Internal Revenue Bulletin 2015-37 (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

4

IRS

## 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

REG-103033-11, page 325.

This document contains proposed regulations that provide
guidance regarding the amount of the penalty under section
6707A of the Internal Revenue Code (Code) for failure to
include on any return or statement any information required to
be disclosed under section 6011 with respect to a reportable
transaction.

### REG-109813-11, page 330.

These proposed regulations would make it easier for individu-
als to satisfy the presence test for qualifying as a bona fide
resident of a U.S. possession or territory under section 937(a).
In counting days of presence in the possession under the
presence test, the proposed regulations generally would allow
an individual to include up to 30 days that the individual was
outside the possession and the United States, provided that
the individual was present for more days in the possession than
in the United States.

### REG-136459-09, page 332.

The proposed regulations provide guidance to taxpayers on
the amendments made to section 199 by the Energy Improve-
ment and Extension Act of 2008 and the Tax Extenders and
Alternative Minimum Tax Relief Act of 2008, involving oil re-
lated qualified production activities income and qualified films,
and the American Taxpayer Relief Act of 2012, involving activ-
ities in Puerto Rico. The proposed regulations also provide
guidance on (1) determining domestic production gross re-
ceipts, (2) the terms manufactured, produced, grown, or ex-
tracted, (3) contract manufacturing, (4) hedging transactions,
(5) construction activities, (6) allocating cost of goods sold,
and (7) agricultural and horticultural cooperatives.

Bulletin No. 2015-37
September 14, 2015

### REG-143800-14, page 347.

Proposed regulations under section 36B of the Code provide
that an eligible employer-sponsored plan does not meet the
minimum value requirement unless it provides substantial cover-
age of inpatient hospitalization services and physician services.

### T.D. 9731, page 314.

Final and temporary regulations relating to the allocation of
W-2 wages for purposes of the W-2 wage limitation on the
amount of a taxpayer's deduction related to domestic produc-
tion activities. Specifically, the temporary regulations provide
guidance on (1) the allocation of W-2 wages paid by two or
more taxpayers that are employers of the same employees
during a calendar year and (2) the determination of W-2 wages
if the taxpayer has a short taxable year.

## EMPLOYEE PLANS

REG-123640-15, page 350.

Notice of proposed rulemaking by cross-reference to tempo-
rary regulations that relate to multiemployer pension plans that
are projected to have insufficient funds, at some point in the
future, to pay the full benefits to which individuals will be
entitled under the plans (referred to as plans in "critical and
declining status"). The Multiemployer Pension Reform Act of
2014 ("MPRA") amended the Internal Revenue Code to incor-
porate suspension of benefits provisions that permit these
multiemployer plans to reduce pension benefits payable to
participants and beneficiaries if certain conditions are satisfied.
A suspension of benefits is not permitted to take effect prior to
a vote of the participants of the plan with respect to the
suspension. These regulations contain guidance relating to the
administration of that vote.

(Continued on the next page)

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### Notice 2015-58, page 322.

This notice provides guidance on certain issues relating to the
application of the Cooperative and Small Employer Charity
Pension Flexibility Act, Pub. L. No. 113-97 (CSEC Act), which
specifies minimum funding requirements and related rules that
apply with respect to certain defined benefit pension plans
maintained by groups of cooperatives and related entities and
groups of charities.

### T.D. 9735, page 316.

These temporary regulations relate to multiemployer pension
plans that are projected to have insufficient funds, at some
point in the future, to pay the full benefits to which individuals
will be entitled under the plans (referred to as plans in "critical
and declining status"). The Multiemployer Pension Reform Act
of 2014 ("MPRA") amended the Internal Revenue Code to
incorporate suspension of benefits provisions that permit these
multiemployer plans to reduce pension benefits payable to
participants and beneficiaries if certain conditions are satisfied.
A suspension of benefits is not permitted to take effect prior to
a vote of the participants of the plan with respect to the
suspension. These regulations contain guidance relating to the
administration of that vote.

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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

1.199-2: Wage Limitation

### Allocation of W-2 Wages in a Short Taxable Year and in an Acquisition or Disposition T.D. 9731

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains fi-
nal and temporary regulations relating to
the allocation of W-2 wages for purposes
of the W-2 wage limitation on the amount
of a taxpayer's deduction related to do-
mestic production activities. Specifically,
the temporary regulations provide guid-
ance on: the allocation of W-2 wages paid
by two or more taxpayers that are employ-
ers of the same employees during a cal-
endar year; and the determination of W-2
wages if the taxpayer has a short taxable
year. The text of the temporary regula-
tions also serves as the text of the pro-
posed regulations set forth in the notice of
proposed rulemaking (REG-136459-09)
on this subject in the Proposed Rules sec-
tion in this issue of the Internal Revenue
Bulletin.

DATES: Effective Date: These regula-
tions are effective on August 27, 2015.

Applicability Date: For dates of appli-
cability, see § 1.199-8T(i)(10).

#### FOR FURTHER INFORMATION

CONTACT: James A. Holmes 202-317-
4137 (not a toll free number).

SUPPLEMENTARY INFORMATION:
Background

This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under section 199(b) of the Internal
Revenue Code (Code). Section 199(b)
was enacted by the American Jobs Cre-
ation Act of 2004 (Public Law 108-357,
118 Stat. 1418 (2004)). Subsequent
amendments to section 199(b) were made
by the Gulf Opportunity Zone Act of 2005

(Public Law 109-135, 119 Stat. 25
(2005)), the Tax Increase Prevention and
Reconciliation Act of 2005 (Public Law
109-222, 120 Stat. 345 (2005)), the Tax
Extenders and Alternative Minimum Tax
Relief Act of 2008 (Public Law 110-343,
122 Stat 3765 (2008)), and the Tax In-
crease Prevention Act of 2014 (Public
Law 113-295, 128 Stat. 4010 (2014)).

Under section 199(b)(1), the amount of
the deduction allowable under section
199(a) for any taxable year shall not ex-
ceed 50 percent of the W-2 wages of the
taxpayer for the taxable year. Section
199(b)(2)(A) generally defines W-2
wages, with respect to any person for any
taxable year of such person, as the sum of
amounts described in section 6051(a)(3)
and (8) paid by such person with respect
to employment of employees by such per-
son during the calendar year ending dur-
ing such taxable year. Section 199(b)(3),
after its amendment by section 219(b) of
the Tax Increase Prevention Act of 2014,
provides that the Secretary shall provide
for the application of section 199(b) in
cases of a short taxable year or where the
taxpayer acquires, or disposes of, the ma-
jor portion of a trade or business, or the
major portion of a separate unit of a trade
or business during the taxable year. Sec-
tion 219(d) of the Tax Increase Prevention
Act of 2014 provides that the amendments
made by section 219 shall take effect as if
included in the provision of the American
Jobs Creation Act of 2004 to which they
relate. Section 1.199-2(c) provides the cur-
rent rule for acquisitions and dispositions.

Section 1.199-2(c) currently provides
that if a taxpayer (a successor) acquires a
trade or business, the major portion of a
trade or business, or the major portion of
a separate unit of a trade or business from
another taxpayer (a predecessor), then, for
purposes of computing the respective sec-
tion 199 deduction of the successor and of
the predecessor, the W-2 wages paid for
that calendar year shall be allocated be-
tween the successor and the predecessor
based on whether the wages are for em-
ployment by the successor or for employ-
ment by the predecessor. Thus, the W-2
wages are allocated based on whether the

wages are for employment for a period
during which the employee was employed
by the predecessor or for employment for
a period during which the employee was
employed by the successor. The W-2
wage allocation under the current regula-
tions is made regardless of which permis-
sible method is used by a predecessor or a
successor for reporting wages on Form
W-2, as provided in Rev. Proc. 2004-53
(2004-2 CB 320) (see § 601.601(d)(2) of
this chapter). Section 1.199-2(e)(1) pro-
vides that under section 199(b)(2), the
term W-2 wages means, with respect to
any person for any taxable year of such
person, the sum of the amounts described
in section 6051(a)(3) and (8) paid by such
person with respect to employment of em-
ployees by such person during the calen-
dar year ending during such taxable year.

Rev. Proc. 2006-47 (2006-2 CB 869)
(see § 601.601(d)(2)) is the currently ef-
fective guidance providing methods of
calculating W-2 wages and related rules
for purposes of section 199(b). Section
6.02(A) of Rev. Proc. 2006-47 provides
that the amount of W-2 wages for a tax-
payer with a short taxable year includes
only those wages subject to Federal in-
come tax withholding that are reported on
Form W-2, "Wage and Tax Statement,"
for the calendar year ending with or
within that short taxable year.

In certain situations, a short taxable
year may not include a calendar year end-
ing within such short taxable year. Section
1.199-2(c) of the current regulations does
not address these situations and does not
reflect the amendment made by the Tax
Increase Prevention Act of 2014. In order
to provide guidance on the application of
section 199(b)(3) to a short taxable year
that does not include a calendar year end-
ing within the short taxable year, the IRS
and the Treasury Department are revising
the regulations to address these situations.
To provide immediate effect, the IRS and
the Treasury Department are issuing these
regulations as temporary regulations.
These temporary regulations apply solely
for purposes of section 199.

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### Explanation of Provisions

The final regulations issued in connec-
tion with these temporary regulations re-
move the current language of § 1.199-
2(c) and replace it with a cross reference
to these temporary regulations. In the
place of the current language, these tem-
porary regulations provide rules for calcu-
lating W-2 wages for purposes of the
W-2 wage limitation in the case of an
acquisition or disposition of a trade or
business, the major portion of a trade or
business, the major portion of a separate
unit of a trade or business during the tax-
able year, or a short taxable year. Specif-
ically, these temporary regulations pro-
vide a rule for acquisitions and
dispositions if one or more taxpayers may
be considered the employer of the em-
ployees of the acquired or disposed of
trade or business during that calendar
year. In that case, the temporary regula-
tions provide that the W-2 wages paid
during the calendar year to employees of
the acquired or disposed of trade or busi-
ness are allocated between each taxpayer
based on the period during which the em-
ployees of the acquired or disposed of
trade or business were employed by the
taxpayer.

These temporary regulations also pro-
vide a rule to apply in the case of a short
taxable year in which there is no calendar
year ending within such short taxable year
(short-taxable-year rule). Wages paid by a
taxpayer during the short taxable year to
employees for employment by such tax-
payer are treated as W-2 wages for such
short taxable year for purposes of section
199(b)(1).

These temporary regulations also de-
scribe types of transactions that are con-
sidered either an acquisition or disposition
for purposes of section 199(b)(3). Specif-
ically, these temporary regulations pro-
vide that an acquisition or disposition in-
cludes an incorporation, a formation, a
liquidation, a reorganization, or a pur-
chase or sale of assets.

These regulations also contain cross
references to § 1.199-2(a), (b), (d), and
(e). The IRS and the Treasury Department
observe that these rules continue to apply
to taxpayers that use these temporary reg-
ulations. For example, the non-duplication
rule of § 1.199-2(d) applies such that a

taxpayer that includes wages as W-2
wages based on these temporary regula-
tions, including by filing an amended re-
turn for a short taxable year, may not treat
those wages as W-2 wages for any other
taxable year. Also, wages qualifying as
W-2 wages of one taxpayer based on
these temporary regulations cannot be
treated as W-2 wages of another taxpayer.

The temporary regulations are applica-
ble for taxable years beginning on or after
August 27, 2015 and expire on August 24,
2018. A taxpayer may apply § 1.199-
2T(c) to taxable years for which the lim-
itations for assessment of tax has not ex-
pired beginning before August 27, 2015.

### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866 of, as supple-
mented and reaffirmed by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 533(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. For the applicability of the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
refer to the Special Analyses section of
the preamble to the cross-reference notice
of proposed rulemaking published in the
Proposed Rules section in this issue of the
Federal Register. Pursuant to section
7805(f) of the Code, these regulations
have been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on their impact
on small business.

### Drafting Information

The principal author of these regula-
tions is James A. Holmes, Office of As-
sociate Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.

* * * * *

### Adoption of Amendment to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:

## PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.199-2T also issued under 26
U.S.C. 199(b)(3).

* * * * *

Par. 2. Section 1.199-0 is amended by
revising the entry for § 1.199-2(c) and add-
ing entries for §§ 1.199-2(c)(1), (c)(2), and
(c)(3), and 1.199-8(i)(10) to read as follows:

§ 1.199-0 Table of contents.

* * * * *

§ 1.199-2 Wage limitation.

* * * * *

(c) Acquisitions, dispositions, and
short taxable years.

(1) Allocation of wages between more
than one taxpayer.

(2) Short taxable years.

(3) Operating rules.

(i) Acquisition or disposition.

(ii) Trade or business.

* * * * *

§ 1.199-8 Other rules.

* * * * *

(i) * * *

(10) Acquisitions, dispositions, and
short taxable years.

* * * * *

Par. 3. Section 1.199-2 is amended by
revising paragraph (c) to read as follows:

§ 1.199-2 Wage limitation.

* * * * *

(c) [Reserved]. For further guidance
see § 1.199-2T(c).

* * * * *

Par. 4. Section 1.199-2T is added to
read as follows:

§ 1.199-2T Wage limitation
(temporary).

(a) through (b) [Reserved]. For further
guidance, see § 1.199-2(a) through (b).

(c) Acquisitions, dispositions, and
short taxable years-(1) Allocation of

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wages between more than one taxpayer.
For purposes of computing the section
199 deduction of a taxpayer, in the case of
an acquisition or disposition (as defined in
paragraph (c)(3)(i) of this section) of a
trade or business (as defined in paragraph
(c)(3)(ii) of this section) that causes more
than one taxpayer to be an employer of the
employees of the acquired or disposed of
trade or business during the calendar year,
the W-2 wages of the taxpayer for the
calendar year of the acquisition or dispo-
sition are allocated between each taxpayer
based on the period during which the em-
ployees of the acquired or disposed of
trade or business were employed by the
taxpayer, regardless of which permissible
method is used for reporting W-2 wages
on Form W-2, "Wage and Tax State-
ment." For this purpose, the period of
employment is determined consistently
with the principles for determining
whether an individual is an employee de-
scribed in § 1.199-2(a)(1).

(2) Short taxable years. If a taxpayer
has a short taxable year that does not
contain a calendar year ending during
such short taxable year, wages paid to
employees for employment by such tax-
payer during the short taxable year are
treated as W-2 wages for such short tax-
able year for purposes of § 1.199-2(a)(1)
(if the wages would otherwise meet the
requirements to be W-2 wages under
§ 1.199-2 but for the requirement that a
calendar year must end during the short
taxable year).

(3) Operating rules-(i) Acquisition or
disposition. For purposes of this para-
graph (c), the term acquisition or disposi-
tion includes an incorporation, a forma-
tion, a liquidation, a reorganization, or a
purchase or sale of assets.

(ii) Trade or business. For purposes of
this paragraph (c), the term trade or busi-
ness includes a trade or business, the ma-
jor portion of a trade or business, or the
major portion of a separate unit of a trade
or business.

(iii) Application to section 199 only.
The provisions of this section apply solely
for purposes of section 199 of the Internal
Revenue Code.

(d) through (e) [Reserved]. For further
guidance, see § 1.199-2(d) through (e).

Par. 5. Section 1.199-8 is amended by
adding paragraph (i)(10) to read as follows:

§ 1.199-8 Other rules.

* * * * *

(i) * * *

(10) Acquisitions, dispositions, and
short taxable years. [Reserved]. For fur-
ther guidance, see § 1.199-8T(i)(10).

Par. 6. Section 1.199-8T is added to
read as follows:

§ 1.199-8T Other rules (temporary).

(a) through (h) [Reserved]. For further
guidance, see § 1.199-8(a) through (h).

(i) Effective/applicability dates. (1)
through (9) [Reserved]. For further guid-
ance, see § 1.199-8(i)(1) through (9).

(10) Acquisitions, dispositions, and
short taxable years. Section 1.199-2T(c) is
applicable for taxable years beginning on or
after August 27, 2015. A taxpayer may apply
§ 1.199-2T(c) to taxable years for which the
limitations for assessment of tax has not ex-
pired beginning before August 27, 2015.

(11) Expiration date. The applicability of
§ 1.199-2T(c) expires on August 24, 2018.

John M. Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: May 29, 2015.

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

(Filed by the Office of the Federal Register on August 26,
2015, 8:45 a.m., and published in the issue of the Federal
Register for August 27, 2015, 80 F.R. 51939)

§ 1.432(e)(9)-1T Benefit suspensions for multiem-
ployer plans in critical and declining status (temporary).
26 CFR Regulation citation will go here.

### T.D. 9735

#### DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1

Administration of Multiemployer Plan
Participant Vote on an Approved Suspen-
sion of Benefits Under MPRA

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: The Multiemployer Pension
Reform Act of 2014 (MPRA) pertains to
multiemployer plans that are projected to
have insufficient funds, at some point in
the future, to pay the full plan benefits to
which individuals will be entitled (re-
ferred to as plans in "critical and declining
status"). The sponsor of such a plan is
permitted to reduce the pension benefits
payable to plan participants and beneficia-
ries if certain conditions are satisfied (re-
ferred to as a "suspension of benefits"). A
suspension of benefits is not permitted to
take effect prior to a vote of the partici-
pants of the plan with respect to the sus-
pension. This document contains tempo-
rary regulations that provide guidance
relating to the administration of that vote.
These temporary regulations affect active,
retired, and deferred vested participants
and beneficiaries of multiemployer plans
that are in critical and declining status as
well as employers contributing to, and
sponsors and administrators of, those
plans. The text of these temporary regula-
tions also serves as the text of the pro-
posed regulations set forth in the notice of
proposed rulemaking (REG-123640-15)
on this subject in the Proposed Rules sec-
tion of this issue of the Internal Revenue
Bulletin.

DATES: Effective date: These temporary
regulations are effective on September 2,
2015.

Applicability date: These temporary
regulations apply on and after June 17,
2015, and expire on June 15, 2018.

FOR FURTHER INFORMATION

CONTACT: The Department of the Trea-
sury MPRA guidance information line at
(202) 622-1559 (not a toll-free number).

SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act

These temporary regulations are being
issued without prior notice and public pro-
cedure pursuant to the Administrative
Procedure Act (5 U.S.C. 553). The collec-
tion of information contained in these reg-
ulations has been reviewed and approved
by the Office of Management and Budget
under control number 1545-2260.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-

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less the collection of information displays
a valid control number.

For further information concerning this
collection of information, and where to
submit comments on the collection of in-
formation and the accuracy of the esti-
mated burden, and suggestions for reduc-
ing this burden, please refer to the
preamble to the cross-referenced notice of
proposed rulemaking on this subject in the
Proposed Rules section in this issue of the
Internal Revenue Bulletin.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

##### Background

Section 432(e)(9) of the Internal Rev-
enue Code (Code), as amended by the
Multiemployer Pension Reform Act of
2014 (MPRA), permits plan sponsors of
certain multiemployer plans to reduce the
plan benefits payable to participants and
beneficiaries (referred to as a “suspension
of benefits") if specified conditions are
satisfied. One key condition is that any
such plan must be projected to have insuf-
ficient funds, at some point in the future,
to pay the full benefits to which individ-
uals will be entitled under the plan (re-
ferred to as a plan in "critical and declin-
ing status").

Under section 432(e)(9)(H), no suspen-
sion of benefits may take effect prior to a
vote of the participants of the plan with
respect to the suspension. Section
432(e)(9)(H) requires that the vote be ad-
ministered by the Secretary of the Trea-
sury, in consultation with the Pension
Benefit Guaranty Corporation and the
Secretary of Labor (generally referred to
in this preamble as the Treasury Depart-
ment, PBGC, and Labor Department, re-
spectively), within 30 days after approval
of a suspension application. The plan
sponsor is required to provide a ballot for
a vote (subject to approval by the Trea-
sury Department, in consultation with the
PBGC and the Labor Department). The
statute specifies information that the ballot
must contain, including a statement in op-
position to the proposed suspension that is

compiled from comments received on the
application.

On June 19, 2015, the Treasury De-
partment and the Internal Revenue Ser-
vice published temporary regulations (TD
9723) under section 432(e)(9) in the Fed-
eral Register (80 FR 35207) (June 2015
temporary regulations). The June 2015
temporary regulations provide general
guidance regarding section 432(e)(9) and
outline the requirements for a plan spon-
sor of a plan that is in critical and declin-
ing status to apply for a suspension of
benefits and for the Treasury Department
to begin processing such an application. A
notice of proposed rulemaking cross-
referencing the temporary regulations
(REG-102648-15) was also published in
the same issue of the Federal Register
(80 FR 35262). Both the June 2015 tem-
porary regulations and the related pro-
posed regulations reflect consideration of
comments received in response to the Re-
quest for Information on Suspensions of
Benefits under the Multiemployer Pension
Reform Act of 2014 published in the Fed-
eral Register on February 18, 2015 (80
FR 8578) (February 2015 request for in-
formation).

The June 2015 temporary regulations
and the related proposed regulations set
forth many of the rules relating to the
participant vote under section 432(e)(9)(H).
However, neither the June 2015 tempo-
rary regulations nor the related proposed
regulations provide detailed guidance on
how the Treasury Department would ad-
minister the vote.

### Explanation of Provisions

#### Overview

These temporary regulations provide
guidance relating to the administration of
the participant vote required under section
432(e)(9)(H). These temporary regula-
tions reflect consideration of comments
received in response to the February 2015
request for information. The Treasury De-
partment consulted with the PBGC and
the Labor Department on these temporary
regulations.

A participant vote requires the comple-
tion of three steps. First, a package of
ballot materials is distributed to eligible
voters. Second, the eligible voters cast
their votes and the votes are collected and

tabulated. Third, the Treasury Department
(in consultation with the PBGC and the
Labor Department) determines whether a
majority of the eligible voters has voted to
reject the proposed suspension. The June
2015 temporary regulations define eligible
voters as all plan participants and all ben-
eficiaries of deceased participants.

Under these temporary regulations, the
Treasury Department is permitted to des-
ignate a service provider or service pro-
viders to facilitate the administration of
the vote. The service provider may assist
in the steps of distributing the ballot pack-
age to eligible voters and collecting and
tabulating the votes. These temporary reg-
ulations provide that if a service provider
is designated to collect and tabulate votes,
then the service provider will provide the
Treasury Department with the report of
the results of the vote, which includes a
breakdown of the number of eligible vot-
ers who voted, the number of eligible vot-
ers who voted in support of and to reject
the suspension, and certain other informa-
tion. The Treasury Department will use
that information to determine (in consul-
tation with the PBGC and the Labor De-
partment) whether a majority of eligible
voters has voted to reject the suspension.

##### Distribution of the ballot package

These temporary regulations provide
that the ballot package sent to eligible
voters includes the approved ballot and a
unique identifier for each eligible voter.
The unique identifier, which is assigned
by the Treasury Department or a desig-
nated service provider, is intended to en-
sure the validity of the vote while main-
taining the eligible voters' privacy in the
voting process.

These temporary regulations provide
guidance on the plan sponsor's statutory
requirement to provide a ballot. Because
the ballot for each eligible voter is accom-
panied by a unique identifier, the plan
sponsor cannot itself distribute the ballot.
Instead, the plan sponsor is responsible for
furnishing a list of eligible voters so that
the ballot can be distributed on the plan
sponsor's behalf. The list must include the
last known mailing address for each eligi-
ble voter (except for those eligible voters
for whom the last known mailing address
is known to be incorrect). The plan spon-

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sor must also provide a list of eligible
voters whom the plan sponsor has been
unable to locate using reasonable efforts.
In addition, the plan sponsor must furnish
current electronic mailing addresses for
certain eligible voters, who are identified
below. The plan sponsor must also furnish
the individualized estimates provided to
eligible voters as part of the earlier notices
described in section 432(e)(9)(F) (or, if an
individualized estimate is no longer accu-
rate for an eligible voter, a corrected ver-
sion of that estimate) so that an individu-
alized estimate can be included with the
ballot for each eligible voter. These mate-
rials must be provided no later than 7 days
after the date the Treasury Department has
approved an application for a suspension
of benefits.

Under these temporary regulations, the
plan sponsor is responsible for paying all
costs associated with the ballot package,
including postage. This is because the sec-
tion 432(e)(9)(H)(iii) requirement that the
plan sponsor provide a ballot means that
the plan sponsor is responsible for the cost
of providing the ballot package to eligible
voters, including the costs associated with
printing, assembling and mailing those
ballot packages.

These temporary regulations provide
that ballot packages will be distributed to
eligible voters by first-class U.S. mail. A
supplemental copy of the mailed ballot
package may also be sent by an electronic
communication to an eligible voter who
has consented to receive electronic notifi-
cations. For example, if the ballot sent by
first-class U.S. mail is not received, a sup-
plemental ballot may be provided by elec-
tronic mail.

These temporary regulations provide
additional detail on the plan sponsor's
duty to communicate with eligible voters.
As part of this communication require-
ment, these temporary regulations provide
that the plan sponsor must notify certain
eligible voters (using an electronic com-
munication) that the ballot package is be-
ing mailed by first-class U.S. mail. The
eligible voters who must be notified under
this rule are those who received the notice
of the proposed suspension under section
432(e)(9)(F) in electronic form and those
who regularly receive plan-related elec-

tronic communications from the plan
sponsor. This notification must be sent
promptly after the plan sponsor is in-
formed of the ballot distribution date. This
notification in electronic form ensures that
those eligible voters who ordinarily ex-
pect to receive communications from the
plan sponsor in electronic form are aware
that a ballot package will arrive via first-
class U.S. mail. Under these temporary
regulations, this notification is sent by the
plan sponsor, rather than a service pro-
vider, so that the communication comes
from a familiar source, which would make
it less likely that the communication is
delivered to a "spam" or "junk" mail
folder.

The plan sponsor will have previously
made reasonable efforts to contact indi-
viduals whose mailed initial notices were
returned as undeliverable, and the mailing
addresses for the ballot packages that are
furnished by the plan sponsor will reflect
updates as a result of those reasonable
efforts. These temporary regulations re-
quire the plan sponsor to make similar
reasonable efforts to locate eligible voters
after being notified that their ballots were
returned as undeliverable.

Voting by eligible voters and collection
and tabulation of votes

In accordance with section 432(e)(9)(H)(ii),
these temporary regulations require that the
Treasury Department (in consultation with
the PBGC and the Labor Department) ad-
minister the participant vote no later than 30
days following the date of approval of an
application for a suspension of benefits.
These temporary regulations interpret the
term "administer a vote" to mean that the
voting period must begin (but need not end)
within the 30-day timeframe. As a result,
these temporary regulations require that bal-
lot packages be distributed no later than 30
days after the application has been approved
and specify that the voting period begins on
the ballot distribution date. Although the
temporary regulations allow for distribution
of ballot packages up to 30 days following
approval of an application for suspension of
benefits, it is generally expected that ballot
packages will be distributed well before that
deadline.

These temporary regulations specify
that the voting period generally will re-
main open until the 30th day following the
date the Treasury Department approves
the application for a suspension of bene-
fits. However, the voting period will not
close earlier than 21 days after the ballot
distribution date. In addition, the Treasury
Department (in consultation with the
PBGC and the Labor Department) is per-
mitted to specify a later end to the voting
period in appropriate circumstances. For
example, an extension might be appropri-
ate if, near the end of the original voting
period, there are significant technical dif-
ficulties with respect to the collection of
votes and those technical difficulties are
not resolved in time to provide eligible
voters with sufficient time to cast their
votes.

These temporary regulations specify
that votes must be collected and tabulated
using an automated voting system under
which each eligible voter must furnish a
unique identifier in order to cast a vote.
Such a system will be designed to record
votes both electronically (through a web-
site) and telephonically (through a toll-
free number that will accommodate a
touch-tone or interactive voice response).
This will permit any voter who lacks in-
ternet access or, for any reason, is not
comfortable voting via a website, to cast a
vote using a toll-free number. It is ex-
pected that the system will provide rea-
sonable support to facilitate eligible vot-
ers' use of the system's electronic and
telephonic features. These temporary reg-
ulations clarify that votes are permitted to
be cast using only these methods and that
responses returned by any other means are
invalid.

The temporary regulations do not pro-
vide for the collection of votes using pa-
per ballots because casting votes using a
website or a telephonic system will be
convenient for participants and will save
time and money while providing reliable
results. Providing a third voting option by
also permitting votes to be cast using pa-
per ballots would require additional time,
in order for ballots to be returned by mail
and authenticated and counted by hand.
Voting by marking and mailing back pa-
per ballots would also entail significant

1The plan sponsor is also permitted to send this notification to any other eligible voters for whom the plan sponsor has an electronic mailing address.

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additional costs to process (such as em-
ploying additional personnel for process-
ing and providing return postage and en-
velopes). The temporary regulations
therefore reflect the conclusion that the
most efficient and fairest approach to im-
plementing the statutory provisions on ad-
ministration of the vote on an approved
suspension of benefits is to provide eligi-
ble voters with sufficient time to carefully
consider the information furnished to
them before casting their votes while
seeking to avoid unnecessary time and
expense processing those votes once they
have been cast. The automated methods of
voting, collecting, and tabulating votes set
forth in these temporary regulations also
have been used by pension plans for other
types of elections that involve voting by
plan participants (including retirees).

Determination that a majority of eligible
voters has voted to reject the suspension

Within 7 days after the end of the vot-
ing period, these temporary regulations
provide that the Treasury Department (in
consultation with the PBGC and the Labor
Department) will either certify that a ma-
jority of all eligible voters has voted to
reject the suspension or, if a majority of
eligible voters did not vote to reject the
suspension, issue a final authorization to
suspend. These temporary regulations
permit the Treasury Department (in con-
sultation with the PBGC and the Labor
Department) to establish necessary poli-
cies and procedures to facilitate the vote.
These policies and procedures may in-
clude, but are not limited to, establishing a
process for an eligible voter to challenge
the vote. It is expected that the Treasury
Department will resolve any challenges
before the conclusion of the 7-day period
following the end of the voting period.

Items related to the contents
of the ballot

Under these temporary regulations, the
statement in opposition to the proposed
suspension that is compiled from com-
ments received on the application will be
prepared by the Labor Department. Under
these temporary regulations, this state-
ment in opposition must be written in a
manner that is readily understandable to

the average plan participant. It is intended
that the statement in opposition will be
written in a manner to ensure parity with
the statement in support of the suspension.
If there are no comments in opposition to
the proposed suspension, then the state-
ment in opposition will indicate that there
were no such comments.

These temporary regulations provide
that a model ballot may be published in
the form of a revenue procedure, notice,
or other guidance published in the Internal
Revenue Bulletin.

### Effective/Applicability Date

As with the previously published tem-
porary regulations, these regulations ap-
ply on and after June 17, 2015, and expire
on June 15, 2018.

### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. For
the applicability of the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6) please refer
to the Special Analyses section of the pre-
amble to the cross-referenced notice of
proposed rulemaking published in the
Proposed Rules section in this issue of the
Internal Revenue Bulletin. Pursuant to
section 7805(f) of the Code, these regula-
tions have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.

### Contact Information

For general questions regarding these
temporary regulations, please contact the
Department of the Treasury MPRA guid-
ance information line at (202) 622-1559
(not a toll-free number). For information
regarding a specific application for a sus-
pension of benefits, please contact the De-
partment of the Treasury at (202) 622-
1534 (not a toll-free number).

* * * * *

## Amendments to the Regulations PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.432(e)(9)-1T(h) is
amended by:

1\. Revising paragraph (h)(2).

2\. Adding paragraphs (h)(3)(iv),
(h)(3)(v), (h)(7) and (h)(8).

The revisions and additions read as fol-
lows:

§ 1.432(e)(9)-1T Benefit suspensions for
multiemployer plans in critical and
declining status (temporary).

* * * * *

(h) * * *

(2) Participant vote-(i) In general.
The participant vote described in para-
graph (h)(1)(i) of this section requires
completion of the following steps-

(A) Distribution of the ballot package
described in paragraph (h)(2)(iii) of this
section to the eligible voters;

(B) Voting by eligible voters and col-
lection and tabulation of the votes, as de-
scribed in paragraph (h)(2)(iv) of this sec-
tion; and

(C) Determination of whether a major-
ity of the eligible voters has voted to reject
the suspension, as described in paragraph
(h)(2)(v) of this section.

(ii) Designation of service provider for
limited functions. The Secretary of the
Treasury is permitted to designate one or
more service providers to perform, under
the supervision of the Secretary, any of
the functions described in paragraphs
(h)(2)(i)(A) and (B) of this section. If the
Secretary designates a service provider to
perform these functions then the service
provider will provide the Secretary with a
written report of the results of the vote,
including (as applicable)-

(A) The number of ballot packages dis-
tributed to eligible voters;

(B) The number of eligible voters to
whom ballot packages have not been pro-
vided (because the individuals could not
be located);

(C) The number of eligible voters who
voted (specifying the number of affirma-
tive votes and the number of negative
votes cast); and

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(D) Any other information that the
Secretary requires.

(iii) Distribution of the ballot package
to the eligible voters-(A) Ballot pack-
age. The ballot package distributed to
each eligible voter shall consist of-

(1) A ballot, approved under paragraph
(h)(3)(iii) of this section, which contains
the items described in section
432(e)(9)(H)(iii) and paragraph (h)(3)(i)
of this section; and

(2) A unique identifier assigned to the
eligible voter for use in voting.

(B) Plan sponsor responsibilities-(1)
In general. This paragraph (h)(2)(iii)(B)
sets forth the responsibilities of the plan
sponsor with respect to the distribution of
the ballot package to the eligible voters.

(2) Furnish information regarding eli-
gible voters. No later than 7 days follow-
ing the date the Secretary of the Treasury
has approved an application for a suspen-
sion of benefits under paragraph (g) of this
section, the plan sponsor must furnish the
following- (i) A list of all eligible voters;

(ii) For each eligible voter, the last
known mailing address (or, if the plan
sponsor has been unable to locate that
individual using the standards that apply
for purposes of paragraph (f)(1)(i) of this
section, an indication that the individual
could not be located through reasonable
efforts);

(iii) Current electronic mailing ad-
dresses for those eligible voters identified
in paragraph (h)(2)(iii)(B)(4) of this sec-
tion; and

(iv) The individualized estimates pro-
vided to eligible voters as part of the earlier
notices described in section 432(e)(9)(F)
(or, if an individualized estimate is no lon-
ger accurate for an eligible voter, a corrected
version of that estimate).

(3) Communicate with eligible voters. In
accordance with section 432(e)(9)(H)(iv)
and paragraph (h)(1)(ii) of this section, the
plan sponsor is responsible for communicat-
ing with eligible voters, which includes-

(i) Notifying the eligible voters de-
scribed in paragraph (h)(2)(iii)(B)(4) of
this section that a ballot package is being
distributed by first-class U.S. mail; and

(ii) Making reasonable efforts (using
the standards that apply for purposes of
paragraph (f)(1)(i) of this section) as nec-
essary to locate eligible voters for whom
the plan sponsor has received notification

that the mailed ballot packages are re-
turned as undeliverable so that ballot
packages can be sent to those eligible vot-
ers.

(4) Eligible voters to receive electronic
notification. Those eligible voters whom
the plan sponsor must notify electroni-
cally are-

(i) Eligible voters who previously re-
ceived the notice described in paragraph
(f) of this section in electronic form (as
permitted under paragraph (f)(3)(ii) of this
section), and

(ii) Any other eligible voters who reg-
ularly receive plan-related communica-
tions from the plan sponsor in electronic
form.

(5) Method of notifying certain eligible
voters. The notification described in para-
graph (h)(2)(iii)(B)(3)(i) of this section
for an eligible voter must be made using
the electronic form normally used to send
plan-related communications to that voter
(or the form used to provide the notice in
paragraph (f) of this section, if different).
The plan sponsor must send this notifica-
tion promptly after being informed of the
ballot distribution date (within the mean-
ing of paragraph (h)(2)(iii)(D) of this sec-
tion) and the notification must include the
ballot distribution date.

(6) Pay costs associated with distribu-
tion. The plan sponsor is responsible for
paying all costs associated with printing,
assembling, and distributing the ballot
package, including postage.

(C) Required method of distributing
ballot package. Ballot packages must be
distributed to eligible voters by first-class
U.S. mail. A supplemental copy of the
mailed ballot package may also be sent by
an electronic communication to an eligi-
ble voter who has consented to receive
electronic communications.

(D) Timing. Ballot packages will be
distributed to eligible voters no later than
30 days after the Secretary of the Treasury
has approved an application for a suspen-
sion of benefits under paragraph (g) of this
section. The date on which the ballot
packages are mailed to the eligible voters
is referred to as the ballot distribution
date.

(iv) Collection and tabulation of votes
cast by eligible voters-(A) Voting pe-
riod. The voting period begins on the bal-
lot distribution date. The voting period

generally remains open until the 30th day
following the date the Secretary of the
Treasury has approved an application for
a suspension of benefits under paragraph
(g) of this section. However, the voting
period will not close earlier than 21 days
after the ballot distribution date. In addi-
tion, the Secretary (in consultation with
the PBGC and the Secretary of Labor)
may specify a later date to end the voting
period in appropriate circumstances.

(B) Required use of automated voting
system. Votes must be cast using an auto-
mated voting system that meets the re-
quirements of paragraph (h)(2)(iv)(C) of
this section. Votes cast by any other
method are invalid.

(C) Automated voting system. An auto-
mated voting system meets the require-
ments of this paragraph (h)(2)(iv)(C) only
if the system-

(1) Collects votes cast by eligible vot-
ers both electronically (through a website)
and telephonically (through a toll-free
number using a touch-tone or interactive
voice response); and

(2) Accepts only votes cast during the
voting period by an eligible voter who
provides the eligible voter's unique identifier
described in paragraph (h)(2)(iii)(A)(2) of this
section.

(D) Policies and procedures. The Sec-
retary of the Treasury (in consultation
with the PBGC and the Secretary of La-
bor) may establish such policies and pro-
cedures as may be necessary to facilitate
the administration of the vote under this
paragraph (h)(2). These policies and pro-
cedures may include, but are not limited
to, establishing a process for an eligible
voter to challenge the vote.

(v) Determination of whether a major-
ity of the eligible voters has voted to reject
the suspension. Within 7 calendar days
after the end of the voting period, the
Secretary of the Treasury (in consultation
with the PBGC and the Secretary of La-
bor) will-

(A) Certify that a majority of all eligi-
ble voters has voted to reject the suspen-
sion that was approved under paragraph
(g) of this section, or

(B) Issue a final authorization to sus-
pend as described in paragraph (h)(6) of
this section.

* * * * *

(3) * * *

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(iv) Statement in opposition to the pro-
posed suspension. The statement in oppo-
sition to the proposed suspension that is
prepared from comments received on the
application, as required under section
432(e)(9)(H)(iii)(II), will be compiled by
the Secretary of Labor and will be written
in accordance with the rules of paragraph
(h)(3)(ii) of this section. If no comments
in opposition are received, the statement
in opposition to the proposed suspension
will include a statement indicating that
there were no such comments.

(v) Model ballot. A model ballot may
be published in the form of a revenue
procedure, notice, or other guidance pub-
lished in the Internal Revenue Bulletin.

* * * * *

(7) Effective/applicability date. Para-
graph (h)(2) and paragraphs (h)(3)(iv) and
(h)(3)(v) of this section apply on and after
June 17, 2015.

(8) Expiration date. The applicability
of paragraph (h)(2) and paragraphs
(h)(3)(iv) and (h)(3)(v) of this section ex-
pires on June 15, 2018.

* * * * *

John M. Dalrymple
Deputy Commissioner for
Services and Enforcement.

Approved: August 25, 2015

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

(Filed by the Office of the Federal Register on August 31,
2015, 11:15 a.m., and published in the issue of the Federal
Register for September 2, 2015, 80 F.R. 52972)

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## Part IV. Items of General Interest

Application of the
Cooperative and Small
Employer Charity Pension
Flexibility Act

Notice 2015-58

### I. PURPOSE

This notice provides guidance on cer-
tain issues relating to the application of
the Cooperative and Small Employer
Charity Pension Flexibility Act, Pub. L.
No. 113-97 (CSEC Act). The CSEC Act,
which was enacted on April 7, 2014, spec-
ifies minimum funding requirements and
related rules that apply with respect to
certain defined benefit pension plans
maintained by groups of cooperatives and
related entities and groups of charities.

### II. BACKGROUND

Section 430 of the Internal Revenue
Code (Code), which was added by the
Pension Protection Act of 2006, Pub. L.
No. 109-280, as amended (PPA '06),
specifies the minimum funding require-
ments that generally apply to single-
employer defined benefit pension plans
(including multiple-employer plans) pur-
suant to § 412. Under § 430(a)(1), the
minimum required contribution for a plan
year under § 430 is generally equal to the
sum of the target normal cost and the
shortfall amortization charge for the plan
year.1 Under § 430(c), the shortfall amor-
tization charge for a plan year is the sum
of the shortfall amortization installments
with respect to the plan's shortfall amor-
tization bases for the current plan year and
prior plan years. Each year, a shortfall
amortization base is determined based on
the difference between the funding target
and the value of plan assets for the plan
year for which it is established. In general,
the shortfall amortization installment with
respect to a shortfall amortization base is
the amount needed to amortize that base
in level annual installments over 7 years.

Section 436 imposes certain restric-
tions on the accrual and payment of ben-
efits under a single-employer defined ben-
efit pension plan that are applied based on
the plan's funded status for the plan year.

As originally enacted, section 104 of
PPA '06 provided that the effective date
for the application of the minimum fund-
ing rules under § 430 and the funding-
based benefit restrictions under § 436 is
delayed for certain plans maintained by
more than one employer that are specified
types of cooperative organizations and re-
lated entities. For those plans, the mini-
mum funding rules under § 430 and the
funding-based benefit restrictions under
§ 436 generally do not apply for plan
years beginning before January 1, 2017.
For plan years before § 430 applies to
such a plan, the minimum funding re-
quirement for the plan is determined un-
der the provisions of § 412 as in effect
prior to amendment by PPA '06. These
provisions are referred to in this notice as
"pre-PPA § 412" provisions.

Section 202(b) of the Preservation of
Access to Care for Medicare Beneficiaries
and Pension Relief Act of 2010, Pub. L.
No.111-192 (PRA 2010), amended sec-
tion 104 of PPA '06, as originally enacted,
to add a new section 104(d). Section
104(d) of PPA '06 expands the group of
plans covered by the delayed effective
date of section 104 of PPA '06 to include
certain plans (referred to as eligible char-
ity plans) that are maintained by employ-
ers that are described in § 501(c)(3). Un-
der section 104(d) of PPA '06, a plan is an
eligible charity plan for a plan year if, for
all periods from July 26, 2005 through the
end of the plan year, the plan has been
maintained by more than one employer
(determined without regard to § 414(c)),
provided that all of the employers main-
taining the plan are described in
§ 501(c)(3).

The CSEC Act provides a number of
rules relating to the minimum funding re-
quirements for certain defined benefit
plans maintained by groups of coopera-

tives and related entities and groups of
charities. Most of the rules under the
CSEC Act apply to CSEC plans, as de-
fined in section 414(y). CSEC plans are
generally the same plans that are covered
by the delayed effective date provisions
for the PPA '06 funding rules under sec-
tion 104 of PPA '06 (as amended by PRA
2010). However, certain eligible charity
plans are not CSEC plans, and certain
CSEC plans maintained by employers that
are § 501(c)(3) organization employers
are not eligible charity plans. In addition,
the CSEC Act includes some rules that
apply solely to eligible charity plans and
some rules that apply to all multiple-
employer plans.

Section 433, which was added to the
Code by the CSEC Act, specifies mini-
mum funding rules that apply to CSEC
plans for plan years beginning on or after
January 1, 2014.2 These minimum fund-
ing rules are similar to the rules under
pre-PPA § 412. However, § 433 provides
that the amortization period for the amor-
tization base established for the change in
liability resulting from an amendment to a
CSEC plan is 15 years (instead of 30 years
as provided in pre-PPA § 412) and § 433
does not include a requirement to make a
deficit reduction contribution as required
under pre-PPA § 412(l). In addition, § 433
provides special rules that apply to a
CSEC plan with a funded percentage (as
defined in § 433(j)(5)(B)) of less than
80%. Such a plan is in "funding restora-
tion status." If a CSEC plan is in funding
restoration status, the plan sponsor must
establish a funding restoration plan that is
designed to bring the plan's funded per-
centage to 100% over a period of 7 years
(or the shortest amount of time practicable
to bring the plan's funded percentage to
100%, if longer).3 For the period for
which a CSEC plan is in funding restora-
tion status (as certified by the enrolled
actuary for the plan), an amount no less
than the plan's normal cost must be con-
tributed for each plan year. If the normal
cost is not contributed for the plan year

1For a plan for which a funding waiver has been obtained, the minimum required contribution also includes a waiver amortization charge.
2The benefit restrictions under § 436 do not apply to CSEC plans.

3Section 4971(h)(1) imposes an excise tax if the plan sponsor fails to timely satisfy the requirement to establish a written funding restoration plan.

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then an accumulated funding deficiency
will exist regardless of the size of the
plan's credit balance. A CSEC plan that is
in funding restoration status generally
cannot be amended to increase benefits or
accelerate vesting unless a specified addi-
tional contribution is made.

Under the CSEC Act, a number of
elections are available to eligible charity
plans and plans that fit within the defini-
tion of a CSEC plan.

· Section 414(y)(3)(A) provides that the
plan sponsor of a plan that fits within
the definition of a CSEC plan can elect
for the plan not to be treated as a
CSEC plan, effective beginning with
the first plan year that begins on or
after January 1, 2014. The effect of
this election for a plan is that § 433 and
related provisions that apply to CSEC
plans will not apply to the plan.

· Section 103(b) of the CSEC Act
amends section 104(d) of PPA '06 to
provide three new options for an eligi-
ble charity plan:

Pursuant to section 104(d)(2) of
PPA '06, the plan sponsor of an
eligible charity plan to which § 433
does not apply can elect for the plan
to cease to be treated as an eligible
charity plan for plan years begin-
ning after December 31, 2013, so
that § 430 applies to the plan begin-
ning with the 2014 plan year.

If this election is made, then the
plan sponsor can also elect to
apply certain extended amortiza-
tion rules under section
104(d)(3) of PPA '06.

Pursuant to section 104(d)(4) of
PPA '06, the plan sponsor of an
eligible charity plan can make a
one-time irrevocable election for
the plan not to be treated as an
eligible charity plan, effective for
plan years beginning after De-
cember 31, 2007, so that § 430
applies to the plan beginning with
the 2008 plan year.

· Section 103(c) of the CSEC Act pro-
vides that a CSEC plan that was es-
tablished before January 1, 2014 is
deemed to have made the election un-
der § 410(d) (under which the plan is
not treated as a church plan for pur-
poses of certain rules) under certain

circumstances.

Section 210(f) of the Employee Retire-
ment Income Security Act of 1974, Pub.
L. No. 93-406, as amended (ERISA),
provides a definition of a CSEC plan for
purposes of title I of ERISA that is paral-
lel to the definition in § 414(y) but also
requires a CSEC plan to be an "employee
pension benefit plan" within the meaning
of section 3(2) of ERISA. Section 306 of
ERISA provides minimum funding rules
that are parallel to the rules of § 433 for a
plan that is a CSEC plan under title I of
ERISA.

Under section 101 of Reorganization
Plan No. 4 of 1978 (43 FR 47713), the
Secretary of the Treasury has interpretive
jurisdiction over the subject matter ad-
dressed in § 433 and the other statutory
provisions addressed in this notice for
purposes of ERISA as well as the Code.
Accordingly, the guidance in this notice
applies not only for purposes of the Code
but also for purposes of the parallel pro-
visions of ERISA. Thus, the guidance in
this notice under §§ 414(y) and 433 also
applies for purposes of sections 210(f) and
306 of ERISA in the case of a CSEC plan
(within the meaning of § 414(y)) that is an
employee pension benefit plan within the
meaning of section 3(2) of ERISA. The
Secretary of the Treasury does not have
interpretive jurisdiction under the Reorga-
nization Plan to determine whether a
CSEC plan within the meaning of
§ 414(y) is an employee pension benefit
plan within the meaning of section 3(2) of
ERISA.

### III. QUESTIONS AND ANSWERS

#### Rules for CSEC plans

Q-1: What is a CSEC plan?

A-1: Under § 414(y)(1) and (2), a plan
is a CSEC plan for a plan year if it is a
defined benefit plan (other than a mul-
tiemployer plan) that meets one of the
following conditions:

(1) for the plan year, the effective date
of the PPA '06 funding rules has been
delayed for the plan under section 104 of
PPA '06 prior to the change to section 104
made by PRA 2010 (i.e., the plan is main-
tained by more than one employer and at
least 85% of those employers are rural
cooperatives or are cooperative organiza-

tions or related entities) and without re-
gard to section 104(a)(2) of PPA '06;

(2) for all periods beginning on June
25, 2010 and ending on the last day of the
plan year, the plan has been maintained by
more than one employer (determined by
treating all employers that are treated as a
single employer under § 414(b) or (c) as a
single employer) and all of those employ-
ers were described in § 501(c)(3); or

(3) for all periods beginning on June
25, 2010 and ending on the last day of the
plan year, the plan was maintained by an
employer described in § 501(c)(3), char-
tered under part B of subtitle II of title 36,
United States Code, with employees in at
least 40 States, and whose primary exempt
purpose is to provide services with respect
to children.

However, in the case of a plan that fits
within the definition of a CSEC plan, the
plan is not treated as a CSEC plan if the
election described in § 414(y)(3) has been
made for the plan. If this election is made,
then § 433 does not apply to the plan.

Q-2: For a plan to which pre-PPA
§ 412 applies for the 2013 plan year and
§ 433 applies for the 2014 plan year, how
are the funding standard account and re-
lated items established for the 2014 plan
year?

A-2: If pre-PPA § 412 applies to a plan
for the 2013 plan year and § 433 applies
for the 2014 plan year, then all items that
are part of the funding standard account
determination under pre-PPA § 412 as of
the close of the 2013 plan year must be
used to establish the corresponding items
established under § 433 as of the begin-
ning of the 2014 plan year. This is because
§ 433 functions as a continuation of pre-
PPA § 412. Thus, the balance of the fund-
ing standard account under § 433 as of the
first day of the 2014 plan year is the same
as the balance of the funding standard
account under pre-PPA § 412 as of the
close of the 2013 plan year. In addition,
charge bases under § 433(b)(2) and credit
bases under § 433(b)(3) must be estab-
lished for the 2014 plan year as continu-
ations of the bases that were being amor-
tized under pre-PPA § 412. Thus, as of the
first day of the 2014 plan year, the out-
standing balances and amortization peri-
ods with respect to those bases are the
same as if pre-PPA § 412 had continued to
apply to the plan. See § 433(b)(6).

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##### Election to cease to be an eligible charity plan beginning in 2014

Q-3: Can a plan sponsor of an eligible
charity plan elect for the plan to cease to
be treated as an eligible charity plan?

A-3: Pursuant to section 104(d)(2) of
PPA '06, as amended by PRA 2010 and
the CSEC Act, a plan sponsor of an eligi-
ble charity plan (other than a plan to
which § 433 applies) can elect for the plan
to cease to be treated as an eligible charity
plan beginning with the 2014 plan year.
If the election is made, then-

. As of the first day of the plan year
beginning in 2014, the plan is subject
to the minimum funding requirements
of § 430 and the benefit restrictions of
§ 436.

· Pursuant to § 1.430(f)-1(b)(2), the
plan's funding standard carryover bal-
ance as of the beginning of the 2014
plan year is the positive balance in the
plan's funding standard account under
pre-PPA § 412(b) as of the end of the
prior plan year.

A plan sponsor makes the election de-
scribed in this Q&A-3 by providing writ-
ten notification of the election to the plan
administrator and the enrolled actuary for
the plan. As a general rule, this election
must be made no later than the plan's
§ 430(j)(1) contribution deadline for the
2014 plan year (i.e., 81/2 months after the
end of the 2014 plan year). Alternatively,
a plan sponsor may make the election
described in this Q&A-3 by reflecting the
election on the Schedule SB filed for the
2014 plan year and providing written no-
tification of the election to the plan admin-
istrator and the enrolled actuary for the
plan by December 31, 2015. This election
can be revoked only with the consent of
the Commissioner.

#### Extended amortization election

Q-4: If a plan sponsor of an eligible
charity plan makes the election described
in Q&A-3 of this notice, can the plan
sponsor elect extended amortization?

A-4: Pursuant to section 104(d)(3)(A)
of PPA '06, which was added by the
CSEC Act, if a plan sponsor of an eligible

charity plan makes the election for the
plan to cease to be treated as an eligible
charity plan beginning with the 2014 plan
year (as described in Q&A-3 of this no-
tice), then the plan sponsor can also make
an election to use the extended amortiza-
tion rules set forth in section 104(d)(3)(B)
through (G) of PPA '06 (which were also
added by the CSEC Act). These amorti-
zation rules provide funding relief for the
plan that is generally comparable to the
funding relief that would have applied if
(1) § 430 had applied to the plan for all
plan years beginning on or after January 1,
2008, (2) the plan sponsor had made a
15-year amortization election under
§ 430(c)(2)(D)(iii) for the plan years be-
ginning in 2010 and 2011, and (3) there
were no previous installment acceleration
amounts described in § 430(c)(7).

A plan sponsor makes the election de-
scribed in this Q&A-4 by providing writ-
ten notification of the election to the plan
administrator and the enrolled actuary for
the plan. As a general rule, this election
must be made no later than the plan's
§ 430(j)(1) contribution deadline for the
2014 plan year (i.e., 81/2 months after the
end of the 2014 plan year). Alternatively,
a plan sponsor may make the election
described in this Q&A-4 by reflecting the
election on the Schedule SB filed for the
2014 plan year and providing written no-
tification of the election to the plan admin-
istrator and the enrolled actuary for the
plan by December 31, 2015 The election
described in this Q&A-4 can be revoked
only with the consent of the Commissioner.

#### Reporting Requirements

Q-5: How should the rules described
in this notice for plans that are subject to
§ 433 be reflected on the Schedule SB for
2014 and 2015?

A-5: For the 2014 and 2015 plan years,
the reporting requirements described in
this Q&A-5 apply to plans that are subject
to § 433.

Complete only the following on Sched-
ule SB:

· Lines A through F

· Part I (including signature of enrolled
actuary), determined as if PPA '06

provisions were effective for all plan
years beginning after December 31,
2007.

· Part III, line 14, determined as if PPA
'06 provisions were effective for all
plan years beginning after December
31, 2007.

· Part IV, line 18.

· Part V, determined as if PPA '06 pro-
visions were effective for all plan
years beginning after December 31,
2007.

Also, report other information for the
current plan year using a 2007 Schedule B
(Form 5500). Label this attachment “[In-
sert reporting year] Schedule SB, line 27 -
Actuarial Information for CSEC Plans."
Each attachment must include the plan
name, the plan sponsor's name and EIN,
and the plan number. Complete all items
from the 2007 Schedule B, excluding line
9f and Part II, and attach the 2007 Sched-
ule B and all applicable attachments to the
Schedule SB. Note that under PPA '06,
the third segment rate determined under
§ 430(h)(2)(C)(iii) and ERISA section
303(h)(2)(C)(iii) is substituted for the cur-
rent liability interest rate under § 412(b)(5)(B)
and ERISA section 302(b)(5)(B) (as in effect
before PPA '06).

If the plan's funded percentage (as de-
fined in § 433(j)(5)(B)) as of the begin-
ning of the plan year is less than 80%,
then the plan is in funding restoration sta-
tus. If the plan's enrolled actuary certifies
that the plan is in funding restoration sta-
tus for a plan year, include the following
additional information in the attachment
"[Insert reporting year] Schedule SB, line
27 - Actuarial Information for CSEC
Plans:" (a) the annual certification by the
enrolled actuary for the plan; and (b) the
value of plan assets and the funding lia-
bility, including any adjustments to these
amounts as specified in § 433(j)(4) and
ERISA section 306(j)(4).

If a plan in funding restoration status
has an accumulated funding deficiency
based on the excess of the employer's
normal cost4 determined under line 9b,
over the amount actually contributed to
the plan for the plan year, as determined
under § 433(j)(1) and ERISA section
306(j)(1), then the details of this calcula-

4In the case of a plan for which a spread gain funding method is used, the normal cost that is used to apply this rule is the normal cost determined under the entry age normal cost funding
method.

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tion must be included in the attachment
"[Insert reporting year] Schedule SB, line
27 - Actuarial Information for CSEC
Plans."

Q-6: How should an election for an
eligible charity plan to be made subject to
the requirements of § 430 beginning either
in 2014 or in 2008 (and the related amor-
tization extension election for a plan that
applies the requirements of § 430 begin-
ning in 2014) be reflected on Schedule SB
for 2014 and later years?

A-6: If a plan sponsor of an eligible
charity plan has made an election for the
plan not to be treated as an eligible charity
plan, a copy of that election should be
included as an attachment to line 27 of the
2014 Schedule SB. In addition, if this
election takes effect beginning with the
2008 plan year, then any difference be-
tween the amount of the funding standard
carryover balance or the prefunding bal-
ance reported on line 7 of the Schedule SB
filed for the 2014 plan year and the cor-
responding amounts reported on line 13 of
the Schedule SB filed for the 2013 plan
year must be explained in the attachment
to line 7 of the Schedule SB filed for the
2014 plan year.

If a plan sponsor of an eligible charity
plan has made an election for the plan to
be made subject to the requirements of
§ 430 beginning in 2014 and has elected
extended amortization as described in
Q&A-4 of this notice, then the extended
amortization election should be reflected
on Schedule SB for 2014 by checking the
box on line 41a and including an attach-
ment to line 32 showing the development
of the 11-year, 12-year and 7-year amor-
tization bases. The Schedule SB for any
later plan year to which this information is
applicable should include an attachment
to line 32 that provides information con-
sistent with the information required with
respect to a § 412(c)(7) amortization ex-
tension and related installment accelera-
tion amounts.

Q-7: If the guidance provided in this
notice affects the computations on the
Schedule SB filed with the Form 5500 or
Form 5500-SF for the 2014 plan year,
must the plan sponsor file a revised 2014
Schedule SB?

A-7: No. The filing of an amended
Form 5500 or Form 5500-SF for the 2014
plan year is not required solely to reflect

the effect of the guidance provided in this
notice on the computations on the Sched-
ule SB. However, the Schedule SB filed
with the Form 5500 or Form 5500-SF for
the 2015 plan year must accurately reflect
the effect of the guidance provided in this
notice. To the extent that the amounts
shown on the Schedule SB for the 2015
plan year are different than the amounts
shown on the Schedule SB for the 2014
year, this difference should be explained
in attachments to the Schedule SB for the
2015 plan year.

### IV. PAPERWORK REDUCTION ACT

The collections of information con-
tained in this notice have been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
§ 3507) under control number 1545-2095.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less the collection of information displays
a valid OMB control number.

The collections of information in this
notice are in section III of this notice. The
collections of information are required to
provide for the elections permitted under
sections 103 and 203 of the CSEC Act.
The collections of information are manda-
tory for those plan sponsors making these
elections.

The likely respondents are sponsors of
fewer than 50 single-employer defined
benefit plans. Currently, it is estimated
that any effect on burden as previously
reported to OMB will not be significant.
Any potential changes on burden will be
reported through the renewal of the cur-
rent OMB approval numbers.

Estimates of the annualized cost to re-
spondents are not relevant, because each
collection of information in this notice is a
one-time collection.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by § 6103.

### V. DRAFTING INFORMATION

The principal authors of this notice are
Michael P. Brewer and Linda S. F. Mar-
shall of the Office of the Associate Chief
Counsel (Tax Exempt and Government
Entities). For further information regard-
ing this notice, contact Michael Brewer or
Linda Marshall (202) 317-6700 (not a
toll-free number).

Notice of Proposed
Rulemaking
Reportable Transactions
Penalties under Section
6707A

REG-103033-11

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations that provide guid-
ance regarding the amount of the penalty
under section 6707A of the Internal Rev-
enue Code (Code) for failure to include on
any return or statement any information
required to be disclosed under section
6011 with respect to a reportable transac-
tion. The proposed regulations are neces-
sary to clarify the amount of the penalty
under section 6707A, as amended by the
Small Business Jobs Act of 2010. The
proposed regulations would affect any
taxpayer who fails to properly disclose
participation in a reportable transaction.

DATES: Written or electronic comments
and requests for a public hearing must be
received by November 25, 2015.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-103033-11), room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand deliv-
ered Monday through Friday between the
hours of 8 a.m. and 4 p.m. to CC:PA:LP-
D:PR (REG-103033-11), Courier's Desk,
Internal Revenue Service, 1111 Constitution
Avenue, N.W., Washington, DC, or sent
electronically via the Federal eRulemaking
Portal at http://www.regulations.gov (indi-
cate IRS and REG-103033-11).

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#### FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Melissa Henkel, (202) 317-
6844; concerning submissions of com-
ments or requests for a public hearing,
Oluwafunmilayo (Funmi) Taylor, (202)
317-6901 (not toll-free numbers).

### SUPPLEMENTARY INFORMATION:

#### Background

This document contains proposed
amendments to 26 CFR part 301 under
section 6707A of the Internal Revenue
Code. Section 6707A was added to the
Code by section 811(a) of the American
Jobs Creation Act of 2004 (Public Law
No. 108-357, 118 Stat. 1418) and was
amended by section 11(a)(41) of the Tax
Technical Corrections Act of 2007 (Public
Law No. 110-172, 121 Stat. 2473). Sec-
tion 6707A imposes a penalty on a tax-
payer who has a duty to disclose a report-
able transaction and fails to do so. It also
imposes a requirement that certain taxpay-
ers must disclose in filings with the Secu-
rities and Exchange Commission (SEC)
any requirement to pay a penalty under (1)
section 6707A with respect to a listed
transaction, (2) section 6662A with re-
spect to an undisclosed reportable trans-
action, or (3) section 6662(h) with respect
to an undisclosed reportable transaction.
Failure to make that required disclosure to
the SEC subjects a taxpayer to another
penalty under section 6707A. On Septem-
ber 11, 2008, temporary regulations (TD
9425) relating to the penalty under section
6707A were published in the Federal
Register (73 FR 52784). A notice of pro-
posed rulemaking (REG-160868-04)
cross-referencing the temporary regula-
tions was published in the Federal Reg-
ister on the same day (73 FR 52805).
Section 6707A was amended again in
2010 by section 2041(a) of the Small
Business Jobs Act of 2010 (Public Law
No. 111-240, 124 Stat. 2504) (the Jobs
Act), which changed the amount of the
penalty from a stated dollar amount to a
percentage (with maximum and minimum
dollar amounts). Before the Jobs Act was
enacted, the penalty was $10,000 in the
case of a natural person ($50,000 in any
other case) and, in the case of a listed
transaction, $100,000 in the case of a nat-
ural person ($200,000 in any other case).

In some cases, this structure resulted in
penalties that were potentially dispropor-
tionate to the tax benefit derived from the
transaction. See "Legislative Recommen-
dations with Legislative Action: Modify
Internal Revenue Code Section 6707A to
Ameliorate Unconscionable Impact," Na-
tional Taxpayer Advocate 2008 Annual
Report to Congress vol. 1, at 419. In re-
sponse, Congress amended section
6707A(b) through the Jobs Act. See Joint
Committee on Taxation, General Expla-
nation of Tax Legislation Enacted in the
111th Congress (JCS-2-11), March 2011
(explaining the reasons for the change to
section 6707A). The Jobs Act amended
section 6707A(b) to make the penalty 75
percent of the decrease in tax shown on
the return as a result of a reportable trans-
action, with a minimum penalty amount of
$10,000 ($5,000 in the case of a natural
person). The maximum penalty amount is
$200,000 ($100,000 in the case of a nat-
ural person) for failure to disclose a listed
transaction, or $50,000 ($10,000 in the
case of a natural person) for failure to
disclose any other reportable transaction.
The 2010 amendment specifying the
amount of the penalty applies to penalties
assessed after December 31, 2006. See
Jobs Act § 2041(b), 124 Stat. at 2560. On
September 7, 2011, final regulations (TD
9550) were published in the Federal Reg-
ister (76 FR 55256). The final regulations
in TD 9550 did not provide guidance on
the amount of the penalty as amended by
the Jobs Act beyond reciting the language
of section 6707A because the notice of
proposed rulemaking on which those final
regulations were based predated the Jobs
Act. The proposed regulations in this doc-
ument provide guidance on the amount of
the penalty under section 6707A, as
amended by the Jobs Act.

#### Explanation of Provisions

The following is a summary of the
proposed changes to the existing regula-
tions relating to the penalties under sec-
tion 6707A.

##### 1. Definition of Return

Treas. Reg. § 1.6011-4 establishes that
a taxpayer whose amended return or ap-
plication for tentative refund reflects par-
ticipation in a reportable transaction has

the same disclosure obligation as a tax-
payer whose original return reflects par-
ticipation in a reportable transaction.
Treas. Reg. § 301.6707A-1, published on
September 11, 2011, clarifies that a tax-
payer's failure to disclose participation in
a reportable transaction will trigger a pen-
alty under section 6707A regardless of
whether the participation is reflected on an
original return, an amended return, or an
application for tentative refund. In its cur-
rent state, the regulation generally refers
to original returns, amended returns, and
applications for tentative refund in every
case where all three terms are relevant.
The proposed regulations streamline these
references by defining the term "return" to
include all three. This change simplifies
sentences throughout the regulation with-
out changing their meaning.

##### 2. Amount of the Penalty

#### A. Decrease in tax

Subject to certain minimum and maxi-
mum amounts, "the amount of the penalty
under subsection (a) with respect to any
reportable transaction shall be 75 percent
of the decrease in tax shown on the return
as a result of such transaction (or which
would have resulted from such transaction
if such transaction were respected for Fed-
eral tax purposes)." Section 6707A(b)(1).
The proposed regulations define this de-
crease in tax generally as the difference
between the amount of tax reported on the
return as filed and the amount of tax that
would be reported on a hypothetical return
where the taxpayer did not participate in
the reportable transaction. The amount of
tax shown on the hypothetical return will
reflect adjustments that result mechani-
cally from backing out the reportable
transaction, such as tax items affected by
an increase in adjusted gross income re-
sulting from non-participation in the re-
portable transaction.

In some situations, a taxpayer's partic-
ipation in a listed transaction creates a
liability for a tax that would not exist
absent participation in the transaction. For
example, a taxpayer engaging in a listed
abusive Roth IRA transaction may be sub-
ject to an excise tax on excess IRA con-
tributions. If the taxpayer fails to report
the excise tax on his excess IRA contri-

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butions, this amount of tax would not ap-
pear on the return filed by the taxpayer
that reflected his participation in the re-
portable transaction. The excise tax would
also not appear on a return filed by the
taxpayer if he had not engaged in the
transaction, because there would be no
excess contribution on which excise tax
would be imposed. Therefore, the differ-
ence between these two returns would re-
sult in no decrease in tax attributable to
the unreported tax. To capture this tax, the
proposed regulations include in the defi-
nition of the decrease in tax "any other tax
that results from participation in the re-
portable transaction but was not reported
on the taxpayer's return." Example 1 in
§ 301.6707A-1(d)(2) illustrates this rule.

#### B. Subsequently identified transactions

Listed transactions and transactions of
interest are identified in published guid-
ance. See § 1.6011-4(b)(2), (6). Once a
listed transaction or a transaction of inter-
est is identified by published guidance, a
taxpayer has a reporting obligation if the
taxpayer participated in the transaction
prior to the issuance of the guidance and
the statute of limitations for the year of the
taxpayer's participation remains open. See
§ 1.6011-4(e)(2). Under § 1.6011-4, the
taxpayer may use a single disclosure state-
ment to disclose multiple years of partic-
ipation in a reportable transaction. Be-
cause the taxpayer in these cases is
permitted to disclose multiple years of
participation on a single statement, the
taxpayer's failure to complete and submit
the disclosure statement properly will re-
sult in no more than one penalty under
section 6707A. The proposed regulations
provide, however, that the amount of that
penalty will be determined by taking into
account the aggregate decrease in tax
shown on all of the returns for which
disclosure was not provided. Accordingly,
under the proposed regulations, the de-
crease in tax will be determined separately
for each year of participation for which
only a single disclosure statement was re-
quired and the amount of the penalty will
be 75 percent of the aggregate decrease in
tax in all years for which disclosure was
required, subject to the minimum and
maximum penalty amount limitations.

#### C. Penalty under section 6707A(e) for failure to report to the Securities and Exchange Commission

Section 6707A(e) generally requires
certain taxpayers who must pay penalties
under sections 6707A, 6662A (accuracy-
related penalty on understatements with
respect to reportable transactions), or
6662(h) (accuracy-related penalty on un-
derpayments attributable to gross valua-
tion misstatements) to disclose their lia-
bility for these penalties in filings with the
SEC. The flush language of section
6707A(e) provides that "[f]ailure to make
a disclosure in accordance with the pre-
ceding sentence shall be treated as a fail-
ure to which the penalty under subsection
(b)(2) applies." However, as discussed in
the Background section of this preamble,
subsection (b)(2) was amended in 2010.
Prior to enactment of the Jobs Act, section
6707A(b)(2) provided that the amount of
the penalty for failure to disclose partici-
pation in a listed transaction was $100,000
for natural persons and $200,000 in any
other case. After the 2010 amendments,
section 6707A(b)(2) now provides that
"[t]he amount of the penalty under sub-
section (a) with respect to any reportable
transaction shall not exceed- (A) in the
case of a listed transaction, $200,000
($100,000 in the case of a natural person),
or (B) in the case of any other reportable
transaction, $50,000 ($10,000 in the case
of a natural person)."

Treasury and the IRS do not believe
that Congress intended its reference to
subsection (b)(2) to impose the maximum
penalty on violations of section 6707A(e).
This would be contrary to the purpose of
the 2010 amendments to section 6707A,
which sought to make the penalty propor-
tionate to the tax benefit derived by the
transaction. A reference solely to subsec-
tion (b)(2) does not make sense in terms
of describing the amount of the penalty, as
subsection (b)(2) merely caps the amount
of the penalty that can be imposed on a
failure to disclose and does not provide a
particular amount for the penalty. It seems
likely that the intent was to reference the
amount of the penalty generally under
subsection (b). The proposed regulations
clarify this point.

In each case giving rise to an obligation
to disclose liability in filings with the

SEC, there must be a reportable transac-
tion for the relevant penalty to arise. The
amount of the penalty for a violation of
section 6707A(e), therefore, will be 75
percent of the decrease in tax, as provided
in section 6707A(b). In addition to being
consistent with the language of section
6707A(e), the proposed regulations are
also consistent with the Congressional in-
tent of the 2010 amendments to section
6707A to render proportionality between
the amount of the penalty and the tax
benefit derived from the reportable trans-
action. See JCS-2-11.

#### D. Minimum and maximum amount of the penalty

Pursuant to section 6707A(b)(2), "[t]he
amount of the penalty under subsection
(a) with respect to any reportable transac-
tion shall not exceed" certain specified
dollar values. Likewise, under section
6707A(b)(3), "[t]he amount of the penalty
under subsection (a) with respect to any
transaction shall not be less than" certain
specified dollar values. Under the pro-
posed regulations, these minimum and
maximum limits on the amount of the
penalty would be applied separately to
each individual penalty under section
6707A(a). The limitations in sections
6707A(b)(2) and (3) apply expressly to
"[t]he amount of the penalty under sub-
section (a)." Because, as provided in
§ 301.6707A-1(c), each separate failure
to disclose a reportable transaction gives
rise to a new penalty under section
6707A(a), the minimum and maximum
limits on the amount of the penalty apply
separately to each failure to disclose.

#### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866 of, as supple-
mented and reaffirmed by Executive Or-
der 13563. Therefore, a regulatory impact
assessment is not required. It also has
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to the proposed
regulations. Because the proposed regula-
tions would not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply.

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Pursuant to section 7805(f) of the In-
ternal Revenue Code, this notice of pro-
posed rulemaking has been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small businesses.

#### Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written or electronic
comments that are submitted timely to the
IRS. The Treasury Department and the
IRS request comments on all aspects of
the proposed regulations. All comments
will be available for public inspection and
copying at www.regulations.gov or upon
request. A public hearing will be sched-
uled if requested in writing by any person
that timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in the Federal Register.

#### Drafting Information

The principal authors of the proposed
regulations are Melissa Henkel of the Of-
fice of the Associate Chief Counsel (Pro-
cedure and Administration) and Spence
Hanemann, formerly of the Office of the
Associate Chief Counsel (Procedure and
Administration).

* * * * *

#### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:

##### PART 301-PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:

Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6707A-1 is
amended by:

1\. Adding paragraph (b)(3).

2\. In paragraph (c)(1), removing the
language "(including an amended return
or application for tentative refund)" in the
fifth sentence.

3\. Redesignating paragraphs (d), (e)
and (f) as paragraphs (e), (f), and (g).

4\. Adding new paragraph (d).

5\. In newly designated paragraph (e),
removing the language "(d)" wherever it
appears and adding "(e)" in its place.

6\. In newly designated paragraph
(e)(3)(i), removing the language "(includ-
ing an amended return or application for
tentative refund)" wherever it appears.

7\. In newly designated paragraph (f),
removing the language "(e)" wherever it
appears and adding "(f)" in its place.

8\. Revising newly designated para-
graphs (g)(1) and (g)(2).

The revisions and additions read as fol-
lows:

§ 301.6707A-1. Failure to include on
any return or statement any information
required to be disclosed under section
6011 with respect to a reportable
transaction .-

* * * * *

(b) * * *

(3) Return. For purposes of this sec-
tion, the term "return" means an original
return, amended return, or application for
tentative refund, except where otherwise
indicated. As used in examples, the term
"return" means an original return, except
where otherwise indicated.

* * * * *

(d) Calculation of the penalty. (1) De-
crease in tax-(i) In general. As used in
this section, the phrase "decrease in tax
shown on the return as a result of the
transaction or the decrease that would
have resulted from the transaction if it
were respected for Federal tax purposes"
means the sum of (A) the excess of the
amount of the tax that would be shown on
the return if the return did not reflect the
taxpayer's participation in the reportable
transaction over the tax actually reported
on the return reflecting participation in the
reportable transaction and (B) any other
tax that results from participation in the
reportable transaction but was not re-
ported on the taxpayer's return. The
amount of tax that would be shown on the
return if it did not reflect the taxpayer's
participation in the reportable transaction
includes adjustments that result mechani-
cally from backing out the reportable
transaction, such as tax items affected by
an increase in adjusted gross income re-
sulting from not participating in the trans-

action. Under this rule, it makes no differ-
ence whether a taxpayer's tax liability is
ultimately settled with the IRS for a dif-
ferent amount or whether the taxpayer
subsequently reports a different amount of
tax on an amended return, because these
amounts do not enter into the calculation
of the decrease in tax shown on the return
(or returns) to which the penalty relates.

(ii) Subsequently identified transac-
tions. If the taxpayer fails to file a com-
plete and proper disclosure statement re-
quired by § 1.6011-4(e)(2)(i) disclosing
participation in a listed transaction or
transaction of interest with respect to
more than one return, the amount of the
penalty will be computed by aggregating
the decrease in tax shown on each return
for which the required disclosure was not
provided.

(iii) Penalty for failure to report to the
SEC. In the case of a penalty imposed
under section 6707A(e) for failure to dis-
close liability for certain penalties in re-
ports to the Securities and Exchange
Commission, the amount of the penalty
will be determined under section
6707A(b) and this paragraph (d), regard-
less of whether the penalty that the tax-
payer failed to disclose is imposed under
section 6707A, 6662A, or 6662(h).

(iv) Minimum and maximum amount of
the penalty. The limitations on the mini-
mum and maximum penalty amounts de-
scribed in paragraph (a) of this section
apply separately to each failure to disclose
that is subject to a penalty.

(2) No tax required to be shown on
return. For returns with respect to which
disclosure is required but on which no tax
is required to be shown (for example, re-
turns of passthrough entities), the mini-
mum penalty amount will be imposed for
failures to disclose.

(3) Examples. The rules in paragraphs
(d)(1) and (2) of this section are illustrated
by the following examples:

Example 1. Taxpayer X, a natural person, filed a
return reflecting participation in an abusive Roth
IRA transaction listed in Notice 2004-8, 2004-1
I.R.B. 333 (Jan. 26, 2004). As described in the
notice, X's Roth IRA acquired shares of a wholly
owned corporation and then X sold assets to the
corporation at less than fair market value, effectively
transferring value to the corporation comparable to a
contribution to the Roth IRA. X failed to disclose his
participation in the listed transaction as required by
the regulations under section 6011. As a result of the
transaction, X was liable under section 4973 for a

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$10,000 excise tax for excess contributions to his
Roth IRA. On his return, X correctly reported
$25,000 of income tax, none of which was attribut-
able to the listed transaction, but failed to report the
excise tax. If X had not participated in the listed
transaction, the excise tax under section 4973 would
not have applied and his income tax would have
remained $25,000. There would, therefore, be no
difference between the tax on his return as filed and
the tax on his return if it did not reflect participation
in the transaction. The excise tax, however, is an-
other tax that resulted from participation in the trans-
action but was not reported on X's return, as de-
scribed in paragraph (d)(1)(i)(B) of this section.
Therefore, the decrease in tax resulting from the
listed transaction is $10,000, which amount is the
sum of zero (the excess of the amount of tax that
would be shown on X's return if the return did not
reflect X's participation in the transaction over the
tax X actually reported on the return reflecting X's
participation in the transaction) and $10,000 (the
amount of excise tax that resulted from participation
in the transaction but was not reported on the return).
The amount of the penalty will be $7,500, which
amount is 75 percent of the $10,000 decrease in tax.

Example 2. Taxpayer X participated in a listed
transaction that resulted in a $40,000 decrease in the
tax shown on its return. X failed to disclose its
participation and is, therefore, subject to a penalty
under section 6707A. After weighing litigating haz-
ards and other costs of litigation, the IRS Office of
Appeals agreed to settle X's deficiency for $20,000.
For purposes of calculating the amount of the pen-
alty, the settlement does not affect the decrease in tax
shown on X's return as a result of the listed trans-
action, which remains $40,000. The amount of X's
penalty will be $30,000, which amount is 75 percent
of the $40,000 decrease in tax.

Example 3. Taxpayer X, a natural person, partic-
ipated in a nonlisted reportable transaction and, be-
cause he failed to disclose his participation, is sub-
ject to a penalty under section 6707A. After
offsetting gross income with the losses generated in
the reportable transaction, X's return reported ad-
justed gross income of $100,000. The return also
reported $12,000 of medical expenses, $2,000 of
which were deductible after applying the 10 percent
floor in section 213(a). If X's return had not reflected
participation in the reportable transaction, his ad-
justed gross income would have been $140,000. The
decrease in tax shown on X's return as a result of the
transaction would take into account both the tax on
the $40,000 difference in adjusted gross income and
the tax on the $2,000 adjustment to X's deductible
medical expenses under section 213(a) caused by the
increase in adjusted gross income.

Example 4. Taxpayer X, a natural person, timely
filed his 2014 return and reported income tax of
$40,000. X did not participate in a reportable trans-
action in 2014. X participated in a listed transaction
in 2015, but failed to file a complete and proper
disclosure statement with his 2015 return as required
by the regulations under section 6011. As filed, the
2015 return reports that X owes no tax and has a loss
of $10,000. If the tax consequences of the listed
transaction were not reflected on the 2015 return, the
return would show income tax of $15,000 and no
loss. X files an amended return for his 2014 tax year

on which its only amendment is to carry back the
$10,000 loss reported on its 2015 tax return to the
2014 tax year, which decreases X's tax liability for
2014 by $3,000. X fails to file a complete and proper
disclosure statement with the 2014 amended return
as required by the regulations under section 6011. X
will be assessed two penalties under section 6707A:
one for his failure to disclose participation in a listed
transaction reflected on his 2015 tax return and an-
other for his failure to disclose participation in the
same listed transaction reflected on his 2014
amended return. The decrease in tax on the 2015 tax
return resulting from the listed transaction is
$15,000, which amount is the excess of the amount
of tax that would be shown on X's return if the return
did not reflect X's participation in the transaction
over the tax X actually reported on the return reflect-
ing X's participation in the transaction. The amount
of the penalty with respect to the 2015 tax return is
$11,250, which amount is 75 percent of the decrease
in tax. The decrease in tax on the 2014 amended
return that results from the listed transaction is
$3,000, which is the excess of the amount of tax that
would be shown on X's return if the return did not
reflect X's participation in the transaction over the
tax X actually reported on the return reflecting X's
participation in the transaction. See § 301.6707A-
1(c). Because X is a natural person, the amount of
the penalty with respect to the 2014 amended return
is $5,000, which is the minimum penalty under
§ 301.6707A-1(a) and section 6707A(b)(3).

Example 5. Taxpayer X, a corporation, timely
files its 2012 and 2013 tax returns, each of which
reflects participation in the same transaction. In
2015, the transaction becomes a listed transaction
and X fails to file a complete and proper disclosure
statement as required by the regulations under sec-
tion 6011. X was required to file a single disclosure
statement reflecting its participation in the listed
transaction for all years which had open periods of
limitation on assessment at the time the transaction
became listed. When the transaction at issue became
listed, the periods of assessment on X's 2012 and
2013 tax years were open. Pursuant to paragraph
(d)(1)(ii) of this section, the amount of the penalty
for X's single failure to disclose its participation in
the transaction in 2012 and 2013 is computed by
aggregating the decrease in tax shown on the 2012
return and the decrease in tax shown on the 2013
return. The decreases in tax shown on the returns as
a result of X's participation in the transaction are
$265,000 in tax year 2012 and $7,000 in tax year
2013. The total decrease in tax shown on both re-
turns is $272,000, and 75 percent of that amount is
$204,000. Because X is a corporation, the amount of
the penalty will be limited to the maximum amount
of $200,000 under § 301.6707A-1(a) and section
6707A(b)(2)(A).

Example 6. The 2014 return of Taxpayer X, a
natural person, reflects participation in a nonlisted
reportable transaction, but X fails to file a complete
and proper disclosure statement as required by the
regulations under section 6011. The decrease in tax
shown on X's 2014 return as a result of participation
in the reportable transaction is $20,000. X subse-
quently files an amended 2014 return to include a net
operating loss carried forward from a prior year,
which X inadvertently failed to include when he filed

his original return. The amended return reflects par-
ticipation in the same reportable transaction, but X
again fails to file a complete and proper disclosure
statement. The decrease in tax shown on the
amended 2014 return as a result of participation in
the transaction is also $20,000. X is subject to two
separate penalties: one for each failure to disclose.
Seventy-five percent of the $20,000 decrease in tax
shown on each of the original 2014 return and the
amended 2014 return is $15,000 for each return.
Because X is a natural person, the amount of the
penalty for failure to disclose with respect to the
original return will be limited to the maximum
amount of $10,000 under § 301.6707A-1(a) and
section 6707A(b)(2)(B). The amount of the penalty
for failure to disclose with respect to the amended
return will also be limited to the maximum amount
of $10,000.

Example 7. Partnership M is required to attach
Form 8886, Reportable Transaction Disclosure
Statement, to its Form 1065, U.S. Return of Partner-
ship Income, for the 2014 taxable year. It fails to do
so and is, therefore, subject to a penalty under sec-
tion 6707A. The amount of the penalty will be the
minimum penalty of $10,000 under § 301.6707A-
1(a) and section 6707A(b)(3) because Form 1065 is
a return that does not show an amount of tax that
would be decreased as a result of participation in the
reportable transaction. The partners of Partnership M
may have separate disclosure obligations as required
by the regulations under section 6011 and would be
subject to separate section 6707A penalties if they
fail to comply with the disclosure requirements.

Example 8. In tax year 2014, Taxpayer X partic-
ipated in a listed transaction that resulted in a
$150,000 deduction. X's gross income for 2014 be-
fore the listed transaction deduction is $100,000. X
uses $100,000 of the deduction to offset $100,000 of
gross income and reports tax of zero for 2014. X also
has a $50,000 net operating loss for 2014. X timely
elects to waive the carryback period and carry over
the 2014 net operating loss to tax year 2015. X's
gross income for tax year 2015 is $200,000 but as a
result of the $50,000 net operating loss carryover, X
reports $150,000 adjusted gross income. Pursuant to
§ 1.6011-4, X is required to disclose participation in
the listed transaction for both 2014 and 2015, but X
fails to make the required disclosures and is there-
fore subject to the section 6707A penalty for each
failure. The decrease in tax on the 2014 return is the
amount of tax on $100,000 because that is the dif-
ference between the amount of tax that would have
been shown on the return if it did not reflect partic-
ipation in the reportable transaction and the tax ac-
tually reported. No other tax resulted from X's par-
ticipation in the listed transaction. The amount of the
penalty with respect to X's failure to disclose with
respect to 2014 will be 75 percent of the decrease in
tax. The decrease in tax on the 2015 return is the
difference between the tax shown on the return as
filed and the tax that would be shown if the $50,000
net operating loss was not used, including any
changes to the amount of tax that are only indirectly
connected with the listed transaction. The amount of
the penalty with respect to X's failure to disclose
with respect to 2015 will be 75 percent of the de-
crease in tax.

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Example 9. In tax year 2014, Taxpayer X, a
natural person, participated in a listed transaction
that resulted in a $50,000 deduction. X's gross in-
come for 2014 before the listed transaction deduc-
tion is $100,000. X also has a net operating loss
carryover of $150,000 from 2013. X uses the deduc-
tion of $50,000 and a portion of the net operating
loss carryover to offset $100,000 of gross income
and reports adjusted gross income of zero for 2014.
X carries over the remaining net operating loss to tax
year 2015. X's gross income for 2015 is $250,000,
but as a result of the net operating loss carryover, X
reports reduced adjusted gross income of $150,000.
Pursuant to § 1.6011-4, X is required to disclose
participation in the listed transaction for both 2014
and 2015, but X fails to make the required disclo-
sures and is subject to the section 6707A penalty for
each failure. The decrease in tax on the 2014 return
that results from the reportable transaction is zero.
Because X has $150,000 of a net operating loss
carryover not attributable to the reportable transac-
tion, X's tax without the benefits of the reportable
transaction is the same as the tax shown on the 2014
return as filed. Because X is a natural person, the
minimum penalty of $5,000 under § 301.6707A-1(a)
and section 6707A(b)(3) will apply for the failure to
disclose the listed transaction with the 2014 return.
The decrease in tax on the 2015 return is the differ-
ence between the tax shown on the return as filed and
the tax that would be shown if X had only $50,000
of net operating loss to carry over to 2015 (i.e., if X
had not offset $50,000 of its 2014 gross income with
the deduction resulting from the reportable transac-
tion and thus had used $100,000 of its net operating
loss carryover in 2014), including any changes to the
amount of tax that are only indirectly connected with
the listed transaction. The amount of the penalty with
respect to the disclosure relating to 2015 will be 75
percent of this decrease in tax.

Example 10. In tax year 2014, Taxpayer X, a
corporation, engaged in a nonlisted reportable trans-
action and is subject to a penalty under section
6662A because its 2014 return resulted in a report-
able transaction understatement. As a result of X's
involvement in the transaction, it reported tax of
$10,000 for 2014; if X had not engaged in the
transaction, it would have reported tax of $200,000.
X disclosed its involvement in the transaction as
required by the regulations under section 6011, and
thus was not subject to a penalty under section
6707A(a). As a person who is required to file peri-
odic reports under section 13 or 15(d) of the Secu-
rities Exchange Act of 1934, however, X was also
required, pursuant to section 6707A(e), to disclose
the penalty imposed under section 6662A to the
Securities and Exchange Commission, which X
failed to do. X's failure to disclose the section 6662A
penalty is treated as a failure to disclose to which
section 6707A(b) applies. Thus, X will be subject to
a penalty under section 6707A(e), which will equal
75 percent of the decrease in tax resulting from the
transaction. The decrease in tax resulting from the
nonlisted reportable transaction was $190,000, 75
percent of which is $142,500. Because X is a cor-
poration, the amount of the penalty will be limited to
$50,000 under § 301.6707A-1(a) and section
6707A(b)(2)(B).
* * * * *

(g) * * *

(1) This section applies to penalties
assessed after the date that these regula-
tions are published as final regulations in
the Federal Register.

(2) For penalties assessed before the
date that these regulations are published
as final regulations in the Federal Regis-
ter, § 301.6707A-1 (as contained in 26
CFR part 1, revised April 2013) shall apply.

John M. Dalrymple
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal register on August 27,
2015, 8:45 a.m., and published in the issue of the Federal
Register for August 28, 2015, 80 F.R. 52231)

## Notice of Proposed Rulemaking Residence Rules Involving U.S. Possessions

### REG-109813-11

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed amendments to the regulations
for determining whether an individual is a
bona fide resident of a U.S. territory.
These proposed amendments affect indi-
viduals establishing bona fide residency in
a U.S. territory by allowing additional
days of constructive presence in a U.S.
territory.

DATES: Written or electronic comments
and requests for a public hearing must be
received by November 25, 2015.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-109813-11), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044.

Submissions may be hand-delivered
Monday through Friday between the
hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-109813-11), Courier's
Desk, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington,
DC, or sent electronically, via the Federal

eRulemaking Portal at www.regulations.gov
(IRS REG-109813-11).

#### FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Stephen Huggs, (202) 317-
6941; concerning submission of com-
ments and/or requests for a hearing, Olu-
wafunmilayo (Funmi) Taylor, (202) 317-
6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
Background

This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section 937 of
the Internal Revenue Code (Code). Sec-
tion 937 was added to the Code by the
American Jobs Creation Act of 2004
(Public Law 108-357, 118 Stat. 1418
(2004)). Section 937(a) provides rules for
determining if an individual is a bona fide
resident of a U.S. possession (generally
referred to in this preamble as a "U.S.
territory").

On April 11, 2005, the Federal Regis-
ter published temporary regulations (TD
9194, 70 FR 18920) and proposed regula-
tions (REG-159243-03, 70 FR 18949)
under section 937, providing rules to im-
plement section 937 and conforming ex-
isting regulations to other legislative
changes with respect to the U.S. territo-
ries. On January 31, 2006, the Federal
Register published final regulations (TD
9248, 71 FR 4996) under section 937(a)
concerning whether an individual is a
bona fide resident of a U.S. territory. Sec-
tion 1.937-1 was amended on November
14, 2006, and on April 9, 2008, to provide
additional guidance concerning bona fide
residency in the U.S. territories. See TD
9297 (71 FR 66232) and TD 9391 (73 FR
19350).

Section 937(a) provides that an indi-
vidual is a bona fide resident of a U.S.
territory if the individual meets a presence
test, a tax home test, and a closer connec-
tion test. In order to satisfy the presence
test, an individual must be present in the
U.S. territory for at least 183 days during
the taxable year (183-day rule), unless
otherwise provided in regulations.

Section 1.937-1 provides several alter-
natives to the 183-day rule. An individual
who does not satisfy the 183-day rule nev-
ertheless meets the presence test if the

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individual satisfies one of four alternative
tests: (1) the individual is present in the
relevant U.S. territory for at least 549 days
during the three-year period consisting of
the current taxable year and the two im-
mediately preceding taxable years, pro-
vided the individual is present in the U.S.
territory for at least 60 days during each
taxable year of the period; (2) the individ-
ual is present no more than 90 days in the
United States during the taxable year; (3)
the individual has no more than $3,000 of
earned income from U.S. sources and is
present for more days in the U.S. territory
than in the United States during the tax-
able year; or (4) the individual has no
significant connection to the United States
during the taxable year. The term "signif-
icant connection" is generally defined as a
permanent home, voter registration, spouse,
or minor child in the United States. See
§ 1.937-1(c)(5). Section 1.937-1 also pro-
vides that certain days count as days of
presence in the relevant U.S. territory for
purposes of the presence test, even if the
individual is not physically present in the
U.S. territory (constructive presence).

##### Explanation of Provisions

Following the original issuance of
§ 1.937-1, the Department of the Treasury
(Treasury Department) and the Internal
Revenue Service (IRS) received com-
ments requesting that the presence test be
revisited to make it more flexible. These
comments included a proposal to allow
days of constructive presence for business
or personal travel outside of the relevant
U.S. territory. The Treasury Department
and the IRS have concluded that it would
be appropriate to allow additional days of
constructive presence subject to certain
limitations. Accordingly, these proposed
regulations provide an additional rule for
calculating days of presence in the rele-
vant U.S. territory for purposes of the
presence test in § 1.937-1(c)(1).

Under the proposed amendment, an in-
dividual would be considered to be pres-
ent in the relevant U.S. territory for up to
30 days during which the individual is
outside of both the United States and the
relevant U.S. territory. The proposed
amendment would not apply, however, if
the number of days that the individual is
considered to be present in the United
States during the taxable year equals or

exceeds the number of days that the indi-
vidual is considered to be present in the
relevant U.S. territory during the taxable
year, determined without taking into ac-
count any days for which the individual
would be treated as present in the U.S.
territory under this proposed amendment.
Furthermore, the 30-day constructive
presence rule would not apply for pur-
poses of calculating the minimum 60 days
of presence in the relevant U.S. territory
that is required for the 549-day test under
§ 1.937-1(c)(1)(ii). Therefore, an individ-
ual invoking § 1.937-1(c)(1)(ii) must oth-
erwise be considered to have been present
at least 60 days in the relevant U.S. terri-
tory in each of the three years in order to
benefit from the 30-day constructive pres-
ence rule.

##### Proposed Effective/Applicability Date

These amendments to the regulations
are proposed to apply to taxable years
beginning after the date these regulations
are published as final regulations in the
Federal Register.

##### Reliance on Proposed Regulations

Until these regulations are published as
final regulations in the Federal Register,
taxpayers may rely on these proposed reg-
ulations with respect to taxable years be-
ginning on or after the date these proposed
regulations are published in the Federal
Register.

##### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It has also been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and
because the regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this regula-
tion has been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.

##### Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. The Treasury Department and
the IRS request comments on all aspects
of the proposed rules. All comments will
be available at www.regulations.gov or
upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled,
notice of the date, time, and place for the
public hearing will be published in the
Federal Register.

##### Drafting Information

The principal author of these proposed
regulations is Cleve Lisecki, formerly of
the Office of Associate Chief Counsel (In-
ternational). However, other personnel
from the Treasury Department and the
IRS participated in their development.
* * * * *

##### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

###### PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Section 1.937-1 also issued under 26
U.S.C. 937(a). * * *

Par. 2. Section 1.937-1 is amended as
follows:

1\. Revising paragraph (c)(3)(i)(B) and
paragraph (c)(3)(i)(C)(2).

2\. Adding paragraph (c)(3)(i)(D).

3\. Revising Example 1 of paragraph (g).

4\. Redesignating Examples 2 through
10 of paragraph (g) as Examples 5 through
13 respectively.

5\. Adding new Examples 2, 3, and 4 to
paragraph (g).

6\. Revising newly re-designated Exam-
ple 5 of paragraph (g).

7\. Adding a new sentence to the end of
paragraph (i).

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The revisions and additions read as fol-
lows:

§ 1.937-1 Bona fide residency in a
possession.

* * * * *

(c) * * *

(3) * * *

(i) * * *

(B) Any day that an individual is out-
side of the relevant possession to receive,
or to accompany on a full-time basis a
parent, spouse, or child (as defined in sec-
tion 152(f)(1)) who is receiving, qualify-
ing medical treatment as defined in para-
graph (c)(4) of this section;

(C) * * *

(1) * * *

(2) Period for which a mandatory evac-
uation order is in effect for the geographic
area in the relevant possession in which the
individual's place of abode is located; and

(D) Any day not described in para-
graph (c)(3)(i)(B) or (C) of this section
that an individual is outside of the United
States and the relevant possession, except
that an individual will not be considered
present in the relevant possession under
this paragraph (c)(3)(i)(D) for more than
30 days during the taxable year, and this
paragraph (c)(3)(i)(D) does not apply for
purposes of calculating the required min-
imum 60 days of presence in the relevant
possession under paragraph (c)(1)(ii) of
this section. Furthermore, this paragraph
(c)(3)(i)(D) applies only if the number of
days that the individual is considered to be
present in the relevant possession during
the taxable year, determined without re-
gard to this paragraph (c)(3)(i)(D), ex-
ceeds the number of days that the individ-
ual is considered to be present in the
United States during the taxable year.

* * * * *

(g) * * *

Example 1. Presence test. H, a U.S. citizen, is
engaged in a profession that requires frequent travel.
In each of the years 2016 and 2017, H spends 195
days in Possession N and the balance of the year in
the United States. In 2018, H spends 160 days in
Possession N and the balance of the year in the
United States. Thus, H spends a total of 550 days in
Possession N for the three-year period consisting of
years 2016, 2017, and 2018. Under paragraph
(c)(1)(ii) of this section, H satisfies the presence test
of paragraph (c) of this section with respect to Pos-
session N for taxable year 2018 because H is present
in Possession N for more than the required 549 days

during the three-year period of 2016 through 2018
and is present in Possession N for at least 60 days
during each of those taxable years. Assuming that in
2018 H does not have a tax home outside of Posses-
sion N and does not have a closer connection to the
United States or a foreign country under paragraphs
(d) and (e) of this section respectively, then regard-
less of whether H was a bona fide resident of Pos-
session N in 2016 and 2017, H is a bona fide resident
of Possession N for taxable year 2018.

Example 2. Presence test. Same facts as Example
1, except that in 2018, H spends 130 days in Pos-
session N, 110 days in foreign countries, and 125
days in the United States. Because H satisfies the
requirements of paragraph (c)(3)(i)(D) of this sec-
tion, 30 of the days spent in foreign countries during
2018 are treated as days of presence in Possession N.
Thus, H will be treated as being present for 160 days
in Possession N for 2018. Under paragraph (c)(1)(ii)
of this section, H meets the presence test of para-
graph (c) of this section with respect to Possession N
for taxable year 2018 because H is present in Pos-
session N for 550 days (more than the required 549
days) during the three-year period of 2016 through
2018 and is present in Possession N for at least 60
days in each of those taxable years. As in Example 1,
assuming that in 2018 H does not have a tax home
outside of Possession N and does not have a closer
connection to the United States or a foreign country
under paragraphs (d) and (e) of this section respec-
tively, then regardless of whether H was a bona fide
resident of Possession N in 2016 and 2017, H is a
bona fide resident of Possession N in 2018.

Example 3. Presence test. Same facts as Example
1, except that in 2018, H spends 130 days in Pos-
session N, 100 days in foreign countries, and 135
days in the United States. Under these facts, H does
not satisfy paragraph (c)(1)(ii) of this section for
taxable year 2018 because H is present in Possession
N for only 520 days (less than the required 549 days)
during the three-year period of 2016 through 2018.
The rule of paragraph (c)(3)(i)(D) of this section
(treating up to 30 days spent in foreign countries as
days of presence in Possession N) is not available
because H fails to satisfy the condition that H be
present more days in Possession N than in the United
States during 2018, determined without regard to the
application of paragraph (c)(3)(i)(D) of this section.

Example 4. Presence test. Same facts as Example
1, except that in 2016, H spends 360 days in Pos-
session N and six days in the United States; in 2017,
H spends 45 days in Possession N, 290 days in
foreign countries, and 30 days in the United States;
and in 2018, H spends 180 days in Possession N and
185 days in the United States. Under these facts, H
does not satisfy paragraph (c)(1)(ii) of this section
for taxable year 2018. During the three-year period
from 2016 through 2018, H is present in Possession
N for 615 days, including 30 of the days spent in
foreign countries in 2017, which are treated under
paragraph (c)(3)(i)(D) of this section as days of
presence in Possession N. Although H is present in
Possession N for more than the required 549 days
during the three-year period, H is only present for 45
days in Possession N during one of the taxable years
(2017) of the period, less than the 60 days of mini-
mum presence required under paragraph (c)(1)(ii) of
this section. The rule of paragraph (c)(3)(i)(D) of this

section does not apply for purposes of determining
whether H is present in Possession N for the 60-day
minimum required under paragraph (c)(1)(ii) of this
section.

Example 5. Presence test. W, a U.S. citizen,
owns a condominium in Possession P where she
spends part of the taxable year. W also owns a house
in State N near her grown children and grandchil-
dren. W is retired and her income consists solely of
pension payments, dividends, interest, and Social
Security benefits. For 2016, W spends 145 days in
Possession P, 101 days in Europe and Asia on va-
cation, and 120 days in State N. For taxable year
2016, W is not present in Possession P for at least
183 days, is present in the United States for more
than 90 days, and has a significant connection to the
United States by reason of her permanent home.
However, under paragraph (c)(1)(iv) of this section,
W still satisfies the presence test of paragraph (c) of
this section with respect to Possession P for taxable
year 2016 because she has no earned income in the
United States and is present for more days in Pos-
session P than in the United States.

* * * * *

(i) * * * Notwithstanding the forego-
ing, paragraph (c)(3)(i)(D) and Examples
1, 2, 3, 4, and 5 of paragraph (g) of this
section apply for taxable years beginning
after the date these regulations are pub-
lished as final regulations in the Federal
Register.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal register on August 26,
2015, 8:45 a.m., and published in the issue of the Federal
Register for August 27, 2015, 80 F.R. 51975)

Notice of Proposed
Rulemaking
Amendments to Domestic
Production Activities
Deduction Regulations;
Allocation of W-2 Wages in
a Short Taxable Year and
in an Acquisition or
Disposition

REG-136459-09

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemak-
ing, notice of proposed rulemaking by
cross reference to temporary regulations
and notice of public hearing.

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SUMMARY: This document contains
proposed regulations involving the do-
mestic production activities deduction un-
der section 199 of the Internal Revenue
Code (Code). The proposed regulations
provide guidance to taxpayers on the
amendments made to section 199 by the
Energy Improvement and Extension Act
of 2008 and the Tax Extenders and Alter-
native Minimum Tax Relief Act of 2008,
involving oil related qualified production
activities income and qualified films, and
the American Taxpayer Relief Act of
2012, involving activities in Puerto Rico.
The proposed regulations also provide
guidance on: determining domestic pro-
duction gross receipts; the terms manufac-
tured, produced, grown, or extracted; con-
tract manufacturing; hedging transactions;
construction activities; allocating cost of
goods sold; and agricultural and horticul-
tural cooperatives. In the Rules and Reg-
ulations of this issue of the Internal Rev-
enue Bulletin, the Treasury Department
and the IRS also are issuing temporary
regulations (TD 9731) clarifying how tax-
payers calculate W-2 wages for purposes
of the W-2 wage limitation in the case of
a short taxable year or an acquisition or
disposition of a trade or business (includ-
ing the major portion of a trade or busi-
ness, or the major portion of a separate
unit of a trade or business) during the
taxable year. This document also contains
a notice of a public hearing on the pro-
posed regulations.

DATES: Written or electronic comments
must be received by. Outlines of topics to
be discussed at the public hearing sched-
uled for December 16, 2015, at 10:00 am,
must be received by November 24, 2015.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-136459-09), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (REG-136459-09),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Wash-
ington, DC, or sent electronically, via the
Federal eRulemaking Portal at http://www.
regulations.gov (IRS REG-136459-09).
The public hearing will be held in the
Auditorium of the Internal Revenue

Building, 1111 Constitution Avenue,
NW., Washington, DC.

FOR FURTHER INFORMATION
CONTACT: Concerning §§ 1.199-1(f),
1.199-2(c), 1.199-2(e), 1.199-2(f),
1.199-3(b), 1.199-3(e), 1.199-3(h),
1.199-3(k), 1.199-3(m), 1.199-6(m),
and 1.199-8(i) of the proposed regula-
tions, James Holmes, (202) 317-4137;
concerning § 1.199-4(b) of the proposed
regulations, Natasha Mulleneaux (202)
317-7007; concerning submissions of
comments, the hearing, or to be placed on
the building access list to attend the hear-
ing, Regina Johnson, at (202) 317-6901
(not toll-free numbers).

### SUPPLEMENTARY INFORMATION:

#### Background

This document contains proposed
amendments to §§ 1.199-0, 1.199-1,
1.199-2, 1.199-3, 1.199-4(b), 1.199-6,
and 1.199-8(i) of the Income Tax Regu-
lations (26 CFR part 1). Section 1.199-1
relates to income that is attributable to
domestic production activities. Section
1.199-2 relates to W-2 wages as defined
in section 199(b). Section 1.199-3 relates
to determining domestic production gross
receipts (DPGR). Section 1.199-4(b) de-
scribes the costs of goods sold allocable to
DPGR. Section 1.199-6 applies to agri-
cultural and horticultural cooperatives.
Section 1.199-8(i) provides the effective/
applicability dates.

Section 199 was added to the Code by
section 102 of the American Jobs Creation
Act of 2004 (Public Law 108-357, 118
Stat. 1418 (2004)), and amended by sec-
tion 403(a) of the Gulf Opportunity Zone
Act of 2005 (Public Law 109-135, 119
Stat. 25 (2005)), section 514 of the Tax
Increase Prevention and Reconciliation
Act of 2005 (Public Law 109-222, 120
Stat. 345 (2005)), section 401 of the Tax
Relief and Health Care Act of 2006 (Pub-
lic Law 109-432, 120 Stat. 2922 (2006)),
section 401(a), Division B of the Energy
Improvement and Extension Act of 2008
(Public Law 110-343, 122 Stat. 3765
(2008)) (Energy Extension Act of 2008),
sections 312(a) and 502(c), Division C of
the Tax Extenders and Alternative Mini-
mum Tax Relief Act of 2008 (Public Law
110-343, 122 Stat. 3765 (2008)) (Tax Ex-
tenders Act of 2008), section 746(a) of the

Tax Relief, Unemployment Insurance Re-
authorization, and Job Creation Act of
2010 (Public Law 111-312, 124 Stat.
3296 (2010)), section 318 of the American
Taxpayer Relief Act of 2012 (Public Law
112-240, 126 Stat. 2313 (2013)), and sec-
tions 130 and 219(b) of the Tax Increase
Prevention Act of 2014 (Public Law 113-
295, 128 Stat. 4010 (2014)).

##### General Overview

Section 199(a)(1) allows a deduction
equal to nine percent (three percent in the
case of taxable years beginning in 2005 or
2006, and six percent in the case of tax-
able years beginning in 2007, 2008, or
2009) of the lesser of: (A) the qualified
production activities income (QPAI) of
the taxpayer for the taxable year, or (B)
taxable income (determined without re-
gard to section 199) for the taxable year
(or, in the case of an individual, adjusted
gross income).

Section 199(b)(1) provides that the
amount of the deduction allowable under
section 199(a) for any taxable year shall
not exceed 50 percent of the W-2 wages
of the taxpayer for the taxable year. Sec-
tion 199(b)(2)(A) generally defines W-2
wages, with respect to any person for any
taxable year of such person, as the sum of
amounts described in section 6051(a)(3)
and (8) paid by such person with respect
to employment of employees by such per-
son during the calendar year ending dur-
ing such taxable year. Section 199(b)(3),
after its amendment by section 219(b) of
the Tax Increase Prevention Act of 2014,
provides that the Secretary shall provide
for the application of section 199(b) in
cases of a short taxable year or where the
taxpayer acquires, or disposes of, the ma-
jor portion of a trade or business, or the
major portion of a separate unit of a trade
or business during the taxable year. Sec-
tion 199(b)(2)(B) limits the W-2 wages to
those properly allocable to DPGR for tax-
able years beginning after May 17, 2006.

Section 199(c)(1) defines QPAI for any
taxable year as an amount equal to the
excess (if any) of: (A) the taxpayer's
DPGR for such taxable year, over (B) the
sum of: (i) the cost of goods sold (CGS)
that are allocable to such receipts; and (ii)
other expenses, losses, or deductions
(other than the deduction under section

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199\) that are properly allocable to such
receipts.

Section 199(c)(4)(A)(i) provides that
the term DPGR means the taxpayer's
gross receipts that are derived from any
lease, rental, license, sale, exchange, or
other disposition of: (I) qualifying produc-
tion property (QPP) that was manufac-
tured, produced, grown, or extracted
(MPGE) by the taxpayer in whole or in
significant part within the United States;
(II) any qualified film produced by the
taxpayer; or (III) electricity, natural gas,
or potable water (utilities) produced by
the taxpayer in the United States.

Section 199(d)(10), as renumbered by
section 401(a), Division B of the Energy
Extension Act of 2008, authorizes the
Secretary to prescribe such regulations as
are necessary to carry out the purposes of
section 199, including regulations that
prevent more than one taxpayer from be-
ing allowed a deduction under section 199
with respect to any activity described in
section 199(c)(4)(A)(i).

#### Explanation of Provisions

1\. Allocation of W-2 Wages in a Short
Taxable Year and in an Acquisition or
Disposition of a Trade or Business (or
Major Portion)

Temporary regulations in the Rules
and Regulations section of this issue of
the Federal Register contain amend-
ments to the Income Tax Regulations that
provide rules clarifying how taxpayers
calculate W-2 wages for purposes of the
W-2 wage limitation under section
199(b)(1) in the case of a short taxable
year or where a taxpayer acquires, or dis-
poses of, the major portion of a trade or
business, or the major portion of a sepa-
rate unit of a trade or business during the
taxable year under section 199(b)(3). The
text of those regulations serves as the text
of these proposed regulations. The pream-
ble to the temporary regulations explains
the temporary regulations.

##### 2. Oil Related Qualified Production Activities Income

Section 401(a), Division B of the En-
ergy Extension Act of 2008 added new
section 199(d)(9), which applies to tax-
able years beginning after December 31,

2008\. Section 199(d)(9) reduces the oth-
erwise allowable section 199 deduction
when a taxpayer has oil related qualified
production activities income (oil related
QPAI), and defines oil related QPAI. Sec-
tion 199(d)(9)(A) provides that if a tax-
payer has oil related QPAI for any taxable
year beginning after 2009, the amount
otherwise allowable as a deduction under
section 199(a) must be reduced by three
percent of the least of: (i) the oil related
QPAI of the taxpayer for the taxable year,
(ii) the QPAI of the taxpayer for the tax-
able year, or (iii) taxable income (deter-
mined without regard to section 199).

Section 1.199-1(f) of the proposed
regulations provides guidance on oil re-
lated QPAI. In defining oil related QPAI,
the Treasury Department and the IRS con-
sidered the relationship between QPAI
and oil related QPAI. Section 199(c)(1)
defines QPAI as the amount equal to the
excess (if any) of the taxpayer's DPGR
for the taxable year over the sum of CGS
allocable to such receipts and other costs,
expenses, losses, and deductions allocable
to such receipts. So, for example, if gross
receipts are not included within DPGR,
those gross receipts are not included when
calculating QPAI. Section 199(d)(9)(B)
defines oil related QPAI as QPAI attrib-
utable to the production, refining, process-
ing, transportation, or distribution of oil,
gas, or any primary product thereof. In
general, gross receipts from the transpor-
tation and distribution of QPP are not in-
cludable in DPGR because those activities
are not considered part of the MPGE of
QPP. See § 1.199-3(e)(1), which defines
MPGE. Section 199(c)(4)(B)(ii) specifi-
cally excludes gross receipts attributable
to the transmission or distribution of nat-
ural gas from the definition of DPGR.

Based on these considerations, the pro-
posed regulations define oil related QPAI
as an amount equal to the excess (if any)
of the taxpayer's DPGR from the produc-
tion, refining, or processing of oil, gas, or
any primary product thereof (oil related
DPGR) over the sum of the CGS that is
allocable to such receipts and other ex-
penses, losses, or deductions that are
properly allocable to such receipts. The
proposed regulations specifically provide
that oil related DPGR does not include
gross receipts derived from the transpor-
tation or distribution of oil, gas, or any

primary product thereof, except if the de
minimis rule under § 1.199-1(d)(3)(i) or
an exception for embedded services ap-
plies under § 1.199-3(i)(4)(i)(B). The
proposed regulations further provide that,
to the extent a taxpayer treats gross re-
ceipts derived from the transportation or
distribution of oil, gas, or any primary
product thereof as DPGR under § 1.199-
1(d)(3)(i) or § 1.199-3(i)(4)(i)(B), the
taxpayer must include those gross receipts
in oil related DPGR.

The proposed regulations define oil as
including oil recovered from both conven-
tional and non-conventional recovery
methods, including crude oil, shale oil,
and oil recovered from tar/oil sands. Sec-
tion 199(d)(9)(C) defines primary product
as having the same meaning as when used
in section 927(a)(2)(C) (relating to prop-
erty excluded from the term export prop-
erty under the former foreign sales corpo-
rations rules), as in effect before its repeal.
The proposed regulations incorporate the
rules in § 1.927(a)-1T(g)(2)(i) regarding
the definition of a primary product with
modifications that are consistent with the
definition of oil for purposes of section
199(d)(9).

Section 1.199-1(f)(2) of the proposed
regulations provides guidance on how a
taxpayer should allocate and apportion
costs under the section 861 method, the
simplified deduction method, and the
small business simplified overall method
when determining oil related QPAI. The
proposed regulations require taxpayers to
use the same cost allocation method to
allocate and apportion costs to oil related
DPGR as the taxpayer uses to allocate and
apportion costs to DPGR.

##### 3. Qualified Films

##### a. Statutory amendments

Section 502(c), Division C of the Tax
Extenders Act of 2008 amended the rules
relating to qualified films. Section
502(c)(1) added section 199(b)(2)(D) to
broaden the definition of the term W-2
wages as applied to a qualified film to
include compensation for services per-
formed in the United States by actors,
production personnel, directors, and pro-
ducers.

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Section 502(c)(2), Division C of the
Tax Extenders Act of 2008 amended the
definition of qualified film in section
199(c)(6) to mean any property described
in section 168(f)(3) if not less than 50
percent of the total compensation relating
to production of the property is compen-
sation for services performed in the
United States by actors, production per-
sonnel, directors, and producers. The term
does not include property with respect to
which records are required to be main-
tained under 18 U.S.C. section 2257 (gen-
erally, films, videotapes, or other matter
that depict actual sexually explicit con-
duct and are produced in whole or in part
with materials that have been mailed or
shipped in interstate or foreign commerce,
or are shipped or transported or are in-
tended for shipment or transportation in
interstate or foreign commerce). Section
502(c)(2), Division C of the Tax Extend-
ers Act of 2008 also amended the defini-
tion of a qualified film under section
199(c)(6) to include any copyrights, trade-
marks, or other intangibles with respect to
such film. The method and means of dis-
tributing a qualified film does not affect
the availability of the deduction.

Section 502(c)(3), Division C of the
Tax Extenders Act of 2008 added an at-
tribution rule for a qualified film for tax-
payers who are partnerships or S corpora-
tions, or partners or shareholders of such
entities under section 199(d)(1)(A)(iv).
Section 199(d)(1)(A)(iv) provides that in
the case of each partner of a partnership,
or shareholder of an S corporation, who
owns (directly or indirectly) at least 20
percent of the capital interests in such
partnership or the stock of such S corpo-
ration, such partner or shareholder is
treated as having engaged directly in any
film produced by such partnership or S
corporation, and that such partnership or S
Corporation is treated as having engaged
directly in any film produced by such part-
ner or shareholder.

The amendments made by section
502(c), Division C of the Tax Extenders
Act of 2008 apply to taxable years begin-
ning after December 31, 2007.

##### b. W-2 wages

Section 1.199-2(e)(1) of the proposed
regulations modifies the definition of W-2

wages to include compensation for ser-
vices (as defined in § 1.199-3(k)(4)) per-
formed in the United States by actors,
production personnel, directors, and pro-
ducers (as defined in § 1.199-3(k)(1)).

##### c. Definition of qualified films

To address the amendments to the def-
inition of qualified film in section
199(c)(6) for taxable years beginning after
2007, the proposed regulations amend the
definition of qualified film in § 1.199-
3(k)(1) to include copyrights, trademarks,
or other intangibles with respect to such
film. The proposed regulations define
other intangibles with a non-exclusive list
of intangibles that fall within the definition.

Section 1.199-3(k)(10) provides a spe-
cial rule for disposition of promotional
films to address concerns of the Treasury
Department and the IRS that the inclusion
of intangibles in the definition of qualified
film could be interpreted too broadly. This
rule clarifies that, when a taxpayer pro-
duces a qualified film that is promoting a
product or service, the gross receipts a
taxpayer later derives from the disposition
of the product or service promoted in the
qualified film are derived from the dispo-
sition of the product or service and not
from a disposition of the qualified film
(including any intangible with respect to
such qualified film). The rule is intended
to prevent taxpayers from claiming that
gross receipts are derived from the dispo-
sition of a qualified film (rather than the
product or service itself) when a taxpayer
sells a product or service with a logo,
trademark, or other intangible that appears
in a promotional film produced by the
taxpayer. The Treasury Department and
the IRS recognize that a taxpayer can, in
certain cases, derive gross receipts from a
disposition of a promotional film or the
intangibles in a promotional film. The pro-
posed regulations add Example 9 in
§ 1.199-3(k)(11) relating to a license to
reproduce a character used in a promo-
tional film to illustrate a situation where
gross receipts can qualify as DPGR be-
cause the gross receipts are distinct (sep-
arate and apart) from the disposition of the
product or service. The Treasury Depart-
ment and the IRS request comments on
how to determine when gross receipts are
distinct.

The proposed regulations add four ex-
amples in redesignated § 1.199-3(k)(11),
formerly § 1.199-3(k)(10), to illustrate
application of the amended definition of
qualified film that includes copyrights,
trademarks, or other intangibles.

The proposed regulations remove the
last sentence of § 1.199-3(k)(3)(ii)
(which states that gross receipts derived
from a license of the right to use or exploit
film characters are not gross receipts de-
rived from a qualified film) because gross
receipts derived from a license of the right
to use or exploit film characters are now
considered gross receipts derived from a
qualified film.

Section 1.199-3(k)(2)(ii), which al-
lows a taxpayer to treat certain tangible
personal property as a qualified film (for
example, a DVD), is amended to exclude
film intangibles because tangible personal
property affixed with a film intangible
(such as a trademark) should not be
treated as a qualified film. For example,
the total revenue from the sale of an im-
ported t-shirt affixed with a film intangible
should not be treated as gross receipts
derived from the sale of a qualified film.
The portion of the gross receipts attribut-
able to the qualified film intangible sepa-
rate from receipts attributable to the t-shirt
may qualify as DPGR, however. The pro-
posed regulations also add Example 10
and Example 11 in redesignated § 1.199-
3(k)(11) to address situations in which
tangible personal property is offered for
sale in combination with a qualified film
affixed to a DVD.

Section 1.199-3(k)(3)(i) and (k)(3)(ii)
of the proposed regulations address the
amendment to section 199(c)(6) (effective
for taxable years beginning after 2007)
that provides the methods and means of
distributing a qualified film will not affect
the availability of the deduction under
section 199. The exception that describes
the receipts from showing a qualified film
in a movie theater or by broadcast on a
television station as not derived from a
qualified film is removed from § 1.199-
3(k)(3)(ii) because, if a taxpayer produces
a qualified film, then the receipts the tax-
payer derives from these showings qualify
as DPGR in taxable years beginning after
2007. In addition, Example 4 in § 1.199-
3(i)(5)(iii) and Example 3 in § 1.199-
3(k)(11) (formerly § 1.199-3(k)(10))

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have been revised to illustrate that, for
taxable years beginning after 2007, prod-
uct placement and advertising income de-
rived from the distribution of a qualified
film qualifies as DPGR if the qualified
film containing the product placements
and advertising is broadcast over the air or
watched over the Internet.

The proposed regulations also add a
sentence to § 1.199-3(k)(6) to clarify that
production activities do not include activ-
ities related to the transmission or distri-
bution of films. The Treasury Department
and the IRS are aware that some taxpayers
have taken the inappropriate position that
these activities are part of the production
of a film. The Treasury Department and
the IRS consider film production as dis-
tinct from the transmission and distribu-
tion of films. This clarification is also con-
sistent with the amendment to the
definition of qualified film, which pro-
vides that the methods and means of dis-
tribution do not affect the availability of
the deduction under section 199.

##### d. Partnerships and S corporations

Section 1.199-3(i)(9) of the proposed
regulations describes the application of
section 199(d)(1)(A)(iv) to partners and
partnerships and shareholders and S cor-
porations for taxable years beginning after
2007. The Treasury Department and the
IRS have determined that for a partnership
to apply the provisions of section
199(d)(1)(A)(iv) to treat itself as having
engaged directly in a film produced by a
partner, the partnership must treat itself as
a partnership for all purposes of the Code.
Further, a partner of a partnership can
apply the provisions of section
199(d)(1)(A)(iv) to treat itself as having
engaged directly in a film produced by the
partnership only if the partnership treats
itself as a partnership for all purposes of
the Code. Section 1.199-3(i)(9)(i) de-
scribes generally that a partner of a part-
nership or shareholder of an S corporation
who owns (directly or indirectly) at least
20 percent of the capital interests in such
partnership or the stock of such S corpo-
ration is treated as having engaged di-
rectly in any film produced by such part-
nership or S corporation. Further, such
partnership or S corporation is treated as

having engaged directly in any film pro-
duced by such partner or shareholder.

Section 1.199-3(i)(9)(ii) of the pro-
posed regulations generally prohibits attri-
bution between partners of a partnership
or shareholders of an S corporation, part-
nerships with a partner in common, or S
corporations with a shareholder in com-
mon. Thus, when a partnership or S cor-
poration is treated as having engaged di-
rectly in any film produced by a partner or
shareholder, any other partners or share-
holders who did not participate directly in
the production of the film are treated as
not having engaged directly in the produc-
tion of the film at the partner or share-
holder level. Similarly, when a partner or
shareholder is treated as having engaged
directly in any film produced by a part-
nership or S corporation, any other part-
nerships or S corporations in which that
partner or shareholder owns an interest
(excluding the partnership or S corpora-
tion that produced the film) are treated as
not having engaged directly in the produc-
tion of the film at the partnership or S
corporation level.

Section 1.199-3(i)(9)(iii) of the pro-
posed regulations describes the attribution
period for a partner or partnership or
shareholder or S corporation under section
199(d)(1)(A)(iv). A partner or shareholder
is treated as having engaged directly in
any qualified film produced by the part-
nership or S corporation, and a partnership
or S corporation is treated as having en-
gaged directly in any qualified film pro-
duced by the partner or shareholder, re-
gardless of when the qualified film was
produced, during the period in which the
partner or shareholder owns (directly or
indirectly) at least 20 percent of the cap-
ital interests in the partnership or the stock
of the S corporation. During any period
that a partner or shareholder owns less
than 20 percent of the capital interests in
such partnership or the stock of such S
corporation that partner or shareholder is
not treated as having engaged directly in
the qualified film produced by the partner-
ship or S corporation for purposes of
§ 1.199-3(i)(9)(iii), and that partnership
or S corporation is not treated as having
engaged directly in any qualified film pro-
duced by the partner or shareholder.

Section 1.199-3(i)(9)(iv) of the pro-
posed regulations provides examples that
illustrate section 199(d)(1)(A)(iv).

##### e. Qualified film safe harbor

Existing § 1.199-3(k)(7)(i) provides a
safe harbor that treats a film as a qualified
film produced by the taxpayer if not less
than 50 percent of the total compensation
for services paid by the taxpayer is com-
pensation for services performed in the
United States and the taxpayer satisfies
the safe harbor in § 1.199-3(g)(3) for
treating a taxpayer as MPGE QPP in
whole or significant part in the United
States. The Treasury Department and the
IRS are aware that it may be unclear how
the safe harbor in § 1.199-3(k)(7)(i) ap-
plies to costs of live or delayed television
programs that may be expensed (specifi-
cally, whether such expensed costs are
part of the CGS or unadjusted depreciable
basis of the qualified film for purposes of
§ 1.199-3(g)(3)). Further, it may be un-
clear whether license fees paid for third-
party produced programs are included in
direct labor and overhead when applying
the safe harbor in § 1.199-3(g)(3). The
proposed regulations clarify how a tax-
payer producing live or delayed television
programs should apply the safe harbor in
§ 1.199-3(k)(7)(i); in particular, how a
taxpayer should calculate its unadjusted
depreciable basis under § 1.199-3(g)(3)(ii).
Specifically, proposed § 1.199-3(k)(7)(i)
requires a taxpayer to include all costs
paid or incurred in the production of a live
or delayed television program in the tax-
payer's unadjusted depreciable basis of
such program under § 1.199-3(g)(3)(ii),
including the licensing fees paid to a third
party under § 1.199-3(g)(3)(ii). The pro-
posed regulations further clarify that li-
cense fees for third-party produced pro-
grams are not included in the direct labor
and overhead to produce the film for pur-
poses of applying § 1.199-3(g)(3).

###### 4. Treatment of Activities in Puerto Rico

Section 199(d)(8)(A) provides that in
the case of any taxpayer with gross re-
ceipts for any taxable year from sources
within the Commonwealth of Puerto Rico,
if all of such receipts are taxable under
section 1 or 11 for such taxable year, then

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for purposes of determining the DPGR of
such taxpayer for such taxable year under
section 199(c)(4), the term United States
includes the Commonwealth of Puerto
Rico. Section 199(d)(8)(B) provides that
in the case of a taxpayer described in
section 199(d)(8)(A), for purposes of ap-
plying the wage limitation under section
199(b) for any taxable year, the determi-
nation of W-2 wages of such taxpayer is
made without regard to any exclusion un-
der section 3401(a)(8) for remuneration
paid for services performed in Puerto
Rico. Section 130 of the Tax Increase
Prevention Act of 2014 amended section
199(d)(8)(C) for taxable years beginning
after December 31, 2013. As amended,
section 199(d)(8)(C) provides that section
199(d)(8) applies only with respect to the
first nine taxable years of the taxpayer
beginning after December 31, 2005, and
before January 1, 2015.

Section 1.199-2(f) of the proposed
regulations modifies the W-2 wage limi-
tation under section 199(b) to the extent
provided by section 199(d)(8). Section
1.199-3(h)(2) of the proposed regulations
modifies the term United States to include
the Commonwealth of Puerto Rico to the
extent provided by section 199(d)(8).

###### 5. Determining DPGR on Item-By-Item Basis

Section 1.199-3(d)(1) provides that a
taxpayer determines, using any reasonable
method that is satisfactory to the Secretary
based on all of the facts and circum-
stances, whether gross receipts qualify as
DPGR on an item-by-item basis. Section
1.199-3(d)(1)(i) provides that item means
the property offered by the taxpayer in the
normal course of the taxpayer's business
for lease, rental, license, sale, exchange,
or other disposition (for purposes of
§ 1.199-3(d), collectively referred to as
disposition) to customers, if the gross re-
ceipts from the disposition of such prop-
erty qualify as DPGR. Section 1.199-
3(d)(2)(iii) provides that, in the case of
construction activities and services or en-
gineering and architectural services, a tax-
payer may use any reasonable method that
is satisfactory to the Secretary based on all
of the facts and circumstances to deter-
mine what construction activities and ser-

vices or engineering or architectural ser-
vices constitute an item.

The Treasury Department and the IRS
are aware that the item rule in § 1.199-
3(d)(2)(iii) has been interpreted to mean
that the gross receipts derived from the
sale of a multiple-building project may be
treated as DPGR when only one building
in the project is substantially renovated.
The Treasury Department and the IRS
have concluded that treating gross receipts
from the sale of a multiple-building proj-
ect as DPGR, and the multiple-building
project as one item, is not a reasonable
method satisfactory to the Secretary for
purposes of § 1.199-3(d)(2)(iii) if a tax-
payer did not substantially renovate each
building in the multiple-building project.
Section 1.199-3(d)(4) of the proposed
regulations includes an example (Example
14) illustrating the appropriate application
of § 1.199-3(d)(2)(iii) to a multiple build-
ing project.

In addition, the Treasury Department
and the IRS are aware that taxpayers may
be unsure how to apply the item rule in
§ 1.199-3(d)(2)(i) when the property of-
fered for disposition to customers includes
embedded services as described in
§ 1.199-3(i)(4)(i). The proposed regula-
tions add Example 6 to § 1.199-3(d)(4) to
clarify that the item rule applies after ex-
cluding the gross receipts attributable to
services.

##### 6. MPGE

Section 1.199-3(e)(1) provides that the
term MPGE includes manufacturing, pro-
ducing, growing, extracting, installing,
developing, improving, and creating QPP;
making QPP out of scrap, salvage, or junk
material as well as from new or raw ma-
terial by processing, manipulating, refin-
ing, or changing the form of an article, or
by combining or assembling two or more
articles; cultivating soil, raising livestock,
fishing, and mining minerals. The Trea-
sury Department and the IRS are aware
that Example 5 in § 1.199-3(e)(5) has
been interpreted to mean that testing ac-
tivities qualify as an MPGE activity even
if the taxpayer engages in no other MPGE
activity. The Treasury Department and the
IRS disagree that testing activities, alone,
qualify as an MPGE activity. The pro-
posed regulations add a sentence to Exam-

ple 5 in § 1.199-3(e)(5) to further illus-
trate that certain activities will not be
treated as MPGE activities if they are not
performed as part of the MPGE of QPP.
Taxpayers are not required to allocate
gross receipts to certain activities that are
not MPGE activities when those activities
are performed in connection with the
MPGE of QPP. However, if the taxpayer
in Example 5 in § 1.199-3(e)(5) did not
MPGE QPP, then the activities described
in the example, including testing, are not
MPGE activities.

Section 1.199-3(e)(2) provides that if
a taxpayer packages, repackages, labels,
or performs minor assembly of QPP and
the taxpayer engages in no other MPGE
activities with respect to that QPP, the
taxpayer's packaging, repackaging, label-
ing, or minor assembly does not qualify as
MPGE with respect to that QPP. This rule
has been the subject of recent litigation.
See United States v. Dean, 945 F. Supp.
2d 1110 (C.D. Cal. 2013) (concluding that
the taxpayer's activity of preparing gift
baskets was a manufacturing activity and
not solely packaging or repackaging for
purposes of section 199). The Treasury
Department and the IRS disagree with the
interpretation of § 1.199-3(e)(2) adopted
by the court in United States v. Dean, and
the proposed regulations add an example
(Example 9) that illustrates the appropri-
ate application of this rule in a situation in
which the taxpayer is engaged in no other
MPGE activities with respect to the QPP
other than those described in § 1.199-
3(e)(2).

##### 7. Definition of "by the taxpayer"

Section 1.199-3(f)(1) provides that if
one taxpayer performs a qualifying activ-
ity under § 1.199-3(e)(1), § 1.199-
3(k)(1), or § 1.199-3(1)(1) pursuant to a
contract with another party, then only the
taxpayer that has the benefits and burdens
of ownership of the QPP, qualified film, or
utilities under Federal income tax princi-
ples during the period in which the qual-
ifying activity occurs is treated as engag-
ing in the qualifying activity.

Taxpayers and the IRS have had diffi-
culty determining which party to a con-
tract manufacturing arrangement has the
benefits and burdens of ownership of the
property while the qualifying activity oc-

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curs. Cases analyzing the benefits and bur-
dens of ownership have considered the
following factors relevant: (1) whether le-
gal title passes; (2) how the parties treat
the transaction; (3) whether an equity in-
terest was acquired; (4) whether the con-
tract creates a present obligation on the
seller to execute and deliver a deed and a
present obligation on the purchaser to
make payments; (5) whether the right of
possession is vested in the purchaser and
which party has control of the property or
process; (6) which party pays the property
taxes; (7) which party bears the risk of
loss or damage to the property; (8) which
party receives the profits from the opera-
tion and sale of the property; and (9)
whether a taxpayer actively and exten-
sively participated in the management and
operations of the activity. See ADVO, Inc.
& Subsidiaries v. Commissioner, 141 T.C.
298, 324-25 (2013); see also Grodt &
Mckay Realty, Inc. v. Commissioner, 77
T.C. 1221 (1981). The ADVO court noted
that the factors it used in its analysis are
not exclusive or controlling, but that they
were in the particular case sufficient to
determine which party had the benefits
and burdens of ownership. ADVO, Inc.,
141 T.C. at 325 n. 21. Determining which
party has the benefits and burdens of own-
ership under Federal income tax princi-
ples for purposes of section 199 requires
an analysis and weighing of many factors,
which in some contexts could result in
more than one taxpayer claiming the ben-
efits of section 199 with respect to a par-
ticular activity. Resolving the benefits and
burdens of ownership issue often requires
significant IRS and taxpayer resources.

Section 199(d)(10) directs the Treasury
Department to provide regulations that
prevent more than one taxpayer from be-
ing allowed a deduction under section 199
with respect to any qualifying activity (as
described in section 199(c)(4)(A)(i)). The
Treasury Department and the IRS have
interpreted the statute to mean that only
one taxpayer may claim the section 199
deduction with respect to the same activ-
ity performed with respect to the same
property. See § 1.199-3(f)(1). Example 1
and Example 2 in § 1.199-3(f)(4) cur-
rently illustrate this one-taxpayer rule us-
ing factors that are relevant to the deter-
mination of who has the benefits and
burdens of ownership.

The Large Business and International
(LB&I) Division issued an Industry Di-
rector Directive on February 1, 2012
(LB&I Control No. LB&I-4-0112-01)
(Directive) addressing the benefits and
burdens factors. The Directive provides a
three-step analysis of facts and circum-
stances relating to contract terms, produc-
tion activities, and economic risks to de-
termine whether a taxpayer has the
benefits and burdens of ownership for pur-
poses of § 1.199-3(f)(1). LB&I issued a
superseding second directive on July 24,
2013 (LB&I Control No. LB&I-04-
0713-006), and a third directive updating
the second directive on October 29, 2013
(LB&I Control No. LB&I-04-1013-
008). The third directive allows a taxpayer
to provide a statement explaining the tax-
payer's determination that it had the ben-
efits and burdens of ownership, along with
certification statements signed under pen-
alties of perjury by the taxpayer and the
counterparty verifying that only the tax-
payer is claiming the section 199 deduction.

To provide administrable rules that are
consistent with section 199, reduce the
burden on taxpayers and the IRS in eval-
uating factors related to the benefits and
burdens of ownership, and prevent more
than one taxpayer from being allowed a
deduction under section 199 with respect
to any qualifying activity, the proposed
regulations remove the rule in § 1.199-
3(f)(1) that treats a taxpayer in a contract
manufacturing arrangement as engaging
in the qualifying activity only if the tax-
payer has the benefits and burdens of
ownership during the period in which the
qualifying activity occurs. In place of the
benefits and burdens of ownership rule,
these proposed regulations provide that if
a qualifying activity is performed under a
contract, then the party that performs the
activity is the taxpayer for purposes of
section 199(c)(4)(A)(i). This rule, which
applies solely for purposes of section 199,
reflects the conclusion that the party actu-
ally producing the property should be
treated as engaging in the qualifying ac-
tivity for purposes of section 199, and is
therefore consistent with the statute's goal
of incentivizing domestic manufacturers
and producers. The proposed rule would
also provide a readily administrable ap-
proach that would prevent more than one
taxpayer from being allowed a deduction

under section 199 with respect to any
qualifying activity.

Example 1 has been revised, and current Exam-
ple 2 has been removed, to reflect the new rule. In
addition, the benefits and burdens language has been
removed from: (1) the definition of MPGE in
§ 1.199-3(e)(1) and (3), including Example 1, Ex-
ample 4, and Example 5 in § 1.199-3(e)(5); (2) the
definition of in whole or in significant part in
§ 1.199-3(g)(1); (3) Example 5 in the qualified film
rules in existing § 1.199-3(k)(7); and (4) the pro-
duction pursuant to a contract in the qualified film
rules in § 1.199-3(k)(8).

The Treasury Department and the IRS
request comments on whether there are
narrow circumstances that could justify an
exception to the proposed rule. In partic-
ular, the Treasury Department and the IRS
request comments on whether there
should be a limited exception to the pro-
posed rule for certain fully cost-plus or
cost-reimbursable contracts. Under such
an exception, the party that is not perform-
ing the qualifying activity would be
treated as the taxpayer engaged in the
qualifying activity if the party performing
the qualifying activity is (i) reimbursed
for, or provided with, all materials, labor,
and overhead costs related to fulfilling the
contract, and (ii) provided with an addi-
tional payment to allow for a profit. The
Treasury Department and the IRS are un-
certain regarding the extent to which such
fully cost-plus or cost-reimbursable con-
tracts are in fact used in practice. Com-
ments suggesting circumstances that
could justify an exception to the proposed
rule should address the rationale for the
proposed exception, the ability of the IRS
to administer the exception, and how the
suggested exception will prevent two tax-
payers from claiming the deduction for
the qualifying activity.

##### 8. Hedging Transactions

The proposed regulations make several
revisions to the hedging rules in § 1.199-
3(i)(3). Section 1.199-3(i) of the pro-
posed regulations defines a hedging trans-
action to include transactions in which the
risk being hedged relates to property de-
scribed in section 1221(a)(1) giving rise to
DPGR, whereas the existing regulations
require the risk being hedged relate to
QPP described in section 1221(a)(1). A
taxpayer commented in a letter to the
Treasury Department and the IRS that
there is no reason to limit the hedging

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rules to QPP giving rise to DPGR, and the
proposed regulations accept the comment.

The other changes to the hedging rules
are administrative. Section 1.199-
3(i)(3)(ii) of the existing regulations on
currency fluctuations was eliminated be-
cause the regulations under sections
988(d) and 1221 adequately cover the
treatment of currency hedges. Similarly,
the rules in § 1.199-3(i)(3)(iii) that ad-
dress the effect of identification and non-
identification were duplicative of the rules
in the section 1221 regulations. Accord-
ingly, § 1.199-3(i)(3)(ii) has been revised
to cross-reference the appropriate rules in
§ 1.1221-2(g), and to clarify that the con-
sequence of an abusive identification or
non-identification is that deduction or
loss, but not income or gain, is taken into
account in calculating DPGR.

##### 9. Construction Activities

Section 199(c)(4)(A)(ii) includes in
DPGR, in the case of a taxpayer engaged
in the active conduct of a construction
trade or business, gross receipts derived
from construction of real property per-
formed in the United States by the tax-
payer in the ordinary course of such trade
or business. Under § 1.199-3(m)(2)(i),
activities constituting construction include
activities performed by a general contrac-
tor or activities typically performed by a
general contractor, for example, activities
relating to management and oversight of
the construction process such as approv-
als, periodic inspection of progress of the
construction project, and required job
modifications. The Treasury Department
and the IRS are aware that some taxpayers
have interpreted this language to mean
that a taxpayer who only approves or au-
thorizes payments is engaged in activities
typically performed by a general contrac-
tor under § 1.199-3(m)(2)(i). The Trea-
sury Department and the IRS disagree that
a taxpayer who only approves or autho-
rizes payments is engaged in construction
for purposes of § 1.199-3(m)(2)(i). Ac-
cordingly, § 1.199-3(m)(2)(i) of the pro-
posed regulations clarifies that a taxpayer
must engage in construction activities that
include more than the approval or autho-
rization of payments or invoices for that
taxpayer's activities to be considered as

activities typically performed by a general
contractor.

Section 1.199-3(m)(2)(i) provides that
activities constituting construction are ac-
tivities performed in connection with a
project to erect or substantially renovate
real property. Section 1.199-3(m)(5) cur-
rently defines substantial renovation to
mean the renovation of a major compo-
nent or substantial structural part of real
property that materially increases the
value of the property, substantially pro-
longs the useful life of the property, or
adapts the property to a new or different
use. This standard reflects regulations un-
der § 1.263(a)-3 related to amounts paid
to improve tangible property that existed
at the time of publication of the final
§ 1.199-3(m)(5) regulations (TD 9263
[71 FR 31268] June 19, 2006) but which
have since been revised. See (TD 9636
[78 FR 57686] September 19, 2013).

The proposed regulations under
§ 1.199-3(m)(5) revise the definition of
substantial renovation to conform to the
final regulations under § 1.263(a)-3,
which provide rules requiring capitaliza-
tion of amounts paid for improvements to
a unit of property owned by a taxpayer.
Improvements under § 1.263(a)-3 are
amounts paid for a betterment to a unit of
property, amounts paid to restore a unit of
property, and amounts paid to adapt a unit
of property to a new or different use. See
§ 1.263(a)-3(j), (k), and (1). Under the
proposed regulations, a substantial renova-
tion of real property is a renovation the costs
of which are required to be capitalized as an
improvement under § 1.263(a)-3, other than
an amount described in § 1.263(a)-3(k)(1)(i)
through (iii) (relating to amounts for
which a loss deduction or basis adjust-
ment requires capitalization as an im-
provement). The improvement rules under
§ 1.263(a)-3 provide specific rules of ap-
plication for buildings (see § 1.263(a)-
3(j)(2)(ii), (k)(2), and (l)(2)), which apply
for purposes of § 1.199-3(m)(5).

##### 10. Allocating Cost of Goods Sold

Section 1.199-4(b)(1) describes how a
taxpayer determines its CGS allocable to
DPGR. The Treasury Department and the
IRS are aware that in the case of transac-
tions accounted for under a long-term
contract method of accounting (either the

percentage-of-completion method (PCM)
or the completed-contract method
(CCM)), a taxpayer incurs allocable con-
tract costs. The Treasury Department and
the IRS recognize that allocable contract
costs under PCM or CCM are analogous
to CGS and should be treated in the same
manner. Section 1.199-4(b)(1) of the pro-
posed regulations provides that in the case
of a long-term contract accounted for un-
der PCM or CCM, CGS for purposes of
§ 1.199-4(b)(1) includes allocable con-
tract costs described in § 1.460-5(b) or
§ 1.460-5(d), as applicable.

Existing § 1.199-4(b)(2)(i) provides
that a taxpayer must use a reasonable
method that is satisfactory to the Secretary
based on all of the facts and circumstances
to allocate CGS between DPGR and non-
DPGR. This allocation must be deter-
mined based on the rules provided in
§ 1.199-4(b)(2)(i) and (ii). Taxpayers
have asserted that under § 1.199-
4(b)(2)(ii) the portion of current year CGS
associated with activities in earlier tax
years (including pre-section 199 tax
years) may be allocated to non-DPGR
even if the related gross receipts are
treated by the taxpayer as DPGR. Section
1.199-4(b)(2)(iii)(A) of the proposed
regulations clarifies that the CGS must be
allocated between DPGR and non-DPGR,
regardless of whether any component of
the costs included in CGS can be associ-
ated with activities undertaken in an ear-
lier taxable year. Section 1.199-
4(b)(2)(iii)(B) of the proposed regulations
provides an example illustrating this rule.

##### 11. Agricultural and Horticultural Cooperatives

Section 199(d)(3)(A) provides that any
person who receives a qualified payment
from a specified agricultural or horticul-
tural cooperative must be allowed for the
taxable year in which such payment is
received a deduction under section 199(a)
equal to the portion of the deduction al-
lowed under section 199(a) to such coop-
erative that is (i) allowed with respect to
the portion of the QPAI to which such
payment is attributable, and (ii) identified
by such cooperative in a written notice
mailed to such person during the payment
period described in section 1382(d).

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Under § 1.199-6(c), the cooperative's
QPAI is computed without taking into ac-
count any deduction allowable under sec-
tion 1382(b) or section 1382(c) (relating
to patronage dividends, per-unit retain al-
locations, and nonpatronage distribu-
tions).

Section 1.199-6(e) provides that the
term qualified payment means any amount
of a patronage dividend or per-unit retain
allocation, as described in section
1385(a)(1) or section 1385(a)(3), received
by a patron from a cooperative that is
attributable to the portion of the cooper-
ative's QPAI for which the cooperative is
allowed a section 199 deduction. For this
purpose, patronage dividends and per-unit
retain allocations include any advances on
patronage and per-unit retains paid in
money during the taxable year.

Section 1388(f) defines the term per-
unit retain allocation to mean any alloca-
tion by an organization to which part I of
subchapter T applies to a patron with re-
spect to products marketed for him, the
amount of which is fixed without refer-
ence to net earnings of the organization
pursuant to an agreement between the or-
ganization and the patron. Per-unit retain
allocations may be made in money, prop-
erty, or certificates.

The Treasury Department and the IRS
are aware that Example 1 in § 1.199-6(m)
has been interpreted as describing that the
cooperative's payment for its members'
corn is a per-unit retain allocation paid in
money as defined in sections 1382(b)(3)
and 1388(f). Example 1 in § 1.199-6(m)
does not identify the cooperative's pay-
ment for its members' corn as a per-unit
retain allocation and is not intended to
illustrate how QPAI is computed when a
cooperative's payments to its patrons are
per-unit retain allocations. The proposed
regulations provide an example (Example
4) in § 1.199-6(m) illustrating how QPAI
is computed when the cooperative's pay-
ments to members for corn qualify as per-
unit retain allocations paid in money un-
der section 1388(f). The new example has
the same facts as Example 1 in § 1.199-
6(m), except that the cooperative's pay-
ments for its members' corn qualify as
per-unit retain allocations paid in money
under section 1388(f) and the cooperative
reports per-unit retain allocations paid in
money on Form 1099-PATR, "Taxable

Distributions Received From Coopera-
tives."

#### Request for Comments

Existing § 1.199-3(e)(2) provides that
if a taxpayer packages, repackages, labels,
or performs minor assembly of QPP and
the taxpayer engages in no other MPGE
activity with respect to that QPP, the tax-
payer's packaging, repackaging, labeling,
or minor assembly does not qualify as
MPGE with respect to that QPP.

The term minor assembly for purposes
of section 199 was first introduced in No-
tice 2005-14 (2005-1 CB 498 (February
14, 2005)) (see § 601.601(d)(2)(ii)(b))
(Notice 2005-14), and was used (by ex-
clusion) in determining whether a tax-
payer met the in-whole-or-in-significant-
part requirement. Specifically, section
3.04(5)(d) of Notice 2005-14 states that in
connection with the MPGE of QPP, pack-
aging, repackaging, and minor assembly
operations should not be considered in
applying the general "substantial in na-
ture" test, and the costs should not be
considered in applying the safe harbor.
The section further states that this rule is
similar to the rule in § 1.954-3(a)(4)(iii).
The rule in § 1.954-3(a)(4)(iii) applies
when deciding whether a taxpayer selling
property will be treated as selling a man-
ufactured product rather than components
of that sold property.

Section 1.199-3(g) of the current reg-
ulations, which superseded Notice 2005-
14, does not provide a specific definition
of minor assembly, but it does allow tax-
payers to consider minor assembly activ-
ities to determine whether the taxpayer
has met the in-whole-or-in-significant-
part requirement (either by showing their
activities were substantial in nature under
§ 1.199-3(g)(2) or by meeting the safe
harbor in § 1.199-3(g)(3)). However, the
current regulations also contain § 1.199-
3(e)(2), which excludes certain activities
from the definition of MPGE. Section
1.199-3(e)(2) provides that if a taxpayer
packages, repackages, labels, or performs
minor assembly of QPP and the taxpayer
engages in no other MPGE activity with
respect to that QPP, the taxpayer's pack-
aging, repackaging, labeling, or minor as-
sembly does not qualify as MPGE with
respect to that QPP. Therefore, a taxpayer
with only minor assembly activities would

not meet the definition of MPGE and a
determination of whether a taxpayer met
the in-whole-or-in-significant-part re-
quirement is not made.

In considering whether to provide a
specific definition of minor assembly, the
Treasury Department and the IRS have
found it difficult to identify an objective
test that would be widely applicable.

The definition of minor assembly could
focus on whether a taxpayer's activity is
only a single process that does not trans-
form an article into a materially different
QPP. Such process may include, but
would not be limited to, blending or mix-
ing two materials together, painting an
article, cutting, chopping, crushing (non-
agricultural products), or other similar ac-
tivities. An example of blending or mixing
two materials is using a paint mixing ma-
chine to combine paint with a pigment to
match a customer's color selection when a
taxpayer did not MPGE the paint or the
pigment. An example of cutting is a tax-
payer using an industrial key cutting ma-
chine to custom cut keys for customers
using blank keys that taxpayer purchased
from unrelated third parties. Examples of
other similar activities include adding an
additive to extend the shelf life of a prod-
uct and time ripening produce that was
purchased from unrelated third parties.

Another possible definition could be
based on whether an end user could rea-
sonably engage in the same assembly ac-
tivity of the taxpayer. For example, as-
sume QPP made up of component parts
purchased by taxpayer is sold by a tax-
payer to end users in either assembled or
disassembled form. To the extent an end
user can reasonably assemble the QPP
sold in disassembled form, the taxpayer's
assembly activity would be considered
minor assembly.

The Treasury Department and the IRS
request comments on how the term minor
assembly in § 1.199-3(e)(2) should be
defined and encourage the submission of
examples illustrating the term.

#### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866 of, as supple-
mented and reaffirmed by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It also has been

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determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
this notice of proposed rulemaking has
been submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small business.

#### Comments and Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are submitted
timely to the IRS. Comments are re-
quested on all aspects of the proposed
regulations. All comments will be avail-
able for public inspection and copying at
http://www.regulations.gov or upon request.

A public hearing has been scheduled
for December 16, 2015, beginning at 10
a.m. in the Auditorium of the Internal
Revenue Building, 1111 Constitution Av-
enue, NW., Washington, DC. Due to
building security procedures, visitors
must enter at the Constitution Avenue en-
trance. Because of access restrictions, vis-
itors will not be admitted beyond the im-
mediate entrance area more than 30
minutes before the hearing starts. In addi-
tion, all visitors must present photo iden-
tification to enter the building. For infor-
mation about having your name placed on
the building access list to attend the hear-
ing, see the "FOR FURTHER INFOR-
MATION CONTACT" section of this
preamble.

The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit electronic or written comments by
November 24, 2015, and an outline of the
topics to be discussed and the time to be
devoted to each topic by November 24,
2015. A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.

#### Drafting Information

The principal author of these regula-
tions is James Holmes, Office of the As-
sociate Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the Treasury Department and
the IRS participated in their development.
* * * * *

#### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

## PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.199-0 is amended by:

1\. Adding entries in the table of con-
tents for § 1.199-1(f).

2\. Revising the entry in the table of
contents for § 1.199-2(c) and adding en-
tries for § 1.199-2(c)(1), (2), and (3).

3\. Adding an entry in the table of con-
tents for § 1.199-2(f).

4\. Redesignating the entry in the table
of contents for § 1.199-3(h) as the entry
for § 1.199-3(h)(1), adding introductory
text for § 1.199-3(h), and adding an entry
for § 1.199-3(h)(2).

5\. Redesignating the entry in the table
of contents for § 1.199-3(i)(9) as the en-
try for § 1.199-3(i)(10) and adding intro-
ductory text and entries in the table of
contents for § 1.199-3(i)(9).

6\. Redesignating the entry in the table
of contents for § 1.199-3(k)(10) as the
entry for § 1.199-3(k)(11) and adding an
entry for § 1.199-3(k)(10).

7\. Adding entries in the table of con-
tents for § 1.199-4(b)(2)(iii).

8\. Revising the introductory text in the
table of contents for § 1.199-8(i) and
adding the entries for § 1.199-8(i)(10)
and (i)(11).

The additions and revision read as fol-
lows:

§ 1.199-0 Table of contents.

* * * * *

§ 1.199-1 Income attributable to
domestic production activities.

* * * * *

(f) Oil related qualified production ac-
tivities income.

(1) In general.

(i) Oil related QPAI.

(ii) Special rule for oil related DPGR.

(iii) Definition of oil.

(iv) Primary product from oil or gas.

(A) Primary product from oil.

(B) Primary product from gas.

(C) Primary products from changing
technology.

(D) Non-primary products.

(2) Cost allocation methods for deter-
mining oil related QPAI.

(i) Section 861 method.

(ii) Simplified deduction method.

(iii) Small business simplified overall
method.

§ 1.199-2 Wage limitation.

* * * * *

(c) Acquisitions, dispositions, and
short taxable years.

(1) Allocation of wages between more
than one taxpayer.

(2) Short taxable years.

(3) Operating rules.

(i) Acquisition or disposition.

(ii) Trade or business.
* * * * *

(f) Commonwealth of Puerto Rico.

### § 1.199-3 Domestic production gross receipts.

* * * * *

(h) United States.

* * * * *

(2) Commonwealth of Puerto Rico.

(i) * * *

(9) Engaging in production of qualified
films.

(i) In general.

(ii) No double attribution.

(iii) Timing of attribution.

(iv) Examples.

* * * * *

(k) * * *

(10) Special rule for disposition of pro-
motional films and products or services
promoted in promotional films.

* * * * *

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§ 1.199-4 Costs allocable to domestic
production gross receipts.

* * * * *

(b) * * *

(2) * * *

(iii) Cost of goods sold associated with
activities undertaken in an earlier taxable
year.

(A) In general.

(B) Example.

* * * * *

§ 1.199-8 Other rules.

* * * * *

(i) Effective/applicability dates.
* * * * *

(10) Acquisition or disposition of a
trade or business (or major portion).

(11) Energy Improvement and Exten-
sion Act of the 2008, Tax Extenders and
Alternative Minimum Tax Relief Act of
2008, American Taxpayer Relief Act of
2012, and other provisions.

* * * * *

Par. 3. Section 1.199-1 is amended by
adding paragraph (f) to read as follows:

§ 1.199-1 Income attributable to
domestic production activities.

* * * * *

(f) Oil related qualified production ac-
tivity income (Oil related QPAI)-(1) In
general-(i) Oil related QPAI. Oil related
QPAI for any taxable year is an amount
equal to the excess (if any) of the taxpay-
er's DPGR (as defined in § 1.199-3) de-
rived from the production, refining or pro-
cessing of oil, gas, or any primary product
thereof (oil related DPGR) over the sum
of:

(A) The CGS that is allocable to such
receipts; and

(B) Other expenses, losses, or deduc-
tions (other than the deduction allowed
under this section) that are properly allo-
cable to such receipts. See §§ 1.199-3 and
1.199-4.

(ii) Special rule for oil related DPGR.
Oil related DPGR does not include gross
receipts derived from the transportation or
distribution of oil, gas, or any primary
product thereof. However, to the extent
that a taxpayer treats gross receipts de-
rived from transportation or distribution

of oil, gas, or any primary product thereof
as DPGR under paragraph (d)(3)(i) of this
section or under § 1.199-3(i)(4)(i)(B),
then the taxpayer must treat those gross
receipts as oil related DGPR.

(iii) Definition of oil. The term oil in-
cludes oil recovered from both conven-
tional and non-conventional recovery
methods, including crude oil, shale oil,
and oil recovered from tar/oil sands.

(iv) Primary product from oil or gas. A
primary product from oil or gas is, for
purposes of this paragraph:

(A) Primary product from oil. The
term primary product from oil means all
products derived from the destructive dis-
tillation of oil, including:

(1) Volatile products;

(2) Light oils such as motor fuel and
kerosene;

(3) Distillates such as naphtha;

(4) Lubricating oils;

(5) Greases and waxes; and

(6) Residues such as fuel oil.

(B) Primary product from gas. The
term primary product from gas means all
gas and associated hydrocarbon compo-
nents from gas wells or oil wells, whether
recovered at the lease or upon further pro-
cessing, including:

(1) Natural gas;

(2) Condensates;

(3) Liquefied petroleum gases such as
ethane, propane, and butane; and

(4) Liquid products such as natural
gasoline.

(C) Primary products and changing
technology. The primary products from oil
or gas described in paragraphs
(f)(1)(iv)(A) and (B) of this section are
not intended to represent either the only
primary products from oil or gas, or the
only processes from which primary prod-
ucts may be derived under existing and
future technologies.

(D) Non-primary products. Examples
of non-primary products include, but are
not limited to, petrochemicals, medicinal
products, insecticides, and alcohols.

(2) Cost allocation methods for deter-
mining oil related QPAI-(i) Section 861
method. A taxpayer that uses the section
861 method to determine deductions that
are allocated and apportioned to gross in-
come attributable to DPGR must use the
section 861 method to determine deduc-
tions that are allocated and apportioned to

gross income attributable to oil related
DPGR. See § 1.199-4(d).

(ii) Simplified deduction method. A
taxpayer that uses the simplified deduc-
tion method to apportion deductions be-
tween DPGR and non-DPGR must deter-
mine the portion of deductions allocable
to oil related DPGR by multiplying the
deductions allocable to DPGR by the ratio
of oil related DPGR divided by DPGR
from all activities. See § 1.199-4(e).

(iii) Small business simplified overall
method. A taxpayer that uses the small
business simplified overall method to ap-
portion total costs (CGS and deductions)
between DPGR and non-DPGR must de-
termine the portion of total costs allocable
to DPGR that are allocable to oil related
DPGR by multiplying the total costs allo-
cable to DPGR by the ratio of oil related
DPGR divided by DPGR from all activi-
ties. See § 1.199-4(f).

Par. 4. Section 1.199-2 is amended by
revising paragraph (c), adding a sentence
at the end of paragraph (e)(1), and adding
paragraph (f) to read as follows:

§ 1.199-2 Wage limitation.

* * * * *

(c) [The text of the proposed amend-
ments to § 1.199-2(c) is the same as the
text of § 1.199-2T(c) published elsewhere
in this issue of the Federal Register].

* * * * *

(e) * * *

(1) * * * In the case of a qualified film
(as defined in § 1.199-3(k)) for taxable
years beginning after 2007, the term W-2
wages includes compensation for services
(as defined in § 1.199-3(k)(4)) performed
in the United States by actors, production
personnel, directors, and producers (as de-
fined in § 1.199-3(k)(1)).

* * * * *

(f) Commonwealth of Puerto Rico. In
the case of a taxpayer described in
§ 1.199-3(h)(2), the determination of
W-2 wages of such taxpayer shall be
made without regard to any exclusion un-
der section 3401(a)(8) for remuneration
paid for services performed in the Com-
monwealth of Puerto Rico. This paragraph
(f) only applies as provided in section
199(d)(8).

Par. 5. Section 1.199-3 is amended by:
1\. In paragraph (d)(4):

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a. Redesignating Example 6, Example
7, Example 8, Example 9, Example 10,
Example 11, and Example 12 as Example
7, Example 8, Example 9, Example 10,
Example 11, Example 12, and Example
13, respectively;

b. In newly-designated Example 10, re-
moving the language "Example 8" and
adding "Example 9" in its place; and

c. Adding Example 6 and Example 14.

2\. Revising the last sentence in para-
graphs (e)(1) and (3).

3\. In paragraph (e)(5):

a. Revising the third sentence in Exam-
ple 1, the second sentence in Example 4,
and Example 5.

b. Adding Example 9.

4\. Revising the last sentence in para-
graph (f)(1).

5\. Revising Example 1, removing Ex-
ample 2, and redesignating Example 3 as
Example 2 in paragraph (f)(4).

6\. Removing the second and third sen-
tences in paragraph (g)(1).

7\. Revising paragraph (g)(4)(i).

8\. Redesignating paragraph (h) as para-
graph (h)(1), adding paragraph (h) head-
ing and adding paragraph (h)(2).

9\. Revising paragraph (i)(3).

10\. Removing Example 3; redesignat-
ing Example 5 as Example 3; and revising
Example 4 in paragraph (i)(5)(iii).

11\. In paragraph (i)(6)(iv)(D)(2), re-
moving the language "§ 1.199-3T(i)(8)"
and adding "§ 1.199-3(i)(8)" in its place.

12\. Redesignating paragraph (i)(9) as
paragraph (i)(10) and adding paragraph
(i)(9).

13\. Adding three sentences after the
first sentence in paragraph (k)(1), revising
paragraph (k)(2)(ii) introductory text, and
adding a sentence at the end of paragraph
(k)(3)(i).

14\. Removing the first, second, and
fifth sentences in paragraph (k)(3)(ii).

15\. Adding one sentence at the end of
paragraph (k)(6).

16\. Adding two sentences before the
last sentence in paragraph (k)(7)(i).

17\. Revising the last sentence in para-
graph (k)(8).

18\. Redesignating paragraph (k)(10) as
paragraph (k)(11) and adding paragraph
(k)(10).

19\. In newly redesignated paragraph
(k)(11):

a. Revising Example 3;

b. Removing Example 4; redesignating
Example 5 and Example 6 as Example 4
and Example 5, respectively; and adding
Example 6, Example 7, Example 8, Exam-
ple 9, Example 10, and Example 11; and

c. Revising the third sentence in newly
redesignated Example 4.

20\. Adding one sentence at the end of
paragraph (m)(2)(i).

21\. Revising paragraph (m)(5).

The revisions and additions read as fol-
lows:

### § 1.199-3 Domestic production gross receipts.

* * * * *

(d) * * *

(4)
* * *

Example 6. The facts are the same as Example 3
except that R offers three-car sets together with a
coupon for a car wash for sale to customers in the
normal course of R's business. The gross receipts
attributable to the car wash do not qualify as DPGR
because a car wash is a service, assuming the de
minimis exception under paragraph (i)(4)(i)(B)(6) of
this section does not apply. In determining R's
DPGR, under paragraph (d)(2)(i) of this section, the
three-car set is an item if the gross receipts derived
from the sale of the three-car sets without the car
wash qualify as DPGR under this section.

* * * * *

Example 14. Z is engaged in the trade or business
of construction under NAICS code 23 on a regular
and ongoing basis. Z purchases a piece of property
that has two buildings located on it. Z performs
construction activities in connection with a project to
substantially renovate building 1. Building 2 is not
substantially renovated and together building 1 and
building 2 are not substantially renovated, as defined
under paragraph (m)(5) of this section. Z later sells
building 1 and building 2 together in the normal
course of Z's business. Z can use any reasonable
method to determine what construction activities
constitute an item under paragraph (d)(2)(iii) of this
section. Z's method is not reasonable if Z treats the
gross receipts derived from the sale of building 1 and
building 2 as DPGR. This is because Z's construc-
tion activities would not have substantially reno-
vated buildings 1 and 2 if they were considered
together as one item. Z's method is reasonable if it
treats the construction activities with respect to
building 1 as the item under paragraph (d)(2)(iii) of
this section because the proceeds from the sale of
building 1 constitute DPGR.

(e) * * *

(1) * * * Pursuant to paragraph (f)(1) of
this section, the taxpayer must be the party
engaged in the MPGE of the QPP during
the period the MPGE activity occurs in
order for gross receipts derived from the
MPGE of QPP to qualify as DPGR.

* * * * *

(3) * * * Notwithstanding paragraph
(i)(4)(i)(B)(4) of this section, if the tax-
payer installs QPP MPGE by the taxpayer,
then the portion of the installing activity
that relates to the QPP is an MPGE activ-
ity.

* * * * *

(5) * * *

Example 1. * * * A stores the agricultural prod-
ucts .* * *

* * * * *

Example 4. * * * Y engages in the reconstruction
and refurbishment activity and installation of the
parts .* * *

Example 5. The following activities are per-
formed by Z as part of the MPGE of the QPP:
materials analysis and selection, subcontractor in-
spections and qualifications, testing of component
parts, assisting customers in their review and ap-
proval of the QPP, routine production inspections,
product documentation, diagnosis and correction of
system failure, and packaging for shipment to cus-
tomers. Because Z MPGE the QPP, these activities
performed by Z are part of the MPGE of the QPP. If
Z did not MPGE the QPP, then these activities, such
as testing of component parts, performed by Z are
not the MPGE of QPP.

* * * * *

Example 9. X is in the business of selling gift
baskets containing various products that are pack-
aged together. X purchases the baskets and the prod-
ucts included within the baskets from unrelated third
parties. X plans where and how the products should
be arranged into the baskets. On an assembly line in
a gift basket production facility, X arranges the prod-
ucts into the baskets according to that plan, some-
times relabeling the products before placing them
into the baskets. X engages in no other activity
besides packaging, repackaging, labeling, or minor
assembly with respect to the gift baskets. Therefore,
X is not considered to have engaged in the MPGE of
QPP under paragraph (e)(2) of this section.

** * * *

(f) * * *

(1) * * * If a qualifying activity under
paragraph (e)(1), (k)(1), or (l)(1) of this
section is performed under a contract, then
the party to the contract that is the tax-
payer for purposes of this paragraph (f)
during the period in which the qualifying
activity occurs is the party performing the
qualifying activity.

* * * * *

(4) * * *

Example 1. X designs machines that it sells to
customers. X contracts with Y, an unrelated person,
for the manufacture of the machines. The contract
between X and Y is a fixed-price contract. To man-
ufacture the machines, Y purchases components and
raw materials. Y tests the purchased components. Y
manufactures the raw materials into additional com-
ponents and Y physically performs the assembly of
the components into machines. Y oversees and di-
rects the activities under which the machines are

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manufactured by its employees. X also has employ-
ees onsite during the manufacturing for quality con-
trol. Y packages the finished machines and ships
them to X's customers. Pursuant to paragraph (f)(1)
of this section, Y is the taxpayer during the period
the manufacturing of the machines occurs and, as a
result, Y is treated as the manufacturer of the ma-
chines.

* * * * *

(g) * * *

(4) * * *

(i) Contract with an unrelated person.
If a taxpayer enters into a contract with an
unrelated person pursuant to which the
unrelated person is required to MPGE
QPP within the United States for the tax-
payer, the taxpayer is not considered to
have engaged in the MPGE of that QPP
pursuant to paragraph (f)(1) of this sec-
tion, and therefore, for purposes of mak-
ing any determination under this para-
graph (g), the MPGE or production
activities or direct labor and overhead of
the unrelated person under the contract are
only attributed to the unrelated person.

* * * * *

(h) United States* * *

(2) Commonwealth of Puerto Rico. The
term United States includes the Common-
wealth of Puerto Rico in the case of any
taxpayer with gross receipts for any tax-
able year from sources within the Com-
monwealth of Puerto Rico, if all of such
receipts are taxable under section 1 or 11
for such taxable year. This paragraph
(h)(2) only applies as provided in section
199(d)(8).

(i) * * *

(3) Hedging transactions-(i) In gen-
eral. For purposes of this section, pro-
vided that the risk being hedged relates to
property described in section 1221(a)(1)
giving rise to DPGR or relates to property
described in section 1221(a)(8) consumed
in an activity giving rise to DPGR, and
provided that the transaction is a hedging
transaction within the meaning of section
1221(b)(2)(A) and § 1.1221-2(b) and is
properly identified as a hedging transac-
tion in accordance with § 1.1221-2(f),
then-

(A) In the case of a hedge of purchases
of property described in section 1221(a)(1),
income, deduction, gain, or loss on the
hedging transaction must be taken into
account in determining CGS;

(B) In the case of a hedge of sales of
property described in section 1221(a)(1),

income, deduction, gain, or loss on the
hedging transaction must be taken into
account in determining DPGR; and

(C) In the case of a hedge of purchases
of property described in section
1221(a)(8), income, deduction, gain, or
loss on the hedging transaction must be
taken into account in determining DPGR.

(ii) Effect of identification and non-
identification. The principles of § 1.1221-
2(g) apply to a taxpayer that identifies or
fails to identify a transaction as a hedging
transaction, except that the consequence
of identifying as a hedging transaction a
transaction that is not in fact a hedging
transaction described in paragraph
(i)(3)(i) of this section, or of failing to
identify a transaction that the taxpayer has
no reasonable grounds for treating as
other than a hedging transaction described
in paragraph (i)(3)(i) of this section, is that
deduction or loss (but not income or gain)
from the transaction is taken into account
under paragraph (i)(3) of this section.

(iii) Other rules. See § 1.1221-2(e) for
rules applicable to hedging by members of
a consolidated group and § 1.446-4 for
rules regarding the timing of income, de-
ductions, gains or losses with respect to
hedging transactions.

* * * * *

(5) * * *

(iii) * * *

Example 4. X produces a live television program
that is a qualified film. In 2010, X broadcasts the
television program on its station and distributes the
program through the Internet. The television pro-
gram contains product placements and advertising
for which X received compensation in 2010. Be-
cause the methods and means of distributing a qual-
ified film under paragraph (k)(1) of this section do
not affect the availability of the deduction under
section 199 for taxable years beginning after 2007,
pursuant to paragraph (i)(5)(ii) of this section, all of
X's product placement and advertising gross receipts
for the program are treated as derived from the
distribution of the qualified film.

* * * * *

(9) Partnerships and S corporations
engaging in production of qualified
films-(i) In general. For taxable years
beginning after 2007, in the case of each
partner of a partnership or shareholder of
an S corporation who owns (directly or
indirectly) at least 20 percent of the cap-
ital interests in such partnership or the
stock of such S corporation, such partner
or shareholder shall be treated as having
engaged directly in any qualified film pro-

duced by such partnership or S corpora-
tion, and such partnership or S corporation
shall be treated as having engaged directly
in any qualified film produced by such
partner or shareholder.

(ii) No double attribution. When a part-
nership or S corporation is treated as hav-
ing engaged directly in any qualified film
produced by a partner or shareholder, any
other partners of the partnership or share-
holders of the S corporation who did not
participate directly in the production of
the qualified film are treated as not having
engaged directly in the production of the
qualified film at the partner or shareholder
level. When a partner or shareholder is
treated as having engaged directly in any
qualified film produced by a partnership
or S corporation, any other partnerships or
S corporations in which that partner or
shareholder owns an interest (excluding
the partnership or S corporation that pro-
duced the film), are treated as not having
engaged directly in the production of the
qualified film at the partnership or S cor-
poration level.

(iii) Timing of attribution. A partner or
shareholder is treated as having engaged
directly in any qualified film produced by
the partnership or S corporation, regard-
less of when the qualified film was pro-
duced by the partnership or S corporation,
during any period that the partner or
shareholder owns (directly or indirectly)
at least 20 percent of the capital interests
in the partnership or stock of the S corpo-
ration (attribution period). During any pe-
riod that a partner or shareholder owns
less than a 20 percent of the capital inter-
ests in such partnership or the stock of
such S corporation, that partner or share-
holder is not treated as having engaged
directly in the qualified film produced by
the partnership or S corporation for pur-
poses of this paragraph (i)(9). A partner-
ship or S corporation is treated as having
engaged directly in a qualified film pro-
duced by a partner or shareholder during
any period the partner or shareholder
owns (directly or indirectly) at least 20
percent of the capital interests in such
partnership or the stock of S corporation
(attribution period). During any period
that the partner or shareholder owns less
than 20 percent of the capital interests in
such partnership or stock of such S cor-
poration, the partnership or S corporation

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is not treated as having engaged directly
in the qualified film produced by the part-
ner or shareholder for purposes of this
paragraph (i)(9). The attribution period
under this paragraph (i)(9) may be shorter
or longer than a taxpayer's taxable year,
depending on the length of the attribution
period.

(iv) Examples. The following examples
illustrate an application of this paragraph
(i)(9). Assume that all taxpayers are cal-
endar year taxpayers.

Example 1. In 2010, Studio A and Studio B form
an S corporation in which each is a 50-percent share-
holder to produce a qualified film. Studio A owns the
rights to distribute the film domestically and Studio
B owns the rights to distribute the film outside of the
United States. The production activities of the S
corporation are attributed to each shareholder, and
thus each shareholder's revenue from the distribu-
tion of the qualified film is treated as DPGR during
the attribution period because Studio A and Studio B
are treated as having directly engaged in any film
that was produced by the S corporation.

Example 2. The facts are the same as Example 1
except that, in 2011, after the S corporation's pro-
duction of the qualified film, Studio C becomes a
shareholder that owns at least 20 percent of the stock
of the S corporation. Studio C is treated as having
directly engaged in any film that was produced by
the S corporation during the attribution period, as
defined in paragraph (i)(9)(iii) of this section.

Example 3. In 2010, Studio A and Studio B form
a partnership in which each is a 50-percent partner to
distribute a qualified film. Studio A produced the
film and contributes it to the partnership and Studio
B contributes cash to the partnership. The production
activities of Studio A are attributed to the partner-
ship, and thus the partnership's revenue from the
distribution of the qualified film is treated as DPGR
during the attribution period, as defined in paragraph
(i)(9)(iii) of this section, because the partnership is
treated as having directly engaged in any film that
was produced by Studio A.

Example 4. The facts are the same as Example 3
except that Studio B receives a distribution of the
rights to license an intangible associated with the
qualified film produced by Studio A. Any receipts
derived from the licensing of the intangible by Stu-
dio B are non-DPGR because Studio A's production
activities are attributed to the partnership, and are not
further attributed to Studio B.

Example 5. The facts are the same as Example 3
except that, at some point in 2011, Studio A owns
less than a 20-percent capital interest in the partner-
ship. During the period that Studio A owns less than
a 20-percent capital interest in the partnership be-
tween Studio A and Studio B, the partnership is not
treated as directly engaging in the production of a
qualified film. Therefore, any future receipts the
partnership derives from the film after the end of the
attribution period, as defined in paragraph (i)(9)(iii)
of this section, are non-DPGR. Studio A, however, is
still treated as having engaged directly in the pro-
duction of the qualified film.

* * * * *

(k) * * *

(1) * * * For taxable years beginning
after 2007, the term qualified film includes
any copyrights, trademarks, or other in-
tangibles with respect to such film (intan-
gibles). For purposes of this paragraph
(k), other intangibles include rights asso-
ciated with the exploitation of a qualified
film, such as endorsement rights, video
game rights, merchandising rights, and
other similar rights. See paragraph (k)(10)
of this section for a special rule for dispo-
sition of promotional films .* * *

(2) * * *

(ii) Film produced by a taxpayer. Ex-
cept for intangibles under paragraph
(k)(1) of this section, if a taxpayer pro-
duces a film and the film is affixed to
tangible personal property (for example, a
DVD), then for purposes of this section-
* * * * *

(3) * * *

(i) * * * For taxable years beginning
after 2007, the methods and means of
distributing a qualified film shall not af-
fect the availability of the deduction under
section 199.

** * * *

(6) * * * Production activities do not
include transmission or distribution activ-
ities with respect to a film, including the
transmission of a film by electronic signal
and the activities facilitating such trans-
mission (such as formatting that enables
the film to be transmitted).

(7) * * *

(i) * * * Paragraph (g)(3)(ii) of this
section includes all costs paid or incurred
by a taxpayer, whether or not capitalized
or required to be capitalized under section
263A, to produce a live or delayed televi-
sion program, and also includes any lease,
rental, or license fees paid by a taxpayer
for all or any portion of a film, or films
produced by a third party that taxpayer
uses in its film. License fees for films
produced by third parties are not included
in the direct labor and overhead to pro-
duce the film for purposes of applying
paragraph (g)(3) of this section. * * *
* * * * *

(8) * * * If one party performs a pro-
duction activity pursuant to a contract
with another party, then only the party that
is considered the taxpayer pursuant to
paragraph (f)(1) of this section during the
period in which the production activity

occurs is treated as engaging in the pro-
duction activity.

* * * * *

(10) Special rule for disposition of pro-
motional films and products or services
promoted in promotional films. A promo-
tional film is a film produced to promote a
taxpayer's particular product or service
and the term includes, but is not limited
to, commercials, infomercials, advertising
films, and sponsored films. A product or
service is promoted in a promotional film
if the product or service appears in, is
described during, or is in a similar way
alluded to by such film. If a promotional
film meets the requirements to be treated
as a qualified film produced by the tax-
payer, then a taxpayer derives gross re-
ceipts from the lease, rental, license, sale,
exchange, or other disposition of a quali-
fied film, including any copyrights, trade-
marks, or other intangibles when the pro-
motional film's disposition is distinct
(separate and apart) from the disposition
of the promoted product or service. Gross
receipts are not derived from the disposi-
tion of a qualified film, including any
copyrights, trademarks, or other intangi-
bles when gross receipts are derived from
a disposition of the promoted product or
service.

(11) * * *

Example 3. X produces live television programs
that are qualified films. X shows the programs on its
own television station. X sells advertising time slots
to advertisers for the television programs. Because
the methods and means of distributing a qualified
film under paragraph (k)(1) of this section do not
affect the availability of the deduction under section
199 for taxable years beginning after 2007, the ad-
vertising income X receives from advertisers is de-
rived from the lease, rental, license, sale, exchange,
or other disposition of the qualified films and is
DPGR.

Example 4. * * * Y is considered the taxpayer
performing the qualifying activities pursuant to para-
graph (f)(1) of this section with respect to the DVDs
during the MPGE and duplication process. * * *
* * * * *

Example 6. X produced a qualified film and
licenses the trademark of Character A, a character in
the qualified film, to Y for reproduction of the Char-
acter A image onto t-shirts. Y sells the t-shirts with
Character A's likeness to customers, and pays X a
royalty based on sales of the t-shirts. X's qualified
film only includes intangibles with respect to the
qualified film in taxable years beginning after 2007,
including the trademark of Character A. Accord-
ingly, any gross receipts derived from the license of
the trademark of Character A to Y occurring in a
taxable year beginning before 2008 are non-DPGR,
and any gross receipts derived from the license of the

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trademark of Character A occurring in a taxable year
beginning after 2007 are DPGR (assuming all other
requirements of this section are met). The royalties X
derives from Y occurring in a taxable year beginning
before 2008 are non-DPGR because the royalties are
derived from an intangible (which is not within the
definition of a qualified film under paragraph (k)(1)
of this section for taxable years beginning before
2008).

Example 7. Y, a media company, acquires all of
the intangible rights to Book A, which was written
and published in 2008, and all of the intangible rights
associated with a qualified film that is based on Book
A. The qualified film based on Book A is produced
in 2009 by Y. Y owns the copyright and trademark
to Character B, the lead character in Book A and the
qualified film based on Book A. Y licenses Character
B's copyright and trademark to Z for $50,000,000.
For 2009, without taking into account the payment
from Z, Y derives 40 percent of its gross receipts
from the qualified film based on Book A, and 60
percent from Book A. Z's payment is attributable to
both Book A and the qualified film based on Book A.
Therefore, Y must allocate Z's payment, and only
the gross receipts derived from licensing the intan-
gible rights associated with the qualified film based
on Book A, or 40 percent, are DPGR.

Example 8. Z produces a commercial in the
United States that features Z's shirts, shoes, and
other athletic equipment that all have Z's trade-
marked logo affixed (promoted products). Z's com-
mercial is a qualified film produced by Z. Z sells the
shirts, shoes, and athletic equipment to customers at
retail establishments. Z's gross receipts are derived
from the disposition of the promoted products and
are not derived from the disposition of Z's qualified
film, including any copyrights, trademarks, or other
intangibles with respect to Z's qualified film.

Example 9. X produces a commercial in the
United States that features X's services (promoted
services). X's commercial is a qualified film pro-
duced by X. The commercial includes Character A
developed to promote X's services. Gross receipts
that X derives from providing the promoted services
are not derived from the disposition of X's qualified
film, including any copyrights, trademarks, or other
intangibles with respect to X's qualified film. X also
licenses the right to reproduce Character A devel-
oped to promote X's services to Y so that Y can
produce t-shirts featuring Character A. This license
is distinct (separate and apart) from a disposition of
the promoted services and the gross receipts are
derived from the license of an intangible with respect
to X's qualified film produced by X. X's gross re-
ceipts derived from the license to reproduce Charac-
ter A are DPGR.

Example 10. Y produces a qualified film in the
United States. Y purchases DVDs and affixes the
qualified film to the DVDs. Y purchases gift baskets
and sells individual gift baskets that contain a DVD
with the affixed qualified film in its retail stores in
the normal course of Y's business. Under § 1.199-
3(k)(2)(ii)(A), Y may treat the DVD as part of the
qualified film produced by taxpayer, but Y cannot
treat the gift baskets as part of the qualified film
produced by taxpayer. The gross receipts that Y
derives from the sale of the DVD are DPGR derived
from a qualified film, but the gross receipts that Y

derives from the sale of the gift baskets are non-
DPGR.

Example 11. The facts are the same as in Exam-
ple 10 except that the individual gift baskets that Y
sells also contain boxes of popcorn and candy man-
ufactured by Y within the United States. Under
§ 1.199-3(k)(2)(ii)(A), Y cannot treat the gift bas-
kets including the boxes of popcorn and candy man-
ufactured by Y as part of the qualified film produced
by taxpayer. Gross receipts from the sale of the DVD
are still treated as DPGR derived from a qualified
film. Y must separately determine whether the gross
receipts from the tangible personal property it sells
qualify as DPGR. Thus, Y must determine whether
the gift basket, including the boxes of popcorn and
candy but excluding the qualified film, is an item for
purposes of § 1.199-3(d)(1)(i).

* * * * *

(m) * * *

(2) * * *

(i) * * * A taxpayer whose engagement
in the activity is primarily limited to ap-
proving or authorizing invoices or pay-
ments is not considered engaged in a con-
struction activity as a general contractor
or in any other capacity.

* * * * *

(5) Definition of substantial renova-
tion. The term substantial renovation
means activities the costs of which would
be required to be capitalized by the tax-
payer as an improvement under
§ 1.263(a)-3, other than an amount de-
scribed in § 1.263(a)-3(k)(1)(i) through
(iii). If not otherwise defined under
§ 1.263(a)-3, the unit of property for pur-
poses of § 1.263(a)-3 is the real property,
as defined in paragraph (m)(3) of this sec-
tion, to which the activities relate.

* * * * *

Par. 6. Section 1.199-4 is amended by
adding a sentence after the seventh sen-
tence in paragraph (b)(1) and adding para-
graph (b)(2)(iii) to read as follows:

§ 1.199-4 Costs allocable to domestic
production gross receipts.

* * * * *

(b) * * *

(1) * * * In the case of a long-term
contract accounted for under the
percentage-of-completion method de-
scribed in § 1.460-4(b) (PCM), or the
completed-contract method described in
§ 1.460-4(d) (CCM), CGS for purposes
of this section includes the allocable con-
tract costs described in § 1.460-5(b) (in
the case of a contract accounted for under

PCM) or § 1.460-5(d) (in the case of a
contract accounted for under CCM). * *

(2) * * *

(iii) Cost of goods sold associated with
activities undertaken in an earlier taxable
year-(A) In general. A taxpayer must
allocate CGS between DPGR and non-
DPGR under the rules provided in para-
graphs (b)(2)(i) and (ii) of this section,
regardless of whether certain costs in-
cluded in CGS can be associated with
activities undertaken in an earlier taxable
year (including a year prior to the effec-
tive date of section 199). A taxpayer may
not segregate CGS into component costs
and allocate those component costs be-
tween DPGR and non-DPGR.

(B) Example. The following example
illustrates an application of paragraph
(b)(2)(iii)(A) of this section:

Example. During the 2009 taxable year, X man-
ufactured and sold Product A. All of the gross re-
ceipts from sales recognized by X in 2009 were from
the sale of Product A and qualified as DPGR. Em-
ployee 1 was involved in X's production process
until he retired in 2003. In 2009, X paid $30 directly
from its general assets for Employee 1's medical
expenses pursuant to an unfunded, self-insured plan
for retired X employees. For purposes of computing
X's 2009 taxable income, X capitalized those med-
ical costs to inventory under section 263A. In 2009,
the CGS for a unit of Product A was $100 (including
the applicable portion of the $30 paid for Employee
1's medical costs that was allocated to cost of goods
sold under X's allocation method for additional sec-
tion 263A costs). X has information readily available
to specifically identify CGS allocable to DPGR and
can identify that amount without undue burden and
expense because all of X's gross receipts from sales
in 2009 are attributable to the sale of Product A and
qualify as DPGR. The inventory cost of each unit of
Product A sold in 2009, including the applicable
portion of retiree medical costs, is related to X's
gross receipts from the sale of Product A in 2009. X
may not segregate the 2009 CGS by separately allo-
cating the retiree medical costs, which are compo-
nents of CGS, to DPGR and non-DPGR. Thus, even
though the retiree medical costs can be associated
with activities undertaken in prior years, $100 of
inventory cost of each unit of Product A sold in
2009, including the applicable portion of the retiree
medical expense cost component, is allocable to
DPGR in 2009.

* * * * *

Par. 7. Section 1.199-6 is amended by
adding Example 4 to paragraph (m) to
read as follows:

§ 1.199-6 Agricultural and horticultural
cooperatives.

* * * * *

(m) * * *

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Example 4. (i) The facts are the same as Example
1 except that Cooperative X's payments of $370,000
for its members' corn qualify as per-unit retain allo-
cations paid in money within the meaning of section
1388(f) and Cooperative X reports the per-unit retain
allocations paid in money on Form 1099-PATR.

(ii) Cooperative X is a cooperative described in
paragraph (f) of this section. Accordingly, this sec-
tion applies to Cooperative X and its patrons and all
of Cooperative X's gross receipts from the sale of its
patrons' corn qualify as domestic production gross
receipts (as defined in § 1.199-3(a)). Cooperative
X's QPAI is $1,370,000. Cooperative X's section
199 deduction for its taxable year 2007 is $82,200
(.06 X $1,370,000). Because this amount is more
than 50% of Cooperative X's W-2 wages (.5 X
$130,000 = $65,000), the entire amount is not al-
lowed as a section 199 deduction, but is instead
subject to the wage limitation section 199(b), and
also remains subject to the rules of section 199(d)(3)
and this section.

Par. 8. Section 1.199-8 is amended by
revising the heading of paragraph (i) and
adding paragraphs (i)(10) and (11) to read
as follows:

§ 1.199-8 Other rules.

* * * * *

(i) Effective/applicability dates* * *
* * * * *

(10) [The text of the proposed amend-
ments to § 1.199-8(i)(10) is the same as
the text of § 1.199-8T(i)(10) published
elsewhere in this issue of the Federal
Register].

(11) Energy Improvement and Exten-
sion Act of the 2008, Tax Extenders and
Alternative Minimum Tax Relief Act of
2008, Tax Relief, Unemployment Insur-
ance Reauthorization, and Job Creation
Act of 2010, and other provisions. Section
1.199-1(f); the last sentence in § 1.199-
2(e)(1) and paragraph (f); § 1.199-3(d)(4)
Example 6 and Example 14, the last sen-
tence in paragraph (e)(1), the last sentence
in paragraph (e)(3), the third sentence in
paragraph (e)(5) Example 1, the second
sentence in paragraph (e)(5) Example 4,
paragraph (e)(5) Example 5 and Example
9, the last sentence in paragraph (f)(1),
paragraph (f)(4) Example 1, paragraph
(g)(4)(i), paragraphs (h)(2), (i)(3), (i)(5)
Example 4, and (i)(9), the second, third,
and fourth sentences in paragraph (k)(1),
paragraph (k)(2)(ii), the second sentence
in paragraph (k)(3)(i), the last sentence in
paragraph (k)(6), the second sentence
from the last sentence in paragraph
(k)(7)(i), the last sentence in paragraph
(k)(8), paragraph (k)(10), the third sentence

in paragraph (k)(11) Example 4, paragraph
(k)(11) Example 3, Example 6, Example 7,
Example 8, Example 9, Example 10, and
Example 11, the last sentence in paragraph
(m)(2)(i), paragraph (m)(5); the eighth sen-
tence in § 1.199-4(b)(1) and paragraph
(b)(2)(iii); and § 1.199-6(m) Example 4
apply to taxable years beginning on or after
the date the final regulations are published
in the Federal Register.

John M. Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal Register on August 26,
2015, 8:45 a.m., and published in the issue of the Federal
Register for August 27, 2015, 80 F.R. 51978)

### Supplemental notice of proposed rulemaking.

### Minimum Value of Eligible Employer-Sponsored Health Plans

REG-143800-14

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Supplemental notice of pro-
posed rulemaking.

SUMMARY: This document withdraws,
in part, a notice of proposed rulemaking
published on May 3, 2013, relating to the
health insurance premium tax credit en-
acted by the Affordable Care Act (includ-
ing guidance on determining whether
health coverage under an eligible
employer-sponsored plan provides mini-
mum value) and replaces the withdrawn
portion with new proposed regulations
providing guidance on determining
whether health coverage under an eligible
employer-sponsored plan provides mini-
mum value. The proposed regulations af-
fect participants in eligible employer-
sponsored health plans and employers that
sponsor these plans.

DATES: Written (including electronic)
comments and requests for a public hear-
ing must be received by November 2,
2015.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-143800-14), Room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-143800-14), Courier's
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, NW., Washington, DC, or
sent electronically via the Federal eRule-
making Portal at www.regulations.gov
(IRS REG-143800-14).

## FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Andrew S. Braden, (202)
317-4725; concerning the submission of
comments and/or requests for a public
hearing, Oluwafunmilayo Taylor, (202)
317-5179 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

### Background

This document withdraws, in part, a
notice of proposed rulemaking (REG-
125398-12), which was published in the
Federal Register on May 3, 2013 (78 FR
25909) and replaces the portion with-
drawn with new proposed regulations.
The 2013 proposed regulations added
§ 1.36B-6 of the Income Tax Regula-
tions, providing rules for determining the
minimum value of eligible employer-
sponsored plans for purposes of the pre-
mium tax credit under section 36B of the
Internal Revenue Code (Code). Notice
2014-69 (2014-48 IRB 903) advised
taxpayers that the Department of Health
and Human Service (HHS) and the Trea-
sury Department and the IRS intended to
propose regulations providing that plans
that fail to provide substantial coverage
for inpatient hospitalization or physician
services do not provide minimum value.
Accordingly, the proposed regulations un-
der § 1.36B-6(a) and (g) are withdrawn.

Beginning in 2014, under the Patient
Protection and Affordable Care Act, Pub-
lic Law 111-148 (124 Stat. 119 (2010)),
and the Health Care and Education Rec-
onciliation Act of 2010, Public Law 111-
152 (124 Stat. 1029 (2010)) (collectively,
the Affordable Care Act), eligible individ-
uals who enroll in, or whose family mem-
ber enrolls in, coverage under a qualified
health plan through an Affordable Insur-

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ance Exchange (Exchange), also known as
a Health Insurance Marketplace, may re-
ceive a premium tax credit under section
36B of the Code.

#### Premium Tax Credit

Section 36B allows a refundable pre-
mium tax credit, which subsidizes the cost
of health insurance coverage enrolled in
through an Exchange. A taxpayer may
claim the premium tax credit on the tax-
payer's tax return only if the taxpayer or a
member of the taxpayer's tax family (the
persons for whom the taxpayer claims a
personal exemption deduction on the tax-
payer's tax return, generally the taxpayer,
spouse, and dependents) has a coverage
month. An individual has a coverage
month only if the individual enrolls in a
qualified health plan through an Ex-
change, is not eligible for minimum es-
sential coverage other than coverage in
the individual market, and premiums for
the qualified health plan are paid. Section
36B(b) and (c)(2)(B). Minimum essential
coverage includes coverage under an eli-
gible employer-sponsored plan. See sec-
tion 5000A(f)(1)(B). However, for pur-
poses of the premium tax credit, an
individual is not eligible for coverage un-
der an eligible employer-sponsored plan
unless the coverage is affordable and pro-
vides minimum value or unless the indi-
vidual enrolls in the plan. Section
36B(c)(2)(C). Final regulations under sec-
tion 36B (TD 9590) were published on
May 23, 2012 (77 FR 30377).

#### Employer Shared Responsibility Provision

Section 4980H(b) imposes an assess-
able payment on applicable large employ-
ers (as defined in section 4980H(c)(2))
that offer minimum essential coverage un-
der an eligible employer-sponsored plan
that is not affordable or does not provide
minimum value for one or more full-time
employees who receive a premium tax
credit subsidy. Final regulations under
section 4980H (TD 9655) were published
on February 12, 2014 (79 FR 8544).

#### Minimum Value

Under section 36B(c)(2)(C)(ii), an eli-
gible employer-sponsored plan provides

minimum value only if the plan's share of
the total allowed costs of benefits pro-
vided under the plan is at least 60 percent.
Section 1302(d)(2)(C) of the Affordable
Care Act provides that, in determining the
percentage of the total allowed costs of
benefits provided under a group health
plan, the regulations promulgated by HHS
under section 1302(d)(2), dealing with ac-
tuarial value, apply.

HHS published final regulations under
section 1302(d)(2) on February 25, 2013
(78 FR 12834). HHS regulations at 45
CFR 156.20, which apply to the actuarial
value of plans required to provide cover-
age of all essential health benefits, define
the percentage of the total allowed costs
of benefits provided under a group health
plan as (1) the anticipated covered medi-
cal spending for essential health benefits
coverage (as defined in 45 CFR
156.110(a)) paid by a health plan for a
standard population, computed in accor-
dance with the plan's cost-sharing, di-
vided by (2) the total anticipated allowed
charges for essential health benefit cover-
age provided to a standard population.

Under section 1302(b) of the Afford-
able Care Act, only individual market and
insured small group market health plans
are required to cover the essential health
benefits. Minimum value, however, ap-
plies to all eligible employer-sponsored
plans, including self-insured plans and in-
sured plans in the large group market.
Accordingly, HHS regulations at 45 CFR
156.145(b)(2) and (c) apply the actuarial
value definition in the context of mini-
mum value by (1) defining the standard
population as the population covered by
typical self-insured group health plans,
and (2) taking into account the benefits a
plan provides that are included in any one
benchmark plan a state uses to specify the
benefits included in essential health benefits.

Notice 2014-69, advising taxpayers of
the intent to propose regulations providing
that plans that fail to provide substantial
coverage for inpatient hospitalization or
physician services do not provide minimum
value, was released on November 4, 2014.
Notice 2014-69 also advised that it was
anticipated that, for purposes of section
4980H liability, the final regulations would
not apply to certain plans (as described later
in this preamble) before the end of a plan
year beginning no later than March 1, 2015.

However, an offer of coverage under these
plans to an employee does not preclude the
employee from obtaining a premium tax
credit, if otherwise eligible.

As announced by Notice 2014-69,
HHS published proposed regulations on
November 26, 2014 (79 FR 70674,
70757), and final regulations on February
27, 2015 (80 FR 10872), amending 45
CFR 156.145(a). The HHS regulations
provide that an eligible employer-
sponsored plan provides minimum value
only if, in addition to covering at least 60
percent of the total allowed costs of ben-
efits provided under the plan, the plan
benefits include substantial coverage of
inpatient hospitalization and physician
services. Consistent with Notice 2014-
69, the HHS regulations indicate that the
changes to the minimum value regulations
do not apply before the end of the plan
year beginning no later than March 1,
2015 to a plan that fails to provide sub-
stantial coverage for inpatient hospitaliza-
tion services or for physician services (or
both), provided that the employer had en-
tered into a binding written commitment
to adopt, or had begun enrolling employ-
ees in, the plan before November 4, 2014.
For this purpose, the plan year is the plan
year in effect under the terms of the plan
on November 3, 2014. Also for this pur-
pose, a binding written commitment exists
when an employer is contractually re-
quired to pay for an arrangement, and a
plan begins enrolling employees when it
begins accepting employee elections to
participate in the plan. See 80 FR 10828.

### Explanation of Provisions

The preamble to the HHS regulations
acknowledges that self-insured and large
group market group health plans are not
required to cover the essential health ben-
efits, but notes that a health plan that does
not provide substantial coverage for inpa-
tient hospitalization and physician ser-
vices does not meet a universally accepted
minimum standard of value expected from
and inherent in any arrangement that can
reasonably be called a health plan and that
is intended to provide the primary health
coverage for employees. The preamble
concludes that it is evident in the structure
of and policy underlying the Affordable
Care Act that the minimum value standard
may be interpreted to require that

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employer-sponsored plans cover critical
benefits. See 80 FR 10827-10828.

As the preamble notes, allowing plans
that fail to provide substantial coverage of
inpatient hospital or physician services to
be treated as providing minimum value
would adversely affect employees (partic-
ularly those with significant health risks)
who may find this coverage insufficient,
by denying them access to a premium tax
credit for individual coverage purchased
through an Exchange, while at the same
time avoiding the employer shared re-
sponsibility payment under section
4980H. Plans that omit critical benefits
used disproportionately by individuals in
poor health would likely enroll far fewer
of these individuals, effectively driving
down employer costs at the expense of
those who, because of their individual
health status, are discouraged from enroll-
ing. See 80 FR 10827-10829.

Accordingly, these proposed regula-
tions incorporate the substance of the rule
in the HHS regulations. They provide that
an eligible employer-sponsored plan pro-
vides minimum value only if the plan's
share of the total allowed costs of benefits
provided to an employee is at least 60
percent and the plan provides substantial
coverage of inpatient hospital and physi-
cian services. Comments are requested on
rules for determining whether a plan pro-
vides "substantial coverage" of inpatient
hospital and physician services.

### Effective/Applicability Date and Transition Relief

These regulations are proposed to ap-
ply for plan years beginning after Novem-
ber 3, 2014. However, for purposes of
section 4980H(b), the changes to the min-
imum value regulations (in § 1.36B-
6(a)(2) of these proposed regulations) do
not apply before the end of the plan year
beginning no later than March 1, 2015 to
a plan that fails to provide substantial cov-
erage for in-patient hospitalization ser-
vices or for physician services (or both),
provided that the employer had entered
into a binding written commitment to
adopt the noncompliant plan terms, or had
begun enrolling employees in the plan
with noncompliant plan terms, before No-
vember 4, 2014. For this purpose, the plan
year is the plan year in effect under the
terms of the plan on November 3, 2014.

Also for this purpose, a binding written
commitment exists when an employer is
contractually required to pay for an ar-
rangement, and a plan begins enrolling
employees when it begins accepting em-
ployee elections to participate in the plan.
The relief provided in this section does not
apply to an applicable large employer that
would have been liable for a payment under
section 4980H without regard to § 1.36B-
6(a)(2) of these proposed regulations.

An offer of coverage under an eligible
employer-sponsored plan that does not com-
ply with § 1.36B-6(a)(2) of these proposed
regulations does not preclude an employee
from obtaining a premium tax credit under
section 36B, if otherwise eligible.

### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations and, because the
regulations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f) of the Code, this notice of pro-
posed rulemaking has been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.

#### Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed in
this preamble under the "Addresses" head-
ing. The Treasury Department and the IRS
request comments on all aspects of the pro-
posed rules. All comments will be available
at www.regulations.gov or upon request. A
public hearing will be scheduled if re-
quested in writing by any person who timely
submits written comments. If a public hear-
ing is scheduled, notice of the date, time,
and place for the hearing will be published
in the Federal Register.

### Drafting Information

The principal author of these regula-
tions is Andrew Braden of the Office of
the Associate Chief Counsel (Income Tax
and Accounting). However, other person-
nel from the Treasury Department and the
IRS participated in their development.
* * * * *

### Proposed Amendments

Accordingly, 26 CFR part 1 as pro-
posed to be amended on May 3, 2013 (78
FR 25909), is proposed to be further
amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.36B-6, as proposed
to be added May 3, 2013 (78 FR 25909),
is amended by revising paragraphs (a) and
(g) to read as follows:

§ 1.36B-6 Minimum value.

(a) In general. An eligible employer-
sponsored plan provides minimum value
(MV) only if-

(1) The plan's share of the total al-
lowed costs of benefits provided to an
employee (the MV percentage) is at least
60 percent; and

(2) The plan provides substantial cov-
erage of inpatient hospital services and
physician services.

* * * * *

(g) Effective/applicability date-(1) In
general. Except as provided in paragraph
(g)(2) of this section, this section applies for
taxable years ending after December 31, 2013.

(2) Exception. Paragraph (a)(2) of this
section applies for plan years beginning
after November 3, 2014.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal Register on August 31,
2015, 8:45 a.m., and published in the issue of the Federal
Register for September 1, 2015, 80 F.R. 52678)

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## Notice of proposed rulemaking by cross- reference to temporary regulations

### Administration of Multiemployer Plan Participant Vote on an Approved Suspension of Benefits Under MPRA

#### REG-123640-15

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking
by cross-reference to temporary
regulations.

SUMMARY: Temporary regulations re-
lating to the administration of a multiem-
ployer plan participant vote on an ap-
proved suspension of benefits under the
Multiemployer Pension Reform Act of
2014 (MPRA) are being issued in the
Rules and Regulations section of this is-
sue of the Internal Revenue Bulletin.
The text of those regulations also serves
as the text of these proposed regulations.

DATES: Comments and requests for a
public hearing must be received by No-
vember 2, 2015.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-123640-15), room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington
D.C. 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to:
CC:PA:LPD:PR (REG-123640-15),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Wash-
ington, D.C., or sent electronically via the
Federal eRulemaking Portal at http://www.
regulations.gov (IRS REG-123640-15).

FOR FURTHER INFORMATION

CONTACT: Concerning the regulations,
the Department of the Treasury MPRA
guidance information line at (202) 622-
1559; concerning submission of com-
ments, and the previously-scheduled hear-
ing, Regina Johnson at (202) 317-6901
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

##### Paperwork Reduction Act

The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) and approved under
OMB control number 1545-2260.

The collection of information in the
paragraphs of these proposed regulations
that cross-reference the temporary regula-
tions that are being published elsewhere in
this issue of the Federal Register is re-
quired for sponsor of a multiemployer de-
fined benefit plan in critical and declining
status to satisfy the criteria with respect to
the required vote of plan participants and
other eligible voters following approval of
the plan sponsor's application for a sus-
pension of benefits.

Comments on the collection of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, SE:
W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by No-
vember 2, 2015.

Comments are specifically requested
concerning:

Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;

The accuracy of the estimated burden
associated with the proposed collection of
information;

How the quality, utility, and clarity of
the information to be collected may be
enhanced;

How the burden of complying with the
proposed collections of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and

Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide information.

For the paragraphs of the proposed reg-
ulations that cross-reference the tempo-
rary regulations:

Estimated total average annual report-
ing or recordkeeping burden: 56 hours.

Estimated average annual burden per
recordkeeper: 2 hours.

Estimated number of recordkeepers: 28.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less it displays a valid control number
assigned by the Office of Management
and Budget.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

## Background and Explanation of Provisions

Section 432(e)(9) of the Internal Rev-
enue Code (Code), as amended by the
Multiemployer Pension Reform Act of
2014 (MPRA), permits plan sponsors of
certain multiemployer plans to reduce the
plan benefits payable to participants and
beneficiaries (referred to as a “suspension
of benefits") if specified conditions are
satisfied. Under section 432(e)(9)(H), no
suspension of benefits may take effect
prior to a vote of the participants of the
plan with respect to the suspension. Sec-
tion 432(e)(9)(H) requires that the vote be
administered by the Secretary of the Trea-
sury, in consultation with the Pension
Benefit Guaranty Corporation and the
Secretary of Labor, within 30 days after
approval of a suspension application.

On June 19, 2015, the Treasury De-
partment and the Internal Revenue Ser-
vice published temporary regulations (TD
9723) under section 432(e)(9) in the Fed-
eral Register (80 FR 35207) (June 2015
temporary regulations). The June 2015
temporary regulations provide general
guidance regarding section 432(e)(9) and
outline the requirements for a plan
sponsor of a plan that is in critical and
declining status to apply for a suspension
of benefits and for the Treasury Depart-
ment to begin processing such an applica-
tion. A notice of proposed rulemaking
cross-referencing the June 2015 temporary

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regulations (REG-102648-15) was also
published in the same issue of the Federal
Register (80 FR 35262) (June 2015 pro-
posed regulations). Both the June 2015
temporary and proposed regulations re-
flect consideration of comments received
in response to the Request for Information
on Suspensions of Benefits under the Mul-
tiemployer Pension Reform Act of 2014
published in the Federal Register on Feb-
ruary 18, 2015 (80 FR 8578).

A public hearing concerning the June
2015 proposed regulations is scheduled
for September 10, 2015, beginning at 9:00
a.m. in the Amphitheater of the Ronald
Reagan Building and International Trade
Center, 1300 Pennsylvania Ave., NW,
Washington, D.C. Persons who wish to
present oral comments at that hearing re-
garding the June 2015 proposed regula-
tions were required to submit written or
electronic comments, including an outline
of topics to be discussed, by August 18,
2015. Anyone who has submitted a timely
request to speak at the September 10,
2015, hearing is also permitted to discuss
these proposed regulations at that hearing
(without submitting a separate request to
discuss these proposed regulations at that
hearing).

The June 2015 temporary and pro-
posed regulations set forth many of the
rules relating to the participant vote under
section 432(e)(9)(H). However, neither
the June 2015 temporary regulations nor
the June 2015 proposed regulations pro-
vide detailed guidance on how the Trea-
sury Department would administer the
vote.

The temporary regulations in the Rules
and Regulations section of this issue of
the Federal Register (August 2015 tem-
porary regulations) amend the Income
Tax Regulations (26 CFR part 1) relating
to the previously reserved paragraph in
the June 2015 temporary and proposed
regulations regarding the participant vote
required under section 432(e)(9)(H).

The August 2015 temporary regula-
tions specify that a participant vote re-
quires the completion of three steps. First,
a package of ballot materials is distributed
to eligible voters. Second, the eligible vot-
ers cast their votes and the votes are col-
lected and tabulated. Third, the Treasury
Department (in consultation with the
PBGC and Labor Department) determines

whether a majority of the eligible voters
has voted to reject the proposed suspen-
sion. The August 2015 temporary regula-
tions also provide guidance regarding the
statement in opposition to the proposed
suspension and allow for the publication
of a model ballot. The text of the August
2015 temporary regulations also serves as
the text of these proposed regulations.

## Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations.

The Regulatory Flexibility Act (RFA)
(5 U.S.C. chapter 6) requires an agency to
consider whether the rules it proposes will
have a significant economic impact on a
substantial number of small entities. In
this case, the IRS and the Treasury De-
partment believe that the regulations
likely would not have a “significant eco-
nomic impact on a substantial number of
small entities." 5 U.S.C. 605. This certifi-
cation is based on the fact that the number
of small entities affected by this rule is
unlikely to be substantial because it is
unlikely that a substantial number of small
multiemployer plans in critical and declin-
ing status will suspend benefits under sec-
tion 432(e)(9). Pursuant to section 7805(f)
of the Code, this notice of proposed rule-
making has been submitted to the Chief
Counsel of Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.

### Comments and Request for a Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the Treasury Depart-
ment and the IRS as prescribed in this
preamble under the "Addresses" heading.
The Treasury Department and the IRS re-
quest comments on all aspects of the pro-
posed rules. All comments will be avail-
able for public inspection and copying at
www.regulations.gov or upon request.

Please Note: All comments will be made
available to the public. Do not include any
personally identifiable information (such
as Social Security number, name, address,
or other contact information) or confiden-
tial business information that you do not
want publicly disclosed. All comments
may be posted on the Internet and can be
retrieved by most Internet search engines.

If requested in writing by any person
who timely submits written comments on
these proposed regulations, a public hear-
ing will be scheduled on the contents of
this document. Comments and requests
for a public hearing must be received by
November 2, 2015. If a public hearing is
scheduled, notice of the date, time, and
place for the public hearing will be pub-
lished in the Federal Register. Please see
the "Background and Explanation of Pro-
visions" heading for information regard-
ing a public hearing scheduled for Sep-
tember 10, 2015, concerning the June
2015 proposed regulations regarding the
Suspension of Benefits under the Mul-
tiemployer Pension Reform Act of 2014,
during which individuals who have al-
ready requested to speak regarding those
regulations may also address the sub-
stance of these proposed regulations.

## Contact Information

For general questions regarding these
regulations, please contact the Depart-
ment of the Treasury MPRA guidance in-
formation line at (202) 622-1559 (not a
toll-free number). For information regard-
ing a specific application for a suspension
of benefits, please contact the Department
of the Treasury at (202) 622-1534 (not a
toll-free number).

## Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

## PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.432(e)(9)-1(h) is
amended by:

1\. Revising paragraph (h)(2).

2\. Adding paragraphs (h)(3)(iv) and
(h)(3)(v).

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The revisions and additions read as fol- lows:

1T(h)(2) published elsewhere in this issue of the Internal Revenue Bulletin.] * * * * *

1(h)(3)(v) is the same as § 1.432(e)(9)- 1T(h)(3)(v) published elsewhere in this issue of the Internal Revenue Bulletin.]

§ 1.432(e)(9)-1 Benefit suspensions for

(3) * * *

* * * * *

multiemployer plans in critical and

(iv) Statement in opposition to the pro-

declining status.

posed suspension. [The text of the pro- posed amendments to § 1.432(e)(9)- 1(h)(3)(iv) is the same as § 1.432(e)(9)- 1T(h)(3)(iv) published elsewhere in this

John M. Dalrymple Deputy Commissioner for Services and Enforcement.

* * * * * (h) * * *

(2) Participant vote. [The text of the

issue of the Internal Revenue Bulletin.]

(Filed by the Office of the Federal Register on August 31,

proposed amendments to § 1.432(e)(9)-

(v) Model ballot. [The text of the pro-

2015, 11:15 a.m., and published in the issue of the Federal Register for September 2, 2015, 80 F.R. 53068)

1(h)(2) is the same as § 1.432(e)(9)-

posed amendments to § 1.432(e)(9)-

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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.

BK-Bank.

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

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.

LP-Limited Partner.

LR-Lessor.

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.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

TT-Trustee.

U.S.C .- United States Code.

DE-Donee.

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.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

D-Decedent.

DC-Dummy Corporation.

X-Corporation.

Y-Corporation.

Z-Corporation.

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### Numerical Finding List1

Bulletins 2015-27 through 2015-37

#### Announcements:

2015-17, 2015-28 I.R.B. 67
2015-18, 2015-33 I.R.B. 198

2015-19, 2015-32 I.R.B. 157
2015-21, 2015-34 I.R.B. 220

2015-22, 2015-35 I.R.B. 288
2015-23, 2015-36 I.R.B. 311
2015-24, 2015-36 I.R.B. 313

Treasury Decisions:

9723, 2015-31 I.R.B. 84
9726, 2015-31 I.R.B. 98
9727, 2015-32 I.R.B. 154
9728, 2015-33 I.R.B. 169
9729, 2015-35 I.R.B. 221
9730, 2015-35 I.R.B. 223
9731, 2015-37 I.R.B. 314
9735, 2015-37 I.R.B. 316

#### Notices:

2015-43, 2015-29 I.R.B. 73
2015-46, 2015-28 I.R.B. 64

2015-47, 2015-30 I.R.B. 76
2015-48, 2015-30 I.R.B. 77
2015-49, 2015-30 I.R.B. 79
2015-50, 2015-30 I.R.B. 81
2015-51, 2015-31 I.R.B. 133
2015-52, 2015-35 I.R.B. 227
2015-53, 2015-33 I.R.B. 190
2015-54, 2015-34 I.R.B. 210
2015-55, 2015-34 I.R.B. 217
2015-56, 2015-35 I.R.B. 235
2015-57, 2015-36 I.R.B. 294
2015-58, 2015-37 I.R.B. 322

### Proposed Regulations:

REG-136459-09, 2015-37 I.R.B. 332
REG-109370-10, 2015-33 I.R.B. 198
REG-103033-11, 2015-37 I.R.B. 325
REG-109813-11, 2015-37 I.R.B. 330
REG-115452-14, 2015-32 I.R.B. 158
REG-132075-14, 2015-35 I.R.B. 288
REG-138526-14, 2015-28 I.R.B. 67
REG-143800-14, 2015-37 I.R.B. 347
REG-102648-15, 2015-31 I.R.B. 134
REG-102837-15, 2015-27 I.R.B. 43
REG-123640-15, 2015-37 I.R.B. 350

### Revenue Procedures:

2015-34, 2015-27 I.R.B. 4

2015-36, 2015-27 I.R.B. 20

2015-38, 2015-36 I.R.B. 295

2015-39, 2015-33 I.R.B. 195

2015-40, 2015-35 I.R.B. 236

2015-41, 2015-35 I.R.B. 263

2015-42, 2015-36 I.R.B. 310

### Revenue Rulings:

2015-15, 2015-27 I.R.B. 1
2015-16, 2015-31 I.R.B. 130
2015-18, 2015-34 I.R.B. 209

2015-19, 2015-36 I.R.B. 291

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-01 through 2015-26 is in Internal Revenue Bulletin
2015-26, dated June 29, 2015.

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### Finding List of Current Actions on Previously Published Items1

Bulletins 2015-27 through 2015-37

Notices:

2014-4
Modified by
Notice 2015-51, 2015-31 I.R.B. 133

#### Revenue Procedures:

1992-75
Clarified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2003-40
Modified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2006-9
Modified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2006-9
Superseded by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2006-54
Modified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2006-54
Superseded by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2008-31
Modified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2008-31
Superseded by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2011-49
Modified by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

2011-49
Superseded by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

2015-14
Modified by
Rev. Proc. 2015-39, 2015-33 I.R.B. 195

2015-40
Amplified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2015-41
Amplified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

"A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-01 through 2015-26 is in Internal Revenue Bulletin
2015-26, dated June 29, 2015.

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Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

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