requirements
under section 6058. A return required un-
der section 6058 with respect to an em-
ployee benefit plan must be filed on mag-
netic media if the filer is required by the
Internal Revenue Code or regulations to
file at least 250 returns during the calendar
year that includes the first day of the plan
year. Returns filed on magnetic media
must be made in accordance with applica-
ble revenue procedures, publications,
forms, instructions, or other guidance on
the IRS.gov Internet website. In prescrib-
ing revenue procedures, publications,
forms, and instructions, or other guidance
on the IRS.gov Internet site, the Commis-
sioner may direct the type of magnetic
media filing. See § 601.601(d)(2)(ii)(b) of
this chapter.

(b) Economic hardship waiver. The
Commissioner may waive the require-
ments of this section in cases of undue
economic hardship. The principal factor in
determining hardship will be the amount,
if any, by which the cost of filing the
return on magnetic media in accordance
with this section exceeds the cost of filing
the returns on other media. A request for a
waiver must be made in accordance with
applicable published guidance, publica-
tions, forms, instructions, or other guid-
ance on the IRS.gov Internet website. See
§ 601.601(d)(2)(ii)(b) of this chapter. The
waiver will specify the type of filing (that
is, a return required under section 6058)
and the period to which it applies. In ad-
dition, the waiver will be subject to such
terms and conditions regarding the
method of filing as may be prescribed by
the Commissioner.

(c) Failure to file. If a filer required to
file a return under section 6058 fails to file
the return on magnetic media when re-
quired to do so by this section, the filer is
deemed to have failed to file the return.
See section 6652(e) for the amount im-

posed for the failure to file a return re-
quired under section 6058. In determining
whether there is reasonable cause for fail-
ure to file the return, § 301.6652-3(b) and
rules similar to the rules in § 301.6724-
1(c)(3)(ii) (regarding undue economic
hardship related to filing information re-
turns on magnetic media) will apply.

(d) Meaning of terms. The following def-
initions apply for purposes of this section.

(1) Magnetic media. The term mag-
netic media means electronic filing, as
well as other media specifically permitted
under applicable regulations, revenue pro-
cedures, or publications, forms, instruc-
tions, or other guidance on the IRS.gov
Internet website. See § 601.601(d)(2)(ii)(b)
of this chapter.

(2) Return required under section
6058. The term return required under sec-
tion 6058 means a return in the Form 5500
series (or its successor).

(3) Determination of 250 returns-(i)
In general. For purposes of this section, a
filer is required to file at least 250 returns
if, during the calendar year that includes
the first day of the plan year, the filer is
required to file at least 250 returns of any
type, including information returns (for
example, Forms W-2 and Forms 1099),
income tax returns, employment tax re-
turns, and excise tax returns.

(ii) Definition of filer. For purposes of
this section, the term filer means the em-
ployer or employers maintaining the plan
and the plan administrator within the
meaning of section 414(g).

(iii) Special rules relating to determin-
ing 250 returns. For purposes of applying
paragraph (d)(3)(ii) of this section, the
aggregation rules of section 414(b), (c),
(m), and (o) will apply to a filer that is or
includes an employer. Thus, for example,
a filer that is a member of a controlled
group of corporations within the meaning
of section 414(b) must file the Form 5500
series on magnetic media if the aggregate
number of returns required to be filed by
all members of the controlled group of
corporations is at least 250.

(e) Example. The following example
illustrates the provisions of paragraph
(d)(3) of this section:

Example. In 2016 Employer X (the plan sponsor
of Plan A) and P (the plan administrator of Plan A)
are required to file 267 returns. Employer X is re-
quired to file the following: one Form 1120, "U.S.
Corporation Income Tax Return;" 195 Forms W-2,

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"Wage and Tax Statement;" 25 Forms 1099-DIV,
"Dividends and Distributions;" one Form 940, "Em-
ployer's Annual Federal Unemployment (FUTA)
Tax Return;" and four Forms 941, "Employer's
Quarterly Federal Tax Return." P is required to file
40 Forms 1099-R, "Distributions From Pensions,
Annuities, Retirement, Profit-Sharing Plans, IRAs,
Insurance Contracts, etc." P and Employer X are
jointly required to file one Form 5500 series return.
Plan A's plan year is the calendar year. Because P
and Employer X, in the aggregate, are required to file
at least 250 returns during the calendar year, the
2016 Form 5500 for Plan A must be filed electron-
ically.

(f) Effective/applicability date. This
section is applicable for returns required
to be filed under section 6058 for plan
years that begin on or after January 1,
2015, but only for filings with a filing
deadline (not taking into account exten-
sions) after December 31, 2015.

Par. 4. Section 301.6059-2 is added to
read as follows:

§ 301.6059-2 Required use of magnetic
media for filing requirements relating to
periodic report of actuary.

(a) Magnetic media filing requirements
under section 6059. An actuarial report
required under section 6059 with respect
to an employee benefit plan must be filed
on magnetic media if the filer is required
by the Internal Revenue Code or regula-
tions to file at least 250 returns during the
calendar year that includes the first day of
the plan year. Actuarial reports filed on
magnetic media must be made in accor-
dance with applicable revenue procedures,
publications, forms, instructions, or other
guidance on the IRS.gov Internet website.
In prescribing revenue procedures, publi-
cations, forms, instructions, or other guid-
ance on the IRS.gov Internet website, the
Commissioner may direct the type of mag-
netic media filing. See § 601.601(d)(2)(ii)(b)
of this chapter.

(b) Economic hardship waiver. The
Commissioner may waive the require-
ments of this section in cases of undue
economic hardship. The principal factor in
determining hardship will be the amount,
if any, by which the cost of filing the
reports on magnetic media in accordance
with this section exceeds the cost of filing

the reports on other media. A request for a
waiver must be made in accordance with
applicable published guidance, publica-
tions, forms, instructions, or other guid-
ance on the IRS.gov Internet website. See
§ 601.601(d)(2)(ii)(b) of this chapter. The
waiver will specify the type of filing (that
is, an actuarial report required under sec-
tion 6059) and the period to which it ap-
plies. In addition, the waiver will be subject
to such terms and conditions regarding the
method of filing as may be prescribed by the
Commissioner.

(c) Failure to file. If a filer required to
file an actuarial report under section 6059
fails to file the report on magnetic media
when required to do so by this section, the
filer is deemed to have failed to file the
report. See section 6692 for the penalty
for the failure to file an actuarial report. In
determining whether there is reasonable
cause for failure to file the report,
§ 301.6692-1(c) and rules similar to the
rules in § 301.6724-1(c)(3)(ii) (regarding
undue economic hardship related to filing
information returns on magnetic media)
will apply.

(d) Meaning of terms. The following def-
initions apply for purposes of this section.

(1) Magnetic media. The term mag-
netic media means electronic filing, as
well as other media specifically permitted
under applicable regulations, revenue pro-
cedures, or publications, forms, instruc-
tions, or other guidance on the IRS.gov
Internet website. See § 601.601(d)(2)(ii)(b)
of this chapter.

(2) Actuarial report required under
section 6059-(i) Single employer plans.
For a single employer plan, the term ac-
tuarial report required under section
6059 means the Schedule SB, "Single-
Employer Defined Benefit Plan Actuarial
Information," of the Form 5500 series (or
its successor).

(ii) Multiemployer and certain money
purchase plans. For multiemployer and
certain money purchase plans, the term
actuarial report required under section
6059 means the Schedule MB, "Multiem-
ployer Defined Benefit Plan and Certain
Money Purchase Plan Actuarial Informa-

tion," of the Form 5500 series (or its suc-
cessor).

(3) Determination of 250 returns-(i)
In general. For purposes of this section, a
filer is required to file at least 250 returns
if, during the calendar year that includes
the first day of the plan year, the filer is
required to file at least 250 returns of any
type, including information returns (for
example, Forms W-2 and Forms 1099),
income tax returns, employment tax re-
turns, and excise tax returns.

(ii) Definition of filer. For purposes of
this section, the term filer means the plan
administrator within the meaning of sec-
tion 414(g). If the plan administrator
within the meaning of section 414(g) is
the employer, the special rules in
§ 1.6058-2(d)(3)(iii) will apply.

(e) Example. The following example
illustrates the provisions of paragraph
(d)(3) of this section:

Example. In 2016, P, the plan administrator of
Plan B (a single employer defined benefit plan), is
required to file 266 returns (including Forms
1099-R "Distributions From Pensions, Annuities,
Retirement, Profit-Sharing Plans, IRAs, Insurance
Contracts, etc." and one Form 5500 series). Plan B's
plan year is the calendar year. Because P is required
to file at least 250 returns during the calendar year, P
must file the 2016 Schedule SB of the Form 5500
series return for Plan B electronically.

(f) Effective/applicability date. This
section is applicable for actuarial reports
required to be filed under section 6059 for
plan years that begin on or after January 1,
2015, but only for filings with a filing
deadline (not taking into account exten-
sions) after December 31, 2015.

John Dalrymple
Deputy Commissioner for
Services and Enforcement

Approved September 23, 2014.

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

(Filed by the Office of the Federal Register on September
26, 2014, 8:45 a.m., and published in the issue of the Federal
Register for September 29, 2014, 79 F.R. 58256)

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## Part III. Administrative, Procedural, and Miscellaneous

### Rules Regarding Inversions and Related Transactions

Notice 2014-52

#### SECTION 1. OVERVIEW

The Department of the Treasury (Trea-
sury Department) and the Internal Reve-
nue Service (IRS) are concerned that cer-
tain recent inversion transactions are
inconsistent with the purposes of sections
7874 and 367 of the Internal Revenue
Code (Code). The Treasury Department
and the IRS understand that certain inver-
sion transactions are motivated in substan-
tial part by the ability to engage in certain
tax avoidance transactions after the inver-
sion that would not be possible in the
absence of the inversion. In light of these
concerns, this notice announces that the
Treasury Department and the IRS intend
to issue regulations under sections
304(b)(5)(B), 367, 956(e), 7701(l), and
7874 of the Code.

Section 2 of this notice describes reg-
ulations that the Treasury Department and
the IRS intend to issue that will address
transactions that are structured to avoid
the purposes of sections 7874 and 367 by
(i) for purposes of section 7874, disre-
garding certain stock of a foreign acquir-
ing corporation that holds a significant
amount of passive assets; (ii) for purposes
of sections 7874 and 367, disregarding
certain non-ordinary course distributions;
and (iii) for purposes of section 7874,
providing guidance on the treatment of
certain transfers of stock of a foreign ac-
quiring corporation (through a spin-off or
otherwise) that occur after an acquisition.

Section 3 of this notice describes reg-
ulations that the Treasury Department and
the IRS intend to issue that will address
certain tax avoidance by (i) preventing the
avoidance of section 956 through post-
inversion acquisitions by controlled for-
eign corporations (CFCs) of obligations of
(or equity investments in) the new foreign
parent corporation or certain foreign affil-
iates; (ii) preventing the avoidance of U.S.
tax on pre-inversion earnings and profits
of CFCs through post-inversion transac-
tions that otherwise would terminate the
CFC status of foreign subsidiaries and/or

substantially dilute the U.S. shareholders'
interest in those earnings and profits; and
(iii) limiting the ability to remove untaxed
foreign earnings and profits of CFCs
through related party stock sales subject to
section 304.

Section 4 of this notice provides the
effective dates of the regulations de-
scribed in this notice. Section 5 of this
notice requests comments and provides
contact information for purposes of sub-
mitting comments.

#### SECTION 2. REGULATIONS TO ADDRESS INVERSION TRANSACTIONS

.01 Regulations under Section 7874 to
Disregard Certain Stock Attributable to
Passive Assets

(a) Section 7874 Background

A foreign corporation (foreign acquir-
ing corporation) generally is treated as a
surrogate foreign corporation under sec-
tion 7874(a)(2)(B) if pursuant to a plan (or
a series of related transactions) (i) the
foreign acquiring corporation completes
after March 4, 2003, the direct or indirect
acquisition of substantially all of the prop-
erties held directly or indirectly by a do-
mestic corporation (acquisition); (ii) after
the acquisition, at least 60 percent of the
stock (by vote or value) of the foreign
acquiring corporation is held by former
shareholders of the domestic corporation
by reason of holding stock in the domestic
corporation (such stock is referred to at
times in this notice as "stock held by
reason of"); and (iii) after the acquisition,
the expanded affiliated group (EAG) that
includes the foreign acquiring corporation
does not have substantial business activi-
ties in the foreign country in which, or
under the law of which, the foreign ac-
quiring corporation is created or orga-
nized, when compared to the total busi-
ness activities of the EAG. Similar
provisions apply if a foreign acquiring
corporation acquires substantially all of
the properties constituting a trade or busi-
ness of a domestic partnership. The do-
mestic corporation or the domestic part-
nership described in this paragraph is
referred to at times in this notice as the
"domestic entity." For purposes of this
notice, a reference to a domestic corpora-

tion, a domestic partnership, or a domestic
entity includes a successor. Furthermore,
the term "EAG" has the meaning provided
in § 1.7874-4T(i)(3), and the term "in-
version transaction" means an acquisition
in which the foreign acquiring corporation
is treated as a surrogate foreign corpora-
tion under section 7874(a)(2).

Section 7874(a)(1) provides that the
taxable income of an "expatriated entity"
for any year that includes any portion of
the applicable period (as defined in sec-
tion 7874(d)(1)) shall in no event be less
than the inversion gain (as defined in sec-
tion 7874(d)(2)) of the entity for the tax-
able year. Pursuant to section 7874(a)(2)(A),
the term expatriated entity means a do-
mestic corporation or a domestic partner-
ship referred to in section 7874(a)(2)(B)(i)
(in other words, a domestic entity), or any
United States person who is related
(within the meaning of section 267(b) or
707(b)(1)) to such domestic corporation
or domestic partnership.

Under section 7874(c)(4), a transfer of
properties or liabilities (including by con-
tribution or distribution) is disregarded if
the transfer is part of a plan a principal
purpose of which is to avoid the purposes
of section 7874. In addition, section
7874(c)(6) grants the Secretary authority
to prescribe regulations as may be appro-
priate to determine whether a corporation
is a surrogate foreign corporation, includ-
ing regulations to treat stock as not stock.
Finally, section 7874(g) grants the Secre-
tary authority to provide regulations nec-
essary to carry out section 7874, including
regulations adjusting the application of
section 7874 as necessary to prevent the
avoidance of the purposes of section 7874,
including the avoidance of such purposes
through (i) the use of related persons,
pass-through or other non-corporate enti-
ties, or other intermediaries, or (ii) trans-
actions designed to have persons cease to
be (or not become) members of expanded
affiliated groups or related persons.

Under section 7874(c)(2)(B) (statutory
public offering rule), stock of the foreign
acquiring corporation that is sold in a pub-
lic offering related to the acquisition de-
scribed in section 7874(a)(2)(B)(i) is ex-
cluded from the denominator of the
fraction used for purposes of calculating

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the ownership percentage described in
section 7874(a)(2)(B)(ii) (ownership frac-
tion). The statutory public offering rule
furthers the policy that section 7874 is
intended to curtail transactions that allow
the benefits of an inversion but "permit
corporations and other entities to continue
to conduct business in the same manner as
they did prior to the inversion." S. Rep.
No. 192, 108th Cong., 1st. Sess., at 142
(2003); Joint Committee on Taxation,
General Explanation of Tax Legislation
Enacted in the 108th Congress (JCS-5-05)
(May 31, 2005), at 343.

Section 1.7874-4T modifies the statu-
tory public offering rule. The preamble to
§ 1.7874-4T provides that "the IRS and
Treasury Department believe that stock of
the foreign acquiring corporation trans-
ferred in exchange for certain property in
a transaction related to the acquisition, but
not through a public offering, presents the
same opportunity to inappropriately re-
duce the ownership fraction." TD 9654,
2014-6 IRB 461. Accordingly, § 1.7874-
4T(b) provides that, subject to a de mini-
mis exception, "disqualified stock" is not
included in the denominator of the own-
ership fraction. Disqualified stock gener-
ally includes stock of the foreign acquir-
ing corporation that is transferred to a
person (other than the domestic entity) in
exchange for "nonqualified property."
The term nonqualified property means (i)
cash or cash equivalents, (ii) marketable
securities, (iii) certain obligations, or (iv)
any other property acquired in a transac-
tion related to the acquisition with a prin-
cipal purpose of avoiding the purposes of
section 7874.

(b) Transactions at Issue and Regula-
tions to be Issued

The Treasury Department and the IRS
are aware that taxpayers may be engaging
in transactions with a foreign corporation
that has substantial cash and other liquid
assets in order to facilitate an inversion to
avoid the application of section 7874. Al-
though § 1.7874-4T addresses cases in
which nonqualified property held directly
or indirectly by the foreign acquiring cor-
poration is received in exchange for stock
of the foreign acquiring corporation in a
transaction related to the acquisition, that
regulation will not apply to nonqualified
property held directly or indirectly by the
foreign acquiring corporation that was not

acquired by the foreign acquiring corpo-
ration in a transaction related to the acqui-
sition. As a result of this limitation in the
application of § 1.7874-4T, stock of the
foreign acquiring corporation may be in-
cluded in the denominator of the owner-
ship fraction, thereby decreasing the own-
ership fraction, even though a substantial
portion of the value of such stock is at-
tributable to nonqualified property.

The Treasury Department and the IRS
intend to issue regulations under section
7874(c)(6) providing that, if more than 50
percent of the gross value of all "foreign
group property" constitutes "foreign
group nonqualified property," a portion of
the stock of the foreign acquiring corpo-
ration will be excluded from the denomi-
nator of the ownership fraction, as de-
scribed below. This 50 percent test is
applied after the acquisition and all trans-
actions related to the acquisition, if any,
are completed.

For this purpose, foreign group prop-
erty means any property (including prop-
erty that gives rise to disqualified stock
upon application of § 1.7874-4T) held by
the EAG after the acquisition (and all
transactions related to the acquisition, if
any) are completed, other than the follow-
ing property: (i) property that is directly or
indirectly acquired in the acquisition and
that, at the time of the acquisition, was
held directly or indirectly by the domestic
entity; and (ii) to avoid double counting,
stock or a partnership interest in a member
of the EAG and an obligation described in
§ 1.7874-4T(i)(7)(iii)(A) (that is, an ob-
ligation of a member of the EAG).

Except as provided in the immediately
succeeding sentence, foreign group non-
qualified property means foreign group
property that is described in § 1.7874-
4T(i)(7) other than property that gives rise
to income described in section 1297(b)(2)(A)
or section 954(h) or (i) (determined by sub-
stituting the term "foreign corporation" for
the term "controlled foreign corporation").
Foreign group property that otherwise
would not be foreign group nonqualified
property nevertheless is treated as foreign
group nonqualified property if, in a transac-
tion related to the acquisition, such property
(substitute property) is acquired in exchange
for other property (transferred property) that
would be foreign group nonqualified prop-

erty had such transferred property not been
exchanged for the substitute property.

If the 50 percent threshold is satisfied,
the portion of the stock of the foreign
acquiring corporation that will be ex-
cluded from the denominator of the own-
ership fraction is the product of (i) the
value of the stock of the foreign acquiring
corporation other than (a) stock described
in section 7874(a)(2)(B)(ii) (that is, stock
held by reason of), and (b) stock excluded
from the denominator of the ownership
fraction under either § 1.7874-1(b) (be-
cause it is held by a member of the EAG)
or § 1.7874-4T(b) (because it is disqual-
ified stock); and (ii) a fraction (foreign
group nonqualified property fraction), the
numerator of which is the gross value of
all foreign group nonqualified property,
and the denominator of which is the gross
value of all foreign group property. Solely
for purposes of the preceding sentence,
property received by the foreign acquiring
corporation that gives rise to disqualified
stock (within the meaning of § 1.7874-4T(c))
that is excluded from the denominator of
the ownership fraction pursuant to
§ 1.7874-4T(b) is excluded from both the
numerator and the denominator of the for-
eign group nonqualified property fraction.

The regulations to be issued also will
contain a rule that incorporates the prin-
ciples of § 1.7874-4T(h) (regarding the
interaction of the expanded affiliated
group rules with the rule that excludes
disqualified stock from the denominator
of the ownership fraction) with respect to
stock of the foreign acquiring corporation
that is excluded from the denominator of
the ownership fraction under the rules de-
scribed in this section 2.01(b).

The following example illustrates the
regulations described in this section
2.01(b):

Example. (i) Facts. FA, a foreign corporation,
has 20 shares of a single class of stock outstanding,
all of which are owned by Individual A. FA acquires
all the stock of DT, a domestic corporation, solely in
exchange for 76 shares of newly issued FA stock
(DT acquisition). In a transaction related to the DT
acquisition, FA issues four shares of stock to Indi-
vidual A in exchange for $50x of cash. After the DT
acquisition, in addition to the DT stock and $50x of
cash received from Individual A, FA holds Asset A
(gross value of $150x), which is foreign group non-
qualified property, and Asset B (gross value of
$100x), which is not foreign group nonqualified
property.

(ii) Analysis. The four shares of FA stock issued
to Individual A in exchange for $50x of cash, which

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is nonqualified property, are disqualified stock and
excluded from the denominator of the ownership
fraction pursuant to § 1.7874-4T(b). After the DT
acquisition, in addition to the DT stock, FA has
foreign group property with a gross value of $300x,
$200x of which is foreign group nonqualified prop-
erty (Asset A and cash of $50x). Accordingly,
66.67% of the gross value of all the foreign group
property constitutes foreign group nonqualified
property ($200x/$300x). Because the 50 percent
threshold is satisfied, a portion of the FA stock will
be excluded from the denominator of the ownership
fraction under this section 2.01(b). Because FA has
only one class of stock outstanding, the multiplicand
of the computation is 20 shares (100 shares of FA
stock outstanding less the 76 shares of FA stock that
are held by reason of and the four shares of disqual-
ified stock). Those 20 shares are multiplied by the
foreign group disqualified property fraction. The nu-
merator of the fraction is $150x ($200x less $50x of
cash that gives rise to disqualified stock) and the
denominator is $250x ($300x less the $50x of cash).
Thus, the portion of the FA stock that is excluded
from the denominator of the ownership fraction un-
der this section 2.01(b), is the product of 20 shares
multiplied by $150x / $250x, or 12 shares. As a
result, the denominator of the ownership fraction is
84 shares (100 shares reduced by four shares of
disqualified stock excluded under § 1.7874-4T(b)
and 12 shares excluded under this section 2.01(b)),
with the result that the ownership fraction is 90.4
percent (76/84).

.02 Regulations under Sections 7874
and 367 to Disregard Certain Distribu-
tions by the Domestic Entity

(a) Section 367(a) Background

Subject to certain exceptions, section
367(a)(1) generally provides that if a
United States person transfers property to
a foreign corporation in an exchange de-
scribed in section 332, 351, 354, 356, or
361, the foreign corporation shall not be
considered a corporation for purposes of
determining the extent to which the
United States person recognizes gain on
such transfer. Section 1.367(a)-3(c) pro-
vides an exception to the general rule of
section 367(a)(1) for certain transfers by a
U.S. person of stock or securities of a
domestic corporation (the U.S. target
company) to a foreign corporation. This
exception only applies, however, if the
U.S. target company complies with the
reporting requirements in § 1.367(a)-
3(c)(6) and if the four conditions set forth
in § 1.367(a)-3(c)(1)(i) through (iv) are
satisfied. The condition set forth in
§ 1.367(a)-3(c)(1)(iv) requires the active
trade or business test (as defined in
§ 1.367(a)-3(c)(3)) to be satisfied, which,
in turn, requires the substantiality test (as
defined in § 1.367(a)-3(c)(3)(iii)) to be

satisfied (among other requirements). The
substantiality test is satisfied if, at the time
of the transfer, the fair market value of the
transferee foreign corporation is at least
equal to the fair market value of the U.S.
target company. For this purpose, the fair
market value of the transferee foreign cor-
poration generally does not include assets
acquired outside the ordinary course of
business within the 36-month period pre-
ceding the exchange if they produce, or
are held for the production of, passive
income or are acquired for the principal
purpose of satisfying the substantiality
test.

(b) Transactions at Issue and Regula-
tions to be Issued

The Treasury Department and the IRS
are aware that a domestic entity may dis-
tribute property to its former shareholders
(within the meaning of § 1.7874-2(b)(2))
or former partners (within the meaning of
§ 1.7874-2(b)(3)), in order to reduce the
ownership fraction by reducing the nu-
merator. Similarly, to avoid the applica-
tion of section 367(a)(1), a U.S. target
company may distribute property to its
shareholders in contemplation of an ac-
quisition to satisfy the substantiality test.
To address these transactions, the Trea-
sury Department and the IRS intend to
issue regulations under sections 7874 and
367, as described below.

For purposes of applying section
7874(c)(4) (which disregards transfers of
properties or liabilities if the transfer is
part of a plan a principal purpose of which
is to avoid the purposes of section 7874),
non-ordinary course distributions (defined
below) made by the domestic entity (in-
cluding a predecessor) during the 36-
month period ending on the acquisition
date (within the meaning of § 1.7874-
3T(d)(1)) will be treated as part of a plan
a principal purpose of which is to avoid
the purposes of section 7874. Accord-
ingly, such distributions will be disre-
garded for purposes of section 7874.

For purposes of this notice, non-
ordinary course distributions mean the ex-
cess of all distributions made during a
taxable year by the domestic entity with
respect to its stock or partnership interests,
as applicable, over 110 percent of the av-
erage of such distributions during the
thirty-six month period immediately pre-
ceding such taxable year. A distribution

means any distribution, regardless of
whether it is treated as a dividend or
whether, for example, it qualifies under
section 355. Thus, a distribution includes
any distribution made by the domestic en-
tity in redemption of its stock, such as a
distribution to which section 302(a) ap-
plies. A distribution also includes a trans-
fer of money or other property to the
owners of the domestic entity that is made
in connection with the acquisition de-
scribed in section 7874(a)(2)(B)(i) to the
extent the money or other property is di-
rectly or indirectly provided by the do-
mestic entity. For example, if the acquisi-
tion of the domestic entity by the foreign
acquiring corporation qualifies as a reor-
ganization under section 368(a) and the
shareholders of the domestic entity re-
ceive other property or "boot" (within the
meaning of section 356) in connection
with the reorganization, then, to the extent
the boot is directly or indirectly provided
by the domestic entity for purposes of
section 356, the domestic entity is treated
as having made a distribution in the
amount of that boot for purposes of this
section 2.02(b)).

Section 1.367(a)-3(c) will be modified
to include a rule that incorporates the prin-
ciples described above for purposes of the
substantiality test.

.03 Regulations under Section 7874
Regarding Subsequent Transfers of Stock
of the Foreign Acquiring Corporation

(a) Section 7874 Background and
Transactions at Issue

Section 7874(c)(2)(A) provides that
stock of a foreign acquiring corporation
that is held by members of the EAG is not
included in the numerator or the denomi-
nator of the ownership fraction (statutory
EAG rule). To illustrate the application of
the statutory EAG rule, assume a domestic
corporation (DC) is wholly owned by a
U.S. parent corporation (USP), and that
USP transfers all the DC stock to a newly
formed foreign corporation (FA) in ex-
change for all of the stock of FA. Absent
the statutory EAG rule, the ownership
fraction would be 100 percent and the
foreign acquiring corporation would be
treated as a domestic corporation (assum-
ing the EAG does not have substantial
business activities in the relevant foreign
country). However, under the statutory
EAG rule, the stock of FA held by USP is

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excluded from the numerator and the de-
nominator of the ownership fraction, so
that the numerator and the denominator of
the ownership fraction are zero and FA is
respected as a foreign corporation.

However, application of the statutory
EAG rule does not always lead to the
appropriate result, for example, when a
domestic entity has minority shareholders.
To illustrate, assume that DC is owned 90
percent by USP and 10 percent by indi-
vidual A, and that USP and individual A
transfer all of their DC stock to newly
formed FA in exchange for 90 percent and
10 percent, respectively, of the stock of
FA. Absent an exception to the statutory
EAG rule, the stock of FA held by USP
would be excluded from the numerator
and the denominator of the ownership
fraction, such that the ownership fraction
would be 100 percent (10/10) and FA would
be treated as a domestic corporation.

To address this and other inappropriate
results, § 1.7874-1 provides two excep-
tions to the statutory EAG rule: the inter-
nal group restructuring exception and the
loss of control exception (together with
the statutory EAG rule, the EAG rules).
See §§ 1.7874-1(c)(2) and 1.7874-
1(c)(3), respectively. When either of these
exceptions applies, stock of the foreign
acquiring corporation held by members of
the EAG is excluded from the numerator
but not the denominator of the ownership
fraction. Thus, both exceptions have the
potential to decrease the ownership fraction.
In general, the internal group restructuring
exception applies when the domestic entity
and the foreign acquiring corporation are
members of an affiliated group (member-
ship generally being based on an 80 percent
vote and value requirement) with the same
common parent both before and after the
acquisition. The loss of control exception
applies when the former owners of the do-
mestic entity do not hold more than 50 per-
cent of the stock of any member of the EAG
after the acquisition.

Section 1.7874-5T addresses the effect
on the numerator of the ownership frac-
tion when former shareholders or former
partners of the domestic entity receive
stock of the foreign acquiring corporation
by reason of holding stock or a partner-
ship interest in the domestic entity and
then transfer that stock to another person.
Specifically, § 1.7874-5T(a) provides that

stock of the foreign acquiring corporation
that is described in section 7874(a)(2)(B)(ii)
(that is, stock held by reason of) shall not
cease to be so described as a result of any
subsequent transfer of the stock by the
former shareholder or former partner that
received the stock, even if the subsequent
transfer is related to the acquisition de-
scribed in section 7874(a)(2)(B)(i). Ac-
cordingly, such stock of the foreign acquir-
ing corporation is included in the numerator
of the ownership fraction unless the stock is
excluded from the ownership fraction under
the EAG rules.

The preamble to §§ 1.7874-4T and
-5T notes that the Treasury Department
and the IRS continue to study the extent to
which subsequent transfers of stock of the
foreign acquiring corporation should be
taken into account in applying the EAG
rules. TD 9654. The preamble describes
certain divisive transactions under section
355 that involve subsequent distributions
by a corporation of the stock of the for-
eign acquiring corporation. For example,
assume a divisive transaction under sec-
tion 355 in which a publicly traded U.S.
parent corporation (USP) contributes all
the stock of a domestic corporation (DC)
to a newly formed foreign acquiring cor-
poration (FA) (which is an acquisition de-
scribed in section 7874(a)(2)(B)(i)) fol-
lowed by a distribution of all of the FA
stock to its shareholders. Pursuant to
§ 1.7874-5T, the FA stock received by
USP does not cease to be described in
section 7874(a)(2)(B)(ii) (that is, it con-
tinues to be treated as stock held by reason
of) as a result of USP's distribution of the
FA stock to its shareholders. Accordingly,
absent application of the EAG rules, the
FA stock is included in the numerator of
the ownership fraction. An issue raised by
this transaction is the extent to which the
distribution should be taken into account
in determining whether the FA stock re-
ceived by USP is treated as stock held by
a member of the EAG for purposes of the
EAG rules; in other words, the extent to
which the EAG should be determined by
taking into account any transactions re-
lated to the acquisition.

As the preamble further notes, this is-
sue can also arise when the subsequent
transfer occurs by reason of a sale or pur-
suant to a reorganization described in sec-
tion 368. More specifically, the issue can

arise, for example, if: (i) a corporation
receives stock of a foreign acquiring cor-
poration in an acquisition described in
section 7874(a)(2)(B)(i) and subsequently
sells that stock (or a portion of that stock),
or (ii) in connection with an acquisitive
asset reorganization described in section
368, a target corporation receives stock of
the foreign acquiring corporation in ex-
change for its assets and subsequently dis-
tributes that stock of the foreign acquiring
corporation to its shareholders pursuant to
the plan of reorganization. Finally, the
preamble requests comments on whether
different results may be appropriate de-
pending on whether the corporation that
receives the stock of the foreign acquiring
corporation and only temporarily holds
that stock is a foreign or a domestic cor-
poration.

Upon further study, the Treasury De-
partment and the IRS have determined
that stock of the foreign acquiring corpo-
ration that is received by a former corpo-
rate shareholder or a former corporate
partner that subsequently is transferred in
a transaction related to the acquisition
should not be treated as held by a member
of the EAG for purposes of applying the
EAG rules, subject to two exceptions. As
a result, absent an exception, that stock
generally will be included in the numera-
tor of the ownership fraction (pursuant to
§ 1.7874-5T) and the denominator of the
ownership fraction. One exception applies
to "U.S .- parented groups" and the other
exception applies to "foreign-parented
groups." In general, the U.S .- parented
group exception applies to transfers of
stock of the foreign acquiring corporation
that remain within the U.S .- parented
group. The foreign-parented group excep-
tion is broader, applying not only to trans-
fers of stock of the foreign acquiring cor-
poration that remain within the foreign-
parented group but also to transfers of
stock of the foreign acquiring corporation
outside the foreign-parented group, sub-
ject to the restriction generally that the
EAG rules would have applied had the
foreign-parented group not transferred
any stock of the foreign acquiring corpo-
ration outside the group (including stock
of the foreign acquiring corporation re-
ceived in the acquisition and other stock
of the foreign acquiring corporation held
by the foreign-parented group).

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(b) Regulations to be Issued

##### (i) In General

Except as provided in section 2.03(b)(ii)
or (iii) of this notice, if stock of the for-
eign acquiring corporation described in
section 7874(a)(2)(B)(ii) (that is, stock of
the foreign acquiring corporation held by
reason of) is received by a former corpo-
rate shareholder or former corporate part-
ner of the domestic entity (transferring
corporation), and, in a transaction (or se-
ries of transactions) related to the acqui-
sition, that stock (transferred stock) is sub-
sequently transferred, the transferred
stock is not treated as held by a member of
the EAG for purposes of applying the
EAG rules. Accordingly, the transferred
stock is included in the numerator and the
denominator of the ownership fraction.

Except as provided in section 2.03(b)(iii)
of this notice, all transactions related to
the acquisition must be taken into account
for purposes of determining an EAG, a
U.S .- parented group, and a foreign-
parented group.

For purposes of this notice, a U.S .-
parented group means an affiliated group
that has a domestic corporation as the
common parent corporation, and a
foreign-parented group means an affili-
ated group that has a foreign corporation
as the common parent corporation. For
this purpose, the term affiliated group
means an affiliated group as defined in
section 1504(a) but without regard to sec-
tion 1504(b)(3), except that section
1504(a) is applied by substituting "more
than 50 percent" for "at least 80 percent"
each place it appears.

For purposes of this section 2.03(b),
including for purposes of applying section
1504(a), each partner in a partnership is
treated as holding its proportionate share
of stock held by the partnership, as deter-
mined under the rules and principles of
sections 701 through 777.

(ii) Exception for Subsequent Transfers
Involving a U.S .- Parented Group

Transferred stock is treated as held by
a member of the EAG for purposes of the
EAG rules if (i) before and after the ac-
quisition, the transferring corporation (or
its successor) is a member of a U.S .-
parented group; and (ii) after the acquisi-
tion, both the person that holds the trans-
ferred stock after all related transfers of
the transferred stock are completed and

the foreign acquiring corporation are
members of the U.S .- parented group. Ac-
cordingly, under section 7874(c)(2)(A)
and § 1.7874-1(b), such transferred stock
is excluded from the numerator of the
ownership fraction, and, depending upon
the application of § 1.7874-1(c)(2), may
be excluded from the denominator of the
ownership fraction.

(iii) Exception for Subsequent Trans-
fers Involving a Foreign-Parented Group

Transferred stock is treated as held by
a member of the EAG for purposes of the
EAG rules if (i) before the acquisition, the
transferring corporation and the domestic
entity are members of the same foreign-
parented group; and (ii) after the acquisi-
tion, the transferring corporation is a
member of the EAG or would be a mem-
ber of the EAG absent the subsequent
transfer of any stock of the foreign acquir-
ing corporation by a member of the
foreign-parented group in a transaction re-
lated to the acquisition (but taking into
account all other transactions related to
the acquisition). Accordingly, under sec-
tion 7874(c)(2)(A) and § 1.7874-1(b),
such transferred stock is excluded from
the numerator of the ownership fraction,
and, depending upon the application of
§ 1.7874-1(c)(2), may be excluded from
the denominator of the ownership frac-
tion.

##### (iv) Examples

The following examples illustrate the
regulations described in this section
2.03(b):

Example 1. (i) Facts. D, a domestic corporation,
owns all of the stock of DT, also a domestic corpo-
ration, and stock of other subsidiaries. The DT stock
does not represent substantially all of the property of
D for purposes of section 7874. Pursuant to a reor-
ganization described in section 368(a)(1)(D), D
transfers all the stock of DT to FA, a newly formed
foreign corporation, in exchange solely for 100
shares of FA stock (DT acquisition) and distributes
all of the FA stock to its shareholders pursuant to
section 361(c)(1) (subsequent distribution). D is the
common parent of a U.S .- parented group before and
after the DT acquisition.

(ii) Analysis. Under § 1.7874-2(f)(1), the 100
shares of FA stock received by D in the DT acqui-
sition is stock of a foreign corporation (FA) that is
held by reason of holding stock in a domestic cor-
poration (DT). Accordingly, such stock is described
in section 7874(a)(2)(B)(ii). Under § 1.7874-5T(a),
all 100 shares of FA stock retain their status as being
described in section 7874(a)(2)(B)(ii) even though D
subsequently transfers all of the FA stock to its
shareholders in the subsequent distribution. Under
section 2.03(b)(i) of this notice, the FA stock re-

ceived by D is not treated as held by a member of the
EAG for purposes of applying the EAG rules. The
exception provided in section 2.03(b)(ii) of this no-
tice does not apply because, after the DT acquisition,
the shareholders of D and FA are not members of the
U.S .- parented group. Accordingly, the ownership
fraction is 100/100.

(iii) Alternative facts and analysis. The facts are
the same as in paragraph (i) of this example, except
that D is a foreign corporation and the common
parent of a foreign-parented group. Under section
2.03(b)(iii) of this notice, the FA stock received by D
is treated as held by a member of the EAG for
purposes of applying the EAG rules because (i)
before the DT acquisition, D and DT are members of
a foreign-parented group of which D is the common
parent, and (ii) D would be a member of the EAG
absent the distribution of the FA stock by D to its
shareholders in the subsequent distribution. In addi-
tion, the DT acquisition qualifies as an internal group
restructuring under § 1.7874-1(c)(2). Accordingly,
the ownership fraction is 0/100.

Example 2. (i) Facts. Individual A owns all the
stock of FT, a foreign corporation. FT owns all the
stock of DT, a domestic corporation. FT does not
own any other property and has no liabilities. Pur-
suant to a reorganization described in section
368(a)(1)(F), FT transfers all of its DT stock to FA,
a newly formed foreign corporation, in exchange for
100 shares of FA stock (DT acquisition) and distrib-
utes the FA stock to individual A in liquidation
pursuant to section 361(c)(1) (subsequent distribu-
tion).

(ii) Analysis. Under § 1.7874-2(f)(1), the 100
shares of FA stock received by FT in the reorgani-
zation is stock of a foreign corporation (FA) that is
held by reason of holding stock in a domestic cor-
poration (DT). Accordingly, such stock is described
in section 7874(a)(2)(B)(ii). Under § 1.7874-5T(a),
all 100 shares of FA stock retain their status as being
described in section 7874(a)(2)(B)(ii) even though
FT subsequently transfers all of the FA stock to its
shareholder (individual A) in the subsequent distri-
bution. Under section 2.03(b)(iii) of this notice, the
FA stock received by FT is treated as held by a
member of the EAG for purposes of applying the
EAG rules because (i) before the DT acquisition, FT
and DT are members of a foreign-parented group (of
which FT is the common parent), and (ii) absent the
distribution of the FA stock by FT to individual A in
the subsequent distribution, FT would be a member
of the EAG. In addition, the DT acquisition qualifies
as an internal group restructuring under § 1.7874-
1(c)(2). Accordingly, the ownership fraction is
0/100.

(iii) Alternative facts and analysis. The facts are
the same as in paragraph (i) of this example, except
that, in a transaction related to the DT acquisition,
FA subsequently issues 200 shares of stock to indi-
vidual B in exchange for qualified property (within
the meaning of § 1.7874-4T(i)(7)). The exception
under section 2.03(b)(iii) of this notice does not
apply because, taking into account FA's issuance of
200 shares to individual B, FT would not be a
member of the EAG absent the subsequent distribu-
tion. Accordingly, the FA stock received by FT is
not treated as held by a member of the EAG for

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purposes of the EAG rules. Accordingly, the owner-
ship fraction is 100/300.

#### SECTION 3. REGULATIONS TO ADDRESS POST-INVERSION TAX AVOIDANCE TRANSACTIONS

.01 Regulations to Address Acquisi-
tions of Obligations and Stock that Avoid
Section 956

(a) Section 956 Background

Section 957(a) defines a CFC as a for-
eign corporation with respect to which
more than 50 percent of the total com-
bined voting power of all classes of stock
entitled to vote or the total value of the
stock of the corporation is owned (di-
rectly, indirectly, or constructively) by
United States shareholders (U.S. share-
holders). Section 951(b) defines a U.S.
shareholder as a U.S. person that owns
(directly, indirectly, or constructively) 10
percent or more of the total combined
voting power of all classes of stock enti-
tled to vote of the foreign corporation.

Section 951(a)(1) provides that every
person that is a U.S. shareholder of a CFC
and owns (within the meaning of section
958(a)) stock in the corporation on the last
day of the CFC's taxable year must in-
clude in its gross income for its taxable
year in which or with which such taxable
year of the CFC ends the amount deter-
mined under section 956 with respect to
the shareholder for the year (but only to
the extent not excluded from gross income
under section 959(a)(2)).

Section 956(a) provides:

In the case of any controlled foreign
corporation, the amount determined under
this section with respect to any United
States shareholder for any taxable year is
the lesser of-

(1) the excess (if any) of-

(A) such shareholder's pro rata share of
the average of the amounts of United
States property held (directly or indi-
rectly) by the controlled foreign corpora-
tion as of the close of each quarter of such
taxable year, over

(B) the amount of earnings and profits
described in section 959(c)(1)(A) with re-
spect to such shareholder, or

(2) such shareholder's pro rata share of
the applicable earnings of such controlled
foreign corporation.

Section 956(c)(1) provides that, for this
purpose:

"United States property" means any
property acquired after December 31,
1962, which is-

(A) tangible property located in the
United States;

(B) stock of a domestic corporation;

(C) an obligation of a United States
person; or

(D) any right to the use in the United
States of-

(i) a patent or copyright,

(ii) an invention, model, or design
(whether or not patented),

(iii) a secret formula or process, or

(iv) any other similar right,

which is acquired or developed by the
controlled foreign corporation for use in
the United States.

Section 956(c)(2) provides exceptions
that apply to the definition of United
States property, including exceptions that
limit the scope of obligations of U.S. per-
sons and stock of domestic corporations
that will be treated as United States prop-
erty to obligations of sufficiently related
U.S. persons and stock of sufficiently re-
lated domestic corporations. See sections
956(c)(1)(B) and (C) and 956(c)(2)(F) and
(L).

Section 956 is intended to prevent a
U.S. shareholder of a CFC from inappro-
priately deferring U.S. taxation of CFC
earnings and profits by "prevent[ing] the
repatriation of income to the United States
in a manner which does not subject it to
U.S. taxation." H.R. Rep. No. 1447, 87th
Cong., 2d Sess., at 58 (1962). In the ab-
sence of section 956, a U.S. shareholder of
a CFC could access the CFC's funds (un-
taxed earnings and profits) in a variety of
ways other than by the payment of an
actual taxable dividend, such that there
would be no reason for the U.S. share-
holder to incur the dividend tax. Section
956 eliminates this disincentive to pay a
dividend by ensuring parity of treatment
for different ways that CFC earnings can
be made available for use in the United
States or for use by the U.S. shareholder.
Accordingly, under section 956, the in-
vestment by a CFC of its earnings and
profits in United States property is "taxed
to the [CFC's] shareholders on the
grounds that this is substantially the
equivalent of a dividend." S. Rep. No.
1881, 87th Cong., 2d Sess., at 88 (1962).
Section 956(e) provides the Secretary

with authority to "prescribe such regula-
tions as may be necessary . . . to prevent
the avoidance of the provisions of [section
956] through reorganizations or other-
wise."

(b) Transactions at Issue and Regula-
tions to be Issued

An inversion transaction may permit
the top corporate parent in the newly in-
verted group, a group still principally
comprised of U.S. shareholders and their
CFCs, to avoid section 956 by accessing
the untaxed earnings and profits of the
CFCs without a current tax to the U.S.
shareholders. This is a result that the U.S.
shareholders could not achieve before the
inversion. The ability of the new foreign
parent to access deferred CFC earnings
and profits would in many cases eliminate
the need for the CFCs to pay dividends to
the U.S. shareholders, thereby circum-
venting the purposes of section 956. Sec-
tion 956(e) directs the Secretary to pre-
scribe regulations to prevent the
avoidance of the provisions of section 956
through reorganizations or otherwise; an
inversion is an example of such a transac-
tion.

In order to prevent this avoidance of
section 956, the Treasury Department and
the IRS intend to issue regulations under
section 956(e) providing that, solely for
purposes of section 956, any obligation or
stock of a foreign related person (within
the meaning of section 7874(d)(3) other
than an "expatriated foreign subsidiary")
(such person, a “non-CFC foreign related
person") will be treated as United States
property within the meaning of section
956(c)(1) to the extent such obligation or
stock is acquired by an expatriated foreign
subsidiary during the applicable period
(within the meaning of section
7874(d)(1)). For purposes of this notice,
except as provided in the succeeding sen-
tence, an expatriated foreign subsidiary is
a CFC with respect to which an expatri-
ated entity (as defined in section 2.01(a) of
this notice) is a U.S. shareholder. An ex-
patriated foreign subsidiary does not in-
clude a CFC that is a member of the EAG
immediately after the acquisition and all
transactions related to the acquisition are
completed (completion date) if the domes-
tic entity is not a U.S. shareholder with
respect to the CFC on or before the com-
pletion date. In addition, for purposes of

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this section, an expatriated foreign subsid-
iary that is a pledgor or guarantor of an
obligation of a non-CFC foreign related
person under the principles of section
956(d) and § 1.956-2(c) will be consid-
ered as holding such obligation.

The Treasury Department and the IRS
are considering, and request comments
on, whether any exceptions under section
956(c)(2) or § 1.956-2 should apply to an
obligation or stock of a foreign related
person that is determined to be United
States property within the meaning of sec-
tion 956(c)(1) pursuant to the regulations
described in this section 3.01(b). How-
ever, the exception to the definition of
obligation provided by Notice 88-108,
1988-2 C.B. 446, will not apply to such
obligations.

.02 Regulations to Address Transac-
tions to De-Control or Significantly Dilute
CFCs

(a) Section 7701(l) Background

Section 7701(1) provides that "[t]he
Secretary may prescribe regulations re-
characterizing any multiple-party financ-
ing transaction as a transaction directly
among any 2 or more of such parties
where the Secretary determines that such
recharacterization is appropriate to pre-
vent avoidance of any tax imposed [under
the Code]." The legislative history notes
that, as a general matter, "[t]he tax treat-
ment of a transaction may depend on the
identity of the parties to the transaction,"
and cites as an example that whether a
loan by a CFC to a related person will
result in a section 956 inclusion depends
upon whether the borrower is a U.S. per-
son or an unrelated foreign person. H.R.
Rep. No. 213, 103rd Cong., 1st Sess., at
654 (1993). The legislative history indi-
cates that regulations could be issued un-
der section 7701(l) to prevent the avoid-
ance of tax under a wide variety of Code
sections. "It is intended that the provision
apply not solely to back-to-back loan
transactions, but also to other financing
transactions. For example, it would be
within the proper scope of the provision
for the Secretary to issue regulations deal-
ing with multiple-party transactions in-
volving debt guarantees or equity invest-
ments." H.R. Rep. No. 213, 103rd Cong.,
1st Sess., at 655 (1993).

In describing the "reasons for change,"
the legislative history cites with approval

several IRS rulings that disregard conduit
entities, and goes on to note, "the commit-
tee does not intend that the Secretary be
bound, in developing regulations, by the
standards on which those rulings are
based, if the Secretary deems it necessary
or appropriate to adopt other standards in
order to properly recharacterize a financ-
ing transaction." H.R. Rep. No. 103-111,
103rd Cong., 1st Sess., at 729 (1993).
Thus, while Congress intended regula-
tions under section 7701(l) to address con-
duit transactions, the legislative history
indicates a broader purpose and notes that
traditional approaches need not be the
only appropriate response when taxpayers
use financing transactions to avoid any tax
imposed by the Code. Consistent with the
legislative history, the statute's wording is
not limited to conduit fact patterns. In this
regard, see § 1.7701(1)-3 (regarding fast-
pay arrangements), which treats the hold-
ers of fast-pay stock in a corporation as
having acquired instruments issued by
other shareholders of the corporation in-
stead of having acquired interests in the
corporation.

(b) Sections 964(e) and 954(c)(6)
Background

Section 964(e)(1) provides that if a CFC
sells or exchanges stock in any other foreign
corporation, gain recognized on such sale or
exchange is included in the gross income of
the CFC as a dividend to the same extent
that it would have been so included under
section 1248(a) if the CFC were a United
States person. Section 964(e)(2) provides
that section 954(c)(3)(A)(i) (the “same
country exception" to foreign personal hold-
ing company income for interest and divi-
dends) does not apply to any amount treated
as a dividend by reason of section 964(e)(1).

Section 954(c)(6)(A) provides that, for
purposes of section 954(c), dividends, in-
terest, rents, and royalties received or ac-
crued from a CFC which is a related per-
son shall not be treated as foreign personal
holding company income to the extent
attributable or properly allocable (deter-
mined under rules similar to the rules of
subparagraphs (C) and (D) of section
904(d)(3)) to income of the related person
which is neither subpart F income nor
effectively connected income. Section
954(c)(6)(A) also provides that the Secre-
tary shall prescribe such regulations as
may be necessary or appropriate to carry

out the provision, including regulations to
prevent the abuse of the purposes of the
provision. Notice 2007-9, 2007-1 C.B.
401, provides that, for purposes of section
954(c)(6), the term "dividend" includes
gains treated as dividends pursuant to sec-
tions 964(e).

(c) Section 367(b) Background

Section 367(b)(1) provides that, in the
case of an exchange described in section
332, 351, 354, 355, 356, or 361 in con-
nection with which there is no transfer of
property described in section 367(a)(1), a
foreign corporation shall be considered to
be a corporation except to the extent pro-
vided in regulations prescribed by the
Secretary which are necessary or appro-
priate to prevent the avoidance of Federal
income taxes. Section 367(b)(2) provides
that the regulations prescribed pursuant to
section 367(b)(1) shall include (but shall
not be limited to) regulations dealing with
the sale or exchange of stock or securities
in a foreign corporation by a United States
person, including regulations providing
the circumstances under which gain is rec-
ognized or deferred, amounts are included
in gross income as a dividend, adjust-
ments are made to earnings and profits, or
adjustments are made to the basis of stock
or securities.

Regulations under section 367(b) gen-
erally provide that if the potential appli-
cation of section 1248 cannot be pre-
served following the acquisition of the
stock or assets of a foreign corporation
(foreign acquired corporation) by another
foreign corporation in an exchange sub-
ject to section 367(b), then certain ex-
changing shareholders of the foreign ac-
quired corporation must include in income
as a dividend the section 1248 amount (as
defined in § 1.367(b)-2(c)(1)) attributable
to the stock of the foreign acquired cor-
poration exchanged. See § 1.367(b)-4(b).
Specifically, subject to certain exceptions,
§ 1.367(b)-4(b)(1)(i) requires a deemed
dividend inclusion if the exchange satis-
fies two conditions. First, immediately be-
fore the exchange, the exchanging share-
holder is either (i) a U.S. person that is a
section 1248 shareholder with respect to
the foreign acquired corporation, or (ii) a
foreign corporation in which a U.S. per-
son is a section 1248 shareholder with
respect to such foreign corporation and
the foreign acquired corporation. See

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§ 1.367(b)-4(b)(1)(i)(A). Second, imme-
diately after the exchange, either (i) the
stock received by the exchanging share-
holder is not stock in a CFC as to which
the U.S. person described in the preceding
sentence is a section 1248 shareholder, or
(ii) the foreign acquiring corporation (for
this purpose, as defined in § 1.367(b)-
4(a)) or the foreign acquired corporation
(in the case of an acquisition of the stock
of the foreign acquired corporation) is not
a CFC as to which the U.S. person is a
section 1248 shareholder. See § 1.367(b)-
4(b)(1)(i)(B).

Section 1.367(b)-4(c)(1) provides that
a section 1248 amount included as a
deemed dividend under § 1.367(b)-4(b) is
not included as foreign personal holding
company income under section 954(c).

##### (d) Transactions at Issue

Inversion transactions facilitate the
avoidance of section 956 through tech-
niques in addition to those discussed in
section 3.01(b) of this notice. After an
inversion transaction, the inverted group
may cause an expatriated foreign subsid-
iary to cease to be a CFC using transac-
tions that avoid the imposition of U.S.
income tax, so as to avoid U.S. tax on the
CFC's pre-inversion earnings and profits.
For example, after an inversion transac-
tion, a foreign acquiring corporation could
issue a note or transfer property to an
expatriated foreign subsidiary in exchange
for stock representing at least 50 percent
of the voting power and value of the ex-
patriated foreign subsidiary. The expatri-
ated foreign subsidiary would cease to be
a CFC, and the U.S. shareholders would
no longer be subject to subpart F of the
Code with respect to the expatriated for-
eign subsidiary. As a result, the expatri-
ated foreign subsidiary could make its
pre-inversion earnings and profits avail-
able to the U.S. shareholders without caus-
ing an income inclusion under section 956.

Even if the foreign acquiring corpora-
tion acquired less stock of an expatriated
foreign subsidiary, such that the expatri-
ated foreign subsidiary remains a CFC, it
could nevertheless substantially dilute a
U.S. shareholder's ownership of the CFC.
As a result, the U.S. shareholder could
avoid tax on the CFC's pre-inversion
earnings and profits if, for example, the
CFC later redeemed, on a non pro rata
basis, its stock held by the foreign acquir-

ing corporation. As another example, the
U.S. shareholder could avoid tax on a
CFC's pre-inversion earnings and profits
if the CFC paid a pro rata extraordinary
distribution, although in this case the U.S.
shareholder could be required to pay some
tax.

The Treasury Department and the IRS
have determined that it is appropriate, in
order to prevent the avoidance of U.S. tax,
to issue regulations under section 7701(l)
that will recharacterize certain transac-
tions that facilitate the avoidance of U.S.
tax on the expatriated foreign subsidiary's
pre-inversion earnings and profits. The
Treasury Department and the IRS also
intend to issue regulations that will mod-
ify the application of section 367(b), so as
to require an income inclusion in certain
nonrecognition transactions that dilute a
U.S. shareholder's ownership of a CFC.

###### (e) Regulations to be Issued

(i) Regulations under section 7701(l)

The Treasury Department and the IRS
intend to issue regulations under section
7701(1) providing that a "specified trans-
action" completed during the applicable
period (as defined in section 7874(d)(1))
will be recharacterized in the manner de-
scribed in section 3.02(e)(i)(A) of this no-
tice, subject to the exceptions described in
section 3.02(e)(i)(C) of this notice. For
this purpose, a specified transaction is a
transaction in which stock in an expatri-
ated foreign subsidiary (as defined in sec-
tion 3.01(b) of this notice) (specified
stock) is transferred (including by issu-
ance) to a "specified related person." For
this purpose, a specified related person
means a non-CFC foreign related person
(as defined in section 3.01(b) of this no-
tice), a U.S. partnership that has one or
more partners that is a non-CFC foreign
related person, or a U.S. trust that has one
or more beneficiaries that is a non-CFC
foreign related person.

In addition, the Treasury Department
and the IRS intend to issue regulations
providing that if a deemed dividend is
included in a CFC's income under section
964(e) as a result of a specified transaction
that is completed during the applicable
period, the deemed dividend will not be
excluded from foreign personal holding
company income under section 954(c)(6)
(to the extent in effect, and notwithstand-

ing the rule described in Notice 2007-9,
2007-1 C.B. 401).

(A) Recharacterization of a Specified
Transaction

A specified transaction is recharacter-
ized for all purposes of the Code, as of the
date on which the specified transaction
occurs, as an arrangement directly be-
tween the specified related person and one
or more section 958(a) U.S. shareholders
of the expatriated foreign subsidiary.
However, if the specified transaction is a
fast-pay arrangement that is recharacter-
ized under § 1.7701(1)-3(c)(2), then the
rules of § 1.7701(1)-3 will apply instead
of the regulations described in this section
3.02(e)(i).

For purposes of this notice, a section
958(a) U.S. shareholder of an expatriated
foreign subsidiary is a U.S. shareholder
(within the meaning of section 951(b))
with respect to the expatriated foreign
subsidiary that owns (within the meaning
of section 958(a)) stock in the expatriated
foreign subsidiary, but only if such U.S.
shareholder is related (within the meaning
of section 267(b) or 707(b)(1)) to the
specified related person or is under the
same common control (within the mean-
ing of section 482) as the specified related
person.

If an expatriated foreign subsidiary is-
sues the specified stock to a specified re-
lated person, the specified transaction will
be recharacterized as follows: (i) the prop-
erty transferred by the specified related
person to acquire the specified stock
(transferred property) will be treated as
having been transferred by the specified
related person to the section 958(a) U.S.
shareholder(s) of the expatriated foreign
subsidiary in exchange for instruments
deemed issued by the section 958(a) U.S.
shareholder(s) (deemed instrument(s));
and (ii) the transferred property or propor-
tionate share thereof will be treated as
having been contributed by the section
958(a) U.S. shareholder(s) (through inter-
vening entities, if any, in exchange for
equity in such entities) to the expatriated
foreign subsidiary in exchange for stock in
the expatriated foreign subsidiary. See sec-
tion 3.02(e)(iii), Example 1, of this notice.

Similar principles will apply to rechar-
acterize a specified transaction in which a
shareholder transfers specified stock of the
expatriated foreign subsidiary to a specified

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related person. Section 3.02(e)(1)(iii), Exam-
ple 2, of this notice illustrates an applica-
tion of these principles when a share-
holder of an expatriated foreign subsidiary
transfers stock of an expatriated foreign
subsidiary to a partnership that is a spec-
ified related person. The Treasury Depart-
ment and the IRS request comments on
this example, and specifically, on alterna-
tive recharacterizations that could apply to
transfers to partnerships.

(B) Other Rules Relating to the Re-
characterization

A deemed instrument described in sec-
tion 3.02(e)(i)(A) of this notice will have
the same terms as the specified stock
(other than issuer). Accordingly, if a dis-
tribution is made with respect to specified
stock of the expatriated foreign subsid-
iary, matching seriatim distributions with
respect to stock will be treated as made by
the expatriated foreign subsidiary (through
intervening entities, if any) to the section
958(a) U.S. shareholder(s). The section
958(a) U.S. shareholder(s), in turn, will be
treated as making payments, with respect
to the deemed instrument(s), to the spec-
ified related person(s).

An expatriated foreign subsidiary will
be treated as the paying agent of a section
958(a) U.S. shareholder of the expatriated
foreign subsidiary with respect to the
deemed instrument treated as issued by
the section 958(a) U.S. shareholder to a
specified related person. In addition, rules
similar to those described in § 1.7701(1)-
3(b)(3)(iii) (regarding transactions that af-
fect benefited stock) will apply to transac-
tions affecting specified stock.

(C) Certain Specified Transactions are
not Recharacterized

A specified transaction will not be re-
characterized under the rules of section
3.02(e)(i)(A) of this notice in two situa-
tions. The first exception applies if the
specified stock was transferred by a share-
holder of the expatriated foreign subsid-
iary and, under applicable U.S. tax rules,
the shareholder either is required to rec-
ognize and include in income all of the
gain in the specified stock (including gain
treated as a deemed dividend pursuant to
section 964(e) or 1248(a) or characterized
as a dividend pursuant to section 356(a)(2))
or has a deemed dividend included in in-
come with respect to the specified stock
under 1.367(b)-4 (including by reason of

the regulations described in section
3.02(e)(ii) of this notice that apply to
specified exchanges).

The second exception applies if (i) the
expatriated foreign subsidiary is a CFC
immediately after the specified transaction
and all related transactions, and (ii) the
amount of stock (by value) in the expatri-
ated foreign subsidiary (and any lower-
tier expatriated foreign subsidiary) that is
owned, in the aggregate, directly or indi-
rectly by the section 958(a) U.S. share-
holders of the expatriated foreign subsid-
iary immediately before the specified
transaction and any transactions related to
the specified transaction does not decrease
by more than 10 percent as a result of the
specified transaction and any related
transactions.

(ii) Regulations under Section 367(b)

The Treasury Department and the IRS
intend to amend the regulations under sec-
tion 367(b) to provide that an exchanging
shareholder described in § 1.367(b)-
4(b)(1)(i)(A) will be required to include in
income as a deemed dividend the section
1248 amount attributable to the stock of
an expatriated foreign subsidiary ex-
changed in a "specified exchange," with-
out regard to whether the conditions set
forth in § 1.367(b)-4(b)(1)(i)(B) are sat-
isfied. The regulations will apply to spec-
ified exchanges completed during the ap-
plicable period (as defined in section
7874(d)(1)). For this purpose, a specified
exchange is an exchange in which a share-
holder of an expatriated foreign subsidiary
exchanges stock in the expatriated foreign
subsidiary for stock in another foreign
corporation pursuant to a transaction de-
scribed in § 1.367(b)-4(a). See section
3.02(e)(iii), Example 3, of this notice.

In addition, the regulations will pro-
vide an exception that incorporates the
principles of the second exception de-
scribed in section 3.02(e)(i)(C) of this no-
tice (regarding specified transactions that
do not decrease, in aggregate, the section
958(a) U.S. shareholders' ownership of
stock in an expatriated foreign subsidiary
(or lower-tier expatriated foreign subsid-
iary) by more than 10 percent).

Finally, the regulations will provide
that § 1.367(b)-4(c)(1) (regarding the ex-
clusion of a deemed dividend from for-
eign personal holding company income)
will not apply to a deemed dividend that

results from a specified exchange pursuant
to the regulations described in this section
3.02(e)(ii) and that such deemed dividend
will not qualify for the exceptions from
foreign personal holding company income
provided by section 954(c)(3)(A)(i) or
section 954(c)(6) (to the extent in effect).

###### (iii) Examples

The following examples illustrate the
regulations described in this section
3.02(e). For each of the examples, assume
that FA, a foreign corporation, wholly
owns DT, a domestic corporation, which,
in turn, wholly owns FT, a foreign corpo-
ration that is a CFC. FA wholly owns FS,
a foreign corporation. FA acquired DT in
an inversion transaction that was com-
pleted on January 1, 2015. Accordingly,
DT is a domestic entity, FT is an expatri-
ated foreign subsidiary, and FS is a spec-
ified related person with respect to FT.

Example 1. (i) Facts. On February 1, 2015, FA
acquires $10x of FT stock from FT, representing 60
percent of total voting power and value of the stock
of FT, in exchange for $10x of cash.

(ii) Analysis. (A) FA's acquisition of the FT
stock from FT is a specified transaction, because
stock of an expatriated foreign subsidiary was trans-
ferred (by issuance) to a specified related person
(FA).

(B) FA's acquisition of the FT stock is rechar-
acterized as follows, with the result that FT contin-
ues to be a CFC:

(1) DT is treated as having issued a deemed
instrument to FA in exchange for $10x of cash.

(2) DT is treated as having contributed the $10x
of cash to FT in exchange for FT stock.

(C) Any distribution with respect to the FT stock
actually acquired by FA will be treated as a distri-
bution to DT, which, in turn, will be treated as
making a matching distribution with respect to the
deemed instrument that DT is treated as having is-
sued to FA. FT is treated as the paying agent of DT
with respect to the deemed instrument issued by DT
to FA.

(iii) Alternative facts and analysis. The facts are
the same as in paragraph (i) of this example, except
that instead of acquiring FT stock from FT in ex-
change for $10x of cash, FA acquires 60% of the FT
stock held by DT in exchange for $4x of cash in a
fully taxable transaction. In this case, the specified
transaction is not recharacterized under section
3.02(e)(i)(A) of this notice pursuant to the first ex-
ception described in section 3.02(e)(i)(C) of this
notice. This is because DT is required to recognize
and include in income all of the gain (including any
gain treated as a deemed dividend pursuant to sec-
tion 1248(a)) with respect to the FT stock transferred
to FA.

Example 2. (i) Facts. On February 1, 2015, DT
transfers all of the stock of FT to FPRS, a foreign
partnership, in exchange for 40% of the capital and
profits interests in the partnership. Furthermore, FA

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contributes property to FPRS in exchange for the
other 60% of the capital and profits interests.

(ii) Analysis. (A) DT's transfer of the FT stock is
a specified transaction, because stock of an expatri-
ated foreign subsidiary was transferred to a specified
related person (FPRS).

(B) Under the principles of section 3.02(e)(i)(A)
of this notice, DT's transfer of the FT stock is
recharacterized as follows, with the result that FT
continues to be a CFC:

(1) FPRS is treated as having issued 40% of its
capital and profits interests to DT in exchange for a
deemed instrument treated as having been issued by
DT.

(2) DT is treated as continuing to own all of the
stock of FT.

(C) Any distribution with respect to the FT stock
actually acquired by FPRS will be treated as a dis-
tribution to DT, which, in turn, will be treated as
making a matching distribution with respect to the
deemed instrument that DT is treated as having is-
sued to FPRS. FT is treated as the paying agent of
DT with respect to the deemed instrument issued by
DT to FPRS.

Example 3. (i) Facts. On February 1, 2015, DT
exchanges all of the stock of FT solely in exchange
for 60% of the stock of FS pursuant to a reorgani-
zation described in section 368(a)(1)(B). Immedi-
ately before the exchange, FT is a CFC in which DT
is a section 1248 shareholder. Immediately after the
exchange, FS and FT are CFCs in which DT is a
section 1248 shareholder.

(ii) Analysis. (A) DT's exchange of the FT stock
is a specified exchange described in section
3.02(e)(ii) of this notice, because DT exchanged
stock of an expatriated foreign subsidiary (FT) for
stock in a foreign corporation (FS) pursuant to a
transaction described in § 1.367(b)-4(a) (which in-
cludes a reorganization described in section
368(a)(1)(B)). Although the specified exchange is
also a specified transaction because there is a transfer
of FT stock to a specified related person (FS), the
exchange is not recharacterized under section
3.02(e)(i)(A) of this notice pursuant to the first ex-
ception in section 3.02(e)(i)(C) of this notice.

(B) Under § 1.367(b)-4(b)(1)(i), as modified by
the regulations described in section 3.02(e)(ii) of this
notice, DT must include in income the section 1248
amount with respect to the FT stock exchanged,
without regard to the fact that immediately after the
exchange, (i) the FS stock received by DT in the
exchange is stock in a corporation that is a CFC as to
which DT is a section 1248 shareholder, and (ii) FT
is a CFC as to which DT is a section 1248 share-
holder.

##### (iv) Request for Comments

The Treasury Department and the IRS
are considering whether to provide an ex-
ception to the application of the regula-
tions described in this section 3.02(e),
such that a taxpayer's chosen form would
be respected, when (1) a specified trans-
action is undertaken in order to integrate
similar or complementary businesses, and
(2) after the inversion transaction, the in-
verted group in fact does not exploit that

form in order to avoid U.S. taxation on the
expatriated foreign subsidiary's pre-
inversion earnings and profits. For exam-
ple, the exception could be limited to sit-
uations in which the expatriated foreign
subsidiary does not, during the applicable
period (within the meaning of section
7874(d)(1)), engage in any avoidance
transactions, such as, for example, acquir-
ing United States property (including ob-
ligations or stock treated as United States
property under the regulations described
in section 3.01(b) of this notice), paying
extraordinary dividends out of pre-
inversion earnings and profits, or engag-
ing in non pro rata redemptions of the new
foreign shareholder in order to bail out
pre-inversion earnings and profits.

In addition to comments on whether
any such exception is warranted, the Trea-
sury Department and the IRS request
comments on the types of transactions that
taxpayers can use to avoid tax on a CFC's
pre-inversion earnings after a specified
transaction and that therefore should serve
as triggers for denying the exception. The
Treasury Department and the IRS also
request comments on the provisions that
would be necessary to administer any
such exception. For example, in order to
avoid the recharacterization of any speci-
fied transaction, the regulations could re-
quire a taxpayer to (i) extend the statute of
limitations with respect to the U.S. tax
consequences of the specified transaction
until the close of the third full taxable year
following the close of the applicable pe-
riod; (ii) agree to certify annually that
there have been no avoidance transactions
for the taxable year, or, if there is an
avoidance transaction, to file amended re-
turns, as appropriate; and (iii) maintain
sufficient documentation regarding, for
example, accounts tracking pre-inversion
earnings and profits described in section
959(c)(3) and the extent to which such
earnings and profits are reduced during
the applicable period.

.03 Regulations under Section 304 to
Prevent the Removal of Untaxed Foreign
Earnings and Profits

(a) Section 304(b)(5)(B) Background
Section 304(a)(1) generally provides
that, for purposes of sections 302 and 303,
if one or more persons are in control of
each of two corporations and in return for
property one of the corporations (acquir-

ing corporation) acquires stock in the
other corporation (issuing corporation)
from the person (or persons) so in control,
then (unless section 304(a)(2) applies) the
property shall be treated as a distribution
in redemption of the stock of the acquiring
corporation.

Section 304(a)(2) provides that, for
purposes of sections 302 and 303, if in
return for property, one corporation ac-
quires from a shareholder of another cor-
poration stock in such other corporation,
and the issuing corporation controls the
acquiring corporation, then the property
shall be treated as a distribution in re-
demption of the stock of the issuing cor-
poration.

Section 304(b)(2) provides that, in the
case of any acquisition to which section
304(a) applies, the determination of the
amount that is a dividend (and the source
thereof) shall be made as if the property
were distributed by the acquiring corpora-
tion to the extent of its earnings and prof-
its, and then by the issuing corporation to
the extent of its earnings and profits.

Section 304(b)(5)(B) limits the earn-
ings and profits taken into account under
section 304(b)(2) where the acquiring cor-
poration is foreign. Specifically, section
304(b)(5)(B) provides that no earnings
and profits are taken into account for pur-
poses of section 304(b)(2)(A) (and section
304(b)(2)(A) shall not apply) if more than
50 percent of the dividends arising from
such acquisition (determined without re-
gard to section 304(b)(5)(B)) would nei-
ther be subject to tax for the taxable year
in which the dividends arise, nor be in-
cluded in the earnings and profits of a
CFC. The Staff of the Joint Committee on
Taxation's technical explanation of sec-
tion 304(b)(5)(B) provides:

The provision prevents the foreign acquiring
corporation's E&P from permanently escaping
U.S. taxation by being deemed to be distributed
directly to a foreign person (i.e., the transferor)
without an intermediate distribution to a do-
mestic corporation in the chain of ownership
between the acquiring corporation and the
transferor corporation.

Staff of the Joint Committee on Tax-
ation, Technical Explanation of the Rev-
enue Provisions of the Senate Amend-
ment to the House Amendment to the
Senate Amendment to H.R. 1586,
Scheduled for Consideration by the

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House of Representatives on August 10,
2010, at 28 (August 10, 2010).

Section 304(b)(5)(C) provides that the
Secretary shall prescribe such regulations
as are necessary to carry out the purposes
of section 304(b)(5).

Dividends paid by a domestic corpora-
tion to a foreign person generally are sub-
ject to a 30-percent gross basis tax under
section 871(a) or 881(a), and to withhold-
ing under section 1441 or 1442, unless
reduced or eliminated pursuant to an ap-
plicable income tax treaty.

(b) Transactions at Issue and Regula-
tions to be Issued

Taxpayers may be engaging in certain
transactions following an inversion trans-
action that reduce the earnings and profits
of a CFC to facilitate repatriation of cash
and other property of the CFC. For exam-
ple, after an inversion transaction, the
foreign acquiring corporation may sell a
portion of the stock of the domestic cor-
poration acquired in the inversion trans-
action to a wholly owned CFC of the
domestic corporation in exchange for
property of the CFC. This sale would be
subject to section 304(a)(2). The exchange
of property (for stock of the domestic cor-
poration) by the CFC in many cases will
not result in income or gain that gives rise
to an income inclusion under section 951,
even though the CFC generally will rec-
ognize income or gain on the exchange of
the property (other than cash) for U.S. tax
purposes pursuant to section 1001. For
example, the property exchanged may be
property used by the CFC in a trade or
business, including property held by the
CFC through an entity that is disregarded
as an entity separate from its owner, as
described in § 301.7701-2(c)(2)(i). See
§ 1.954-2(e)(1)(ii). The Treasury Depart-
ment and the IRS understand that taxpay-
ers may interpret section 304(b)(5)(B) to
not apply where more than 50 percent of
the dividend arising upon application of
section 304 is sourced from the domestic
corporation, even though, for example,
pursuant to an income tax treaty there may
be no (or a reduced rate of) U.S. withhold-
ing tax imposed on a dividend sourced
from the domestic corporation. Under this
position, the dividend sourced from earn-
ings and profits of the CFC would never
be subject to U.S. tax. To address these
transactions, the Treasury Department and

the IRS intend to issue regulations under
section 304(b)(5)(C) as described below.

The Treasury Department and the IRS
intend to issue regulations providing that,
for purposes of applying section 304(b)(5)(B),
the determination of whether more than
50 percent of the dividends that arise un-
der section 304(b)(2) is subject to tax or
includible in the earnings and profits of a
CFC will be made by taking into account
only the earnings and profits of the acquir-
ing corporation (and therefore excluding
the earnings and profits of the issuing cor-
poration). If a partnership, option (or sim-
ilar interest), or other arrangement, is used
with a principal purpose of avoiding the
application of the rule in this section
3.03(b) (for example, to treat a transferor
as a CFC), then the partnership, option (or
similar interest), or other arrangement will
be disregarded for purposes of applying
the rule in this section 3.03(b).

The rules of this section 3.03(b) will
apply as a general matter, without regard
to whether an inversion transaction has
occurred.

The following examples illustrate the
regulations described in this section
3.03(b):

Example 1. (i) Facts. FA, a foreign corporation
that is not a CFC, wholly owns DT, a domestic
corporation. DT wholly owns FS1, a CFC. DT has
earnings and profits of $51x, and FS1 has earnings
and profits of $49x. FA transfers DT stock with a
value of $100x to FS1 in exchange for $100x of
cash.

(ii) Analysis. Under section 304(a)(2), the $100x
of cash is treated as a distribution in redemption of
the stock of DT. The redemption of the DT stock is
treated as a distribution to which section 301 applies
pursuant to section 302(d), which ordinarily would be
sourced first from FS1 under section 304(b)(2)(A).
Without regard to the application of section
304(b)(5)(B), more than 50 percent of the dividend
arising from the acquisition, taking into account only
the earnings and profits of FS1 pursuant to this
section 3.03(b), would not be subject to tax under
Chapter 1 of the Code. In particular, no portion of a
dividend from FS1 would be subject to U.S. tax or
includible in the earnings and profits of a CFC.
Accordingly, section 304(b)(5)(B) applies to the
transaction, and no portion of the distribution of
$100x is treated under section 301(c)(1) as a divi-
dend (as defined in section 316) out of the earnings
and profits of FS1. Furthermore, the $100x of cash is
treated as a dividend to the extent of the earnings and
profits of DT ($51x).

Example 2. (i) Facts. FA, a foreign corporation
that is not a CFC, wholly owns DT, a domestic
corporation. DT wholly owns FS1, a CFC. FA and
DT own 40 percent and 60 percent, respectively, of
the capital and profits interests of PRS, a foreign
partnership. PRS wholly owns FS2, a CFC. The FS2

stock has a fair market value of $100x. FS1 has
earnings and profits of $150x. PRS transfers all of its
FS2 stock to FS1 in exchange for $100x of cash. DT
enters into a gain recognition agreement that com-
plies with the requirements set forth in section 4.01
of Notice 2012-15, 2012-9 IRB 424, with respect to
the portion (60 percent) of the FS2 stock that DT is
deemed to transfer to FS1 in an exchange described
in section 367(a)(1). See § 1.367(a)-1T(c)(3)(i)(A).

(ii) Analysis. Under section 304(a)(1), PRS and
FS1 are treated as if PRS transferred its FS2 stock to
FS1 in an exchange described in section 351(a)
solely for FS1 stock, and, in turn, FS1 redeemed
such FS1 stock in exchange for $100x of cash. The
redemption of the FS1 stock is treated as a distribu-
tion to which section 301 applies pursuant to section
302(d). Without regard to the application of section
304(b)(5)(B), more than 50 percent of a dividend
arising from the acquisition, taking into account only
the earnings and profits of FS1 pursuant to this
section 3.03(b), would be subject to tax under Chap-
ter 1 of the Code. In particular, 60 percent of a
dividend from FS1 would be included in DT's dis-
tributive share of PRS's partnership income and
therefore would be subject to tax. Accordingly, sec-
tion 304(b)(5)(B) does not apply and the entire dis-
tribution of $100x is treated under section 301(c)(1)
as a dividend (as defined in section 316) out of the
earnings and profits of FS1.

#### SECTION 4. EFFECTIVE DATES

Except as provided in this section 4,
the regulations described in (i) section
2.01(b) of this notice (which disregards
certain stock of the foreign acquiring cor-
poration attributable to passive assets)
will apply to acquisitions completed on or
after September 22, 2014; (ii) section
2.02(b) of this notice (which disregards
certain distributions by a domestic entity)
will apply to acquisitions, or to transfers
of domestic stock described in § 1.367(a)-
3(c), completed on or after September 22,
2014; (iii) section 2.03(b) of this notice
(regarding the application of the EAG
rules upon a subsequent transfer of stock
of the foreign acquiring corporation) will
apply to acquisitions completed on or af-
ter September 22, 2014; (iv) section
3.01(b) of this notice will apply to acqui-
sitions of obligations or stock of a non-
CFC foreign related person by an expatri-
ated foreign subsidiary completed on or
after September 22, 2014, but only if the
inversion transaction is completed on or
after September 22, 2014; (v) section
3.02(e) of this notice will apply to speci-
fied transactions and specified exchanges
completed on or after September 22,
2014, but only if the inversion transaction
is completed on or after September 22,

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2014; and (vi) section 3.03(b) of this no-
tice will apply to acquisitions of stock
described in section 304 completed on or
after September 22, 2014.

Taxpayers may elect to apply the rule
in section 2.03(b)(iii) of this notice (re-
garding subsequent transfers of stock of
the foreign acquiring corporation when a
domestic entity is a member of a foreign-
parented group) to acquisitions completed
before September 22, 2014.

No inference is intended regarding the
treatment of transactions described in this
notice under current law, and the IRS may
challenge such transactions under applica-
ble Code provisions or judicial doctrines.

#### SECTION 5. REQUEST FOR COMMENTS AND CONTACT INFORMATION

The Treasury Department and the IRS
expect to issue additional guidance to fur-
ther limit inversion transactions that are
contrary to the purposes of section 7874
and the benefits of post-inversion tax
avoidance transactions. In particular, the
Treasury Department and the IRS are con-
sidering guidance to address strategies
that avoid U.S. tax on U.S. operations by
shifting or "stripping" U.S .- source earn-
ings to lower-tax jurisdictions, including
through intercompany debt. Comments
are requested regarding the approaches
such guidance should take. Future guid-
ance will apply prospectively; however,
the Treasury Department and the IRS ex-
pect that, to the extent any tax avoidance
guidance applies only to inverted groups,
such guidance will apply to groups that
completed inversion transactions on or af-
ter September 22, 2014.

The Treasury Department is also re-
viewing its tax treaty policy regarding in-
verted groups and the extent to which
taxpayers inappropriately obtain tax treaty
benefits that reduce U.S. withholding
taxes on U.S. source income.

Written comments may be submitted
to the Office of Associate Chief Counsel
(International), Attention: David A.
Levine, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington,
DC 20224. Alternatively, taxpayers may
submit comments electronically to
notice.comments@irscounsel.treas.gov.
Comments will be available for public
inspection and copying. The principal

authors of this notice are Mr. Levine and
Rose E. Jenkins of the Office of Asso-
ciate Chief Counsel (International).
However, other personnel from the
Treasury Department and the IRS par-
ticipated in its development. For further
information regarding this notice, con-
tact Mr. Levine at (202) 317-6937 or
Ms. Jenkins at (202) 317-6934 (not a
toll-free number).

## 2014-2015 Special Per Diem Rates Notice 2014-57

### SECTION 1. PURPOSE

This annual notice provides the 2014-
2015 special per diem rates for taxpayers
to use in substantiating the amount of or-
dinary and necessary business expenses
incurred while traveling away from home,
specifically (1) the special transportation
industry meal and incidental expenses
(M&IE) rates, (2) the rate for the inciden-
tal expenses only deduction, and (3) the
rates and list of high-cost localities for
purposes of the high-low substantiation
method.

### SECTION 2. BACKGROUND

Rev. Proc. 2011-47, 2011-42 I.R.B.
520, provides rules for using a per diem
rate to substantiate, under § 274(d) of the
Internal Revenue Code and § 1.274-5 of
the Income Tax Regulations, the amount
of ordinary and necessary business ex-
penses paid or incurred while traveling
away from home. Taxpayers using the
rates and list of high-cost localities pro-
vided in this notice must comply with
Rev. Proc. 2011-47. Notice 2013-65,
2013-42 I.R.B. 440, provides the rates
and list of high-cost localities for the pe-
riod October 1, 2013, to September 30,
2014.

Section 3.02(3) of Rev. Proc. 2011-47
provides that the term "incidental ex-
penses" has the same meaning as in the
Federal Travel Regulations, 41 C.F.R.
300-3.1, and that future changes to the
definition of incidental expenses in the
Federal Travel Regulations would be an-
nounced in the annual per diem notice.
Subsequent to publication of Rev. Proc.

2011-47, the General Services Adminis-
tration published final regulations revising
the definition of incidental expenses under
the Federal Travel Regulations to include
only fees and tips given to porters, bag-
gage carriers, hotel staff, and staff on
ships. Transportation between places of
lodging or business and places where
meals are taken, and the mailing cost of
filing travel vouchers and paying employer-
sponsored charge card billings, are no lon-
ger included in incidental expenses. Accord-
ingly, taxpayers using per diem rates may
separately deduct or be reimbursed for
transportation and mailing expenses.

### SECTION 3. SPECIAL M&IE RATES FOR TRANSPORTATION INDUSTRY

The special M&IE rates for taxpayers
in the transportation industry are $59 for
any locality of travel in the continental
United States (CONUS) and $65 for any
locality of travel outside the continental
United States (OCONUS). See section
4.04 of Rev. Proc. 2011-47.

#### SECTION 4. RATE FOR INCIDENTAL EXPENSES ONLY DEDUCTION

The rate for any CONUS or OCONUS
locality of travel for the incidental ex-
penses only deduction is $5 per day. See
section 4.05 of Rev. Proc. 2011-47.

## SECTION 5. HIGH-LOW SUBSTANTIATION METHOD

1\. Annual high-low rates. For purposes
of the high-low substantiation method, the
per diem rates in lieu of the rates de-
scribed in Notice 2013-65 (the per diem
substantiation method) are $259 for travel
to any high-cost locality and $172 for
travel to any other locality within CO-
NUS. The amount of the $259 high rate
and $172 low rate that is treated as paid
for meals for purposes of § 274(n) is $65
for travel to any high-cost locality and $52
for travel to any other locality within CO-
NUS. See section 5.02 of Rev. Proc.
2011-47. The per diem rates in lieu of the
rates described in Notice 2013-65 (the
meal and incidental expenses only sub-
stantiation method) are $65 for travel to
any high-cost locality and $52 for travel to
any other locality within CONUS.

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2\. High-cost localities. The following
localities have a federal per diem rate of

$216 or more, and are high-cost localities
for all of the calendar year or the portion

of the calendar year specified in parenthe-
ses under the key city name.

Key city

County or other defined location

Arizona

Sedona (March 1-May 31)

City limits of Sedona

California

Monterey

Monterey

(July 1-August 31)

Napa

Napa

(October 1-November 30 and February 1-September 30)

San Francisco

San Francisco

San Mateo/Foster City/Belmont

San Mateo

San Barbara

San Barbara

Santa Cruz

Santa Cruz

(June 1-August 31)

Santa Monica

City limits of Santa Monica

Sunnyvale/Palo Alto/San Jose

Santa Clara

Colorado

Aspen

Pitkin

(December 1-March 31 and June 1-August 31)

Denver/Aurora

Denver, Adams, Arapahoe and Jefferson

Steamboat Springs

Routt

(December 1-March 31)

Telluride

San Miguel

(December 1-March 31 and June 1-September 30)

Vail

Eagle

(December 1-March 31 and July 1-August 31)

District of Columbia

Washington D.C. (also the cities of Alexandria, Falls Church, and Fairfax, and the counties of Arlington and Fairfax, in Virginia; and the counties of Montgomery and Prince George's in Maryland) (See also Maryland and Virginia)

Florida

Boca Raton/Delray Beach/Jupiter

Palm Beach and Hendry

(January 1-April 30)

Fort Lauderdale

Broward

(January 1-March 31)

Fort Walton Beach/De Funiak Springs

Okaloosa and Walton

(June 1-July 31)

Key West

Monroe

Miami

Miami-Dade

(October 1-March 31)

Naples

Collier

(January 1-April 30)

Illinois

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Key city

County or other defined location

Chicago (October 1-November 30 and March 1-September 30)

Cook and Lake

Louisiana

New Orleans

Orleans, St. Bernard, Jefferson and Plaquemine Parishes

(October 1-June 30)

Maine

Bar Harbor

Hancock

(July 1-August 31)

Maryland

Baltimore City (October 1-November 30 and March 1-Spetember 30)

Baltimore City

Cambridge/St. Michaels (June 1-August 31)

Dorchester and Talbot

Ocean City

Worcester

(June 1-August 31)

Washington, DC Metro Area

Montgomery and Prince George's

Massachusetts

Boston/Cambridge

Suffolk, City of Cambridge

Falmouth

City limits of Falmouth

(July 1-August 31)

Martha's Vineyard

Dukes

(July 1-August 31)

Nantucket

Nantucket

(June 1-September 30)

Montana

Glendive/Sidney

Dawson and Richland

New Hampshire

Conway

Carroll

(July 1-August 31)

New York

Glens Falls

Warren

(July 1-August 31)

Lake Placid

Essex

(July 1-August 31)

New York City

Bronx, Kings, New York, Queens and Richmond

Saratoga Springs/Schenectady (July 1-August 31)

Saratoga and Schenectady

Tarrytown/White Plains/New Rochelle

Westchester

North Carolina

Kill Devil

Dare

(July 1-August 31)

North Dakota

Williston

Williams, Mountrail and Mckenzie

Pennsylvania

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Key city

County or other defined
location

Philadelphia

Philadelphia

(October 1-November 30 and March 1-June 30 and September 1-September 30)

Rhode Island

Jamestown/Middletown/Newport (October 1-October 31 and May 1-Spetember 30)

Newport

South Carolina

Charleston

Charleston, Berkeley and Dorchester

(March 1-May 31)

Texas

Midland

Midland

Utah

Park City

Summit

(December 1-March 31)

Virginia

Washington, DC Metro Area

Cities of Alexandria, Fairfax, and Falls Church; counties of Arlington and Fairfax

Virginia Beach

City of Virginia Beach

(June 1-August 31)

Washington

Seattle

King

Wyoming

Jackson/Pinedale

Teton and Sublette

(July 1-August 31)

3\. Changes in high-cost localities. The
list of high-cost localities in this notice
differs from the list of high-cost localities
in section 5 of Notice 2013-65.

a. The following localities have been
added to the list of high-cost localities:
San Mateo/Foster City/Belmont, Califor-
nia; Sunnyvale/Palo Alto/San Jose, Cali-
fornia; Glendive/Sidney, Montana; Willi-
ston, North Dakota.

b. The following localities have
changed the portion of the year in which
they are high-cost localities: Sedona, Ar-
izona; Napa, California; Vail, Colorado;
Fort Lauderdale, Florida; Miami, Florida;
Philadelphia, Pennsylvania.

c. The following localities have been
removed from the list of high-cost locali-
ties: Yosemite National Park, California;
San Diego, California; Floral Park/Garden
City/Great Neck, New York.

## SECTION 6. EFFECTIVE DATE

This notice is effective for per diem
allowances for lodging, meal and inciden-
tal expenses, or for meal and incidental
expenses only, that are paid to any em-
ployee on or after October 1, 2014, for
travel away from home on or after Octo-
ber 1, 2014. For purposes of computing
the amount allowable as a deduction for
travel away from home, this notice is ef-
fective for meal and incidental expenses

or for incidental expenses only paid or
incurred on or after October 1, 2014. See
sections 4.06 and 5.04 of Rev. Proc.
2011-47 for transition rules for the last 3
months of calendar year 2014.

## SECTION 7. EFFECT ON OTHER DOCUMENTS

Notice 2013-65 is superseded.
DRAFTING INFORMATION

The principal author of this notice is
Neville R. Jiang of the Office of Associate
Chief Counsel (Income Tax & Account-
ing). For further information regarding
this notice contact Mr. Jiang at (202) 317-
7007 (not a toll-free number).

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# Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe the
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.

Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

# Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

GP-General Partner.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

TT-Trustee.

D Decedent.

LP-Limited Partner.

LR-Lessor.

X-Corporation.

DE-Donee.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO Possession of the U.S.

PR-Partner.

PRS Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

BK-Bank.

B.T.A .- Board of Tax Appeals.

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

U.S.C .- United States Code.

DC-Dummy Corporation.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.

DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

Y-Corporation.

Z-Corporation.

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## Numerical Finding List1

Bulletins 2014-27 through 2014-42

### Announcements:

2014-2, 2014-28 I.R.B. 120
2014-28, 2014-34 I.R.B. 391
2014-29, 2014-35 I.R.B. 452

### Notices:

2014-40, 2014-27 I.R.B. 100
2014-41, 2014-27 I.R.B. 97
2014-42, 2014-34 I.R.B. 387
2014-43, 2014-31 I.R.B. 249
2014-44, 2014-32 I.R.B. 270
2014-45, 2014-34 I.R.B. 388
2014-46, 2014-36 I.R.B. 520
2014-47, 2014-36 I.R.B. 522
2014-48, 2014-36 I.R.B. 523
2014-49, 2014-41 I.R.B. 665
2014-50, 2014-40 I.R.B. 590
2014-51, 2014-40 I.R.B. 594
2014-52, 2014-42 I.R.B. 712
2014-54, 2014-41 I.R.B. 670
2014-55, 2014-41 I.R.B. 672
2014-56, 2014-41 I.R.B. 674
2014-57, 2014-42 I.R.B. 723

### Proposed Regulations:

REG-104579-13, 2014-33 I.R.B. 370
REG-120756-13, 2014-31 I.R.B. 252
REG-105067-14, 2014-34 I.R.B. 391
REG-110948-14, 2014-30 I.R.B. 239
REG-121542-14, 2014-28 I.R.B. 119
REG-107012-14, 2014-33 I.R.B. 371
REG-123286-14, 2014-33 I.R.B. 377
REG-209459-78, 2014-31 I.R.B. 253
REG-129507-14, 2014-38 I.R.B. 561
REG-129786-14, 2014-38 I.R.B. 562
REG-105739-11, 2014-41 I.R.B. 704

### Revenue Procedures:

2014-26, 2014-27 I.R.B. 26
2014-27, 2014-27 I.R.B. 41
2014-29, 2014-28 I.R.B. 105
2014-37, 2014-33 I.R.B. 363
2014-38, 2014-29 I.R.B. 132
2014-39, 2014-29 I.R.B. 151
2014-40, 2014-30 I.R.B. 229
2014-41, 2014-33 I.R.B. 364
2014-42, 2014-29 I.R.B. 193
2014-43, 2014-32 I.R.B. 273
2014-44, 2014-32 I.R.B. 274
2014-45, 2014-34 I.R.B. 388
2014-46, 2014-33 I.R.B. 367
2014-47, 2014-35 I.R.B. 393
2014-48, 2014-36 I.R.B. 527

Revenue Procedures-Continued:

2014-49, 2014-37 I.R.B. 535
2014-50, 2014-37 I.R.B. 540
2014-51, 2014-37 I.R.B. 543
2014-52, 2014-38 I.R.B. 560
2014-53, 2014-39 I.R.B. 573
2014-54, 2014-41 I.R.B. 675

## Revenue Rulings:

2014-14, 2014-27 I.R.B. 12
2014-19, 2014-32 I.R.B. 266
2014-20, 2014-28 I.R.B. 101
2014-21, 2014-34 I.R.B. 381
2014-22, 2014-37 I.R.B. 523
2014-23, 2014-40 I.R.B. 575
2014-24, 2014-37 I.R.B. 529
2014-25, 2014-40 I.R.B. 574
2014-26, 2014-41 I.R.B. 663

## Treasury Decisions:

9664, 2014-32 I.R.B. 254
9668, 2014-27 I.R.B. 1
9669, 2014-28 I.R.B. 103
9670, 2014-29 I.R.B. 121
9671, 2014-29 I.R.B. 124
9672, 2014-30 I.R.B. 196
9673, 2014-30 I.R.B. 212
9674, 2014-30 I.R.B. 225
9675, 2014-31 I.R.B. 242
9676, 2014-32 I.R.B. 260
9677, 2014-31 I.R.B. 241
9678, 2014-32 I.R.B. 262
9679, 2014-32 I.R.B. 267
9680, 2014-32 I.R.B. 254
9681, 2014-33 I.R.B. 340
9682, 2014-33 I.R.B. 342
9683, 2014-33 I.R.B. 330
9684, 2014-33 I.R.B. 345
9685, 2014-34 I.R.B. 379
9686, 2014-34 I.R.B. 382
9687, 2014-36 I.R.B. 486
9688, 2014-36 I.R.B. 482
9689, 2014-36 I.R.B. 456
9690, 2014-38 I.R.B. 548
9691, 2014-38 I.R.B. 547
9692, 2014-40 I.R.B. 574
9693, 2014-41 I.R.B. 596
9694, 2014-41 I.R.B. 626
9695, 2014-42 I.R.B. 707

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2014-01 through 2014-26 is in Internal Revenue Bulletin
2014-26, dated June 30, 2014.

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## Finding List of Current Actions on Previously Published Items1

## Revenue Procedures-Continued:

## Revenue Rulings:

2011-16

2008-40

Bulletins 2014-27 through 2014-42

Modified by Rev. Proc. 2014-51, 2014-51 I.R.B. 543

Modified by

Rev. Rul. 2014-24, 2014-37 I.R.B. 529

Announcements:

2012-11

2012-38

2011-1

Supplemented by

Superseded by Rev. Proc. 2014-27, 2014-27 I.R.B. 26

Modified by Rev. Rul. 2014-24, 2014-37 I.R.B. 529

Ann. 2014-2, 2014-28 I.R.B. 120

2013-11

2012-46

2012-6

Supplemented by

Superseded by

Modified by Rev. Rul. 2014-24, 2014-37 I.R.B. 529

Ann. 2014-2, 2014-28 I.R.B. 120

Rev. Proc. 2014-26, 2014-27 I.R.B. 41

2010-41

2014-4

Notices:

Obsoleted by

Amplified by

Rev. Proc. 2014-43, 2014-32 I.R.B. 273

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

2013-11 Modified by

Revenue Procedures:

2014-4

Notice 2014-48, 2014-36 I.R.B. 523

Modified by

1981-38

Rev. Proc. 2014-41, 2014-41 I.R.B. 675

2013-23

Superseded by

Modified by

Rev. Proc. 2014-42, 2014-29 I.R.B. 193

2014-5

Notice 2014-48, 2014-36 I.R.B. 523

Amplified by

93-37

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

2013-28

Modified and Superseded by

Modified by

Rev. Proc. 2014-43, 2014-32 I.R.B. 273

2014-8

Notice 2014-48, 2014-36 I.R.B. 523

1981-38

Amplified by

2013-29

Modified by

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

Modified by

Rev. Proc. 2014-42, 2014-29 I.R.B. 193

2014-9

Notice 2014-46, 2014-36 I.R.B. 520

2000-12

Amplified by

2013-29

Superseded by

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

Clarified by

Rev. Proc. 2014-39, 2014-29 I.R.B. 151

2014-10

Notice 2014-46, 2014-36 I.R.B. 520

2002-55

Amplified by

2013-32

Revoked by

Rev. Proc. 2014-40, 2014-30 I.R.B. 229

Modified by

Rev. Proc. 2014-39, 2014-29 I.R.B. 151

2014-13

Notice 2014-48, 2014-36 I.R.B. 523

2003-64

Modified by

2013-37

Superseded by

Rev. Proc. 2014-38, 2014-29 I.R.B. 132

Modified by

Rev. Proc. 2014-47, 2014-35 I.R.B. 393

2014-13

Notice 2014-48, 2014-36 I.R.B. 523

2004-21

Superseded by

2013-51

Superseded by

Rev. Proc. 2014-38, 2014-29 I.R.B. 132

Obsoleted by Notice 2014-42, 2014-34 I.R.B. 387

Rev. Proc. 2014-47, 2014-35 I.R.B. 393

2014-16

2005-77

Superseded by

2013-60

Superseded by Rev. Proc. 2014-47, 2014-35 I.R.B. 393

Rev. Proc. 2014-51, 2014-37 I.R.B. 543

Modified by Notice 2014-46, 2014-36 I.R.B. 520

2011-14

2014-16

Modified by

Modified by

2013-60 Clarified by

Rev. Proc. 2014-48, 2014-36 I.R.B. 527

Rev. Proc. 2014-51, 2014-37 I.R.B. 543

Notice 2014-46, 2014-36 I.R.B. 520

2011-14

2014-12

Modified by

Modified by

2013-65 Superseded by

Rev. Proc. 2014-54, 2014-41 I.R.B. 675

Rev. Proc. 2014-54, 2014-41 I.R.B. 675

Notice 2014-57, 2014-42 I.R.B. 723

2011-16

2014-17

2014-44

Superseded by

Modified by

Supplemented by

Rev. Proc. 2014-51, 2014-37 I.R.B. 543

Rev. Proc. 2014-54, 2014-41 I.R.B. 675

Notice 2014-45, 2014-34 I.R.B. 388

1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2014-01 through 2014-26 is in Internal Revenue Bulletin 2014-26, dated June 30, 2014.

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## Treasury Decisions:

2005-47
Obsoleted by
T.D. 9668 2014-27 I.R.B. 1

2010-51
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

2010-71
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

2011-6
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

2011-9
Obsoleted by
T.D. 9684 2014-33 I.R.B. 345

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### Internal Revenue Bulletins 2014-27 through 2014-42

The abbreviation and number in parenthesis following the index
entry refer to the specific item; numbers in roman and italic type
following the parentheses refer to the Internal Revenue Bulletin in
which the item may be found and the page number on which it
appears.

Key to Abbreviations:

Ann
Announcement

CD
Court Decision

DO
Delegation Order

EO
Executive Order

PL
Public Law

PTE
Prohibited Transaction Exemption

RP
Revenue Procedure

RR
Revenue Ruling

SPR
Statement of Procedural Rules

TC
Tax Convention

TD
Treasury Decision

TDO
Treasury Department Order

# ADMINISTRATIVE

AJCA-Section 6707 and the Penalty for Failure to Furnish
Information Regarding Reportable Transactions by Material
Advisors (TD 9686) 34, 382

Adjusted Applicable Dollar Amount for Fee Imposed by §§ 4375
and 4376 (Notice 56) 41, 674

Announcement to Discontinue the Internal Revenue Bulletin
Index (Ann 27) 28, 120

Annual Filing Season Program (RP 42) 29, 193

Disclosure to Census Bureau (REG-120756-13) 31, 241

Disclosure to Census Bureau (TD 9677) 31, 241

Information reporting by passport applicants (TD 9679) 32, 267

Low-Income Housing Tax Credit (RP 52) 38, 560

Procedures to void backup withholding (RP 43) 32, 273
Proposed Regulations:

26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (REG-
120756-13) 31, 241

Regulations Governing Practice Before the Internal Revenue
Service (REG-138367-06) (TD 9668) 27, 1
Regulations:

31 CFR 10.1, revised; 10.3, revised; 10.22, revised; 10.31,
revised; 10.35, revised; 10.36, revised; 10.37, revised;
10.52, revised; 10.81, revised; 10.82, revised; 10.91, re-
vised. (TD 9668) 27, 1

26 CFR 301.6109-4, added; 1.6042-4, amended; 1.6043-4,
amended; 1.6044-5, amended; 1.6045-2, amended;
1.6045-3, amended; 1.6045-4, amended; 1.6045-5,
amended; 1.6049-6, amended; 1.6050A-1, amended;
1.6050E-1, amended; 1.6050N-1, amended; 1.6050P-1,
amended; 1.6050S-1, amended; 1.6050S-3, amended (TD
9675) 31, 242

# ADMINISTRATIVE-Cont.

26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (TD 9677) 31,
241

26 CFR part 301, amended; 26 CFR 301.6039E-1 added (TD
9679) 32, 267

26 CFR 301.6707-1, added; 301.6707-1T, removed; Rev.
Proc. 2007-21, sections 4.04, 4.05, and 4.06 superseded;
material advisor penalty for failure to furnish information
regarding reportable transactions (TD 9686) 34, 382

Substantiation by Per Diem Rates (Notice 2014-57) 42, 723
Substitute Forms Preparation for Certain Information Returns
(RP 27) 27, 41

Substitute Forms Preparation for Certain Information Returns
(RP 44) 32, 274

Truncated Taxpayer Identification Numbers (TD 9675) 31, 242

# EMPLOYEE PLANS

Additional Permitted Election Changes for Health Coverage
under § 125 Cafeteria Plans (Notice 55) 41, 672

Cash balance plans and other hybrid defined benefit pension
plans (TD 9693) 41, 596

Group Trusts (RR 24) 37, 529

Individual Retirement Account Rollover Limitations (REG-
209459-78) 31, 253

Longevity Annuity Contracts (TD 9673) 30, 212212

Proposed Regulations:

26 CFR 408, Individual Retirement Accounts (REG-209459-
78) 31, 253

Qualified Plans
Rollovers (Notice 54) 41, 670

Regulations:
26 CFR 54.9815-2708, as amended (TD 9671) 29, 174

26 CFR 1.401(a)(9)-5, amended; 1.401(a)(9)-6, amended;
1.403(b)-6, amended; 1.408-8, amended; 1.408A-6,
amended; 1.6047-2, added (TD 9673) 30, 212

26 CFR 1.411(a)(13)-1, amended (TD 9693); 26 CFR
1.411(b)-1, amended (TD 9693); 26 CFR 1.411(b)(5)-1,
amended (TD 9693) 41, 596

26 CFR 1.162-31, added (REG-106796-12 TD 9694) 41,
626

26 CFR 301.6057-3 added, 301.6058-2 added, 301.6059-2
added (TD 9695) 42, 707

Requirement to File Certain Employee Benefit Statements, No-
tices and Reports Electronically with the Internal Revenue
Service (TD 9695) 42, 707

Rules relating to 90 day waiting period limitation (TD 9671) 29,
174

The $500,000 deduction limitation for remuneration provided by
certain health insurance providers (REG-106796-12) (TD
9694) 41, 626

Weighted average interest rates

Segment rates for June 2014 (Notice 41) 27, 97

Segment rates for July 2014 (Notice 43) 31, 249

Segment rates for August 2014 (Notice 48) 36, 523

Segment rates for September 2014 (Notice 50) 40, 590

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# EMPLOYMENT TAX

Extending religious and family member FICA and FUTA excep-
tions to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD 9670)
29, 121

Method of accounting for gains and losses on shares in certain
money market funds; broker returns with respect to sales of
shares in money market funds (REG-107012-14) 33, 371
Publications:

1223, General Rules and Specifications for Substitute Forms
W-2c and W-3c (RP29) 28, 105

4436, General Rules and Specifications for Substitute Form
941 and Schedule B (Form 941), and Schedule R (RP 26)
27, 26

Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Regulations:

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews. (TD 9669) 28, 103

26 CFR 1.1361-4, amended; 1.1361-4T, removed;
31.3121(b)(3)-1, amended; 31.3121(b)(3)-1T, removed;
31.3127-1, added; 31.3127-1T, removed; 31.3306(c)(5)-1,
amended; 31.3306(c)(5)-1T, removed; 301.7701-2, amend-
ed; 301.7701-2T, removed; extending religious and family
member FICA and FUTA exceptions to disregarded entities;
regulations regarding the indoor tanning services excise tax
and disregarded entities (TD 9670) 29, 121

26 CFR 1.446-7 added; 1.6045-1 amended; method of ac-
counting for gains and losses on shares in certain money
market funds; broker returns with respect to sales of shares
in money market funds (REG-107012-14) 33, 371

# ESTATE TAX

Section 2032A .-- Valuation of Certain Farm, Etc., Real Property
(RR 21) 34, 381

Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Regulations:

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews. (TD 9669) 28, 103

# EXCISE TAX

Adjusted Applicable Dollar Amount for Fee Imposed by §§ 4375
and 4376 (Notice 56) 41, 674

Alternative process for religious objections to providing contra-
ceptive coverage under section 9815 (REG-129507-14) 38,
561

Alternative process for religious objections to providing contra-
ceptive coverage under section 9815 (TD 9690) 38, 548

Branded Prescription Drug Fee (REG-123286-14) 33, 377
Branded Prescription Drug Fee (TD 9684) 33, 245

Branded Prescription Drug Fee (Notice 42) 34, 387

Definition of "eligible organization" under section 9815, regard-
ing coverage of preventive services, including contraceptive
coverage (REG-129786-14) 38, 562

# EXCISE TAX-Cont.

Extending religious and family member FICA and FUTA excep-
tions to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD 9670)
29, 121

Section 9010 of the ACA; health insurance providers fee (Notice
47) 36, 522

Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Proposed Regulations:

26 CFR 54.9815-2713A is revised; accommodations in con-
nection with coverage of preventive health services under
section 9815 (REG-129507-14) 38, 561

26 CFR 54.9815-2713A(a) amended; accommodations in
connection with coverage of preventive health services
under section 9815 (REG-129786-14) 38, 562

Regulations:

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews. (TD 9669) 28, 103

26 CFR 1.1361-4, amended; 1.1361-4T, removed;
31.3121(b)(3)-1, amended; 31.3121(b)(3)-1T, removed;
31.3127-1, added; 31.3127-1T, removed; 31.3306(c)(5)-1,
amended; 31.3306(c)(5)-1T, removed; 301.7701-2, amend-
ed; 301.7701-2T, removed; extending religious and family
member FICA and FUTA exceptions to disregarded entities;
regulations regarding the indoor tanning services excise tax
and disregarded entities (TD 9670) 29, 121

26 CFR 54.9815-2708, as amended (TD 9671)

26 CFR 51.2(e)(3), amended; (REG-123286-14) 33, 377

26 CFR 54.9815-2713A(b), (c)(1), and (c)(2)(i) introductory
text amended; 54.9815-2713A(f) and 54.9815-2713AT
added; accommodations in connection with coverage of
preventive health services under section 9815 (TD 9690)
38, 548

Rules relating to 90 day waiting period limitation (TD 9671) 29, 121

# EXEMPT ORGANIZATIONS

Streamlined Application for Recognition of Exemption Under
Section 501(c)(3) (RP 2014-40) 30, 229

Streamlined process for 501(c)(3) recognition (REG-110948-
14) 30, 225

Streamlined process for 501(c)(3) recognition (TD 9674) 30, 225
Regulations:

26 CFR 1.501(c)-1 amended 1. 501(a)-1T added;
1.501(c)(3)-1 amended, 1.501(c)(3)-1T added; and
1.508-1 amended, 1.508-1T added (REG-110948-
14)(TD 9674) 30, 225

# GIFT TAX

Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Regulations:

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews (REG-121542-14) (TD
9669) 28, 103

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# INCOME TAX

Accounting method change, retail inventory method (RP 48) 36, 132
AJCA - Section 6707 and the Penalty for Failure to Furnish
Information Regarding Reportable Transactions by Material
Advisors (TD 9686) 34, 382

Allocation and Apportionment of Interest Expense (TD 9676)
32, 260

Awards for Information Relating to Detecting Underpayments of
Tax or Violations of the Internal Revenue Laws (TD 9687) 36, 486
Basis of indebtedness of S corporations to their shareholders (TD
9682) 33, 342

Credit for carbon dioxide Sequestration (Notice 40) 27, 100

Debt that is a position in personal property that is part of a
straddle (TD 9691) 38, 547

Disciplinary actions involving attorneys, certified public accoun-
tants, enrolled agents, and enrolled actuaries, enrolled retire-
ment plan agents, and appraisers (ANN 29) 35, 452

Disclosure to Census Bureau (REG-120756-13) 31, 252

Disclosure to Census Bureau (TD 9677) 31, 241

Dispositions of property subject to depreciation under section
168 (TD 9689) 36, 456

Employer shared responsibility; look-back measurement method
(Notice 49) 41, 665

FFI Agreement for Participating FFI and Reporting Model 2 FFI
(RP 38) 29, 132

Foreign Earned Income Exclusion (ANN 2014-28) 34, 391

Foreign tax credit guidance under section 901 (m) (Notice 44)
32, 391

Foreign tax credit guidance under section 901 (m) (Notice 45)
34, 270

Information reporting by passport applicants (TD 9679) 32, 267
Insurance; effectively connected income (RP 53) 39, 573

Interest:

Investment:

Federal short-term, mid-term, and long-term rates for: July
2014 (RR 20) 28, 101

Federal short-term, mid-term, and long-term rates for: Au-
gust 2014 (RR 19) 32, 266

Federal short-term, mid-term, and long-term rates for: Sep-
tember 2014 (RR 22) 37, 533

Federal short-term, mid-term, and long-term rates for: Oc-
tober 2014 (RR 26) 41, 663

Method change procedures for dispositions of tangible deprecia-
ble property (RP 2014-54) 41, 675

Money market funds and the wash sale rules (RP 45) 34, 388
Premium Tax Credit (REG-104579-13) 33, 370

Premium Tax Credit (RP 37) 33, 363

Premium Tax Credit (RP 41) 33, 364

Premium Tax Credit (TD 9683) 33, 330

Production Tax Credit, Investment Tax Credit, Beginning of
Construction (Notice 46) 36, 520

Proposed Regulations:

26 CFR part 301 is amended, section 301.6103(j)(1)-1 is amended,
section 301.6103(j)(1)-1T added (REG-120756-13) 31, 252

26 C.F.R. 1.382-3(j)(17), modified; 1.382-3T(j)(17), added,
segregation rules for public groups of shareholders (REG-
105067-14) 34, 391

# INCOME TAX-Cont.

Publications:

1223, General Rules and Specifications for Substitute Forms
W-2c and W-3c (RP 29) 28, 105

4436, General Rules and Specifications for Substitute Form
941 and Schedule B (Form 941), and Schedule R (RP 26)
27, 26

Qualified Intermediary (QI) Agreement (RP 39) 29, 151
Qualified residential rental projects (RP-105272-13) (RP 50) 37,
540

Regulations:

31 CFR 10.1, revised; 10.3, revised; 10.22, revised; 10.31,
revised; 10.35, revised; 10.36, revised; 10.37, revised;
10.52, revised; 10.81, revised; 10.82, revised; 10.91, re-
vised (TD 9668) 27, 1

26 CFR 301.7602-1 is amended to add new paragraph (b)(3)
pertaining to summons interviews (REG-121542-14) (TD
9669) 28, 103

26 CFR 1.45R-0, added; 1.45R-1, added; 1.45R-2, added;
1.45R-3, added; 1.45R-4, added; 1.45R-5, added; tax credit
for employee health insurance expenses of small employ-
ers (TD 9672) 30, 196

26 CFR 301.6109-4, added; 1.6042-4, amended; 1.6043-4,
amended; 1.6044-5, amended; 1.6045-2, amended;
1.6045-3, amended; 1.6045-4, amended; 1.6045-5, amend-
ed; 1.6049-6, amended; 1.6050A-1, amended; 1.6050E-1,
amended; 1.6050N-1, amended; 1.6050P-1, amended;
1.6050S-1, amended; 1.6050S-3, amended (TD 9675) 31,
242

26 CFR 1.67-4, amended (TD 9667) 32, 254

26 CFR part 301 is amended, section 301.6103(j)(1)-1 is
amended, section 301.6103(j)(1)-1T added (TD 9677) 31,
241

26 CFR 1.861-9 amended, 1.861-11 amended; (TD 9676) 32,
260

26 CFR 1.1092(b)-6, added; 1.1092(b)-6T, removed;
1.1092(b)-3T, amended; (TD 9678) 32, 262

26 CFR part 301, amended; 26 CFR 301.6039E-1 added (TD
9679) 32, 267

26 CFR 1.174-2 amended; (TD 9680) 32, 254

26 CFR 1.36B-2T, 26 CFR 1.36B-3T, 1.36B-4T, added; 26
CFR 1.36B-2, 26 CFR 1.36B-3\\, 1.36B-4, amended; 26
CFR 1.162(1)-1 and 26 CFR 1.162(1)-1T, added. (REG-
104579-13) 33, 370

26 CFR 1.195-2, added; 26 CFR 1.708-1, amended; 26 CFR
1.709-1, amended. (TD 9681) 33, 340

26 CFR 1.1366-2(a), added new paragraph (a)(2) and moved
current (a)(2) through (a)(6) to (a)(3) through (a)(7), re-
spectively; basis of indebtedness of S corporations to their
shareholders (TD 9682) 33, 342

26 CFR 1.36B-2T, 26 CFR 1.36B-3T, 1.36B-4T added, 26
CFR 1.36B-2, 26 CFR 1.36B-3\\, 1.36B-4, amended, 26
CFR 1.162(1)-1 and 26 CFR 1.162(1)-1T added, (TD
9683) 33, 330

26 C.F.R. 1.382-3(j)(17), modified; 1.382-3T(j)(17), added,
segregation rules for public groups of shareholders (TD
9685) 34, 379

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# INCOME TAX-Cont.

26 CFR 301.6707-1, added; 301.6707-1T, removed; Rev.
Proc. 2007-21, sections 4.04, 4.05, and 4.06 superseded;
material advisor penalty for failure to furnish information
regarding reportable transactions (TD 9686) 34, 382

26 CFR 301.7623-1, revised; 26 CFR 301.7623-4, added; 26
CFR 301.7623-2, added; 26 CFR 301.6103(h)(4)-1, added
26 CFR 301.7623-3, added; (TD 9687) 36, 486

26 CFR 1.471-8 amended (TD 9688) 36, 482

26 CFR 1.168(i)-8 added; 1.165-2, 1.168(i)-0, 1.168(i)-1,
1.168(i)-7, 1.263(a)-3, 1.1016-3 amended; 1.168(i)-0T,
1.168(i)-1T, 1.168(i)-8T removed; dispositions of prop-
erty subject to depreciation under section 168 (TD 9689)
36, 456

26 CFR 1.1092(d)-1, amended; 1.1092(d)-1T, removed; debt
that is a position in personal property that is part of a
straddle (TD 9691) 38, 547

26 CFR 1.402A-1, amended; Removal of Allocation Rule for
Disbursements from Designated Roth Accounts to Multi-
ple Destinations (REG-105739-11) 41, 704

Regulations Governing Practice Before the Internal Revenue
Service (REG-138367-06) (TD 9668) 27, 1

REIT Distressed Debt (RP 51) 37, 543

Removal of Allocation Rule for Disbursements from Designated
Roth Accounts to Multiple Destinations (REG-105739-11)
41, 704

Research and experimental expenditures (TD 9680) 32, 254
Retail inventory method (TD 9688) 36, 482

Rules Regarding Inversions and Related Transactions (Notice
2014-52) 42, 712

Tax Credit for Employee Health Insurance Expenses of Small
Employers (TD 9672) 30, 196

Temporary relief from certain requirements of § 42 (Rev. Proc.
2014-39) (RP 49) 37, 535

Truncated Taxpayer Identification Numbers (TD 9675) 31, 242

Section 67 Limitations on Estates or Trusts; Change of Effective
Date (TD 9664) 32, 254

Section 1298(f) Reporting Requirements for U.S. Persons that
Hold Stock of a Passive Foreign Investment Company that is
Marked to Market Under Section 475 or Another Chapter 1

Code Provision Other Than Section 1296 (Notice 51) 40, 594
Section 5000A national average premium for a bronze level of
coverage (RP 46) 33, 367

Segregation rules for public groups of shareholders, (REG-
105067-14) 34, 391

Segregation rules for public groups of shareholders, (TD 9685)
34, 379

Standard Industry Fare Level (RR 2014-25) 40, 574

Substantiation by Per Diem Rates (Notice 2014-57) 42, 723

Substitute Forms Preparation for Certain Information Returns
(RP 27) 27, 41

Substitute Forms Preparation for Certain Information Returns
(RP 44) 32, 274

Summons Interview Regulations Under Section 7602 (REG-
121542-14) (TD 9669) 28, 103

Unamortized organization and syndication expenses following a
partnership technical termination (TD 9681) 33, 340

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# INCOME TAX-Cont.

Underpayment and overpayments, quarter beginning: July 1,
2014 (RR 14) 27, 12

Underpayment and overpayments, quarter beginning: October 1,
2014 (RR-129839-14) 40, 575

Unrealized gain or loss treatment upon establishment of an
identified mixed straddle (TD 9678) 32, 262

Voluntary withholding(TD-9692) 40, 574

26 CFR 31.3402(p)-1, section (c) added (TD 9692) 40, 574
Withholding Foreign Partnership and Trust Agreements (RP 47)
35, 393

# SELF-EMPLOYMENT TAX

Extending religious and family member FICA and FUTA excep-
tions to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD 9670)
29, 121

Regulations:

26 CFR 1.1361-4, amended; 1.1361-4T, removed;
31.3121(b)(3)-1, amended; 31.3121(b)(3)-1T, removed;
31.3127-1, added; 31.3127-1T, removed;
31.3306(c)(5)-1, amended; 31.3306(c)(5)-1T, removed;
301.7701-2, amended; 301.7701-2T, removed; extending
religious and family member FICA and FUTA exceptions
to disregarded entities; regulations regarding the indoor
tanning services excise tax and disregarded entities (TD
9670) 29, 121

# SPECIAL ANNOUNCEMENT

Annual Filing Season Program (RP 42) 29, 193

Procedures to Avoid Backup Withholding (RP 43) 32, 273

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# INTERNAL REVENUE BULLETIN

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or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

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would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
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