Internal Revenue Bulletin 2008-11 (PDF rendition): IRS Announcements

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Bulletin No. 200
8-11
March 17, 2008
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2008–14, page 578.
Fringe benefits aircraft valuation formula.The Standard
Industry Fare Level (SIFL) cents-per-mile rates and terminal
charge in effect for the first half of 2008 are set forth for
purposes of determining the value of noncommercial flights
on employer-provided aircraft under section 1.61–21(g) of the
regulations.
Rev. Rul. 2008–16, page 585.
S corporations; charitable contributions.This ruling pro-
vides guidance for S corporations that made charitable contri-
butions of appreciated property during a taxable year begin-
ning after December 31, 2005 and before January 1, 2008.
The ruling provides that the amount of the charitable deduction
the shareholder may claim may not exceed the sum of (i) the
shareholder’spro ratashare of the fair market value of the con-
tributed property over the shareholder’spro ratashare of the
contributed property’s adjusted tax basis, and (ii) the amount
of the Code section 1366(d) loss limitation amount that is al-
locable to the contributed property’s basis under regulations
section 1.1366–2(a)(4).
T.D. 9376, page 587.
Final regulations under section 1502 of the Code provide guid-
ance regarding the manner in which the items (including items
described in section 381(c) but excluding intercompany items
under regulations section 1.1502–13) of a liquidating corpora-
tion are succeeded to and taken into account in cases in which
multiple members acquire the assets of the liquidating corpo-
ration in a complete liquidation to which section 332 applies.
The regulations affect corporations filing consolidated returns.
T.D. 9377, page 578.
Final regulations under section 338 of the Code relate to the
determination of the adjusted basis of amortizable section 197
intangible assets in the hands of an insurance company result-
ing from certain reinsurance transactions, increases in an in-
surance company’s reserves after a deemed sale, and a car-
ryover to the new (target) insurance company of an election
to use the old (target) insurance company’s historical payment
pattern to discount unpaid losses. The final regulations apply
to insurance companies.
Notice 2008–31, page 592.
This notice updates procedures for issuers of tax-exempt
bonds and tax credit bonds to submit requests for voluntary
closing agreements to resolve violations of the Code. Notice
2001–60 modified and superseded.
Notice 2008–32, page 593.
This notice provides interim guidance on the treatment under
section 67 of the Code of investment advisory costs and other
costs subject to the 2-percent floor under section 67(a) that are
bundled as part of one commission or fee paid to the trustee
or executor and are incurred by a trust other than a grantor
trust or an estate.
(Continued on the next page)
Finding Lists begin on page ii.

EMPLOYEE PLANS
REG–104946–07, page 596.
Proposed regulations provide guidance under sections
411(a)(13) and 411(b)(5) of the Code, which were added
by the Pension Protection Act of 2006. Section 411(a)(13)
provides rules relating to vesting and payment of benefits that
must be satisfied in order for hybrid defined benefit plans to
be tax-qualified. Section 411(b)(5) provides age discrimination
rules for tax-qualified defined benefit plans, including hybrid
defined benefit plans.
REG–136701–07, page 616.
Proposed regulations under section 401 of the Code provide
guidance relating to diversification requirements for certain de-
fined contribution plans and to publicly traded employer secu-
rities.
EXEMPT ORGANIZATIONS
Announcement 2008–20, page 625.
The IRS has revoked its determination that Drive for Youth 2020
of Missouri City, TX; Rise and Shine, Inc., of Medical Lake, WA;
Bluegrass Gymnastic Boosters, Inc., of Lexington, KY; Debt-
Tech of Columbia, MD; Nexum Credit Counseling, Inc., of Vero
Beach, FL; New Home Gallery, Inc., of Louisville, KY; Alban
Community Services Foundation of Lititz, PA; Union Oaks, Inc.,
of Omaha, NE; Shiloh Ministries of Hagerstown, Inc., of Hager-
stown, MD; Credicure, Inc., of Martinsburg, WV; Newton Fam-
ily Foundation of West Jordan, UT; Alliance to Rebuild LA of
Santa Monica, CA; The Down Payment Assistance Group of San
Diego, CA; Phillip J. Kronzer Foundation for Religious Research
of Los Gatos, CA; Credit Success Company of Jacksonville, FL;
Mario C. and Elva G. Rapanotti Charitable Supporting Organ-
ization of San Antonio, TX; and Anthony & Megan Wolfenden
Charitable Supporting Organization of Santa Clara, CA, qualify
as organizations described in sections 501(c)(3) and 170(c)(2)
of the Code.
ADMINISTRATIVE
Rev. Proc. 2008–19, page 594.
Qualified mortgage bonds; mortgage credit certificates;
national median gross income.Guidance is provided con-
cerning the use of the national and area median gross income
figures by issuers of qualified mortgage bonds and mortgage
credit certificates in determining the housing cost/income ratio
described in section 143(f) of the Code. Rev. Proc. 2007–31
obsoleted in part.
Announcement 2008–19, page 624.
This announcement contains changes to Publication 1187 for
filing procedures for Form 1042–S,Foreign Person’s U.S.
Source Income Subject to Withholding,filed electronically
or magnetically. These changes are effective immediately.
Announcement 2008–6 superseded.
March 17, 20082008–11 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping them
understand an
d meet their tax responsibilities and by applying
the tax law with
integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2008–11 I.R.B.March 17, 2008

March 17, 20082008–11 I.R.B.
Place missing child here.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 25.—Interest on
Certain Home Mortgages
A revenue procedure provides guidance with re-
spect to the United States and area median gross in-
come figures that are to be used by issuers of qualified
mortgage bonds, as defined in § 143(a) of the Internal
Revenue Code, and issuers of mortgage credit certifi-
cates, as defined in § 25(c), in computing the housing
cost/income ratio described in § 143(f)(5). See Rev.
Proc. 2008-19, page 594.
Section 61.—Gross Income
Defined
26 CFR 1.61–21: Taxation of fringe benefits.
Fringe benefits aircraft valuation for-
mula.The Standard Industry Fare Level
(SIFL) cents-per-mile rates and terminal
charge in effect for the first half of 2008
are set forth for purposes of determining
the value of noncommercial flights on
employer-provided aircraft under section
1.61–21(g) of the regulations.
Rev. Rul. 2008–14
For purposes of the taxation of fringe
benefits under section 61 of the Inter-
nal Revenue Code, section 1.61–21(g) of
the Income Tax Regulations provides a
rule for valuing noncommercial flights
on employer-provided aircraft. Section
1.61–21(g)(5) provides an aircraft valua-
tion formula to determine the value of such
flights. The value of a flight is determined
under the base aircraft valuation formula
(also known as the Standard Industry Fare
Level formula or SIFL) by multiplying
the SIFL cents-per-mile rates applicable
for the period during which the flight was
taken by the appropriate aircraft multiple
provided in section 1.61–21(g)(7) and then
adding the applicable terminal charge. The
SIFL cents-per-mile rates in the formula
and the terminal charge are calculated by
the Department of Transportation and are
reviewed semi-annually.
The following chart sets forth the termi-
nal charge and SIFL mileage rates:
Period During Which
the Flight Is Taken
Terminal
Charge
SIFL Mileage
Rates
1/1/08 - 6/30/08
$39.86
Up to 500 miles
= $.2180 per mile
501-1500 miles
= $.1662 per mile
Over 1500 miles
= $.1598 per mile
DRAFTING INFORMATION
The principal author of this revenue
ruling is Kathleen Edmondson of the
Office of Division Counsel/Associate
Chief Counsel (Tax Exempt/Govern-
ment Entities). For further information
regarding this revenue ruling, contact
Ms. Edmondson at (202) 622–0047 (not a
toll-free call).
Section 103.—Interest on
State and Local Bonds
A revenue procedure provides guidance with re-
spect to the United States and area median gross in-
come figures that are to be used by issuers of qualified
mortgage bonds, as defined in § 143(a) of the Internal
Revenue Code, and issuers of mortgage credit certifi-
cates, as defined in § 25(c), in computing the housing
cost/income ratio described in § 143(f)(5). See Rev.
Proc. 2008-19, page 594.
Section 143.—Mortgage
Revenue Bonds: Qualified
Mortgage Bond and
Qualified Veterans’
Mortgage Bond
A revenue procedure provides guidance with re-
spect to the United States and area median gross in-
come figures that are to be used by issuers of qualified
mortgage bonds, as defined in § 143(a) of the Internal
Revenue Code, and issuers of mortgage credit certifi-
cates, as defined in § 25(c), in computing the housing
cost/income ratio described in § 143(f)(5). See Rev.
Proc. 2008-19, page 594.
Section 338.—Certain
Stock Purchases Treated
as Asset Acquisitions
26 CFR 1.338–11: Effect on section 338 election on
insurance company targets.
T.D. 9377
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Application of Section 338 to
Insurance Companies
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations under section 197 of the
2008–11 I.R.B.578March 17, 2008

Internal Revenue Code (Code) that apply
to a section 197 intangible resulting from
an assumption reinsurance transaction, and
under section 338 that apply to reserve in-
creases after a deemed asset sale. The final
regulations also provide guidance with re-
spect to existing section 846(e) elections to
use historical loss payment patterns. The
final regulations apply to insurance com-
panies.
DATES:Effective Date:These regulations
are effective on January 23, 2008.
Applicability Date:Fordateofap-
plicability of these regulations, see
§1.197–2(g)(5)(ii)(E), §1.338–11(d)(7)
and §1.846–4(b).
FOR FURTHER INFORMATION
CONTACT: William T. Sullivan (202)
622–7052 or Donald J. Drees, Jr. (202)
622–3970 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in these
final regulations has been reviewed and
approved by the Office of Manage-
ment and Budget in accordance with
the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–1990.
The collection of information in these
final regulations is in §1.338–11(e)(2).
This information is required by the IRS
to allow an insurance company to choose
to cease using its historical loss payment
pattern, and instead use industry-wide fac-
tors, to discount unpaid losses.
An agency may not conduct or sponsor,
and the person is not required to respond
to a collection of information unless the
collection of information displays a valid
control number.
Books or records relating to a collection
of information must be retained as long as
their contents may become material in the
administration of any internal revenue law.
Generally, tax returns and tax information
are confidential, as required by 26 U.S.C.
6103.
Background and Explanation of
Provisions:
On March 8, 2002, the IRS and the
Treasury Department published a notice
of proposed rulemaking REG–118861–00,
2002–1 C.B. 651, in theFederal Register
(67 FR 10640) (2002–1 Cumulative Bul-
letin (C.B.) 651) (the 2002 proposed regu-
lations) that set forth rules applying to tax-
able acquisitions and dispositions of insur-
ance businesses, including those that are
deemed to occur when an election under
section 338 of the Code is made. (See
§601.601(d)(2)(ii)(b)). The C.B. is made
available by the Superintendent of Docu-
ments, U.S. Government Printing Office,
Washington, DC 20402. Written com-
ments were received in response to the
2002 proposed regulations, and a public
hearing was held. After consideration of
all the comments, the IRS and the Trea-
sury Department published final regula-
tions in theFederal Registeron April
10, 2006, (T.D. 9257, 2006–1 C.B. 821)
(71 FR 17990), as corrected in theFederal
Register(T.D. 9257) (71 FR 26826) to
remove an error that might have proven to
be misleading.
T.D. 9257 also contains temporary
regulations under sections 197, 338,
and 846, which serve as the basis for a
cross-reference notice of proposed rule-
making published in theFederal Register
(REG–146384–05, 2006–1 C.B. 843) (71
FR 18053) with respect to issues that
were the subject of comments on the
2002 proposed regulations. Specifically,
§1.197–2T(g)(5)(ii) provides guidance
with regard to the interplay between sec-
tion 197(f)(5) (concerning the treatment
of certain reinsurance transactions) and
section 848 (requiringthe capitalization
of certain policy acquisition expenses);
§1.338–11T(d) addresses reserve increases
after a deemed asset sale that results from
a section 338 election; and §1.338–11T(e)
provides guidance on the effect of a section
338 election on an insurance company’s
election under section 846(e) to use its
historical loss payment pattern to discount
certain unpaid losses.
Although the 2002 proposed regula-
tions generated a number of comments
which are discussed in detail in the pream-
ble to T.D. 9257, no new comments were
received with respect to the temporary
regulations that served as a cross-refer-
ence notice of proposed rulemaking in
2006. Accordingly, this Treasury decision
adopts the proposed regulations without
substantive change and removes the cor-
responding temporary regulations. This
Treasury decision also revises cross-ref-
erences where appropriate to reflect the
removal of temporary regulations and
their replacement with final regulations
and corrects two obvious errors, one a
mathematical error in the last sentence
of §1.381(c)(22)–1(b)(7)(v), Example 3,
the other an error in the captioning of
§1.338(i)–1(c)(2)(ii)(B).
Special Anal
yses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It is hereby certified that
the collection of information requirement
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certification
is based on the fact that these regulations
do not have a substantial economic im-
pact because they merely provide guidance
about the operation of the tax law in the
context of acquisitions of insurance com-
panies and businesses. Moreover, they are
expected to apply predominantly to trans-
actions involving larger businesses. In ad-
dition, the collection of information re-
quirement merely requires a taxpayer to
prepare a written representation that con-
tains minimal information relating to the
making of an election. Therefore, a Regu-
latory Flexibility Analysis under the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6) is not required. Under section 7805(f)
of the Code, the notice of proposed rule-
making preceding this regulation was sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of the final regu-
lations is William T. Sullivan, Office of
Chief Counsel (Financial Institutions and
Products). However, other personnel from
the IRS and the Treasury Department par-
ticipated in the development of these reg-
ulations.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
March 17, 20085792008–11 I.R.B.

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entries
for §§1.197–2T, 1.338–1T, and 1.338–11T
to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.197–0 is amended by:
1. Revising the introductory text and
the entries for §1.197–2(g)(5)(ii).
2. Removing the entries for §1.197–2T.
The revisions read as follows:
§1.197–0 Table of contents.
This section lists the headings that ap-
pear in §1.197–2.
§1.197–2 Amortization of goodwill and
certain other intangibles.
*****
(g) * * *
(5) * * *
(ii) Determination of adjusted basis of
amortizable section 197 intangible result-
ing from an assumption reinsurance trans-
action.
(A) In general.
(B) Amount paid or incurred by ac-
quirer (reinsurer) under the assumption
reinsurance transaction.
(C) Amount required to be capitalized
under section 848 in connection with the
transaction.
(1) In general.
(2) Required capitalization amount.
(3) General deductions allocable to the
assumption reinsurance transaction.
(4) Treatment of a capitalization short-
fall allocable to the reinsurance agreement.
(i) In general.
(ii) Treatment of additional capitalized
amounts as the result of an election under
§1.848–2(g)(8).
(5) Cross references and special rules.
(D) Examples.
(E) Effective/applicability date.
*****
Par. 3. Section 1.197–2(g)(5)(ii) is re-
vised to read as follows:
§1.197–2 Amortization of goodwill and
certain other intangibles.
*****
(g) * * *
(5) * * *
(ii)Determination of adjusted basis of
amortizable section 197 intangible result-
ing from an assumption reinsurance trans-
action—(A)In general. Section 197(f)(5)
determines the basis of an amortizable sec-
tion 197 intangible for insurance or an-
nuitycontractsacquiredinanassumption
reinsurance transaction. The basis of such
intangible is the excess, if any, of—
(1) The amount paid or incurred by the
acquirer (reinsurer) under the assumption
reinsurance transaction; over
(2) The amount, if any, required to be
capitalized under section 848 in connec-
tion with such transaction.
(B)Amount paid or incurred by ac-
quirer (reinsurer) under the assumption
reinsurance transaction. The amount paid
or incurred by the acquirer (reinsurer) un-
der the assumption reinsurance transaction
is—
(1) In a deemed asset sale resulting
from an election under section 338, the
amount of the adjusted grossed-up basis
(AGUB) allocable thereto (see §§1.338–6
and 1.338–11(b)(2));
(2) In an applicable asset acquisition
within the meaning of section 1060, the
amount of the consideration allocable
thereto (see §§1.338–6, 1.338–11(b)(2),
and 1.1060–1(c)(5)); and
(3) In any other transaction, the ex-
cess of the increase in the reinsurer’s tax
reserves resulting from the transaction
(computed in accordance with sections
807, 832(b)(4)(B), and 846) over the value
of the net assets received from the ceding
company in the transaction.
(C)Amount required to be capitalized
under section 848 in connection with the
transaction—(1)In general. The amount
required to be capitalized under section
848 for specified insurance contracts (as
definedinsection848(e))acquiredinan
assumption reinsurance transaction is the
lesser of—
(i) The reinsurer’s required capitaliza-
tion amount for the assumption reinsur-
ance transaction; or
(ii) The reinsurer’s general deductions
(as defined in section848(c)(2)) allocable
to the transaction.
(2)Required capitalization amount.
The reinsurer determines the required
capitalization amount for an assumption
reinsurance transaction by multiplying
the net positive or net negative considera-
tion for the transaction by the applicable
percentage set forth in section 848(c)(1)
for the category of specified insurance
contracts acquired in the transaction. See
§1.848–2(g)(5). If more than one category
of specified insurance contracts is acquired
in an assumption reinsurance transaction,
the required capitalization amount for each
category is determined as if the transfer of
the contracts in that category were made
under a separate assumption reinsurance
transaction. See §1.848–2(f)(7).
(3)General deductions allocable to the
assumption reinsurance transaction.The
reinsurer determines the general deduc-
tions allocable to the assumption reinsur-
ance transaction in accordance with the
procedure set forth in §1.848–2(g)(6). Ac-
cordingly, the reinsurer must allocate its
general deductions to the amount required
under section 848(c)(1) on specified insur-
ance contracts that the reinsurer has issued
directly before determining the general
deductions allocable to the assumption
reinsurance transaction. For purposes of
allocating its general deductions under
§1.848–2(g)(6), the reinsurer includes pre-
miums received on the acquired specified
insurance contracts after the assumption
reinsurance transaction in determining the
amount required under section 848(c)(1)
on specified insurance contracts that the
reinsurer has issued directly. If the rein-
surer has entered into multiple reinsur-
ance agreements during the taxable year,
the reinsurer determines the general de-
ductions allocable to each reinsurance
agreement (including the assumption rein-
surance transaction) by allocating the
general deductions allocable to reinsur-
ance agreements under §1.848–2(g)(6) to
each reinsurance agreement with a posi-
tive required capitalization amount.
(4)Treatment of a capitalization short-
fall allocable to the reinsurance agree-
ment—(i)In general. The reinsurer deter-
mines any capitalization shortfall allocable
to the assumption reinsurance transaction
in the manner provided in §§1.848–2(g)(4)
and 1.848–2(g)(7). If the reinsurer has
a capitalization shortfall allocable to the
assumption reinsurance transaction, the
ceding company must reduce the net neg-
ative consideration (as determined under
§1.848–2(f)(2)) for the transaction by
the amount described in §1.848–2(g)(3)
unless the parties make the election pro-
vided in §1.848–2(g)(8) to determine the
amounts capitalized under section 848 in
2008–11 I.R.B.580March 17, 2008

connection with the transaction without
regard to the general deductions limitation
of section 848(c)(2).
(ii)Treatment of additional capitalized
amounts as the result of an election under
§1.848–2(g)(8). The additional amounts
capitalized by the reinsurer as the result of
the election under §1.848–2(g)(8) reduce
the adjusted basis of any amortizable sec-
tion 197 intangible with respect to speci-
fied insurance contracts acquired in the as-
sumption reinsurancetransaction. If the
additional capitalizedamounts exceed the
adjusted basis of theamortizable section
197 intangible, the reinsurer must reduce
its deductions under section 805 or section
832 by the amount of such excess. The
additional capitalized amounts are treated
as specified policy acquisition expenses at-
tributable to the premiums and other con-
sideration on the assumption reinsurance
transaction and are deducted ratably over
a 120-month period as provided under sec-
tion 848(a)(2).
(5)Cross references and special rules.
In general, for rules applicable to the de-
termination of specified policy acquisition
expenses, net premiums, and net consid-
eration, see section 848(c) and (d), and
§1.848–2(a) and (f). However, the follow-
ing special rules apply for purposes of this
paragraph (g)(5)(ii)(C)—
(i) The amount required to be capital-
ized under section 848in connection with
the assumption reinsurance transaction
cannot be less than zero;
(ii) For purposes of determining the
company’s general deductions under sec-
tion 848(c)(2) for the taxable year of
the assumption reinsurance transaction,
the reinsurer takes into account a tenta-
tive amortization deduction under section
197(a) as if the entire amount paid or in-
curred by the reinsurer for the specified
insurance contracts were allocated to an
amortizable section 197 intangible with
respect to insurance contracts acquired
in an assumption reinsurance transaction;
and
(iii) Any reduction of specified policy
acquisition expensespursuant to an elec-
tion under §1.848–2(i)(4) (relating to an
assumption reinsurance transaction with
an insolvent insurance company) is disre-
garded.
(D)Examples. The following examples
illustrate the principles of this paragraph
(g)(5)(ii):
Example 1.(i)Facts. On January 15, 2006, P
acquires all of the stock of T, an insurance com-
pany, in a qualified stock purchase and makes a
section 338 election for T. T issues individual life
insurance contracts which are specified insurance
contracts as defined in section 848(e)(1). P and new
T are calendar year taxpayers. Under §§1.338–6
and 1.338–11(b)(2), the amount of AGUB allo-
cated to old T’s individual life insurance contracts is
$300,000. On the acquisition date, the tax reserves
for old T’s individual life insurance contracts are
$2,000,000. After the acquisition date, new T re-
ceives $1,000,000 of net premiums with respect to
new and renewal individual life insurance contracts
and incurs $100,000 of general deductions under
section 848(c)(2) through December 31, 2006. New
T engages in no other reinsurance transactions other
than the assumption reinsurance transaction treated
as occurring by reason of the section 338 election.
(ii)Analysis. The transfer of insurance contracts
and the assumption of related liabilities deemed to
occur by reason of the election under section 338
is treated as an assumption reinsurance transaction.
New T determines the adjusted basis under section
197(f)(5) for the life insurance contracts acquired in
the assumption reinsurance transaction as follows.
The amount paid or incurred for the individual life
insurance contracts is $300,000. To determine the
amount required to be capitalized under section 848
in connection with the assumption reinsurance trans-
action, new T compares the required capitalization
amount for the assumption reinsurance transaction
with the general deductions allocable to the transac-
tion. The required capitalization amount for the as-
sumption reinsurance transaction is $130,900, which
is determined by multiplying the $1,700,000 net pos-
itive consideration for the transaction ($2,000,000
reinsurance premium less $300,000 ceding com-
mission) by the applicable percentage under section
848(c)(1) for the acquired individual life insurance
contracts (7.7 percent). To determine its general
deductions, new T takes into account a tentative
amortization deduction under section 197(a) as if the
entire amount paid or incurred for old T’s individual
life insurance contracts ($300,000) were allocable to
an amortizable section 197 intangible with respect
to insurance contracts acquired in the assumption
reinsurance transaction. Accordingly, for the year
of the assumption reinsurance transaction, new T is
treated as having general deductions under section
848(c)(2) of $120,000 ($100,000 + $300,000/15).
Under §1.848–2(g)(6), these general deductions
are first allocated to the $77,000 capitalization re-
quirement for new T’s directly written business
($1,000,000 x .077). Thus, $43,000 ($120,000 -
$77,000) of the general deductions are allocable to
the assumption reinsurance transaction. Because
the general deductions allocable to the assumption
reinsurance transaction ($43,000) are less than the
required capitalization amount for the transaction
($130,900), new T has a capitalization shortfall of
$87,900 ($130,900 - $43,000) with regard to the
transaction. Under §1.848–2(g), this capitalization
shortfall would cause old T to reduce the net negative
consideration taken into account with respect to the
assumption reinsurance transaction by $1,141,558
($87,900 ÷ .077) unless the parties make the elec-
tion under §1.848–2(g)(8) to capitalize specified
policy acquisition expenses in connection with the
assumption reinsurance transaction without regard
to the general deductions limitation. If the parties
make the election, the amount capitalized by new T
under section 848 in connection with the assump-
tion reinsurance transaction would be $130,900.
The $130,900 capitalized by new T under section
848 would reduce new T’s adjusted basis of the
amortizable section 197 intangible with respect to
the specified insurance contracts acquired in the
assumption reinsurance transaction. Accordingly,
new T would have an adjusted basis under section
197(f)(5) with respect to the individual life insurance
contracts acquired from old T of $169,100 ($300,000
- $130,900). New T’s actual amortization deduction
under section 197(a) with respect to the amortiz-
able section 197 intangible for insurance contracts
acquired in the assumption reinsurance transaction
would be $11,273 ($169,100 ÷15).
Example 2.(i)Facts. The facts are the same
asExample 1, except that T only issues accident
and health insurance contracts that are qualified
long-term care contracts under section 7702B. Un-
der section 7702B(a)(5), T’s qualified long-term
care insurance contracts are treated as guaranteed
renewable accident and health insurance contracts,
and, therefore, are considered specified insurance
contracts under section 848(e)(1). Under §§1.338–6
and 1.338–11(b)(2), the amount of AGUB allocable
to T’s qualified long-term care insurance contracts
is $250,000. The amount of T’s tax reserves for the
qualified long-term care contracts on the acquisition
date is $7,750,000. Following the acquisition, new
T receives net premiums of $500,000 with respect to
qualified long-term care contracts and incurs general
deductions of $75,000 through December 31, 2006.
(ii)Analysis. The transfer of insurance contracts
and the assumption of related liabilities deemed to
occur by reason of the election under section 338
is treated as an assumption reinsurance transaction.
New T determines the adjusted basis under section
197(f)(5) for the insurance contracts acquired in the
assumption reinsurance transaction as follows. The
amount paid or incurred for the insurance contracts
is $250,000. To determine the amount required
to be capitalized under section 848 in connection
with the assumption reinsurance transaction, new T
compares the required capitalization amount for the
assumption reinsurance transaction with the general
deductions allocable to the transaction. The required
capitalization amount for the assumption reinsur-
ance transaction is $577,500, which is determined
by multiplying the $7,500,000 net positive consid-
eration for the transaction ($7,750,000 reinsurance
premium less $250,000 ceding commission) by the
applicable percentage under section 848(c)(1) for
the acquired insurance contracts (7.7 percent). To
determine its general deductions, new T takes into
account a tentative amortization deduction under
section 197(a) as if the entire amount paid or incurred
for old T’s insurance contracts ($250,000) were
allocable to an amortizable section 197 intangible
with respect to insurance contracts acquired in the
assumption reinsurance transaction. Accordingly,
for the year of the assumption reinsurance transac-
tion, new T is treated as having general deductions
under section 848(c)(2) of $91,667 ($75,000 +
$250,000/15). Under §1.848–2(g)(6), these general
deductions are first allocated to the $38,500 capi-
talization requirement for new T’s directly written
March 17, 20085812008–11 I.R.B.

business ($500,000 x .077). Thus, $53,167 ($91,667
- $38,500) of general deductions are allocable to
the assumption reinsurance transaction. Because
the general deductions allocable to the assumption
reinsurance transaction ($53,167) are less than the
required capitalization amount for the transaction
($577,500), new T has a capitalization shortfall of
$524,333 ($577,500 - $53,167) with regard to the
transaction. Under §1.848–2(g), this capitalization
shortfall would cause old T to reduce the net negative
consideration taken intoaccount with respect to the
assumption reinsurance transaction by $6,809,519
($524,333 ÷ .077) unless the parties make the elec-
tion under §1.848–2(g)(8) to capitalize specified
policy acquisition expenses in connection with the
assumption reinsurance transaction without regard
to the general deductions limitation. If the parties
make the election, the amount capitalized by new T
under section 848 in connection with the assumption
reinsurance transaction would increase from $53,167
to $577,500. Pursuant to paragraph (g)(5)(ii)(C)(4)
of this section, the additional $524,333 ($577,500
- $53,167) capitalized by new T under section 848
would reduce new T’s adjusted basis of the amor-
tizable section 197 intangible with respect to the
insurance contracts acquired in the assumption rein-
surance transaction. Accordingly, new T’s adjusted
basis of the section 197 intangible with regard to
the insurance contracts is reduced from $196,833
($250,000 - $53,167) to $0. Because the additional
$524,333 capitalized pursuant to the §1.848–2(g)(8)
election exceeds the $196,833 adjusted basis of the
section 197 intangible before the reduction, new T is
required to reduce its deductions under section 805
by the $327,500 ($524,333 - $196,833).
(E)Effective/applicability date.This
section applies to acquisitions and dispo-
sitions of insurance contracts on or after
April 10, 2006.
*****
§1.197–2T [Removed]
Par. 4. Section 1.197–2T is removed.
Par. 5. Section 1.338–0 is amended by
revising the entries for §1.338–11(d) and
(e) to read as follows:
§1.338–0 Outline of topics.
*****
§1.338–11 Effect of section 338 election
on insurance company targets.
*****
(d) Reserve increases by new target af-
ter the deemed asset sale.
(1) In general.
(2) Exceptions.
(3) Amount of additional premium.
(i) In general.
(ii) Increases in unpaid loss reserves.
(iii) Increases in other reserves.
(4) Limitation on additional premium.
(5) Treatment of additional premium
under section 848.
(6) Examples.
(7) Effective/applicability date.
(i) In general.
(ii) Application to pre-effective date in-
creases to reserves.
(e) Effect of section 338 election on sec-
tion 846(e) election.
(1) In general.
(2) Revocation of existing section
846(e) election.
*****
Par. 6. Section 1.338–1 is amended
by adding paragraph (b)(2)(vii) to read as
follows:
§1.338–1 General principles; status of old
target and new target.
*****
(b) * * *
(2) * * *
(vii) Section 846(e) (relating to an elec-
tion to use an insurance company’s histor-
ical loss payment pattern).
*****
§1.338–1T [Removed]
Par. 7. Section 1.338–1T is removed.
Par. 8. Section 1.338–11 is amended
by revising paragraphs (d) and (e) to read
as follows:
§1.338–11 Effect of section 338 election
on insurance company targets.
*****
(d)Reserve increases by new target
after the deemed asset sale—(1)In gen-
eral. If in new target’s first taxable year or
any subsequent year, new target increases
its reserves for any acquired contracts,
new target is treated as receiving an ad-
ditional premium, which is computed
under paragraph (d)(3) of this section, in
the assumption reinsurance transaction
described in paragraph (c)(1) of this sec-
tion. New target includes the additional
premium in gross income for the taxable
year in which new target increases its
reserves for acquired contracts. New tar-
get’s increase in reserves for the insurance
contracts acquired in the deemed asset
sale is a liability of new target not orig-
inally taken into account in determining
AGUB that is subsequently taken into
account. Thus, AGUB is increased by
the amount of the additional premium
included in new target’s gross income.
See §§1.338–5(b)(2)(ii) and 1.338–7. Old
target has no deduction under this para-
graph (d) and makes no adjustments under
§§1.338–4(b)(2)(ii) and 1.338–7.
(2)Exceptions. New target is not
treated as receiving additional premium
under paragraph (d)(1) of this section if—
(i) It is under state receivership as of
the close of the taxable year for which the
increase in reserves occurs; or
(ii) It is required by section 807(f) to
spread the reserve increase over the 10 suc-
ceeding taxable years.
(3)Amount of additional premium—(i)
In general. The additional premium taken
into account under this paragraph (d) is an
amount equal to the sum of the positive
amounts described in paragraphs (d)(3)(ii)
and (d)(3)(iii) of this section. However,
the additional premium cannot exceed the
limitation described in paragraph (d)(4) of
this section.
(ii)Increases in unpaid loss reserves.
The positive amount with respect to un-
paid loss reserves is computed using the
formula A/B x (C - [D + E]) where—
(A) A equals old target’s discounted
unpaid losses (determined under section
846) included in AGUB under paragraph
11(b)(1) of this section;
(B) B equals old target’s undiscounted
unpaid losses (determined under section
846(b)(1)) as of the close of the acquisition
date;
(C) C equals new target’s undiscounted
unpaid losses (determined under section
846(b)(1)) at the end of the taxable year
that are attributable to losses incurred by
old target on or before the acquisition date;
(D) D (which may be a negative num-
ber) equals old target’s undiscounted un-
paid losses as of the close of the acquisition
date, reduced by the cumulative amount
of losses, loss adjustment expenses, and
reinsurance premiums paid by new target
through the end of the taxable year for
losses incurred by old target on or before
the acquisition date; and
(E) E equals the amount obtained by
dividing the cumulative amount of reserve
increases taken into account under this
paragraph (d) in prior taxable years by
A/B.
2008–11 I.R.B.582March 17, 2008

(iii)Increases in other reserves.The
positive amount with respect to reserves
other than discounted unpaid loss reserves
is the net increase of those reserves due
to changes in estimate, methodology, or
other assumptions used to compute the re-
serves (including the adoption by new tar-
get of a methodology or assumptions dif-
ferent from those used by old target).
(4)Limitation on additional premium.
The additional premium taken into account
by new target under paragraph (d)(1) of
this section is limited to the excess, if any,
of—
(i) The fair market value of old tar-
get’s assets acquired by new target in the
deemed asset sale (other than Class VI and
Class VII assets); over
(ii) The AGUB allocated to those as-
sets (including increases in AGUB allo-
cated to those assets as the result of re-
serve increases by new target in prior tax-
able years).
(5)Treatment of additional premium
under section 848.Ifaportionofthe
positive amounts described in paragraphs
(d)(3)(ii) and (iii) of this section are at-
tributable to an increase in reserves for
specified insurance contracts (as defined
in section 848(e)), new target takes an al-
locable portion of the additional premium
in determining its specified policy acqui-
sition expenses under section 848(c) for
the taxable year of the reserve increase.
(6)Examples. The following examples
illustrate this paragraph (d):
Example 1.(i)Facts. On January 1, 2006, P
purchases all of the stock of T, a non-life insurance
company, for $120 and makes a section 338 elec-
tion for T. On the acquisition date, old T has total
reserve liabilities under state law of $725, consisting
of undiscounted unpaid losses of $625 and unearned
premiums of $100. Old T’s tax reserves on the ac-
quisition date are $580, which consist of discounted
unpaid losses (as defined in section 846) of $500
and unearned premiums (as computed under section
832(b)(4)(B)) of $80. Old T has Class I through Class
V assets with a fair market value of $800. Old T also
has a Class VI asset with a fair market value of $75,
consisting of the future profit stream of certain insur-
ance contracts. During 2006, new T makes loss and
loss adjustment expense payments of $200 with re-
spect to the unpaid losses incurred by old T before
the acquisition date. As of December 31, 2006, new
T reports undiscounted unpaid losses of $475 attrib-
utable to losses incurred before the acquisition date.
The related amount of discounted unpaid losses (as
defined in section 846) for those losses is $390.
(ii)Computation and allocation of AGUB. Under
§1.338–5 and paragraph (b)(1) of this section, as of
the acquisition date, AGUB is $700, reflecting the
sum of the amount paid for old T’s stock ($120) and
the tax reserves assumed by new T in the transac-
tion ($580). The fair market value of old T’s Class
I through V assets is $800, whereas the AGUB avail-
able for such assets under §1.338–6 is $700. There is
no AGUB available for old T’s Class VI assets, even
though such assets have a fair market value of $75 on
the acquisition date.
(iii)Adjustments for increases in reserves for un-
paid losses. Under paragraph (d) of this section, new
T must determine whether there are any amounts by
which it increased its unpaid loss reserves that will
be treated as an additional premium and an increase
in AGUB. New T applies the formula of paragraph
(d)(3) of this section, where A equals $500, B equals
$625, C equals $475, D equals $425 ($625 - $200),
and E equals $0. Under this formula, new T is treated
as having increased its reserves for discounted unpaid
losses attributable to losses incurred by old T by $40
($500/$625 x ($475 -[$425+0]). The limitation under
paragraph (d)(5) of this section based on the differ-
ence between the fair market value of old T’s Class
I through Class V assets and the AGUB allocated to
such assets is $100. Accordingly, new T includes an
additional premium of $40 in gross income for 2006,
and increases the AGUB allocated to old T’s Class I
through Class V assets to reflect this additional pre-
mium.
Example 2.(i)Facts. Assume the same facts as in
Example 1. Further assume that during 2007 new T
deducts total loss and loss expense payments of $375
with respect to losses incurred by old T before the ac-
quisition date. On December 31, 2007, new T reports
undiscounted unpaid losses of $150 with respect to
losses incurred before the acquisition date. The re-
lated amount of discounted unpaid losses (as defined
in section 846) for those unpaid losses is $125.
(ii)Analysis. New T must determine whether any
amounts by which it increased its unpaid losses dur-
ing 2007 will be treated as an additional premium in
paragraph (d)(3) of this section. New T applies the
formula under paragraph (d)(3) of this section, where
A equals $500, B equals $625, C equals $150, D
equals $50 ($625 - $575), and E equals $50 ($40 di-
vided by .8). In paragraph (d)(3) of this section, new
T is treated as increasing its reserves for discounted
unpaid losses by $40 during 2007 with respect to
losses incurred by old T ($500/$625 x ($150 - [$50 +
$50]). New T determines the limitation of paragraph
(d)(5) of this section by comparing the $800 fair mar-
ket value of the Class I through V assets on the acqui-
sition date to the $740 AGUB allocated to such assets
(which includes the $40 addition to AGUB included
during 2006). Thus, new T recognizes $40 of addi-
tional premium as a result of the increase in reserves
during 2007, and adjusts the AGUB allocable to the
Class I through V assets acquired from old T to re-
flect such additional premium.
Example 3.(i)Facts. The facts are the same
asExample 2, except that on January 1, 2008, new
T reinsures the outstanding liability with respect to
losses incurred by old T before the acquisition date
through a portfolio reinsurance transaction with R,
another non-life insurance company. R agrees to as-
sume any remaining liability relating to losses in-
curred by old T before the acquisition date in ex-
change for a reinsurance premium of $200. Accord-
ingly, as of December 31, 2008, new T reports no
undiscounted unpaid losses with respect to losses in-
curred by old T before the acquisition date.
(ii)Analysis. New T must determine whether any
amount by which it increased its unpaid loss reserves
will be treated as an additional premium under para-
graph (d) of this section. New T applies the formula
of paragraph (d)(3) of this section, where A equals
$500, B equals $625, C equals $0, and D equals -$150
($625 - ($575 + $200), and E equals $100 ($80 di-
vided by .8). Thus, new T is treated as having in-
creased its discounted unpaid losses by $40 in 2008
with respect to losses incurred by old T before the
acquisition date ($500/$625 x (0 - [-$150 + $100]).
New T includes this positive amount in gross income,
subject to the limitation of paragraph (d)(4) of this
section. The limitation of paragraph (d)(4) of this sec-
tion equals $20, which is computed by comparing the
$800 fair market value of the Class I through V as-
sets acquired from old T with the $780 AGUB allo-
cated to such assets (which includes the $40 addition
to AGUB in 2006 and the $40 addition to AGUB in
2007). Thus, New T includes $20 in additional pre-
mium, and increases the AGUB allocated to the Class
I through V assets acquired from old T by $20. As a
result of these adjustments, the limitation under para-
graph(d)(4)ofthissection is reduced to zero.
(7)Effective/applicability date—(i)In
general. This section applies to increases
to reserves made by new target after a
deemed asset sale occurring on or after
April 10, 2006.
(ii)Application to pre-effective date
increases to reserves. If either new target
makes an election under §1.338(i)–1(c)(2)
or old target makes an election under
§1.338(i)–1(c)(3) to apply the rules of
this section, in whole, to a qualified stock
purchase occurring before April 10, 2006,
then the rules contained in this section
shall apply in whole to the qualified stock
purchase.
(e)Effect of section 338 election on sec-
tion 846(e) election—(1)In general.New
target and old target are treated as the same
corporation for purposes of an election by
old target to use its historical loss pay-
ment pattern under section 846(e). See
§1.338–1(b)(2)(vii). Therefore, if old tar-
get has a section 846(e) election in effect
on the acquisition date, new target will
continue to use the historical loss payment
pattern of old target to discount unpaid
losses incurred in accident years covered
by the election, unless new target elects to
revoke the section 846(e) election. In addi-
tion, new target may consider old target’s
historical loss payment pattern when deter-
mining whether to make the section 846(e)
election for a determination year that in-
cludes or is subsequent to the acquisition
date.
(2)Revocation of existing section
846(e) election. New target may revoke
March 17, 20085832008–11 I.R.B.

old target’s section 846(e) election to use
its historical loss payment pattern to dis-
count unpaid losses. If new target elects
to revoke old target’s section 846(e) elec-
tion, new target will use the industry-wide
patterns determined by the Secretary to
discount unpaid losses incurred in accident
years beginning on or after the acquisition
date through the subsequent determination
year. New target may revoke old tar-
get’s section 846(e) election by attaching
a statement to new target’s original tax
return for its first taxable year.
*****
§1.338–11T [Removed]
Par. 9. Section 1.338–11T is removed.
Par. 10. Section 1.338(i)–1 is amended
by:
1. Revising the section heading to read
as set forth below.
2.Redesignating paragraph
(c)(2)(ii)(b) as paragraph (c)(2)(ii)(B).
The revisions read as follows:
§1.381(i)–1 Effective/applicability date.
*****
Par. 11. Section 1.381(c)(22)–
1(b)(7)(v) is amended by revising the last
sentence ofExample 3to read as follows:
§1.381(c)(22)–1 Successor life insurance
company.
*****
(b) * * *
(7) * * *
(v) * * *
Example 3. * * * In that case, in the taxable year
of the indemnity reinsurance transaction, S takes into
account as ordinary income the portion of the old T’s
accounts ($1) that old T or S has not previously taken
into account as income.
*****
§1.846–0 [Amended]
Par. 12. Section 1.846–0 is amended by
removing the entries for §§1.846–2T and
1.846–4T.
Par. 13. Section 1.846–2(d) is revised
to read as follows:
§1.846–2 Election by taxpayer to use its
own historical loss payment pattern.
*****
(d)Effect of section 338 election on
section 846(e) election.Forrulesre-
garding qualified stock purchase oc-
curring on or after April 10, 2006, see
§§1.338–1(b)(2)(vii) and 1.338–11(e).
Par. 14. Section 1.846–4 is amended by
revising the section heading and paragraph
(b) to read as follows:
§1.846–4 Effective/applicability date.
*****
(b)Section 338 election. Section
1.846–2(d) applies to section 846(e) elec-
tions made with regard to a qualified stock
purchase made on or after April 10, 2006.
Par. 15. For each entry in the “Sec-
tion” column remove the phrase in the
“Remove” column and add the phrase in
the “Add” column in its place.
SectionRemoveAdd
§1.338(i)–1(c)(2)(i)§§1.338–11 and 1.338–11T(d)§1.338–11
§1.338(i)–1(c)(2)(i)
1.197–2T(g)(5)(ii),
§1.338(i)–1(c)(2)(ii)§§1.338–11 and 1.338–11T(d)§1.338–11
§1.338(i)–1(c)(2)(ii)
1.197–2T(g)(5)(ii),
§1.338(i)–1(c)(2)(ii)(B)
(First sentence)
§§1.338–11 and 1.338–11T(d)§1.338–11
§1.338(i)–1(c)(2)(ii)(B)
(First sentence)
1.197–2T(g)(5)(ii),
§1.338(i)–1(c)(2)(ii)(B)
(Second sentence)
§§1.338–11 and 1.338–11T(d)§1.338–11
§1.338(i)–1(c)(2)(ii)(B)
(Second sentence)
1.197–2T(g)(5)(ii),
§1.338(i)–1(c)(3)(i)§§1.338–11 and 1.338–11T(d)§1.338–11
§1.338(i)–1(c)(3)(i)
1.197–2T(g)(5)(ii),
§1.338(i)–1(c)(3)(ii)§§1.338–11 and1.338–11T(d)§1.338–11
§1.338(i)–1(c)(3)(ii)
1.197–2T(g)(5)(ii),
§1.338(i)–1(c)(3)(ii)(B)
(First sentence)
§§1.338–11 and 1.338–11T(d)§1.338–11
§1.338(i)–1(c)(3)(ii)(B)
(First sentence)
1.197–2T(g)(5)(ii),
§1.338(i)–1(c)(3)(ii)(B)
(Second sentence)
§§1.338–11 and 1.338–11T(d)§1.338–11
2008–11 I.R.B.584March 17, 2008

SectionRemoveAdd
§1.338(i)–1(c)(3)(ii)(B)
(Second sentence)
1.197–2T(g)(5)(ii),
§1.1060–1(a)(2)(i)§§1.338–11 and 1.338–11T(d)§1.338–11
§1.1060–1(a)(2)(i)
1.197–2T(g)(5)(ii),
§1.1060–1(a)(2)(ii)§§1.338–11 and 1.338–11T(d)§1.338–11
§1.1060–1(a)(2)(ii)
1.197–2T(g)(5)(ii),
§1.1060–1(a)(2)(ii)(B)§§1.338–11 and 1.338–11T(d)§1.338–11
§1.1060–1(a)(2)(ii)(B)
1.197–2T(g)(5)(ii),
§1.1060–1(a)(2)(iii)§§1.338–11T(d) and 1.338–11T(d)§1.338–11(d)
§1.1060–1(a)(2)(iii)
1.197–2T(g)(5)(ii),
§1.1060–1(a)(2)(iii)(B)§§1.338–11 and 1.338–11T(d)§1.338–11
§1.1060–1(a)(2)(iii)(B)
1.197–2T(g)(5)(ii),
PART 602 — OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 16. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 17. In §602.101, paragraph (b)
is amended by removing the entry for
§1.338–11T from the table and adding an
entry to the table in numerical order to
read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
Identified and described
Current OMB
control No.
*****
1.338–11...........................................................
1545–1990
*****
Linda Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved January 9, 2008.
Eric Solomon,
Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register on January 22,
2008, 8:45 a.m., and published in the issue of the Federal
Register for January 23, 2008, 73 F.R. 3868)
Section 1366.—Pass-Thru
of Items to Shareholders
26 CFR 1.1366–2: Limitations on deduction of pass-
through items of an S corporation to its shareholders.
(Also § 1367; 1.1367–1.)
S corporations; charitable contribu-
tions.This ruling provides guidance for
S corporations that made charitable con-
tributions of appreciated property during a
taxable year beginning after December 31,
2005 and before January 1, 2008. The rul-
ing provides that the amount of the chari-
table deduction the shareholder may claim
may not exceed the sum of (i) the share-
holder’spro ratashare of the fair market
value of the contributed property over the
shareholder’spro ratashare of the con-
tributed property’s adjusted tax basis, and
(ii) the amount of the Code section 1366(d)
loss limitation amount that is allocable to
the contributed property’s basis under reg-
ulations section 1.1366–2(a)(4).
Rev. Rul. 2008–16
ISSUE
If an S corporation makes a charitable
contribution of appreciated property in a
taxable year beginning after December 31,
2005, and before January 1, 2008, what is
the amount of the charitable contribution
deduction that a shareholder may claim
in circumstances where § 1366(d) of the
Internal Revenue Code (Code) limits the
shareholder’spro ratashare of the S cor-
poration’s losses and deductions for the
taxable year in which the property is con-
tributed?
FACTS
IndividualAis the sole shareholder of
S CorporationX. At the beginning ofX’s
2007 taxable year,Ahas a basis of $50x in
theXstock. During 2007,Xmakes a char-
itable contribution of unencumbered real
property, with an adjusted basis of $100x
and a fair market value of $190x, in a
transaction that qualifies under § 170(c).
The charitable contribution is not subject
to the limitations of § 170(e)(1). In 2007,
Xhas §1363 taxable income of $30x and a
long-term capital loss of $25x.
LAW
Section 170(a) allows as a deduction
any charitable contribution (as defined in
§ 170(c)) the payment of which is made
March 17, 20085852008–11 I.R.B.

during the taxable year. The deduction al-
lowable by § 170(a) is subject to the limi-
tations of § 170(b).
Section 1.170A–1(c)(1) of the Income
Tax Regulations provides that if a charita-
ble contribution is made in property other
than money, the amount of the contribution
is the fair market value of the property at
the time of the contribution reduced as pro-
vided in § 170(e)(1) and § 1.170A–4(a), or
§ 170(e)(3) and § 1.170A–4A(c).
Section 1363(b)(2) provides that the
taxable income of an S corporation shall
be computed in the same manner as in
the case of an individual, except that the
deductions referred to in § 703(a)(2),
including the deduction for charitable con-
tributions provided in § 170, shall not be
allowed to the corporation.
Section 1366(a)(1)(A) provides that,
in determining the tax of a shareholder,
there shall be taken into account the share-
holder’spro ratashare of the corporation’s
items of income, loss, deduction, or credit
the separate treatment of which could af-
fect the liability for tax of any shareholder.
Section 1366(a)(1) provides further that
the items referred to in § 1366(a)(1)(A)
include amounts described in § 702(a)(4).
Section 702(a)(4) refers to charitable con-
tributions (as defined in § 170(c)).
Section 1366(a)(1)(B) provides that,
in determining the tax of a shareholder,
there shall be taken into account the share-
holder’spro ratashare of any nonsepa-
rately computed income or loss.
Section 1366(d)(1) provides that the ag-
gregate amount of losses and deductions
taken into account by a shareholder under
§ 1366(a) for any taxable year shall not
exceed the sum of (A) the adjusted basis
of the shareholder’s stock in the S corpo-
ration, and (B) the shareholder’s adjusted
basis of any indebtedness of the S corpo-
ration to the shareholder.
Section 1366(d)(2)(A) generally pro-
vides that any loss or deduction which is
disallowed for any taxable year by reason
of § 1366(d)(1) shall be treated as incurred
by the corporation in the succeeding tax-
able year with respect to that shareholder.
Section 1.1366–1(a)(2)(i) and (iii) pro-
vides that each S corporation shareholder
must take into account separately the
shareholder’spro ratashare of the S cor-
poration’s gains and losses from sales or
exchanges of capital assets and the corpo-
ration’s charitable contributions.
Section 1.1366–1(a)(3) provides that
each shareholder must take into account
separately the shareholder’spro ratashare
of the nonseparately computed income or
loss of the S corporation.
Section 1.1366–1(b)(1) provides, in
part, that the character of any item of in-
come, loss, deduction, or credit described
in § 1366(a)(1)(A) or (B) is determined for
the S corporation and retains that character
in the hands of the shareholder.
Section 1.1366–2(a)(4) generally pro-
vides that if a shareholder’spro ratashare
of the aggregate amount of losses and
deductions exceeds the sum of the ad-
justed basis of the shareholder’s stock in
the corporation and the adjusted basis of
any indebtedness of the corporation to the
shareholder, then the limitation on losses
and deductions under § 1366(d)(1) must
be allocated among the shareholder’spro
ratashare of each loss or deduction. The
amount of the limitation allocated to any
loss or deduction is an amount that bears
thesameratiototheamountofthelimi-
tation as the loss or deduction bears to the
total of the losses and deductions.
Section 1367(a)(1)(B) provides that the
basis of each shareholder’s stock in an
S corporation is increased for any period
by any nonseparately computed income
determined under § 1366(a)(1)(B).
Section 1367(a)(2)(B) provides that
the basis of each shareholder’s stock
in an S corporation is decreased for
any period (but not below zero) by the
items of loss and deduction described in
§ 1366(a)(1)(A).
Section 1.1367–1(f) provides that in-
creases in an S corporation shareholder’s
stock basis that are attributable to income
items described in § 1367(a)(1)(B) are
made before decreases in such basis that
are attributable to items of loss or deduc-
tiondescribedin§1367(a)(2)(B).
Section 1203(a) of the Pension Pro-
tection Act of 2006 (Pension Act),
P.L. 109–280, 120 Stat. 780 (2006),
amended Code § 1367(a)(2) to provide that
the decrease in shareholder basis under
§ 1367(a)(2)(B) by reason of a charitable
contribution (as defined in § 170(c)) of
property shall be the amount equal to the
shareholder’spro ratashare of the adjusted
basis of such property. The Technical
Explanation of the Pension Act, Technical
Explanation of H.R. 4, “The Pension
Protection Act of 2006,” JCX–38–06 page
271, provides the following illustration of
§ 1203:
Thus, for example, assume an S corpo-
ration with one individual shareholder
makes a charitable contribution of stock
with a basis of $200 and a fair market
value of $500. The shareholder will be
treated as having made a $500 chari-
table contribution (or a lesser amount
if the special rules of section 170(e)
apply), and will reduce the basis of the
S corporation stock by $200. (Footnote
306: This example assumes that basis
of the S corporation stock (before
reduction) is at least $200.)
Section 3(b) of the Tax Technical Cor-
rections Act of 2007 (Technical Correc-
tions Act), P.L. 172, 121 Stat. 2473 (2007),
added § 1366(d)(4), which concerns the
application of the basis limitation rule of
§ 1366(d)(1) to charitable contributions
of appreciated property by S corporations.
Generally, under § 1366(d)(1), the amount
of losses and deductions which a share-
holder of an S corporation may take into
account in any taxable year is limited to
the shareholder’s adjusted basis in his
stock and indebtedness of the corpora-
tion. Section 1366(d)(4) provides that,
in the case of a charitable contribution of
property, § 1366(d)(1) shall not apply to
the extent of the excess (if any) of (A)
the shareholder’spro ratashare of such
contribution, over (B) the shareholder’s
pro ratashare of the adjusted basis of
such property. Thus, the basis limitation
rule of § 1366(d)(1) does not apply to
the amount of deductible appreciation in
the contributed property.SeeDescription
of the Tax Technical Corrections Act of
2007, JCX–119–07, pages 2–3.
The Pension Act amendment to
§ 1367(a)(2) and the Technical Correc-
tions Act amendment to § 1366(d) apply
to charitable contributions made by S cor-
porations in taxable years beginning after
December 31, 2005, and before January
1, 2008. Charitable contributions made
by S corporations in taxable years begin-
ning after December 31, 2007, barring any
statutory change, are subject to the law in
existence prior to these amendments. The
IRS and Treasury Department are consid-
ering issuing guidance on the treatment of
charitable contributions made by S cor-
porations in taxable years beginning after
December 31, 2007.
2008–11 I.R.B.586March 17, 2008

ANALYSIS
Under the facts of this revenue ruling,
Xmakes a charitable contribution of un-
encumbered real property with an adjusted
basis of $100x and a fair market value of
$190x in a transaction that qualifies un-
der § 170(c). The charitable contribution
is treated as a separately stated item of de-
duction that passes through toAand is de-
ductible in computingA’s individual tax li-
ability. Section 1.1366–1(a)(2)(iii).
Pursuant to § 1.1367–1(f),A’s $50x ba-
sis in theXstock is first increased by $30x
under § 1367(a)(1)(B) to reflectA’s share
ofX’s taxable income.A’s basis in the
Xstock is then decreased (but not below
zero) byA’spro ratashare of the sum of
the adjusted basis of the contributed prop-
erty ($100x) pursuant to the flush language
of § 1367(a)(2) and byA’spro ratashare of
X’s long-term capital loss ($25x) pursuant
to § 1367(a)(2)(B). However,A’spro rata
share of the aggregate amount of losses
and deductions ($125x) exceedsA’s basis
in theXstock of $80x. Section 1366(d)(1),
accordingly, will limit the allowable losses
and deductions toAforX’s 2007 tax year.
Pursuant to § 1366(d)(4), the basis
limitation rule in § 1366(d)(1) does not
apply to a contribution of appreciated
property to the extent the shareholder’s
pro ratashare of the contribution exceeds
the shareholder’spro ratashare of the
adjusted basis of the contributed property.
Accordingly, the basis limitation rule of
§ 1366(d)(1) does not apply to A’spro rata
share of the amount of deductible appreci-
ation in the contributed property ($90x).
Under § 1.1366–2(a)(4), when a share-
holder has losses or deductions in excess
of the sum of the shareholder’s basis in
the stock plus indebtedness of the S cor-
poration to the shareholder, the limitation
on losses must be allocatedpro ratato
each item of loss or deduction. In the
case of a charitable contribution deduction,
the limitation amount allocable to such de-
duction is determined by reference to the
shareholder’spro ratashare of the con-
tributed property’s adjusted basis pursuant
to § 1366(d)(4).
In applying § 1.1366–2(a)(4), the
amount of the limitation allocable to a
charitable contribution deduction is an
amount that bears the same ratio to the
§ 1366(d) limitation as the shareholder’s
pro ratashare of the contributed prop-
erty’s adjusted basis bears to the total of
the shareholder’spro ratashare of the
corporation’s losses and deductions (ex-
cluding the charitable contribution deduc-
tion attributable to the shareholder’spro
ratashare of the fair market value of the
contributed property over the contributed
property’s tax basis). Accordingly, the
amount of the limitation allocable toA’s
share ofX’s charitable contribution deduc-
tion is determined by multiplyingA’s basis
in theXstock ($80x) by a fraction, the nu-
merator of which is $100x (the contributed
property’s adjustedbasis) and the denom-
inator of which is $125x (the total of the
capital loss and the contributed property’s
adjusted basis). Thus, $64x is allocated to
the charitable contribution deduction. The
remaining $16x is allocated to the capital
loss.
Accordingly, in 2007, the amount of
the charitable contribution deduction that
Amay claim is $154x. This amount is
comprised ofA’spro ratashare of the
property’s appreciation ($90x) plus the
amount of the loss limitation allocated
toA’spro ratashare of the contributed
property’s adjusted basis ($64x). Under
§ 1367(a)(2)(B),A’s basis in theXstock is
reduced to 0 to reflect the $16x reduction
in basis attributable to the capital loss and
the $64x reduction in basis attributable
to the charitable contribution deduction.
Pursuant to § 1366(d)(2), the disallowed
portion of the charitable contribution de-
duction ($36x) and the capital loss ($9x)
shall be treated as incurred byXin the
succeeding taxable year with respect toA.
HOLDING
If an S corporation makes a charita-
ble contribution of appreciated property
during a taxable year beginning after
December 31, 2005, and before January
1, 2008, the amount of the charitable
contribution deduction the shareholder
may claim may not exceed the sum of
(i) the shareholder’spro ratashare of
the fair market value of the contributed
property over the contributed property’s
adjusted tax basis, and (ii) the amount of
the § 1366(d) loss limitation amount that
is allocable to the contributed property’s
adjusted basis under § 1.1366–2(a)(4).
Any disallowed portion of the charitable
contribution retainsits character and is
treated as incurred by the corporation in
the corporation’s first succeeding taxable
year, and subsequent taxable years, with
respect to the shareholder.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Cynthia D. Morton of the Office of
Associate Chief Counsel (Passthroughs &
Special Industries). For further informa-
tion regarding this revenue ruling, contact
Cynthia D. Morton at (202) 622–3060 (not
a toll-free call).
Section 1502.—Regulations
26 CFR 1.1502–80: Applicability of other provisions
of law.
T.D. 9376
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Under Section 1502;
Miscellaneous Operating
Rules for Successor Persons;
Succession to Items of the
Liquidating Corporation
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations under section 1502 of the
Internal Revenue Code that provide guid-
ance regarding the manner in which the
items (including items described in section
381(c) but excluding intercompany items
under §1.1502–13) of a liquidating cor-
poration are succeeded to and taken into
account in cases in which multiple mem-
bers acquire the assets of the liquidating
corporation in a complete liquidation to
which section 332 applies. These final reg-
ulations affect corporations filing consoli-
dated returns.
DATES:Effective Date:These regulations
are effective January 15, 2008.
Applicability Date:For the date of ap-
plicability, see §1.1502–80(g)(7).
March 17, 20085872008–11 I.R.B.

FOR FURTHER INFORMATION
CONTACT: Amber C. Vogel or
Marie C. Milnes-Vasquez, (202) 622–7530
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On February 22, 2005, the IRS and
Treasury Department published in the
Federal Register(70 FR 8552) a notice of
proposed rulemaking (REG–131128–04,
2005–1 C.B. 733) under section 1502
proposing guidance as to how multiple
consolidated group members (distributee
members) that acquire assets in a liquida-
tion to which section 332 applies succeed
to and take into account the items of the
liquidating corporation. The proposed
regulations apply single-entity principles
and allocate the items of the liquidating
corporation that could be used to offset
the income or tax liability of the group or
any member to each distributee member
to the extent that such items would have
been reflected in investment adjustments
to the stock of the liquidating corporation
owned by such distributee member under
the principles of §1.1502–32(c) if, imme-
diately before the liquidation, any stock
of the liquidating corporation owned by
nonmembers had been redeemed, and then
such items had been taken into account.
The proposed regulations also provide
allocation rules for the credits and earn-
ings and profits of the liquidating corpo-
ration. Under the proposed regulations,
each distributee member succeeds to the
credits of the liquidating corporation to
the extent that the items of income, gain,
loss, or deduction attributable to the ac-
tivities that gave rise to the credit would
have been reflected in investment adjust-
ments to the stock of the liquidating cor-
poration owned by such distributee mem-
ber under the principles of §1.1502–32(c)
if, immediately before the liquidation, any
stock of the liquidating corporation owned
by nonmembers had been redeemed, and
then such items had been taken into ac-
count. The proposed regulations provide
similar rules for allocating the liquidating
corporation’s earnings and profits to the
distributee members.
Under the proposed regulations, a dis-
tributee member generally succeeds to any
other items of the liquidating corporation
if, immediately before the liquidation,
such distributee owns stock in the liquidat-
ing corporation meeting the requirements
of section 1504(a)(2) without regard to the
application of §1.1502–34. In contrast,
a distributee member that does not meet
the ownership requirements of section
1504(a)(2) without regard to the appli-
cation of §1.1502–34 (a non-80-percent
distributee) succeeds to any remaining
items of the liquidating corporation only to
the extent that it would have succeeded to
those items if it had purchased, in a taxable
transaction, the assets or businesses of the
liquidating corporation that it received in
the liquidation and had assumed the liabil-
ities that it assumed in the liquidation.
In addition, the proposed regulations
also provide guidance regarding the
method for allocating the intercompany
items of a liquidating subsidiary in cases in
which multiple members acquire the assets
of a liquidating subsidiary in a complete
liquidation to which section 332 applies.
The IRS and Treasury Department con-
tinue to study those rules. Accordingly,
that portion of the notice of proposed
rulemaking is withdrawn, and the final
regulations do not apply to the intercom-
pany items of the liquidating corporation.
For rules applicable to the treatment of
those items, see §1.1502–13(j)(2)(ii).
No public hearing was requested or
held. Written and electronic comments
responding to the notice of proposed
rulemaking were received. After consid-
eration of all the comments, the proposed
regulations are adopted as amended by
this Treasury decision. The revisions are
discussed in this preamble.
Explanation and Summary of
Comments
The Complete Liquidation Rules
Section 332(a) provides that no gain
or loss shall be recognized on the receipt
by a corporation of property distributed in
complete liquidation of another corpora-
tion. Section 332(b) provides, in part, that
a distribution shall be considered to be in
complete liquidation only if the corpora-
tion receiving such property was, on the
date of the adoption of the plan of liq-
uidation and at all times thereafter until
the receipt of the property, the owner of
stock meeting the requirements of section
1504(a)(2) and the distribution is made in
complete cancellation or redemption of all
of the stock of the liquidating corporation.
Section 1.1502–34 provides that in deter-
mining the stock ownership of a member
in another corporation (the issuing corpo-
ration) for purposes of determining the ap-
plication of section 332(b)(1) there shall
be included the stock of the issuing corpo-
ration owned by all other members of the
group.
Section 337(a) provides that the liqui-
dating corporation shall not recognize gain
or loss on the distribution to the 80-percent
distributee of any property in a complete
liquidation to which section 332 applies.
Section 337(c) provides that, for purposes
of section 337, the term “80-percent dis-
tributee” means only the corporation that
meets the 80-percent stock ownership re-
quirements of section 332(b) without re-
gard to the application of any consolidated
return regulation. If section 337(a) does
not apply, under section 336, the liquidat-
ing corporation will generally recognize
gain or loss on the distribution of property
in complete liquidation as if such property
were sold to the distributee at its fair mar-
ket value. Therefore, a complete liquida-
tion to which section 332 applies may be
taxable in whole or in part to the liquidat-
ing corporation but tax-free to the distribu-
tee members.
Deferred Income Items of the Liquidating
Corporation
Section 1.451–5 generally allows ac-
crual method taxpayers to defer the in-
clusion in gross income of advance pay-
ments for goods until the taxable year in
which properly accruable under the tax-
payer’s method of accounting for tax pur-
poses if such method results in gross in-
come inclusion no later than when such
items are included in gross income under
the taxpayer’s method of accounting for fi-
nancial reporting purposes. However, if in
a taxable year the taxpayer ceases to ex-
ist in a transaction other than one to which
section 381(a) applies, or the liability un-
der the agreement otherwise ends, then de-
ferred income amounts are includable in
the taxpayer’s gross income for such tax-
able year.
Rev. Proc. 2004–34, 2004–1 C.B. 991,
(see §601.601(d)(2)(ii)(b) of this chapter)
allows taxpayers a limited deferral beyond
2008–11 I.R.B.588March 17, 2008

the taxable year of receipt for certain ad-
vance payments. However, inclusion of
deferred income is accelerated to the tax-
able year of receipt if, in such taxable year,
the taxpayer ceases to exist in a transaction
other than a transaction to which section
381(a) applies or the taxpayer’s obligation
with respect to the advance payment is sat-
isfied or otherwise ends other than in cer-
tain types of section 351(a) transfers or in
a transaction to which section 381(a) ap-
plies.
Section 455 provides accrual method
taxpayers with an election to include pre-
paid subscription income in gross income
in the taxable year in which the liability ex-
ists to furnish or deliver a newspaper, mag-
azine, or other periodical. However, if the
liability to furnish or deliver the periodical
ends or the taxpayer ceases to exist, then
the amount of prepaid subscription income
not previously included in the taxpayer’s
gross income is included in the taxpayer’s
gross income for the taxable year in which
the liability ends. If the taxpayer’s liabil-
ity to furnish or deliver the periodical ends
as a result of a transaction to which sec-
tion 381(a) applies, the prepaid subscrip-
tion income will generally not be included
in the taxpayer’s gross income, and the ac-
quiring corporation must continue to defer
the prepaid subscription income under sec-
tion 455. Treas. Reg. §1.455–4 (citing
section 381(c)(4) and the regulations un-
der that section).
Section 381(a) applies to a distribution
to which section 332 applies. As described
in this preamble, a complete liquidation
to which section 332 applies is taxable
to the liquidating corporation to the ex-
tent that it distributes property to a non-
80-percent distributee. In particular, the
liquidating corporation is treated as if it
had sold the property distributed to the
non-80-percent distributee at its fair mar-
ket value. If the liquidating corporation
had sold a business with regard to which
income items had been deferred (for exam-
ple, deferred prepaid subscription income
under section 455) and the purchaser had
assumed the liquidating corporation’s obli-
gation or liability to perform the services
or provide the goods relating to the de-
ferred income, then the liquidating corpo-
ration would have recognized the deferred
income. However, the liquidating corpora-
tion would also have been entitled to a de-
duction under section 162 for any amount
paid (or deemed paid) to the purchaser for
its assumption of the obligation or liabil-
ity related to the deferred income. See
Rev. Rul. 68–112, 1968–1 C.B. 62 (see
§601.601(d)(2)(ii)(b)ofthischapter).The
amount paid (or deemed paid) by the liqui-
dating corporation to the purchaser for its
liability assumption would have been in-
cludible in the purchaser’s gross income.
See Rev. Rul. 71–450, 1971–2 C.B. 78
(see §601.601(d)(2)(ii)(b)ofthischapter).
The IRS and Treasury Department be-
lieve that it is appropriate for any deferred
income items of a liquidating corpora-
tion attributable to assets and/or liabilities
transferred to a non-80-percent distributee
to be taken into account under applicable
principles of law as a result of the liqui-
dation despite the fact that the transaction
is described in section 381(a). Likewise,
section 332(a) does not apply in determin-
ing the recognition or nonrecognition of
any income realized by the non-80-percent
distributee attributable to its assumption
of an obligation or liability related to the
deferred income because such income is
not gain or loss recognized with respect
to the stock of the liquidating corporation.
These final regulations include such rules.
Allocation of Items Specific to Property
or a Business
The IRS and Treasury Department also
believe that it is appropriate to allocate
the full amount of deferred income items
or deferred deductions of the liquidating
corporation that are attributable to specific
property or a specific business to the dis-
tributee member that receives such prop-
erty or business in the liquidation. These
final regulations include such a rule.
Succession to Credits of the Liquidating
Corporation
As described in this preamble, the pro-
posed regulations allocate credits to dis-
tributee members based on the items of in-
come, gain, loss, or deduction attributable
to the activities that gave rise to the cred-
its. Comments were received indicating
that it was unclear how to allocate credits
that are not clearly associated with items
of income, gain, loss, or deduction (for ex-
ample, the section 53 minimum tax credit).
The IRS and Treasury Department agree
with those comments. Accordingly, these
final regulations revise the credit alloca-
tion rule and provide that credits will be
allocated proportionally based on the value
of the stock of the liquidating corporation
owned by each distributee member. The
IRS and Treasury Department believe that
this rule represents a reasonable and ad-
ministrable approach to allocating credits.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. Further, it is hereby cer-
tified that these regulations will not have
a significant economic impact on a sub-
stantial number of small entities. This cer-
tification is based on the fact that these
regulations will primarily affect affiliated
groups of corporations that have elected to
file a consolidated return, which tend to be
larger businesses. Accordingly, a regula-
tory flexibility analysis under the Regula-
tory Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice of
proposed rulemaking preceding this regu-
lation was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Amber C. Vogel of the Office
of Associate Chief Counsel (Corporate).
However, other personnel from the IRS
and Treasury Department participated in
their development.
Partial Withdrawal of Proposed
Regulations
Accordingly, we are not adopting the
amendments to §1.1502–13 as proposed
in the notice of proposed rulemaking
(REG–131128–04) that was published in
theFederal Registeron Tuesday, Febru-
ary 22, 2005 (70 FR 8552).
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
March 17, 20085892008–11 I.R.B.

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 1.1502–80 also issued under
26 U.S.C. 1502. * * *
Par. 2. Section 1.1502–80 is amended
by:
1. Removing the second sentence from
paragraph (a).
2. Revising the third sentence of para-
graph (a).
3. Adding paragraph (g).
The revision and addition read as fol-
lows:
§1.1502–80 Applicability of other
provisions of law.
(a) * * * For example, sections 269 and
482 apply for any consolidated year. * * *
*****
(g)Special rules for liquidations to
which section 332 applies.Notwithstand-
ing the general rule of section 381, if
multiple members (distributee members)
acquire assets of a corporation in a liq-
uidation to which section 332 applies
(regardless of whether any single member
owns stock in the liquidating corpora-
tion meeting the requirements of section
1504(a)(2)), such members succeed to
and take into account the items of the
liquidating corporation (including items
described in section 381(c), but excluding
intercompany items under §1.1502–13)
as provided in this paragraph (g) to the
extent not otherwise prohibited by any ap-
plicable provision of law. This paragraph
(g) does not apply to the intercompany
items of the liquidating corporation. See
§1.1502–13(j)(2)(ii).
(1)Income offset items and deferred in-
come. Except as otherwise provided in this
paragraph (g)(1), each distributee mem-
ber succeeds to and takes into account the
items of the liquidating corporation that
couldbeusedtooffsettheincomeofthe
group or any member (including deferred
deductions, net operating loss carryovers,
and capital loss carryovers) (income offset
items) to the extent that such items would
have been reflected in investment adjust-
ments to the stock of the liquidating corpo-
ration owned by such distributee member
under §1.1502–32(c) if, immediately prior
to the liquidation, any stock of the liqui-
dating corporation owned by nonmembers
had been redeemed and then such items
had been taken into account. However,
each distributee member succeeds to the
full amount of any deferred deduction or
deferred income item attributable to the
particular property or business operations
distributed to such distributee in the liqui-
dation to the extent that such item is not
taken into account in the determination of
the income or loss of the liquidating cor-
poration with regard to the liquidation un-
der chapter 1 of the Internal Revenue Code
(Code). If the liquidating corporation is
not a member of the group at the time of
the liquidation, the rules of this paragraph
(g)(1) are applied as if the liquidating cor-
poration had been a member of the group.
(2)Accounting for deferred income
items. Solely for the purpose of deter-
mining whether deferred income items of
a liquidating corporation are taken into
account under applicableprinciples of law
as a result of a liquidation to which section
332 applies, the transfer of property to,
and the assumption of liabilities by, a dis-
tributee member that does not own stock in
the liquidating corporation meeting the re-
quirements of section 1504(a)(2) without
regard to the application of §1.1502–34
immediately prior to the liquidation is not
treated as part of a transaction to which
section 381(a) applies. In addition, sec-
tion 332(a) does not apply in determining
the recognition or nonrecognition of any
income realized by the distributee mem-
ber under applicable principles of law
on account of consideration received (or
deemed received) on the assumption of the
liquidating corporation’s obligation or lia-
bility attributable to any deferred income
item.
(3)Credits and earnings and profits.
Each distributee member succeeds to and
takes into account a percentage of each
credit of the liquidating corporation equal
to the value of the stock of the liquidating
corporation owned by such distributee at
the time of the liquidation divided by the
total value of all the stock of the liquidat-
ing corporation owned by members of the
group at the time of the liquidation. Except
to the extent that the distributee member’s
earnings and profits already reflect the liq-
uidating corporation’s earnings and prof-
its, each distributee member succeeds to
and takes into account under the principles
of §1.1502–32(c) the earnings and profits,
or deficit in earnings and profits, of the liq-
uidating corporation (determined after tak-
ing into account the amount of earnings
and profits properly applicable to distribu-
tions to non-member shareholders under
§1.381(c)(2)–1(c)(2)). If the liquidating
corporation is not a member of the group
at the time of the liquidation, the rules of
this paragraph (g)(3) are applied as if the
liquidating corporation had been a mem-
ber of the group.
(4)Other items. With regard to items to
which neither paragraph (g)(1) nor (g)(3)
of this section applies, a distributee mem-
ber that, immediately prior to the liqui-
dation, owns stock in the liquidating cor-
poration meeting the requirements of sec-
tion 1504(a)(2) without regard to the ap-
plication of §1.1502–34 succeeds to the
items of the liquidating corporation in ac-
cordance with section 381 and other ap-
plicable principles. Adistributee member
that, immediately prior to the liquidation,
does not own stock in the liquidating cor-
poration meeting the requirements of sec-
tion 1504(a)(2) without regard to the appli-
cation of §1.1502–34 succeeds to the items
of the liquidating corporation to the extent
that it would have succeeded to those items
if it had purchased, in a taxable transaction,
the assets or businesses of the liquidating
corporation that it received in the liquida-
tion and had assumed the liabilities that it
assumed in the liquidation.
(5)Determination of the items of a
liquidating subsidiary. For purposes of
this section, the items of a liquidating
subsidiary include the amount of any
consolidated tax attribute attributable
to the liquidating subsidiary that is de-
termined pursuant to the principles of
§1.1502–21(b)(2)(iv). In addition, if the
liquidating subsidiary is a member of a
separate return limitation year subgroup,
the amount of a tax attribute that arose
in a separate returnlimitation year that is
attributable to that member shall also be
determined pursuant to the principles of
§1.1502–21(b)(2)(iv).
(6)Examples. The following examples
illustrate the application of this paragraph
(g):
Example 1.Liquidation–80 percent distributee.
(i)Facts. X has only common stock outstanding. On
January 1 of year 1, X acquired equipment with a
10-year recovery period and elected to depreciate the
equipment using the straight-line method of depreci-
ation. On January 1 of year 7, M1 and M2 own 80
percent and 20 percent, respectively, of X’s stock. X
2008–11 I.R.B.590March 17, 2008

is a domestic corporation but is not a member of the
group that includes M1 and M2. On that date, X dis-
tributes all of its assets to M1 and M2 in complete
liquidation. The equipment is distributed to M1. Un-
der section 334(b), M1’s basis in the equipment is the
same as it would be in X’s hands. After computing
its tax liability for the taxable year that includes the
liquidation, X has net operating losses of $100, busi-
ness credits of $40, and earnings and profits of $80.
(ii)Succession to items described in section
381(c).(A)Losses. Under paragraph (g)(1) of this
section, each distributee member succeeds to X’s
items that could be used to offset the income of the
group or any member to the extent that such items
would have been reflected in investment adjustments
to the stock of X it owned under §1.1502–32(c) if,
immediately prior to the liquidation, such items had
been taken into account. Accordingly, M1 and M2
succeed to $80 and $20, respectively, of X’s net
operating loss.
(B)Credits and earnings and profits. Under para-
graph (g)(3) of this section, because, immediately
prior to the liquidation, M1 and M2 hold 80 percent
and 20 percent, respectively, of the value of the stock
of X, M1 and M2 succeed to $32 and $8, respec-
tively, of X’s $40 of business credits. In addition, be-
cause M1’s and M2’s earnings and profits do not re-
flect X’s earnings and profits, X’s earnings and prof-
its are allocated to M1 and M2 under the principles
of §1.1502–32(c). Therefore, M1 and M2 succeed to
$64 and $16, respectively, of X’s earnings and prof-
its.
(C)Depreciation of equipment’s basis.Un-
der paragraph (g)(4) of this section, because M1
owns stock in X meeting the requirements of sec-
tion 1504(a)(2) without regard to the application of
§1.1502–34, M1 is required to continue to depreciate
the equipment using the straight-line method of de-
preciation over the remaining recovery period of 4.5
years (assuming X used a half-year convention).
Example 2.Liquidation-no 80 percent distribu-
tee.(i)Facts. The facts are the same as inExample
1except that M1 and M2 own 60 percent and 40 per-
cent, respectively, of X’s stock. In addition, on Jan-
uary 1 of year 6, X entered into a long-term contract
with Y, an unrelated party. The total contract price
is $1000, and X estimates the total allocable contract
costs to be $500. At the time of the liquidation, X had
received $250 in progress payments under the con-
tract and incurred costs of $125. X accounted for the
contract under the percentage of completion method
described in section 460(b). In the liquidation, M1
assumes X’s contract obligations and rights.
(ii)Succession to items described in section
381(c).(A)Losses. Under paragraph (g)(1) of this
section, each distributee member succeeds to X’s
items that could be used to offset the income of the
group or any member to the extent that such items
would have been reflected in investment adjustments
to the stock of X it owned under §1.1502–32(c) if,
immediately prior to the liquidation, such items had
been taken into account. Accordingly, M1 and M2
succeed to $60 and $40, respectively, of X’s net
operating loss.
(B)Credits and earnings and profits. Under para-
graph (g)(3) of this section, because, immediately
prior to the liquidation, M1 and M2 hold 60 percent
and 40 percent, respectively, of the value of the stock
of X, M1 and M2 succeed to $24 and $16, respec-
tively, of X’s $40 of business credits. In addition, be-
cause M1’s and M2’s earnings and profits do not re-
flect X’s earnings and profits, X’s earnings and prof-
its are allocated to M1 and M2 under the principles
of §1.1502–32(c).Therefore, M1 and M2 succeed to
$48 and $32, respectively, of X’s earnings and prof-
its.
(C)Depreciation of equipment’s basis. Under
section 334(a), M1’s basis in the equipment is its fair
market value at the time of the distribution. Pursuant
to section 168(i)(7), to the extent that M1’s basis in
the equipment does not exceed X’s adjusted basis in
the equipment at the time of the transfer, M1 is re-
quired to continue to depreciate the equipment using
the straight-line method of depreciation over the re-
maining recovery period of 4.5 years (assuming X
used a half-year convention). Any portion of M1’s
basis in the equipment that exceeds X’s adjusted basis
in the equipment at the time of the transfer is treated
as being placed in service by M1 in the year of the
transfer. Thus, M1 may choose any applicable de-
preciation method, recovery period, and convention
under section 168 for such excess basis.
(D)Method of accounting for long-term contract.
Under paragraph (g)(4) of this section, M1 does not
succeed to X’s method of accounting for the con-
tract. Rather, under §1.460–4(k)(2), M1 is treated
as having entered into a new contract on the date of
the liquidation. Under §1.460–4(k)(2)(iii), M1 must
evaluate whether the new contract should be classi-
fied as a long-term contract within the meaning of
§1.460–1(b) and account for the contract under a per-
missible method of accounting.
Example 3.Liquidation—deferred items.(i)
Facts. X has only common stock outstanding, and
M1 and M2 (who are members of the same group)
own 80 percent and 20 percent, respectively, of X’s
stock. X operates two divisions, each of which defers
prepaid subscription income pursuant to an election
under section 455. X distributes all of its assets in
complete liquidation. M1 receives all of the assets of
Division 1, including prepaid subscription income,
and assumes X’s liability to furnish or deliver the
newspaper, magazine, or other periodical to which
the prepaid subscription income received by M1
relates. M2 receives all of the assets of Division 2,
including prepaid subscription income, and assumes
X’s liability to furnish or deliver the newspaper,
magazine, or other periodical to which the prepaid
subscription income received by M2 relates.
(ii)Acceleration of deferred income items and
succession to other deferred items. Under paragraph
(g)(1) of this section, M1 succeeds to the full amount
of the deferred prepaid subscription income of X at-
tributable to Division 1. Under applicable law, X
does not recognize the deferred prepaid subscription
income attributable to Division 1 because X’s liabil-
ity to furnish or deliver the newspaper, magazine, or
other periodical ends as a result of a transaction to
which section 381(a) applies. Under paragraph (g)(2)
of this section, solely for purposes of determining
whether the deferred income items of X attributable
to Division 2 are taken into account as a result of the
liquidation, the distribution of property to M2 is not
treated as a transaction to which section 381(a) ap-
plies. Therefore, under applicable law, X’s deferred
prepaid subscription income attributable to Division
2 is taken into account in the determination of X’s in-
come or loss with regard to the liquidation. Further,
under paragraph (g)(2) of this section, section 332(a)
does not apply in determining the recognition or non-
recognition of any income that M2 realizes on ac-
count of consideration received (or deemed received)
on its assumption of X’s liability to furnish or de-
liver the newspaper, magazine, or other periodical to
which the prepaid subscription income relates.
(7)Effective/applicability date.This
paragraph (g) applies to transactions oc-
curring after April 14, 2008.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved January 8, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on January 14,
2008, 8:45 a.m., and published in the issue of the Federal
Register for January 15, 2008, 73 F.R. 2416)
March 17, 20085912008–11 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Voluntary Closing Agreement
Program For Tax-Exempt
Bonds and Tax Credit Bonds
Notice 2008–31
SECTION 1. PURPOSE
This notice provides information about
the voluntary closingagreement program
for tax-exempt bonds and tax credit bonds
(“TEB VCAP”). In particular, the no-
tice updates procedures whereby issuers
of tax-exempt bonds and tax credit bonds
can resolve violations of the Internal Rev-
enue Code (the “Code”) through closing
agreements with the Internal Revenue Ser-
vice (the “Service”). The Tax Exempt
Bonds Compliance & Program Manage-
ment (“TEB CPM”) function of Tax Ex-
empt and Government Entities (TE/GE) is
continuing to develop voluntary compli-
ance initiatives to insure compliance by is-
suers of tax-exempt bonds and tax credit
bonds with applicable provisions of the
Code. TEB VCAP is part of the TEB CPM
voluntary compliance initiatives and pro-
vides appropriate remedies when issuers
voluntarily come forward and express a
desire to resolve violations of the Code.
TEB VCAP is intended to encourage is-
suers and conduit borrowers to exercise
due diligence in complying with the Code
and to provide a vehicle to correct viola-
tions of the Code. It is the continuing pol-
icy of the Service to attempt to resolve vi-
olations of the Code without taxing bond-
holders. TEB VCAP reflects this policy.
The Service is continuing to work on
more detailed procedures about the pro-
gram, and intends to provide those proce-
dures in forthcoming guidance. For ex-
ample, the Service anticipates specifying
standardized closing agreement terms and
amounts for particular violations.
SECTION 2. CHANGES
This notice modifies and supersedes
Notice 2001–60, 2001–2 C.B. 304. In
general, Notice 2001–60 is amended by:
(1) changing references to Outreach Plan-
ning and Review (OPR) to Compliance
& Program Management (CPM); (2) in-
corporating tax credit bonds into the TEB
VCAP program; (3) simplifying section
5(a) by referring to Internal Revenue Man-
ual (“IRM”) 7.2.3 for the specific infor-
mation required for a VCAP submission;
(4) clarifying that under section 5(b) CPM
staff will obtain additional information as
needed; (5) clarifyingthat all information
for a VCAP submission must be provided
in electronic format; and (6) providing
email and regular mail addresses for sub-
missions.
SECTION 3. BACKGROUND
Gross income does not include inter-
est on any state or local bond that meets
the requirements of section 103 and related
provisions of the Code. A credit against
tax is provided to a holder of a qualified
tax credit bond issued under sections 54,
1397E or 1400N that meets the require-
ments of those sections and related pro-
visions of the Code. Under certain cir-
cumstances, an issuer may take remedial
action under provisions such as sections
1.141–12, 1.142–2, 1.144–2, 1.145–2, and
1.147–2 of the Income Tax Regulations
and similar provisions that are applicable
to tax credit bonds in order to cure a viola-
tion of the Code.
The Service has previously provided
formal tax-exempt bond closing agree-
ment programs such as the program de-
scribed in Rev. Proc. 97–15, 1997–1
C.B. 635. Violations of section 103 and
related provisions of the Code that cannot
be remediated under existing remedial ac-
tion provisions or other tax-exempt bond
closing agreement programs contained in
regulations or other published guidance
may be resolved by entering into a closing
agreement under TEB VCAP.
Section 7121 of the Code and the regu-
lations thereunder authorize the Commis-
sioner to enter into written closing agree-
ments with any person in connection with
the tax liability of such person (or of the
person or estate for which he acts). Section
301.7121–1 of the Income Tax Regulations
provides, in part, that a closing agreement
may be entered into in any case in which
there appears to be an advantage in hav-
ing the case permanently and conclusively
closed, or if good and sufficient reasons are
shown by the taxpayer for desiring a clos-
ing agreement and it is determined by the
Commissioner that the United States will
sustain no disadvantage through consum-
mationofsuchanagreement.
SECTION 4. SCOPE OF TEB VCAP
Under TEB VCAP, an issuer may re-
quest a closing agreement with respect to
its bonds to resolve violations of sections
103, 54, 1397E, 1400N and related provi-
sions of the Code. TEB VCAP is not avail-
able when:
(a) Absent extraordinary circum-
stances, the violation can be remediated
under existing remedial action provisions
or tax-exempt bond closing agreement
programs contained in regulations or other
published guidance.
(b) The bond issue is under examina-
tion. A bond issue is generally treated
as under examination on the date a letter
opening an examination on the bond issue
is sent.
(c) The tax-exempt status of the bonds
or qualified status of tax credit bonds is at
issue in any court proceeding or is being
considered by the IRS Office of Appeals.
(d) The Service determines that the vi-
olation was due to willful neglect.
SECTION 5. PROCEDURES
FOR REQUESTING A CLOSING
AGREEMENT UNDER TEB VCAP
(a)InformationRequiredinRequests.
An issuer or its authorized representative
requesting a closing agreement must sub-
mit the information specified in IRM 7.2.3
and the information reporting return for
the applicable bonds on IRS Form 8038 or
other comparable form that was filed with
respect to the issue. (For convenience of
reference, the relevant portions of the In-
ternal Revenue Manual (IRM) are avail-
able on the IRS website, atwww.irs.gov,in
the section on the Tax-Exempt Bond Com-
munity, under the subheading of Published
Guidance.) All information concerning
the closing agreement must be submitted
under penalty of perjury signed by an of-
ficial of the issuer with knowledge of the
issue and authorized to make the submis-
sions on behalf of the issuer. The re-
quest may also contain a Form 2848 with
the name, address, phone number, and fax
number of an authorized contact person.
2008–11 I.R.B.592March 17, 2008

(b)Additional Information for Re-
quests. CPM staff may require additional
information depending on the facts and
circumstances. All additional information
must be submitted under penalty of per-
jury signed by the person who initially
signed the submission or who would have
been authorized to make the original sub-
mission.
(c)Electronic Format. All informa-
tion submitted in support of a closing
agreement request must be provided in an
electronic format that is either emailed in
PDF format or provided on a compact disc
(“CD”) sent via regular mail to the address
provided by this notice. Hard copies of
the submissions can be provided but are
not required.
(d)Anonymous Closing Agreement
Requests. An issuer or its authorized
representative may initiate discussions
regarding the appropriate terms of a clos-
ing agreement on an anonymous basis.
An anonymous request may be made on
behalf of a group of similarly situated is-
suers. However, the execution of a closing
agreement must be between the Service
and a disclosed issuer, and all terms of
a closing agreement must be consistent
with section 7121 of the Code. Until the
name of the bond issue is disclosed to the
Service, a request for a closing agreement
under TEB VCAP will not prevent the
Service from beginning an examination
of the bond issue. An issue for which
a request has been submitted under this
paragraph (d) that has been placed under
examination prior to the date the issue is
identified to the Service will no longer be
eligible for TEB VCAP.
(e)TEB VCAP Mailing Address. TEB
VCAP submissions should be mailed to:
Internal Revenue Service
Attn: TEB VCAP
1122 Town & Country Commons
St. Louis, MO 63017
(f)TEBVCAPE-MailAddress.
In the alternative, VCAP information
maybesubmittedinPDFformatto
TEBVCAP@irs.gov. TEB CPM will
provide an acknowledgement of receipt of
an email request.
SECTION 6. CLOSING AGREEMENT
TERMS
Closing agreements under TEB VCAP
will generally follow the model closing
agreement in IRM 4.81.1, Exhibit 9, as the
same may be modified or changed. Spe-
cific closing agreement terms will depend
on the facts and circumstances of the case,
including the degree of diligence exercised
by the issuer and any conduit borrower.
Any standardized closing agreement terms
that are developed for TEB VCAP will be
set forth in the Internal Revenue Manual
and/or other published guidance.
SECTION 7. EFFECT OF CLOSING
AGREEMENT EXECUTED UNDER
TEB VCAP
A closing agreement properly executed
by the issuer and the Service will protect
bondholders from including in their gross
income any interest on the bonds or from
recapturing tax credits during the period
specified in the agreement for any viola-
tion described in the agreement. A closing
agreement executed under section 7121 of
the Code shall be final and conclusive ex-
cept that: (1) the matter it relates to may
be reopened in the event of fraud, malfea-
sance, or misrepresentation of a material
fact; (2) it is subject to the sections of
the Code that expressly provide that ef-
fect be given to theirprovisions (including
any stated exception for section 7122 of
the Code) notwithstanding any other law
or rule of law; and (3) it is subject to any
law, enacted after the date of the agree-
ment, that applies to a tax period ending
after the date of the agreement covered by
the agreement.
SECTION 8. REQUESTS FOR
COMMENTS
We anticipated that TEB VCAP will
continue to be expanded and refined over
time based on experience and public com-
ment. The Service welcomes comments
regarding the format and operation of
TEB VCAP, and suggestions with re-
gard to the general framework of closing
agreement terms including standardized
closing agreement terms and amounts
that may be specified for particular vi-
olations. Comments should be submit-
tedinwritingandshouldbeemailedto
Steven.A.Chamberlin@irs.govor mailed
to the following address:
Steven A. Chamberlin
Manager, Tax Exempt Bonds
Compliance & Program
Management
SE:T:GE:TEB:CPM
1122 Town & Country Commons
St. Louis, MO 63017
SECTION 9. EFFECT ON OTHER
DOCUMENTS
Notice 2001–60, 2001–2 C.B. 304, is
modified and superseded.
SECTION 10. EFFECTIVE DATE
TEB VCAP is effective February 27,
2008.
SECTION 11. DRAFTING
INFORMATION
The principal authors of this notice
are Steven A. Chamberlin of Tax Exempt
Bonds Compliance & Program Manage-
ment, Tax Exempt & Government Entities,
and Carla Young of the Office of Associate
Chief Counsel (Financial Institutions &
Products). For furtherinformation regard-
ing this notice, contact Steven Chamberlin
at (636) 255–1290 or Carla Young at (202)
622–3980 (not toll-free calls).
Section 67 Limitations on
Estates or Trusts for Bundled
Investment Management and
Advisory Costs
Notice 2008–32
This notice provides interim guidance
on the treatment under § 67 of the Inter-
nal Revenue Code of investment advisory
costs and other costs subject to the 2-per-
cent floor under § 67(a) that are bundled
as part of one commission or fee paid to
the trustee or executor (“Bundled Fidu-
ciary Fee”) and are incurred by a trust other
than a grantor trust (nongrantor trust) or an
estate.
BACKGROUND
On January 16, 2008, the Supreme
Court of the United States issued its de-
cision inMichael J. Knight, Trustee of
March 17, 20085932008–11 I.R.B.

William L. Rudkin Testamentary Trust
v. Commissioner, 552 U.S.
,128
S. Ct. 782 (2008), holding that costs paid
to an investment advisor by a nongrantor
trust or estate generally are subject to the
2-percent floor for miscellaneous itemized
deductions under § 67(a). The IRS and the
Treasury Department expect to issue final
regulations under § 1.67–4 of the Income
Tax Regulations consistent with the
Supreme Court’s holding inKnight.The
final regulations alsowill address the issue
raised when a nongrantor trust or estate
pays a Bundled Fiduciary Fee for costs
incurred in-house by the fiduciary, some
of which are subject to the 2-percent floor
and some of which are fully deductible
without regard to the 2-percent floor. The
final regulations, however, will not be
issued prior to the due date for filing 2007
income tax returns (determined without
regard to extensions), and will apply only
prospectively. Accordingly, in light of
the Supreme Court’s decision inKnight,
the IRS and the Treasury Department
are providing interim guidance that
specifically addresses the treatment of a
Bundled Fiduciary Fee.
INTERIM GUIDANCE
Taxpayers will not be required to deter-
mine the portion of a Bundled Fiduciary
Fee that is subject to the 2-percent floor
under § 67 for any taxable year beginning
before January 1, 2008. Instead, for each
such taxable year, taxpayers may deduct
the full amount of the Bundled Fiduciary
Fee without regard to the 2-percent floor.
Payments by the fiduciary to third par-
ties for expenses subject to the 2-percent
floor are readily identifiable and must be
treated separately from the otherwise Bun-
dled Fiduciary Fee.
The IRS and the Treasury Department
anticipate that final regulations under
§ 1.67–4 will be published without delay
after the extended comment period granted
in this notice. The final regulations may
contain one or more safe harbors for the
allocation of fees and expenses between
those costs that are subject to the 2-per-
cent floor and those that are not. Any
safe harbors in the final regulations for
determining the allocation of a bundled
fiduciary fee between costs subject to the
2-percent floor and those not subject to the
2-percent floor may be available for tax-
payers to use for taxable years beginning
on or after January 1, 2008.
REQUESTS FOR COMMENTS
Interested parties are invited to submit
comments on this notice and § 1.67–4
of the proposed regulations published in
theFederal Registerof July 27, 2007
(REG–128224–06, 2007–36 I.R.B. 551
[72 FR 41243–01]) by May 27, 2008.
The IRS and the Treasury Department
are considering various modifications to
§ 1.67–4 of the proposed regulations that
may include safe harbors for determin-
ing the allocation of a Bundled Fiduciary
Fee between costs subject to the 2-per-
cent floor and those that are not. The IRS
and the Treasury Department request com-
ments on whether safe harbors would be
helpful and request suggestions on how the
safe harbors may be formulated. Com-
ments are specifically requested on reason-
able estimates of the percentage(s) of the
total costs of administering a nongrantor
trust or estate that is attributable to costs
subject to the 2-percent floor including,
but not limited to, costs for investment
management and advice. Comments are
also requested on whether the safe har-
bors should reflect the nature or value of
the assets in the nongrantor trust or estate,
and/or the number of beneficiaries of the
nongrantor trust or estate.
Comments should be submitted to: In-
ternal Revenue Service, CC:PA:LPD:PR
(Notice 2008–32), Room 5203, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, DC 20224.Alternatively,
comments may be hand delivered
Monday through Friday between the
hours of 8:00 a.m. to 4:00 p.m. to:
CC:PA:LPD:PR (Notice 2008–32),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
N.W., Washington, DC. Comments
may also be submitted electronically
via the following e-mail address:
Notice.Comments@irscounsel.treas.gov.
Please include Notice 2008–32 in the
subject line of any electronic submissions.
EFFECTIVE DATE
This notice is effective February 27,
2008.
CONTACT INFORMATION
The principal author of this notice
is Jennifer N. Keeney of the Office of
Associate Chief Counsel (Passthroughs
& Special Industries). For further in-
formation regarding this notice, contact
Jennifer N. Keeney at (202) 622–3060
(not a toll-free call).
26 CFR 601.601: Rules and regulations.
(Also Part I, §§ 25, 103, 143; 1.25–4T, 1.103–1,
6a.103A–2.)
Rev. Proc. 2008–19
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance with respect to the United States and
area median gross income figures that are
to be used by issuers of qualified mortgage
bonds, as defined in § 143(a) of the Inter-
nal Revenue Code, and issuers of mortgage
credit certificates, as defined in § 25(c), in
computing the housing cost/income ratio
described in § 143(f)(5).
SECTION 2. BACKGROUND
.01 Section 103(a) provides that, ex-
cept as provided in § 103(b), gross income
does not include interest on any state or
local bond. Section 103(b)(1) provides
that § 103(a) shall not apply to any pri-
vate activity bond that is not a qualified
bond (within the meaning of § 141). Sec-
tion 141(e) provides that the term “qual-
ified bond” includes any private activity
bond that (1) is a qualified mortgage bond,
(2) meets the applicable volume cap re-
quirements under § 146, and (3) meets the
applicable requirements under § 147.
.02 Section 143(a)(1) provides that the
term “qualified mortgage bond” means a
bond that is issued as part of a “qualified
mortgage issue”. Section 143(a)(2)(A)
provides that the term “qualified mort-
gage issue” means an issue of one or more
bonds by a state or political subdivision
thereof, but only if (i) all proceeds of the
issue (exclusive of issuance costs and a
reasonably required reserve) are to be used
to finance owner-occupied residences; (ii)
the issue meets the requirements of sub-
sections (c), (d), (e), (f), (g), (h), (i), and
(m)(7) of § 143; (iii) the issue does not
2008–11 I.R.B.594March 17, 2008

meet the private business tests of para-
graphs(1)and(2)of§141(b);and(iv)
with respect to amounts received more
than 10 years after the date of issuance,
repayments of $250,000 or more of prin-
cipal on financing provided by the issue
are used not later than the close of the first
semi-annual period beginning after the
date the prepayment (or complete repay-
ment) is received to redeem bonds that are
part of the issue.
.03 Section 143(f) imposes eligibility
requirements concerning the maximum
income of mortgagors for whom financing
maybeprovidedbyqualifiedmortgage
bonds. Section 25(c)(2)(A)(iii)(IV) pro-
vides that recipientsof mortgage credit
certificates must meet the income re-
quirements of § 143(f). Generally, under
§§ 143(f)(1) and 25(c)(2)(A)(iii)(IV),
these income requirements are met only
if all owner-financing under a qualified
mortgage bond and all certified indebt-
edness amounts under a mortgage credit
certificate program are provided to mort-
gagors whose family income is 115 percent
or less of the applicable median family
income. Under § 143(f)(6), the income
limitation is reduced to 100 percent of the
applicable median family income if there
are fewer than three individuals in the
family of the mortgagor.
.04 Section 143(f)(4) provides that the
term “applicable median family income”
means the greater of (A) the area median
gross income for the area in which the res-
idence is located, or (B) the statewide me-
dian gross income for the state in which the
residence is located.
.05 Section 143(f)(5) provides for an
upward adjustment of the income limita-
tions in certain high housing cost areas.
Under § 143(f)(5)(C), a high housing
cost area is a statistical area for which
the housing cost/income ratio is greater
than 1.2. The housing cost/income ratio
is determined under § 143(f)(5)(D) by
dividing (a) the applicable housing price
ratio by (b) the ratio that the area median
gross income bears to the median gross
income for the United States. The applica-
ble housing price ratio is the new housing
price ratio (new housing average purchase
price for the area divided by the new hous-
ing average purchase price for the United
States) or the existinghousing price ratio
(existing housing average area purchase
price divided by the existing housing aver-
age purchase price for the United States),
whichever results in the housing cost/in-
come ratio being closer to 1. This income
adjustment applies only to bonds issued,
and nonissued bond amounts elected, after
December 31, 1988.See§ 4005(h) of the
Technical and Miscellaneous Revenue Act
of 1988, 1988–3 C.B. 1, 311 (1988).
.06 The Department of Housing and
Urban Development (HUD) has com-
puted the median gross income for the
United States, the states, and statisti-
cal areas within the states. The income
information was released to the HUD
regional offices on February 13, 2008,
and may be obtained by calling the HUD
reference service at 1–800–245–2691.
The income information is also avail-
able at HUD’s World Wide Web site,
http:huduser.org/datasets/il.html,which
provides a menu from which you may
select the year and type of data of interest.
The Internal Revenue Service annually
publishes the median gross income for the
United States.
.07 The most recent nationwide average
purchase prices and average area purchase
price safe harbor limitations were pub-
lished on March 10, 2008, in Rev. Proc.
2008–17, 2008–10 I.R.B. 549.
SECTION 3. APPLICATION
.01 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use
$61,500 as the median gross income for
the United States.See§2.06ofthisrev-
enue procedure.
.02 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use the
area median gross income figures released
by HUD on February 13, 2008.See§2.06
of this revenue procedure.
SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
.01 Rev. Proc. 2007–31, 2007–19
I.R.B. 1225, is obsolete except as provided
in § 5.02 of this revenue procedure.
.02 This revenue procedure does not af-
fect the effective date provisions of Rev.
Rul. 86–124, 1986–2 C.B. 27. Those ef-
fective date provisions will remain opera-
tive at least until the Service publishes a
new revenue ruling that conforms the ap-
proach to effective dates set forth in Rev.
Rul. 86–124 to the general approach taken
in this revenue procedure.
SECTION 5. EFFECTIVE DATES
.01 Issuers must use the United States
and area median gross income figures
specifiedin§3ofthisrevenueprocedure
for commitments to provide financing that
are made, or (if the purchase precedes the
financing commitment) for residences that
are purchased, in the period that begins on
February 13, 2008, and ends on the date
when these United States and area median
gross income figures are rendered obsolete
by a new revenue procedure.
.02 Notwithstanding § 5.01 of this rev-
enue procedure, issuers may continue to
rely on the United States and area me-
dian gross income figures specified in Rev.
Proc. 2007–31 with respect to bonds orig-
inally sold and nonissued bond amounts
elected not later than March 30, 2008, if
the commitments or purchases described
in § 5.01 are made not later than May 29,
2008.
DRAFTING INFORMATION
The principal author of this revenue
procedure is David White of the Office
of Associate Chief Counsel (Financial
Institutions & Products). For further infor-
mation regarding this revenue procedure,
contact Mr. White at (202) 622–3980 (not
a toll-free call).
March 17, 20085952008–11 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Hybrid Retire
ment Plans
REG–104946–0
7
AGENCY: Inter
nal Revenue Service
(IRS), Treasu
ry.
ACTION: Notic
e of proposed rulemaking.
SUMMARY: This
document contains
proposed reg
ulations providing guid-
ance relatin
g to sections 411(a)(13) and
411(b)(5) of
the Internal Revenue Code
(Code) conce
rning certain hybrid defined
benefit pla
ns. These regulations provide
guidance on
changes made by the Pension
Protection
Act of 2006. These regulations
affect spon
sors, administrators, partici-
pants, and
beneficiaries of hybrid defined
benefit pl
ans.
DATES: Wri
tten or electronic comments
and reques
ts for a public hearing must be
received b
y March 27, 2008.
ADDRESSES
: Send submissions to:
CC:PA:LPD
:PR(REG–104946–07),
Room 5203
, Internal Revenue Service, PO
Box 7604,
Ben Franklin Station, Wash-
ington, D
C 20044. Submissions may be
hand-del
ivered Monday through Friday
between t
he hours of 8 a.m. and 4 p.m.
to: CC:P
A:LPD:PR (REG–104946–07),
Courier
’s Desk, Internal Revenue Ser-
vice, 11
11 Constitution Avenue, NW,
Washing
ton, DC, or sent electroni-
cally vi
a the Federal eRulemaking Por-
tal ath
ttp://www.regulations.gov(IRS
REG–10
4946–07).
FOR FUR
THER INFORMATION
CONTAC
T: Concerning the regulations,
Lauson
C. Green or Linda S. F. Marshall
at (202
) 622–6090; concerning submis-
sions
of comments or to request a public
heari
ng, Funmi Taylor at (202) 622–7180
(not t
oll-free numbers).
SUPPL
EMENTARY INFORMATION:
Backg
round
This d
ocument contains amendments to
the In
come Tax Regulations (26 CFR part
1) under secti
ons 411(a)(13) and 411(b)(5)
of the Code. Ge
nerally, a defined benefit
pension plan m
ust satisfy the minimum
vesting stand
ards of section 411(a) and the
accrual requi
rementsofsection411(b)in
order to be qu
alified under section 401(a)
of the Code. S
ections 411(a)(13) and
411(b)(5), w
hich were added to the Code
by section 70
1(b) of the Pension Protec-
tion Act of 2
006, Public Law 109–280,
120 Stat. 78
0 (PPA ’06), modify the min-
imum vestin
g standards of section 411(a)
and the accr
ual requirements of section
411(b).
Section 411
(a)(13)(A) provides that an
applicabl
e defined benefit plan (which is
defined in
section 411(a)(13)(C)) is not
treated as
failing to meet either (i) The
requireme
nts of section 411(a)(2) (sub-
ject to a sp
ecial vesting rule in section
411(a)(1
3)(B) with respect to benefits
derived f
rom employer contributions) or
(ii) The r
equirements of section 411(c)
or 417(e)
with respect to contributions
other th
an employee contributions, merely
because
the present value of the accrued
benefit
(or any portion thereof) of any
partici
pant is, under the terms of the plan,
equal to
the amount expressed as the bal-
ance in
a hypothetical account or as an
accumu
lated percentage of the partici-
pant’s
final average compensation. Sec-
tion 41
1(a)(13)(B) requires an applicable
define
d benefit plan to provide that an em-
ploye
e who has completed at least 3 years
of ser
vice has a nonforfeitable right to 100
perce
nt of the employee’s accrued benefit
deriv
ed from employer contributions.
Under
section 411(a)(13)(C)(i), a plan
is an a
pplicable defined benefit plan if
the pl
an is a defined benefit plan under
whic
h the accrued benefit (or any portion
ther
eof) of a participant is calculated as the
bala
nce of a hypothetical account main-
tain
ed for the participant or as an accu-
mula
ted percentage of the participant’s fi-
nal
average compensation. Under sec-
tio
n 411(a)(13)(C)(ii), the Secretary of the
Tre
asury is to issue regulations which in-
clu
de in the definition of an applicable de-
fin
ed benefit plan any defined benefit plan
(or
portion of such a plan) which has an ef-
fe
ctsimilartoaplandescribedinsection
41
1(a)(13)(C)(i).
Section 411(b
)(1)(H)(i) provides that
a defined bene
fit plan fails to comply
with section 4
11(b) if, under the plan,
an employee’s
benefit accrual is ceased,
or the employe
e’s rate of benefit accrual
is reduced, b
ecause of the attainment of
any age. Sect
ion 411(b)(5), which was
addedtotheC
ode by section 701(b)(1)
of PPA ’06, pr
ovides additional rules re-
latedtosec
tion 411(b)(1)(H)(i). Section
411(b)(5)(
A) generally provides that a
plan is not t
reated as failing to meet the
requiremen
ts of section 411(b)(1)(H)(i)
if a partic
ipant’s accrued benefit, as de-
termined a
s of any date under the terms
of the plan
, would be equal to or greater
than that o
f any similarly situated younger
individua
l who is or could be a partic-
ipant. Se
ction 411(b)(5)(G) provides
that, for
purposes of section 411(b)(5),
any refer
ence to the accrued benefit of
a partici
pant shall be a reference to the
partici
pant’s benefit accrued to date. For
purpose
s of section 411(b)(5)(A), section
411(b)(
5)(A)(iv) provides that the accrued
benefit
may, under the terms of the plan,
be expre
ssed as an annuity payable at
normal
retirement age, the balance of a
hypoth
etical account, or the current value
of the a
ccumulated percentage of the em-
ployee
’s final average compensation.
Sectio
n 411(b)(5)(B) imposes several
requir
ements on an applicable defined
benefi
t plan as a condition of the plan
satis
fying section 411(b)(1)(H). Section
411(b
)(5)(B)(i) provides that such a plan is
treat
ed as failing to meet the requirements
of sec
tion 411(b)(1)(H) if the terms of the
plan p
rovide for an interest credit (or an
equi
valent amount) for any plan year at a
rate
that is greater than a market rate of
retu
rn. Under section 411(b)(5)(B)(i)(I), a
plan
is not treated as having an above-mar-
ket r
ate merely because the plan provides
for a
reasonable minimum guaranteed rate
of r
eturn or for a rate of return that is
equ
al to the greater of a fixed or variable
rat
e of return. Section 411(b)(5)(B)(i)(II)
pro
vides that an interest credit (or an
equ
ivalent amount) of less than zero can
in
no event result in the hypothetical ac-
co
unt balance or similar amount being
le
ss than the aggregate amount of contri-
bu
tions credited to the account. Section
41
1(b)(5)(B)(i)(III) specifies that the Sec-
2008–11 I.R.B.596March 17, 2008

retary of the Treasury may provide by
regulation for rules governing the calcula-
tion of a market rate of return for purposes
of section 411(b)(5)(B)(i)(I) and for per-
missible methods of crediting interest to
the account (including fixed or variable
interest rates) resulting in effective rates of
return meeting the requirements of section
411(b)(5)(B)(i)(I).
Section 411(b)(5)(B)(ii), (iii), and (iv)
contain minimum benefit rules that ap-
ply if, after June 29, 2005, an applicable
plan amendment is adopted. Section
411(b)(5)(B)(v)(I) defines an applica-
ble plan amendment as an amendment
to a defined benefit plan which has the
effect of converting the plan to an ap-
plicable defined benefit plan. Under
section 411(b)(5)(B)(ii), if, after June
29, 2005, an applicable plan amendment
is adopted, the plan is treated as fail-
ing to meet the requirements of section
411(b)(1)(H) unless the requirements of
section 411(b)(5)(B)(iii) are met with
respect to each individual who was a par-
ticipant in the plan immediately before
the adoption of the amendment. Section
411(b)(5)(B)(iii) specifies that, subject to
section 411(b)(5)(B)(iv), the requirements
of section 411(b)(5)(B)(iii) are met with
respect to any participant if the accrued
benefit of the participant under the terms
of the plan as in effect after the amend-
ment is not less than the sum of: (I) The
participant’s accrued benefit for years of
service before the effective date of the
amendment, determined under the terms
oftheplanasineffectbeforetheamend-
ment; plus (II) The participant’s accrued
benefit for years of service after the effec-
tive date of the amendment, determined
under the terms of the plan as in effect after
the amendment. Section 411(b)(5)(B)(iv)
provides that, for purposes of section
411(b)(5)(B)(iii)(I), the plan must credit
the participant’s account or similar amount
with the amount of any early retirement
benefit or retirement-type subsidy for the
plan year in which the participant retires
if, as of such time, the participant has met
the age, years of service, and other re-
quirements under the plan for entitlement
to such benefit or subsidy.
Section 411(b)(5)(B)(v) sets forth
certain provisions related to an ap-
plicable plan amendment.Section
411(b)(5)(B)(v)(II) provides that if the
benefits under two or more defined ben-
efit plans of an employer are coordinated
in such a manner as to have the effect of
adoption of an applicable plan amend-
ment, the plan sponsor is treated as having
adopted an applicable plan amendment
as of the date the coordination begins.
Section 411(b)(5)(B)(v)(III) directs the
Secretary of the Treasury to issue regu-
lations to prevent the avoidance of the
purposes of section 411(b)(5)(B) through
the use of two or more plan amendments
rather than through a single plan amend-
ment.
Section 411(b)(5)(B)(vi) provides a
special rule for converting a variable in-
terest crediting rate to a fixed rate for
purposes of determining plan benefits in
the case of a terminating applicable de-
fined benefit plan.
Section 411(b)(5)(C) provides that a
plan is not treated as failing to meet the
requirements of section 411(b)(1)(H)(i)
solely because the plan provides offsets
against benefits under the plan to the ex-
tent the offsets are allowable in applying
the requirements of section 401(a). Sec-
tion 411(b)(5)(D) provides that a plan
is not treated as failing to meet the re-
quirements of section 411(b)(1)(H) solely
because the plan provides a disparity in
contributions or benefits with respect to
which the requirements of section 401(l)
(relating to permitted disparity for Social
Security benefits and related matters) are
met.
Section 411(b)(5)(E) provides that a
plan is not treated as failing to meet the re-
quirements of section 411(b)(1)(H) solely
because the plan provides for indexing of
accrued benefits under the plan. Under
section 411(b)(5)(E)(iii), indexing means
the periodic adjustment of the accrued
benefit by means of the application of a
recognized investment index or methodol-
ogy. Section 411(b)(5)(E)(ii) requires that,
except in the case of a variable annuity,
the indexing not result in a smaller benefit
than the accrued benefit determined with-
out regard to the indexing.
Section 701(a) of PPA ’06 added provi-
sions to the Employee Retirement Income
Security Act of 1974, Public Law 93–406
(88 Stat. 829) (ERISA), that are paral-
lel to the above-described sections of the
Code that were added by section 701(b) of
PPA ’06. The guidance provided in these
proposed regulations with respect to the
Code would also apply for purposes of the
parallel amendments to ERISA made by
section701(a)ofPPA’06.
1
Section 701(c) of PPA ’06 added pro-
visions to the Age Discrimination in Em-
ployment Act of 1967, Public Law 90–202
(81 Stat. 602) (ADEA), that are parallel
to section 411(b)(5) of the Code. Exec-
utive Order 12067 requires all Federal
departments and agencies to advise and
offer to consult with the Equal Employ-
ment Opportunity Commission (EEOC)
during the development of any proposed
rules, regulations, policies, procedures
or orders concerning equal employment
opportunity. The IRS and the Treasury De-
partment have consulted with the EEOC
prior to the issuance of these proposed
regulations.
Section 701(d) of PPA ’06 provides
that nothing in the amendments made by
section 701 should be construed to create
an inference concerning the treatment of
applicable defined benefit plans or conver-
sions of plans into applicable defined ben-
efit plans under section 411(b)(1)(H), or
concerning the determination of whether
an applicable defined benefit plan fails to
meet the requirements of section 411(a)(2),
411(c), or 417(e) as in effect before such
amendments solely because the present
value of the accrued benefit (or any por-
tion thereof) of any participant is, under
the terms of the plan, equal to the amount
expressed as the balance in a hypothetical
account or as an accumulated percentage
of the participant’s final average compen-
sation.
Section701(e)ofPPA’06setsforth
the effective date provisions with respect
to amendments made by section 701 of
PPA ’06. Section 701(e)(1) specifies that
the amendments made by section 701
generally apply to periods beginning on
or after June 29, 2005. Thus, the age
discrimination safe harbors under section
411(b)(5)(A) and section 411(b)(5)(E) are
effective for periods beginning on or after
June 29, 2005. Section 701(e)(2) pro-
vides that the special present value rules
1
Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretivejurisdiction over the subject matter addressed by these proposed
regulations for purposes of ERISA, as well as the Code.
March 17, 20085972008–11 I.R.B.

of section 411(a)(13)(A) are effective for
distributions made after August 17, 2006.
Under section 701(e)(3) of PPA ’06, in
the case of a plan in existence on June 29,
2005, the 3-year vesting rule under section
411(a)(13)(B) and the market rate of return
limitation under section 411(b)(5)(B)(i)
are generally effective for years beginning
after December 31, 2007. In the case of
a plan not in existence on June 29, 2005,
those sections are effective for periods
beginning on or after June 29, 2005. Sec-
tion 701(e)(4) of PPA ’06 contains special
effective date provisions for collectively
bargained plans that modify these effec-
tive dates.
Under section 701(e)(5) of PPA ’06,
sections 411(b)(5)(B)(ii), (iii), and (iv)
apply to a conversion amendment that is
adopted after, and takes effect after, June
29, 2005.
Section 702 of PPA ’06 provides for
regulations to be prescribed by August 16,
2007, addressing the application of rules
set forth in section 701 of PPA ’06 where
the conversion of a defined benefit pension
plan into an applicable defined benefit plan
is made with respect to a group of employ-
ees who become employees by reason of a
merger, acquisition, or similar transaction.
Proposed regulations (EE–184–86,
1988–1 C.B. 881) under sections
411(b)(1)(H) and 411(b)(2) were pub-
lished by the Treasury Department and the
IRS in the Federal Register on April 11,
1988 (53 FR 11876), as part of a package
of regulations that also included pro-
posed regulations under sections 410(a),
411(a)(2), 411(a)(8), and 411(c) (relating
to the maximum age for participation,
vesting, normal retirement age, and actu-
arial adjustments after normal retirement
age, respectively).
2
Notice 96–8, 1996–1 C.B. 359, see
§601.601(d)(2)(ii)(b)ofthischapter,de-
scribed the application of sections 411
and 417(e) to a single sum distribution
under a cash balance plan where inter-
est credits under the plan are frontloaded
(that is, where future interest credits to an
employee’s hypothetical account balance
are not conditioned upon future service
and thus accrue at the same time that the
benefits attributable to a hypothetical al-
location to the account accrue). Under
the analysis set forth in Notice 96–8, in
order to comply with sections 411(a) and
417(e) in calculating the amount of a sin-
gle sum distribution under a cash balance
plan, the balance of an employee’s hy-
pothetical account must be projected to
normal retirement age and converted to an
annuity under the terms of the plan, and
then the employee must be paid at least
the present value of the projected annuity,
determined in accordance with section
417(e). Under that analysis, where a cash
balance plan provides frontloaded interest
credits using an interest rate that is higher
than the section 417(e) applicable interest
rate, payment of a single sum distribution
equal to the current hypothetical account
balance as a complete distribution of the
employee’s accrued benefit may result in
a violation of section 417(e) or a forfeiture
in violation of section 411(a). In addi-
tion, Notice 96–8 proposed a safe harbor
which provided that, if frontloaded inter-
est credits are provided under a plan at a
rate no greater than the sum of identified
standardindicesand associated margins,
no violation of section 411(a) or 417(e)
would result if the employee’s entire ac-
crued benefit is distributed in the form
of a single sum distribution equal to the
employee’s hypothetical account balance,
provided the plan uses appropriate annuity
conversion factors. Since the issuance of
Notice 96–8, four federal appellate courts
have followed the analysis set out in the
Notice:Esden v. Bank of Boston,229
F.3d 154 (2d Cir. 2000),cert. dismissed,
531 U.S. 1061 (2001);West v. AK Steel
Corp. Ret. Accumulation Pension Plan,
484 F.3d 395 (6th Cir. 2007),reh’g and
reh’g en banc denied, No. 06–3442, 2007
U.S. App. LEXIS 20447 (6th Cir. Aug. 8,
2007);Berger v. Xerox Corp. Ret. Income
Guarantee Plan, 338 F.3d 755 (7th Cir.
2003),reh’g and reh’g en banc denied,
No. 02–3674, 2003 U.S. App. LEXIS
19374 (7th Cir. Sept. 15, 2003);Lyons v.
Georgia-Pacific Salaried Employees Ret.
Plan, 221 F.3d 1235 (11th Cir. 2000),cert.
denied, 532 U.S. 967 (2001).
Notice 2007–6, 2007–3 I.R.B.
272 (January 16, 2007), see
§601.601(d)(2)(ii)(b)ofthischapter,
provides transitional guidance with re-
spect to certain requirements of sections
411(a)(13) and 411(b)(5) and section
701(b) of PPA ’06. Notice 2007–6
includes certain special definitions, in-
cluding:accumulated benefit,whichis
defined as a participant’s benefit accrued
to date under a plan;lump sum-based
plan, which is defined as a defined
benefit plan under the terms of which the
accumulated benefit of a participant is
expressed as the balance of a hypothetical
account maintained forthe participant or
as the current value of the accumulated
percentage of the participant’s final aver-
age compensation; andstatutory hybrid
plan, which is a lump sum-based plan
or a plan which has an effect similar to
a lump sum-based plan. Notice 2007–6
provides guidance on a number of issues,
including a rule under which a plan that
provides for indexed benefits described in
section 411(b)(5)(E) is a statutory hybrid
plan (because it has an effect similar to
a lump sum-based plan), unless the plan
either solely provides for post-retirement
adjustment of the amounts payable to a
participant or is a variable annuity plan
under which the assumed interest rate
used to determine adjustments is at least 5
percent. The notice provides a safe harbor
forapplyingtherulessetforthinsection
701 of PPA ’06 where the conversion of
a defined benefit pension plan into an
applicable defined benefit plan is made
with respect to a group of employees who
become employees by reason of a merger,
acquisition, or similar transaction. This
transitional guidance, along with other
guidance provided in Part III of Notice
2007–6, applies pending the issuance of
further guidance and, thus, will cease to
apply when these regulations are finalized
and become effective.
Explanation of Provisions
Overview
In general, these proposed regula-
tions would incorporate the transitional
2
On December 11, 2002, the Treasury Department and the IRS issued proposed regulations regarding the age discrimination requirements of section 411(b)(1)(H) that specifically addressed
cash balance plans as part of a package of regulations that also addressed section 401(a)(4) nondiscrimination cross-testing rules applicable to cash balance plans (67 FR 76123). The 2002
proposed regulations were intended to replace the 1988 proposed regulations. In Ann. 2003–22, 2003–1 C.B. 847, see §601.601(d)(2)(ii)(b) of this chapter, the Treasury Department and
the IRS announced the withdrawal of the 2002 proposed regulations under section 401(a)(4), and in Ann. 2004–57, 2004–2 C.B. 15, see §601.601(d)(2)(ii)(b) of this chapter, the Treasury
Department and the IRS announced the withdrawal of the 2002 proposed regulations relating to age discrimination.
2008–11 I.R.B.598March 17, 2008

guidance provided under Notice 2007–6.
However, the proposed regulations would
utilize new terminology (such as statu-
tory hybrid benefit formula and lump
sum-based benefit formula) to take into
account situations where plans provide
more than one benefit formula. These
proposed regulations would also provide
additional guidance with respect to sec-
tions 411(a)(13) and 411(b)(5), taking into
account comments received in response to
Notice 2007–6.
Section 411(a)(13): Special vesting rules
for applicable defined benefit plans and
applicable definitions
The proposed regulations would reflect
new section 411(a)(13)(A) by providing
that an applicable defined benefit plan
does not violate the requirements of sec-
tion 411(a)(2), or the requirements of
section 411(c) or 417(e), with respect to
a participant’s accrued benefit derived
from employer contributions, merely be-
cause the plan determines the present
value of benefits determined under a lump
sum-based benefit formula as the amount
of the hypothetical account maintained for
the participant or as the current value of
the accumulated percentage of the partic-
ipant’s final average compensation under
that formula. However, section 411(a)(13)
does not alter the definition of an accrued
benefit under section 411(a)(7)(A) (which
generally defines a participant’s accrued
benefit as the annual benefit commencing
at normal retirement age), nor does it al-
ter the definition of a normal retirement
benefit under section 411(a)(9) (which
generally defines a participant’s normal
retirement benefit as the benefit under the
plan commencing at normal retirement
age).
Section 411(b)(5)(G) provides that, for
purposes of section 411(b)(5), any ref-
erence to the accrued benefit means the
benefit accrued to date. The proposed
regulations refer to this as the accumu-
lated benefit, which is distinct from the
participant’s accrued benefit under sec-
tion 411(a)(7) (an annuity beginning at
normal retirement age that is actuarially
equivalent to the participant’s accumu-
lated benefit).
The regulations define a lump
sum-based benefit formula as a benefit
formula used to determine all or any part
of a participant’s accumulated benefit un-
der which the benefit provided under the
formula is expressed as the balance of a
hypothetical account maintained for the
participant or as the current value of the
accumulated percentage of the partici-
pant’s final average compensation. Under
the proposed regulations, whether a ben-
efit formula is a lump sum-based benefit
formula would be determined based on
how the accumulated benefit of a partic-
ipant is expressed under the terms of the
plan, and would not depend on whether
the plan provides an optional form of ben-
efit in the form of a single sum payment.
Similarly, a formula would not fail to be
a lump sum-based benefit formula merely
because the plan’s terms state that the
accrued benefit is an annuity at normal
retirement age that is actuarially equiva-
lent to a hypothetical account balance. In
addition, the regulations would provide
that a participant isnot treated as having
a lump sum-based benefit formula merely
because the participant is entitled to a ben-
efit under a defined benefit plan that is not
less than the benefit properly attributable
to after-tax employee contributions.
Section 411(a)(13)(A) applies only
with respect to a benefit provided under a
lump sum-based benefit formula. Accord-
ingly, if the present value rules of section
417(e) apply to a form of benefit under
a plan and the plan provides benefits un-
der a benefit formula that is not a lump
sum-based benefit formula (including, for
example, a plan that provides for indexing
asdescribedinsection411(b)(5)(E)),then
the plan must set forth a methodology
to determine the projected benefit under
that formula at normal retirement age for
purposes of applying the rules of section
417(e), as described in the “Analysis” sec-
tion of Notice 96–8.
The proposed regulations use the term
statutory hybrid benefit formulato de-
scribe the portion of a defined benefit plan
that is an applicable defined benefit plan
describedinsection411(a)(13)(C)(i)or
the portion of the plan that has a similar
effect. Specifically, the proposed regu-
lations would define a statutory hybrid
benefit formula as a benefit formula that is
either a lump sum-based benefit formula
or a formula that has an effect similar to
a lump sum-based benefit formula. For
this purpose, under the proposed regula-
tions, a benefit formula under a defined
benefit plan has an effect similar to a
lump sum-based benefit formula if the for-
mula provides that a participant’s accrued
benefit payable at normal retirement age
(or at benefit commencement, if later) is
expressed as a benefit that includes peri-
odic adjustments (including a formula that
provides for indexed benefits described
in section 411(b)(5)(E)) that are reason-
ably expected to result in a smaller annual
benefitatnormalretirementage(orat
commencement of benefits, if later) for
the participant, when compared to a sim-
ilarly situated, younger individual who is
or could be a participant in the plan. Thus,
a benefit formula under a plan has an ef-
fect similar to a lump sum-based benefit
formula if the right to future adjustments
accrues at the same time as the benefit that
is subject to the adjustments.
The proposed regulations would set
forth certain additional rules that are used
in determining whether a benefit formula
hasaneffectsimilartoalumpsum-based
benefit formula. For example, the pro-
posed regulations provide that a benefit
formula that does not include periodic ad-
justments is treated as a formula with an
effect similar to a lump sum-based ben-
efit formula if the formula is otherwise
described in the preceding paragraph and
the adjustments are provided pursuant to a
pattern of repeated plan amendments. See
§1.411(d)–4, A–1(c)(1). The proposed
regulations would provide that, for pur-
poses of determining whether a benefit
formula has an effect similar to a lump
sum-based benefit formula, indexing that
applies to adjust benefits after the annuity
starting date (for example, cost-of-living
increases) is disregarded. In addition, the
proposed regulations would provide that
a benefit formula under a defined benefit
plan that provides for a benefit properly
attributable to after-tax employee contri-
butions does not have an effect similar to
a lump sum-based benefit formula. The
proposed regulations would also provide
that adjustments under a variable annuity
do not have an effect similar to a lump
sum-based benefit formula if the assumed
interest rate used to determine the ad-
justments is at least 5 percent. Such an
annuity does not have an effect similar to
a lump sum-based benefit formula even if
post-annuity starting date adjustments are
made using a specified assumed interest
rate that is less than 5 percent.
March 17, 20085992008–11 I.R.B.

Pursuant to new section 411(a)(13)(B),
the proposed regulations would provide
that, in the case of a participant whose ac-
crued benefit (or any portion thereof) un-
der a defined benefit plan is determined
under a statutory hybrid benefit formula,
the plan is not treated as meeting the re-
quirements of section 411(a)(2) unless the
plan provides that the participant has a
nonforfeitable right to 100 percent of the
participant’s accrued benefit if the partici-
pant has 3 or more years of service. This
requirement would apply on a participant-
by-participant basis and would apply to
the participant’s entire benefit (not just the
portion of the participant’s benefit that is
determined under a statutory hybrid ben-
efit formula). Furthermore, if the par-
ticipant is entitled to the greater of two
benefits under a plan, one of which is a
benefit calculated under a statutory hy-
brid benefit formula, the proposed regula-
tions would provide that the 3-year vest-
ing requirement applies to that participant
even if the participant’s benefit under the
statutory hybrid benefit formula is ulti-
mately smaller than under the other for-
mula. The proposed regulations do not ad-
dress how the 3-year vesting requirement
applies in the case of floor-offset arrange-
ments.
3
See the discussion in this pream-
ble under the heading “Comments and Re-
quests for Public Hearing.”
Section 411(b)(5): Safe harbor for age
discrimination, conversion protection,
and market rate of return limitation
A.Safe harbor for age discrimination
The proposed regulations under new
section 411(b)(5)(A) would provide that a
plan is not treated as failing to meet the re-
quirements of section 411(b)(1)(H)(i) with
respect to certain benefit formulas if, as
determined as of any date, a participant’s
accumulated benefitexpressed under one
of those formulas would not be less than
any similarly situated, younger partic-
ipant’s accumulated benefit expressed
under the same formula. A plan that does
not satisfy this test is required to satisfy the
general nondiscrimination test of section
411(b)(1)(H)(i).
Under the proposed regulations, the
safe harbor standard for satisfying sec-
tion 411(b)(5)(A) would be available only
where a participant’saccumulated benefit
under the terms of the plan is expressed as
an annuity payable at normal retirement
age (or current age, if later), the balance of
a hypothetical account, or the current value
of the accumulated percentage of the em-
ployee’s final average compensation. For
this purpose, if the accumulated benefit
of a participant is expressed as an annu-
ity payable at normal retirement age (or
current age, if later) under the plan terms,
then the comparison of benefits is made
using such an annuity. If the accumulated
benefit of a participant is expressed under
the plan terms as the balance of a hypo-
thetical account or the current value of
an accumulated percentage of the partic-
ipant’s final average compensation, then
the comparison of benefitsismadeusing
the balance of a hypothetical account or
the current value of the accumulated per-
centage of the participant’s final average
compensation,respectively.
The proposed regulations would require
a comparison of the accumulated benefit
of each possible participant in the plan to
the accumulated benefit of each other simi-
larly situated, younger individual who is or
could be a participant in the plan. For this
purpose, the proposed regulations would
provide that an individual is similarly situ-
ated to another individual if the individual
is identical to that other individual in ev-
ery respect that is relevant in determining
a participant’s benefit under the plan (in-
cluding but not limited to period of service,
compensation, position, date of hire, work
history, and any other respect) except for
age.
4
In determining whether an individual
is similarly situated to another individual,
any characteristic that is relevant for deter-
mining benefits under the plan and that is
based directly or indirectly on age is disre-
garded. For example, if a particular benefit
formula applies to a participant on account
of the participant’sage, an individual to
whom the benefit formula does not apply
and who is identical to a participant in all
respects other than age is similarly situated
to the participant. By contrast, an individ-
ual is not similarly situated to a participant
if a different benefit formula applies to the
individual and the application of the dif-
ferent formula is based neither directly nor
indirectly on age.
The comparison of accumulated bene-
fits is made without regard to any subsi-
dized portion of any early retirement ben-
efit that is included in a participant’s accu-
mulated benefit. For this purpose, the sub-
sidized portion of an early retirement bene-
fit is the retirement-type subsidy within the
meaning of §1.411(d)–3(g)(6) that is con-
tingent on a participant’s severance from
employment and commencement of bene-
fits before normal retirement age.
In addition, the comparison of accumu-
lated benefits generally must be made us-
ing the same form of benefit. Thus, the
safe harbor is not available for compar-
ing the accumulated benefit of a partici-
pant expressed as an annuity at normal re-
tirement age with the accumulated benefit
of a similarly situated, younger participant
expressed as a hypothetical account bal-
ance. Nevertheless, the proposed regula-
tions would permit a plan that provides the
sum of benefits that are expressed in two
or more different forms of benefit to sat-
isfy the safe harbor if the plan would sepa-
rately satisfy the safe harbor for each sep-
arate form of benefit. Similarly, the pro-
posed regulations would permit a plan that
provides the greater of benefits that are ex-
pressed in two or more different forms of
benefit to satisfy the safe harbor if the plan
would separately satisfy the safe harbor for
each separate form of benefit. For this pur-
pose, a similarly situated, younger partic-
ipant is treated as having an accumulated
benefit of zero with respect to a benefit for-
mula that does not apply to the participant.
Thus, the safe harbor would be available if
an older participant is entitled to benefits
under more than one type of benefit for-
mula, even if not all of those types of ben-
efit formulas are available to every simi-
larly situated participant who is younger.
The proposed regulations would reflect
new section 411(b)(5)(C), which provides
that a plan is not treated as failing to meet
the requirements of section 411(b)(1)(H)
solely because the plan provides offsets
of benefits under the plan to the extent
such offsets are allowable in applying
3
See Rev. Rul. 76–259, 1976–2 C.B. 111, see §601.601(d)(2)(ii)(b) of this chapter, for certain standards applicable to floor-offset arrangements.
4
For example, if a plan provides for an election extended to all participantsthat affects a participant’s accumulated benefit, then someone who makessuch an election is similarly situated to
a participant who makes such an election, and someone who does not make an election is similarly situated to a participant who does not make such an election.
2008–11 I.R.B.600March 17, 2008

the requirements under section 401 and
the applicable requirements of the Em-
ployee Retirement Income Security Act
of 1974, Public Law 93–406 (88 Stat.
829) (ERISA) and the Age Discrimina-
tion in Employment Act of 1967, Public
Law 90–202 (81 Stat. 602) (ADEA). The
proposed regulations incorporate the pro-
visions of section 411(b)(5)(D) (relating to
permitted disparity under section 401(l))
without providing additional guidance.
The proposed regulations would reflect
new section 411(b)(5)(E), which provides
for the disregard of certain indexing of
benefits for purposes of the age discrimi-
nation rules of section 411(b)(1)(H). The
proposed regulations limit the disregard of
indexing to formulas under defined benefit
plans other than lump sum-based formulas.
In addition, the proposed regulations limit
the disregard of indexing to situations in
which the extent of the indexing for a par-
ticipant would not be less than the indexing
applicable to a similarly situated, younger
participant. Thus, the disregard of index-
ing is only available if the indexing is nei-
ther terminated nor reduced on account of
the attainment of any age.
Section 411(b)(5)(E) requires that the
indexing methodology be a recognized
methodology. The proposed regulations
would treat only the following index-
ing methodologies as recognized for
this purpose: indexing using an eligi-
ble cost-of-living index as described in
§1.401(a)(9)–6, A–14(b); indexing using
the rate of return on the aggregate assets
of the plan; and indexing using the rate
of return on the annuity contract for the
employee issued by an insurance company
licensed under the laws of a State.
Under the proposed regulations, the
section 411(b)(5)(E)(ii) protection against
loss (“no-loss”) requirement for an in-
dexed plan (which provides that the index-
ing not result in a smaller accrued benefit)
would be implemented by applying the
“preservation of capital” rule of section
411(b)(5)(B)(i)(II) to indexed plans. (The
preservation of capital rule is discussed
in this preamble paragraph heading “C.
Market rate of return limitation.”) For
this purpose, the exemption from the ap-
plication of the no-loss rule for variable
annuities would be limited to situations
in which the variable annuity adjustment
is based on the rate of return on the ag-
gregate assets of the plan or the annuity
contract. Thus, the exemption from the
application of the no-loss rule would not
apply if the variable annuity adjustment
is based on the rate of return of a portion
of the assets of the plan. In addition, this
exemption would also apply for purposes
of the preservation of capital requirement
that applies to statutory hybrid plans.
B.Conversion protection
The regulations would provide guid-
ance on the new conversion protections
under section 411(b)(5)(B)(ii), (iii), and
(iv). Under the proposed regulations, a
participant whose benefits are affected by
a conversion amendment which occurred
after June 29, 2005, must generally be
provided with a benefit after the conver-
sion that is at least equal to the sum of
the benefits accrued through the date of
the conversion and benefits earned after
the conversion, with no permitted inter-
action between these two portions. This
would assure participants that there will be
no “wear-away” as a result of a conver-
sion, both with respect to the participant’s
accrued benefits and any early retirement
subsidy to which the participant is entitled
based on the pre-conversion benefits.
The proposed regulations would pro-
vide an alternative mechanism under
which the plan provides for the establish-
ment of an opening hypothetical account
balance as part of the conversion and
keeps separate track of (1) The opening
hypothetical account balance and inter-
est credits attributable thereto, and (2)
The post-conversion hypothetical contri-
butions and interest credits attributable
thereto. Under this alternative, the plan
must provide that, when a participant com-
mences benefits, the plan will determine
whether the benefit attributable to the
opening hypothetical account payable in
the particular optional form of benefit se-
lected is greater than or equal to the benefit
accrued under the plan prior to the date of
conversion and payable in the same gen-
eralized optional form of benefit (within
the meaning of §1.411(d)–3(g)(8)) at the
same annuity starting date. For example,
if a participant elects astraight life annuity
payable at age 60, the plan must deter-
mine if the straight life annuity payable at
age 60 that is attributable to the opening
hypothetical account balance is greater
than or equal to the straight life annuity
payable at age 60 based on service prior
to the conversion and determined under
the terms of the pre-conversion plan. If
the benefit attributable to the opening hy-
pothetical account balance is greater, then
the plan must provide that such benefit is
paid in lieu of the pre-conversion bene-
fit together with the benefit attributable
to post-conversion contribution credits.
If the benefit attributable to the opening
hypothetical account balance is less, then
the plan must provide that such benefit
will be increased sufficiently to provide
the pre-conversion benefit. In such a case,
the participant must also be entitled to
the benefit attributable to post-conversion
contribution credits.
The proposed regulations would pro-
vide that, if an optional form of benefit
is available on the annuity starting date
with respect to the benefit attributable to
the opening hypothetical account balance
or opening accumulated percentage, but no
optional form within the same generalized
optional form of benefit was available at
that annuity starting date under the terms
of a plan as in effect immediately prior to
the effective date of the conversion amend-
ment, then the comparison must still be
made by assuming that the pre-conversion
plan had such an optional form of bene-
fit. For example, if the pre-conversion plan
did not provide for a single sum distribu-
tion option, the alternative would require
that any single sum distribution option that
is attributable to the opening hypothetical
account balance be greater than or equal
to the present value of the pre-conversion
benefit, where present value is determined
in accordance with section 417(e).
The IRS and the Treasury Department
are seeking comments on another alter-
native means of satisfying the conversion
requirements that would involve estab-
lishing an opening hypothetical account
balance, but in limited situations would
not require the subsequent comparison.
Any such alternative would be permitted
only if it were designed to provide ade-
quate protection to participants in plans
that adopt conversion amendments. For
example, such an alternative might be
limited to situations in which the partici-
pant elects a single sum distribution, and
where the pre-conversion plan either did
not provide a single sum option or had a
single sum option that was based on the
benefit payable at normal retirement age
March 17, 20086012008–11 I.R.B.

(rather than the benefit payable at early
retirement age). In those situations, the
alternative might provide that the compar-
ison is not necessary if (1) The opening
hypothetical account balance is equal to
the present value of the pre-conversion
benefit determined in accordance with
section 417(e), (2) The interest credits on
the opening hypothetical account balance
are reasonably expected to be no lower
than the interest rate used to determine the
opening hypothetical account balance, and
(3) Either the plan provides a death benefit
equal to the hypothetical account balance
or no pre-retirement mortality decrement
is applied in establishing the opening
hypothetical account balance. Such an
alternative could result in a single sum
distribution attributable to the pre-conver-
sion benefit that is lower, or higher, than
the present value of the pre-conversion
benefit, depending on whether the actual
interest credits applicable to the opening
hypothetical account balance during the
interim are lower, or higher, than the inter-
est rate used in determining the opening
hypothetical account balance and whether
the applicable interest rate and applicable
mortality table under section 417(e)(3)
have changed in the interim.
The proposed regulations also would
provide guidance on what constitutes
a conversion amendment under section
411(b)(5)(B)(v). Under the proposed
regulations, whether an amendment is a
conversion amendment is determined on
a participant-by-participant basis. The
proposed regulations would provide that
an amendment (or amendments) is a con-
version amendment with respect to a
participant if it meets two criteria: (1)
The amendment reduces or eliminates the
benefits that, but for the amendment, the
participant would have accrued after the
effective date of the amendment under a
benefit formula that is not a statutory hy-
brid benefit formula and under which the
participant was accruing benefits prior to
the amendment, and (2) After the effective
date of the amendment, all or a portion
of the participant’s benefit accruals under
the plan are determined under a statutory
hybrid benefit formula.
The proposed regulations would pro-
vide that only amendments that reduce or
eliminate accrued benefits described in
section 411(a)(7), or retirement-type sub-
sidies described in section 411(d)(6)(B)(i),
that would otherwise accrue as a result of
future service are treated as amendments
that reduce or eliminate the participant’s
benefits that would have accrued after the
effective date of the amendment under
abenefitformulathatisnotastatutory
hybrid benefit formula. Under the pro-
posed regulations, a plan is treated as
having been amended for this purpose if,
under the terms of the plan, a change in
the conditions of a participant’s employ-
ment results in a reduction or elimination
of the benefits that the participant would
have accrued in the future under a benefit
formula that is not a statutory hybrid ben-
efit formula (for example, a job transfer
from an operating division covered by a
non-statutory hybrid defined benefit plan
to an operating division that is covered
by a cash balance formula). However,
in the absence of coordination between
the formulas, the special requirements for
conversion amendments typically will be
satisfied automatically.
The proposed regulations would pro-
vide rules prohibiting the avoidance of the
conversion protections through the use of
multiple plans or multiple employers. Un-
der the proposed regulations, an employer
is treated as having adopted a conversion
amendment if the employer adopts an
amendment under which a participant’s
benefits under a plan that is not a statutory
hybrid plan are coordinated with a sepa-
rate plan that is a statutory hybrid plan,
such as through a reduction (offset) of the
benefit under the plan that is not a statutory
hybrid plan. In addition, if an employee’s
employer changes as a result of a merger,
acquisition, or other transaction described
in §1.410(b)–2(f), then the two employers
would be treated as a single employer for
this purpose. Thus, for example, in an
acquisition, if the buyer adopts an amend-
ment to its statutory hybrid plan under
which a participant’s benefits under the
seller’s plan (that is not a statutory hybrid
plan) are coordinated with benefits under
the buyer’s plan, such as through a reduc-
tion (offset) of the buyer’s plan benefits,
the seller and buyer would be treated as a
single employer and as having adopted a
conversion amendment. However, if there
is no coordination between the plans, there
is no conversion amendment.
The proposed regulations would pro-
vide that a conversion amendment also
includes multiple amendments that result
in a conversion amendment, even if the
amendments would not be conversion
amendments individually. Under the pro-
posed regulations, if an amendment to
provide a benefit under a statutory hybrid
benefit formula is adopted within 3 years
after adoption of an amendment to re-
duce non-statutory hybrid benefit formula
benefits, then those amendments would
be consolidated in determining whether a
conversion amendment has been adopted.
In the case of an amendment to provide
a benefit under a statutory hybrid benefit
formula that is adopted more than 3 years
after adoption of an amendment to reduce
non-statutory hybrid benefit formula ben-
efits, there would be a presumption that
the amendments are not consolidated un-
less the facts and circumstances indicate
that adoption of an amendment to provide
a statutory hybrid benefit formula was
intended at the time of the reduction in the
non-statutory hybrid benefit formula.
The proposed regulations would pro-
vide that the effective date of a conver-
sion amendment is, with respect to a par-
ticipant, the date as of which the reduc-
tion occurs of the benefits that the partic-
ipant would have accrued after the effec-
tive date of the amendment under a benefit
formula that is not a statutory hybrid ben-
efit formula. In accordance with section
411(d)(6), the proposed regulations would
provide that the date of a reduction of those
benefits cannot be earlier than the date of
adoption of the conversion amendment.
C.Market rate of return limitation
The proposed regulations would reflect
the rule in section 411(b)(5)(B)(i)(I) under
which a statutory hybrid plan is treated as
failing to satisfy section 411(b)(1)(H) if it
provides an interest crediting rate that is
in excess of a market rate of return. The
proposed regulations would define an in-
terest crediting rate as the rate by which
a participant’s benefit is increased under
the ongoing terms of a plan to the ex-
tent the amount of the increase is not con-
ditioned on current service, regardless of
how the amount of that increase is calcu-
lated. Thus, whether the amount is an in-
terest credit for this purpose is determined
without regard to whether the amount is
calculated by reference to a rate of inter-
est, a rate of return, an index, or otherwise.
2008–11 I.R.B.602March 17, 2008

The proposed regulations would require
a plan to specify the timing for determin-
ing the plan’s interest crediting rate that
will apply for each plan year (or portion
of a plan year) using one of two permit-
ted methods — either pursuant to a daily
interest crediting rate based on permis-
sible interest crediting rates specified in
the proposed regulations, or pursuant to a
specified lookback month and stability pe-
riod. For this purpose, the plan’s lookback
month and stability period must satisfy the
rules for selecting the lookback month and
stability period under §1.417(e)–1(d)(4).
However, the stability period and look-
back month need not be the same as those
used under the plan for purposes of section
417(e)(3).
In addition, the proposed regulations
would require a plan to specify the peri-
odic (at least annual) frequency at which
interest credits are made under the plan.
If, under a plan, interest is credited more
frequently than annually (for example,
monthly or quarterly), then the interest
credit for that period must be apro rata
portion of the annual interest credit. Thus,
for example, in the case of a plan the terms
of which provide for interest to be credited
at an interest crediting rate that would be
permitted under the proposed regulations,
if the plan provides for monthly interest
credits and if the interest rate for a plan
year has a value of 6 percent, then the
accumulated benefits at the beginning of
each month would be increased by 0.5
percent per month during the plan year.
The proposed regulations would provide
that interest credits are not treated as cre-
ating an effective rate of return in excess
of a market rate of return merely because
an otherwise permissible interest crediting
rate is compounded more frequently than
annually.
The proposed regulations would pro-
vide that an interest crediting rate for a plan
year is not in excess of a market rate of re-
turn if it is based on specifiedindices.As
in Notice 2007–6, these include the safe
harbor rates described in Notice 96–8, the
interest rates on 30-Year Treasury securi-
ties, and the rate of interest on long-term
investment grade corporate bonds (as de-
scribed in section 412(b)(5)(B)(ii)(II) prior
to amendment by PPA ’06 for plan years
beginning before January 1, 2008, and the
third-segment bond rate used under sec-
tion 430 for subsequent plan years). For
this purpose, the third-segment bond rate
is permitted to be determined with or with-
out regard to the transition rules of section
430(h)(2)(G).
These rates would be required to change
on at least an annual basis.
5
These rates are
market yields to maturity on outstanding
bonds and do not reflect the change in the
market value of an outstanding bond as a
result of future changes in the interest rate
environment or in a bond issuer’s risk pro-
file.
6
As noted in the preceding paragraph,
the proposed rules generally are similar to
those described in Notice 2007–6 but do
not provide guidance on a number of issues
related to market rate of return. It is ex-
pected that these issues will be addressed
in the first part of 2008.
The proposed regulations would reflect
the preservation of capital rule in section
411(b)(5)(B)(i)(II) that requires a statutory
hybrid plan to provide that interest cred-
its will not result in a hypothetical account
balance (or similar amount) being less than
the aggregate amount of the hypothetical
allocations. Under the proposed regula-
tions, this requirement would be applied at
the participant’s annuity starting date. In
addition, the proposed regulations would
provide that the combination of this preser-
vation of capital protection with a rate of
return which otherwise satisfies the mar-
ket rate of return limitation will not result
in an effective interest crediting rate that is
in excess of a market rate of return.
While the second sentence of section
411(b)(5)(B)(i)(I) provides that a statutory
hybrid plan is not treated as having an
above-market rate merely because the plan
provides for a reasonable minimum guar-
anteed rate of return or for a rate of return
that is equal to the greater of a fixed or
variable rate of return, these proposed reg-
ulations do not provide guidance for these
alternatives. Moreover, the presence of a
preservation of capital requirement indi-
cates that Congress considered that a rate
of return that could be negative in some
years (such as a rate of return on an eq-
uity portfolio) could be permissible. How-
ever, as discussed in the following para-
graphs, the Treasury Department and the
IRS have concerns that the use of a mini-
mum guaranteed rate of return or the use
of the greater of a fixed and a variable
rate could result in effective interest cred-
iting rates that are above market rates of
return and are soliciting comments on how
to avoid that result.
Some commentators have suggested
that it should be acceptable for a plan to
adopt a fixed interest crediting rate that
would apply without regard to changes
in the interest rate environment. This is
particularly important where the plan pro-
vides for hypothetical contributions that
increase with age or service and the plan
needs a minimum interest crediting rate in
order to satisfy the accrual rules of section
411(b). While this issue is reserved under
these proposed regulations, the approach
suggested by commentators could be ac-
complished in two different ways. Under
one possibility, the regulations might set
forth a specific interest crediting rate (such
as 4 percent or 5 percent) that a plan may
be permitted to use. Under an alternative
approach, the regulations might set forth
a permitted methodology under which a
plan would be permitted to establish a
fixed interest crediting rate based on the
then-applicable level of a permissible rate,
such as the 3rd segment rate. For example,
if the 3rd segment rate were 5.5 percent
at the time the fixed rate is established
under the plan, then under the alternative
approach the plan might be permitted to
fix the interest crediting rate at 5.5 per-
cent. Comments are requested on these
alternatives. In particular, comments are
requested as to rules that the regulations
could set forth that would avoid the po-
tential for the fixed rate to be established
at a time when interest rates are unusually
high, such as occurred in the early 1980s.
With respect to the option for a plan
to use an interest crediting rate that is the
greater of a fixed or variable interest rate,
the Treasury Department and the IRS be-
lieve that the interaction between the two
interest rates must be taken into account in
determining whether the effective interest
crediting rate under a plan which provides
an interest crediting rate that is equal to the
5
The requirement that an interest crediting rate change not less frequently than annually is intended to distinguish these rates from fixed rates, which are discussed later in this preamble. See
also §31.3121(v)(2)–1(d)(2)(i)(C)(2) of the Employment Tax Regulations, which permits a rate to be fixed for up to 5 years.
6
Because this interest rate does not reflect the change in the market value ofan outstanding bond when an issuer becomes higher risk or the bond goes intodefault, the bonds have been limited
to investment grade bonds in the top three quality levels where the risk of default is small.
March 17, 20086032008–11 I.R.B.

greater of a fixed or variable interest rate
is above a market rate of return. Whether
a statutory hybrid plan that is providing
interest credits based on the greater of a
fixed or variable interest rate effectively
provides an interest crediting rate that ex-
ceeds a market rate of return depends on
a number of factors, including how high
the fixed interest rate is, how frequently the
“greater of” determination is applied, and
the volatility of the variable interest rate.
As noted earlier, the proposed regu-
lations would provide that including the
preservation of capital rule does not cause
the plan’s effective interest crediting rate to
be in excess of a market rate of return. This
rule reflects the fact that the minimum rate
under the preservation of capital rule is an
interest rate of 0 percent which is applied
onaone-timebasisattheannuitystart-
ing date, and is premised on the expecta-
tion that the variable rate would rarely be
negative for extended periods of time (so
that the inclusion of the capital preserva-
tion rule should not significantly increase
the effective rate of return under the plan).
If the variable rate is the rate of interest on
bonds that would be permitted under the
proposed regulations, then that expectation
is easily met.
By contrast, if the variable interest
rate is the rate of return on an equity in-
vestment, the expectation that the capital
preservation rule does not significantly in-
crease the effective interest crediting rate
is only applicable if the equity investment
is a well-diversified portfolio. This is be-
cause a well-diversified portfolio should
have sufficiently limited volatility so that
the inclusion of the preservation of capi-
tal rule should not significantly increase
the effective rate of return resulting from
interest credits that are based on that port-
folio. Accordingly, if the regulations were
to permit the use of an interest crediting
rate based on an asset portfolio as an in-
terest credit, the regulations might limit
the choice of portfolio to the actual plan
assets (relying on the fiduciary rules to
ensure that the portfolio is adequately di-
versified). Of course, any such regulations
would only permit the use of an interest
crediting rate based on an asset portfolio
if the use of such a rate is prospective and
is selected before the period during which
the rate is determined.
Comments are requested on what other
asset portfolios have sufficiently con-
strained volatility that they should be
permitted to form the basis of a market
rate of return for interest crediting under
a statutory hybrid plan and whether it is
appropriate to base an interest crediting
rate on the value of an index. For ex-
ample, are the assets under a regulated
investment company (RIC) described in
section 851 sufficiently diversified such
that a statutory hybrid plan will not be
treated as providing an effective interest
crediting rate in excess of a market rate
of return where it credits interest based
on the rate of return on the RIC and also
provides for the preservation of capital (as
required for a statutory hybrid plan under
section 411(b)(5)(B)(i)(II))? Similarly, if a
statutory hybrid plan credits interest based
on the rate of return on an equity index
that is not a narrow-based equity index
(as defined under section 3(a)(55) of the
Securities Exchange Act of 1934) and
which also provides for the preservation
of capital, is the plan providing an interest
crediting rate that is not in excess of a
market rate of return?
If the determination of the greater of
a fixed interest crediting rate and a vari-
able interest crediting rate is made more
frequently than required to comply with
the capital preservation rule, the added fre-
quency is more likely to result in an effec-
tive interest crediting rate that is in excess
of a market rate of return. For example, if
a statutory hybrid plan were to credit in-
terest each day based on the greater of the
actual rate of return on the plan assets for
that day or 0 percent, the effective interest
crediting rate would be far in excess of a
market rate of return.
The Treasury Department and the IRS
are considering providing that a plan will
not have an effective interest crediting rate
in excess of a market rate of return merely
because it provides annual interest credits
based on the greater of a reasonable fixed
rate (such as 3 percent or 4 percent) and
one of the rates of interest set forth in the
proposed regulations. However, if a statu-
tory hybrid plan were to provide interest
credits based on the greater of a fixed rate
(including a fixed rate of 0 percent) and the
rate of return on plan assets or the value
of an equity-based index, determined on
an annual basis, then the effective interest
crediting rate would typically be in excess
of a market interest rate. Comments are
requested on what types of reductions to
thevariableratewouldbeappropriatein
order to ensure that the effective interest
crediting rate under these situations does
not exceed a market rate of return. In ad-
dition, comments are requested on whether
regulations should establish reductions in
these situations where the determination
of whether the fixed or variable interest
crediting rate is greater is made more fre-
quently than annually.
Pending issuance of guidance address-
ing this issue, plan sponsors should be
cautious in adopting interest crediting
rates other than those explicitly permitted
in these proposed regulations. If such a
rate were adopted, and it did not satisfy
the requirement not to be in excess of a
market rate of return under rules provided
in future guidance, the rate would have to
be reduced in order to satisfy the require-
ment.
The proposed regulations would pro-
vide that, to the extent that interest credits
(or equivalent amounts) have accrued un-
der the terms of a statutory hybrid plan,
section 411(d)(6) is violated by a plan
amendment that changes the interest cred-
iting rate if the revised rate under any
circumstances could result in a lower rate
of return after the applicable amendment
date of the plan amendment. An excep-
tion is provided that would permit certain
changes in a plan’s interest crediting rate
without violating section 411(d)(6). Under
this exception, the proposed regulations
would permit an amendment to change
the plan’s interest crediting rate for future
periods from the safe harbor market rates
of interest (for example, rates based on el-
igible cost-of-livingindices, or rates based
on Treasury bonds with the margins speci-
fied in the proposed regulations) to the rate
of interest on long-term investment grade
corporate bonds. Such a change would not
constitute a reduction in accrued benefits
in violation of section 411(d)(6) because
it is expected that the change would result
in a reduction only in rare and unusual
circumstances, and the change would be
permitted only if the amendment is effec-
tive not less than 30 days after adoption
and, on the effective date of the amend-
ment, the new interest crediting rate is
not less than the interest crediting rate
that would have applied in the absence
of the amendment. In addition, the IRS
and the Treasury Department may provide
additional guidance regarding changes to
2008–11 I.R.B.604March 17, 2008

the ongoing interest crediting rate under a
plan that would or would not constitute a
reduction of accrued benefits in violation
of section 411(d)(6).
Pension Equity Plans (PEPs)
These proposed regulations do not in-
clude any rules specifically relating to
plans that are often referred to as pension
equity plans, or PEPs (other than defining
a participant’s accumulated benefit under a
PEP as the accumulated percentage of final
average compensation). Notice 2007–6
requested comments on the application
of qualification requirements other than
sections 411(b)(1)(H) and 417(e) to such
plans, including the treatment of interest
credited with respect to terminated vested
participants. See §601.601(d)(2)(ii)(b)of
this chapter. The IRS and the Treasury
Department have received a number of
comments pursuant to this request. These
comments indicate that, apart from de-
termining the accumulated benefit as a
percentage of final average compensa-
tion, this design often provides explicit
or implicit interest credits by determining
the normal retirement benefit to be: (1)
The accumulated percentage of final av-
erage compensation divided by a deferred
annuity factor (thus implicitly providing
interest and mortality credits for deferred
benefits); or (2) The lesser of (a) the cur-
rent single sum benefit projected to normal
retirement age and using an interest rate set
forth in the plan or (b) the projected single
sum benefit based on projected service to
normal retirement age (taking into account
the plan’s formula for the accumulated
percentage of final average compensation
without salary increases), with the lesser
of these two amounts converted to an an-
nuity. The right to future interest credits
under these designs is earned at the same
time as the related percentage of final
average compensation; however, the com-
ments indicated that the interest typically
commences only after active participation
ceases.
The IRS and the Treasury Department
will continue to evaluate comments re-
ceived regarding PEPs and are focusing on
the following questions in situations where
the interest credit is credited only after ac-
tive participation ceases:
•Are these designs properly treated as
plans under which the accrued benefit
is expressed “as an accumulated per-
centage of the participant’s final aver-
age compensation” within the meaning
of section 411(a)(13)(A)? After the
date on which interest credits com-
mence, should these designs be treated
as plans under which the accrued ben-
efit is expressed “as the balance of
a hypothetical account” within the
meaning of section 411(a)(13)(A)?
•Do any of the designs in (1) or (2) of
the preceding paragraph provide for
a lower rate of accrual for additional
years of service (because no interest is
credited if service is continued)? See
section 411(b)(1)(G). Alternatively,
can this issue be avoided by treating
the annual rate at which the normal
retirement benefit accrues as declining
with each additional year of service?
•How should the backloading rules
of section 411(b)(1)(A)-(C) apply to
these designs and do they raise issues
on which comments were requested in
Notice 2007–14, 2007–7 I.R.B. 501?
See §601.601(d)(2)(ii)(b)ofthischap-
ter.
Section 1107 of PPA ’06 and Code
Section 411(d)(6)
Under section 1107 of PPA ’06, a plan
sponsor is permitted to delay adopting
a plan amendment pursuant to statutory
provisions under PPA ’06 (or pursuant
to any regulation issued under PPA ’06)
until the last day of the first plan year
beginning on or after January 1, 2009
(January 1, 2011 in the case of govern-
mental plans). As described in Rev. Proc.
2007–44, 2007–28 I.R.B. 54, this amend-
ment deadline applies to both interim and
discretionary amendments that are made
pursuant to PPA ’06 statutory provisions
or any regulation issued under PPA ’06.
See §601.601(d)(2)(ii)(b) of this chapter.
If section 1107 of PPA ’06 applies to an
amendment of a plan, section 1107 pro-
vides that the plan does not fail to meet
the requirements of section 411(d)(6) by
reason of such amendment, except as pro-
vided by the Secretary of the Treasury.
7
The IRS and the Treasury Department
are considering whether relief from section
411(d)(6) should be provided for particular
amendments that would be made pursuant
to section 701 of PPA ’06 or these pro-
posed regulations. In the following provi-
sions of this section of the preamble, the
IRS and the Treasury Department have set
forth a description of amendments that are
and are not entitled to section 411(d)(6) re-
lief. Comments are requested on whether
section 411(d)(6) relief is or is not appro-
priate for any additional amendments re-
latedtosection701ofPPA’06orthese
proposed regulations.
Until further guidance is provided by
the IRS and the Treasury Department, sec-
tion 411(d)(6) relief is not available for the
following amendments that are described
in section 1107 of PPA ’06:
•A conversion amendment where the
effective date of the reduction in ben-
efits that a participant, but for the
amendment, would have accrued un-
der a benefit formula that is not a
statutory hybrid benefit formula is ear-
lier than the date of adoption of the
reduction amendment.
•An amendment that reduces a partici-
pant’s hypothetical account balance or
accumulated percentage of final aver-
age compensation below the amount
on the date the amendment is adopted.
•An amendment to change the interest
crediting rate from one of the rates
specified in Notice 96–8 using a mar-
gin that is less than or equal to the
maximum margin for that rate to the
same or another rate specified in No-
tice 96–8 with an associated margin
where the excess (if any) of the max-
imum margin under the second rate
over the margin used for that second
rate exceeds the excess (if any) of the
maximum margin under the first rate
over the margin used for that first rate.
7
Except to the extent permitted under section 411(d)(6) and §§1.411(d)–3 and1.411(d)–4, or under a statutory provision such as section 1107 of PPA ’06, section 411(d)(6) prohibits a plan
amendment that decreases a participant’s accrued benefits or that has the effect of eliminating or reducing an early retirement benefit or retirement-type subsidy, or eliminating an optional
form of benefit, with respect to benefits attributable to service before theamendment. However, an amendment that eliminates or decreases benefitsthat have not yet accrued does not violate
section 411(d)(6), provided that the amendment is adopted and effective before the benefits accrue.
March 17, 20086052008–11 I.R.B.

Until further guidance is provided by
the IRS and the Treasury Department, sec-
tion 411(d)(6) relief is available for the fol-
lowing amendments that are described in
section 1107 of PPA ’06:
•As provided in Notice 2007–6, in the
case of a plan that provides for a single
sum distribution to a participant that
exceeds the participant’s hypotheti-
cal account balance or accumulated
percentage of final average compen-
sation, the plan may be amended to
eliminate the excess for distributions
made after August 17, 2006. See
§601.601(d)(2)(ii)(b)ofthischapter.
•An amendment to change the interest
crediting rate from one of the rates
specified in Notice 96–8 using a mar-
gin that is less than or equal to the max-
imum margin for that rate to one of
the other rates specified in Notice 96–8
with an associated margin where the
excess (if any) of the maximum mar-
gin under the second rate over the mar-
gin used for that second rate does not
exceed the excess (if any) of the max-
imum margin under the first rate over
the margin used for that first rate.
These rules under section 1107 of
PPA ’06 will be reflected in future
guidance on the market rate of return
rules under section 411(b)(5)(B)(i). The
IRS and the Treasury Department expect
that section 411(d)(6) relief under section
1107 of PPA ’06 will be available in
the case of an amendment pursuant to
that future guidance to change a plan’s
interest crediting rate (including credits
on pre-August 18, 2006 accruals) from an
interest rate that is above a market rate of
return to an interest rate that constitutes
a market rate of return, provided that any
retroactive change in the crediting rate
does not apply for periods before the date
that section 411(b)(5)(B)(i) first applies
to the plan. In addition, to the extent
permitted under future guidance, the IRS
and the Treasury Department expect that
section 411(d)(6) relief under section 1107
of PPA ’06 will be available in the case of
an amendment to change the plan’s interest
crediting rate to a rate that is expected
to be higher than the plan’s current rate
(such as an amendment to change to an
equity-based rate of return).
Effective/Applicability Dates
Pursuant to section 701(e)(1) of
PPA ’06, the amendments made by section
701ofPPA’06aregenerallyeffective
for periods beginning on or after June
29, 2005. However, sections 701(e)(2)
through 701(e)(5) of PPA ’06 set forth a
number of special effective/applicability
date rules that are described earlier in the
Background section of the preamble of
these proposed regulations.
These proposed regulations reflect
the statutory effective dates set forth in
section 701(e) of PPA ’06. Thus, the
proposed regulations would reflect that
section 411(a)(13)(A) applies to distri-
butions made after August 17, 2006. In
addition, the proposed regulations would
reflect that, in the case of a plan that is
in existence on June 29, 2005, section
411(a)(13)(B) applies to plan years be-
ginning on or after January 1, 2008. At
the date of issuance of these proposed
regulations, bills have been introduced
in the House of Representatives and the
Senate which provide that (1) section
411(a)(13)(B) only applies to a participant
who performs at least one hour of service
on or after the effective date of section
411(a)(13)(B) with respect to the plan, and
(2) in the case of a plan other than a plan
described in section 701(e)(3) or 701(e)(4)
of PPA ’06, section 411(a)(13)(B) applies
to years ending on or after June 29, 2005.
8
Proposed §1.411(a)(13)–1(e)(1)(iii)(A)(2)
and §1.411(a)(13)–1(e)(1)(iii)(B)(2)have
been reserved in order to accommodate
these changes.
These regulations are proposed to be
effective for plan years beginning on or
after January 1, 2009 (or, if later, the date
that applies to certain collectively bar-
gained plans pursuant to section 701(e)(4)
of PPA ’06). For periods after the statutory
effective date and before the regulatory
effective date set forth in the preceding
sentence, a plan must comply with sec-
tions 411(a)(13) and 411(b)(5). During
these periods, a plan is permitted to rely
on the provisions set forth in the proposed
regulations for purposes of satisfying the
requirements of sections 411(a)(13) and
411(b)(5).
These regulations should not be con-
strued to create any inference concerning
the applicable law prior to the effective
dates of sections 411(a)(13) and 411(b)(5).
See also section 701(d) of PPA ’06.
Special Analyses
It has been determined that these pro-
posed regulations arenot a significant reg-
ulatory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It also has been deter-
mined that section 553(b) of the Adminis-
trative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and be-
cause the regulation does not impose a col-
lection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to section
7805(f) of the Code, these regulations will
be submitted to the Chief Counsel for Ad-
vocacy of the Small Business Administra-
tion for comment on its impact on small
business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (one signed
and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and the Treasury Department
specifically request comments on the clar-
ity of the proposed regulations and how
they may be made easier to understand.
In addition to the comments requested
under the “Conversion protection” and
“Market rate of return limitation” headings
of this preamble (and in Part V of Notice
2007–6), comments are also requested on
issues not addressed in these proposed
regulations, including:
•The application of the 3-year vesting
requirement in section 411(a)(13)(B)
to a plan that is not a statutory hy-
brid plan when the plan is part of a
floor-offset arrangement with a plan
that includes a lump sum-based benefit
formula.
8
H.R. 3361 (Aug. 3, 2007) and S. 1974 (Aug. 2, 2007), at section 8(3)(B)(iv).
2008–11 I.R.B.606March 17, 2008

•Whether guidance should be issued un-
der section 411(b)(5) as to whether a
characteristic is indirectly on account
of age.
•Whether the age discrimination safe
harbor in section 411(b)(5)(A) should
be available in the case of any plan
that does not express a participant’s ac-
cumulated benefitas either an annu-
ity payable at normal retirement age
(or current age, if later), the balance of
a hypothetical account, or the current
value of the accumulated percentage of
a participant’s final average compensa-
tion.
All comments will be available for
public inspection and copying. A public
hearing will be scheduled if requested in
writing by any person who timely submits
written comments. If a public hearing is
scheduled, notice of the date, time, and
place of the public hearing will be pub-
lished in theFederal Register.
Drafting Information
The principal authors of these reg-
ulations are Lauson C. Green and
Linda S. F. Marshall, Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities).
However, other personnel from the IRS
and the Treasury Department participated
in the development of these regulations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Section 1.411(a)(13)–1 also issued un-
der 26 U.S.C. 411(a)(13).
Section 1.411(b)(5)–1 also issued under
26 U.S.C. 411(b)(5). * * *
Par. 2. Section 1.411(a)(13)–1 is added
to read as follows:
§1.411(a)(13)–1 Statutory hybrid plans.
(a)In general. This section sets forth
certain rules that apply to statutory hybrid
plans under section 411(a)(13). Paragraph
(b) of this section describes special rules
for certain statutory hybrid plans that de-
termine benefits under a lump sum-based
benefit formula. Paragraph (c) of this sec-
tion describes the vesting requirement for
statutory hybrid plans. Paragraphs (d) and
(e) of this section contain definitions and
effective/applicability dates, respectively.
(b)Calculation of benefit by reference
to hypothetical account balance or accu-
mulated percentage. Pursuant to section
411(a)(13)(A), a statutory hybrid plan that
determines any portion of a participant’s
benefits under a lump sum-based benefit
formula is not treated as failing to meet the
requirements of section 411(a)(2), or the
requirements of section 411(c) or 417(e)
with respect to the participant’s accrued
benefit derived from employer contribu-
tions, solely because, with respect to ben-
efits determined under that formula, the
present value of those benefits is, under
the terms of the plan, equal to the balance
of the hypothetical account maintained for
the participant or to the current value of
the accumulated percentage of the partic-
ipant’s final average compensation under
that formula.
(c)Three-year vesting require-
ment—(1)In general. Pursuant to section
411(a)(13)(B), if any portion of the par-
ticipant’s accrued benefit under a defined
benefit plan is determined under a statu-
tory hybrid benefit formula, the plan is
not treated as meeting the requirements of
section 411(a)(2) unless the plan provides
that the participant has a nonforfeitable
right to 100 percent of the participant’s
accrued benefit if the participant has 3 or
more years of service. Thus, this 3-year
vesting requirement applies with respect
to the entire accrued benefit of a partici-
pant under a defined benefit plan even if
only a portion of the participant’s accrued
benefit under the plan is determined under
a statutory hybrid benefit formula. Sim-
ilarly, if the participant’s accrued benefit
under a defined benefit plan is, under the
plan’s terms, the larger of two (or more)
benefit amounts, where each amount is de-
termined under a different benefit formula
(including a benefit determined pursuant
to an offset among formulas within the
plan) and at least one of those formulas is
a statutory hybrid benefit formula, the par-
ticipant’s entire accrued benefit under the
defined benefit plan is subject to the 3-year
vesting rule of section 411(a)(13)(B) and
this paragraph (c). The rule described
in the preceding sentence applies even if
the larger benefit is ultimately the benefit
determined under a formula that is not a
statutory hybrid benefit formula.
(2)Floor-offset arrangements involving
a statutory hybrid plan.[Reserved]
(3)Examples. The provisions of this
paragraph (c) are illustrated by the follow-
ing examples:
Example 1. Employer M sponsors Plan X, pur-
suant to which each participant’s accrued benefit is
equal to the sum of the benefit provided under two
benefit formulas. The first benefit formula is a statu-
tory hybrid benefit formula, and the second formula is
not. Because a portion of eachparticipant’s accrued
benefit provided under Plan X is determined under a
statutory hybrid benefit formula, the 3-year vesting
requirement described in paragraph (c)(1) of this sec-
tion applies to each participant’s entire accrued ben-
efit provided under Plan X.
Example 2. ThefactsarethesameasinExam-
ple 1, except that the benefit formulas described in
Example 1only apply to participants for service per-
formed in Division A of Employer M and a differ-
ent benefit formula applies to participants for service
performed in Division B of Employer M. Pursuant
to the terms of Plan X, the accrued benefit of a par-
ticipant attributable to service performed in Division
B is equal to the benefit provided by a benefit for-
mula that is not a statutory hybrid benefit formula.
Therefore, the 3-year vesting requirement described
in paragraph (c)(1) of this section does not apply to
a participant with an accrued benefit under Plan X if
the participant’s benefit is solely attributable to ser-
vice performed in Division B.
(d)Definitions—(1)In general.The
definitions in this paragraph (d) apply for
purposes of this section.
(2)Lump sum-based benefit formula.
The term lump sum-based benefit formula
means a lump sum-based benefit formula
as defined in §1.411(b)(5)–1(e)(3).
(3)Statutory hybrid benefit for-
mula—(i)In general. A statutory hybrid
benefit formula means a benefit formula
that is either a lump sum-based benefit
formula or a formula that is not a lump
sum-based benefit formula but that has an
effect similar to a lump sum-based benefit
formula.
(ii)Effectsimilartoalumpsum-based
benefit formula. Except as provided in
paragraph (d)(3)(iii) of this section, a
benefit formula under a defined bene-
fit plan that is not a lump sum-based
benefit formula has an effect similar to
March 17, 20086072008–11 I.R.B.

a lump sum-based benefit formula if
the formula provides that a participant’s
accumulated benefit (within the mean-
ing of §1.411(b)(5)–1(e)(2)) payable at
normal retirement age (or benefit com-
mencement, if later) is expressed as a
benefit that includes the right to peri-
odic adjustments (including a formula
that provides for indexed benefits under
§1.411(b)(5)–1(b)(2)) that are reason-
ably expected to result in a smaller an-
nual benefit at normal retirement age (or
benefit commencement, if later) for the
participant than for a similarly situated,
younger individual (within the meaning
of §1.411(b)(5)–1(b)(5)) who is or could
be a participant in the plan. A benefit
formula that does not include periodic ad-
justments is treated as a formula with an
effect similar to a lump sum-based ben-
efit formula if the formula is otherwise
described in the preceding sentence and
the adjustments are provided pursuant to a
pattern of repeated plan amendments. See
§1.411(d)–4, A–1(c)(1).
(iii)Exceptions—(A)Post-retirement
benefit adjustments. Post-annuity starting
date adjustments of the amounts payable
to a participant (such as cost-of-living
increases) are disregarded in determining
whether a benefit formula under a defined
benefit plan has an effect similar to a lump
sum-based benefit formula.
(B)Certain variable annuity benefit
formulas. If the assumed interest rate
used for purposes of the adjustment of
amounts payable to a participant under a
variable annuity benefit formula is at least
5 percent, then the adjustments under the
variable annuity benefit formula are not
treated as being reasonably expected to
result in a smaller annual benefit at normal
retirement age (or benefit commencement,
if later) for the participant than for a sim-
ilarly situated, younger individual (within
the meaning of §1.411(b)(5)–1(b)(5)) who
is or could be a participant in the plan,
and thus such a variable annuity benefit
formula does not have an effect similar to
a lump sum-based benefit formula.
(C)Contributory plans. A benefit for-
mula under a defined benefit plan that
provides for a benefit equal to the benefit
properly attributable to after-tax employee
contributions does not have an effect sim-
ilar to a lump sum-based benefit formula.
See section 411(c)(2) for rules for deter-
mining benefits attributable to after-tax
employee contributions.
(4)Variable annuity benefit formula.
A variable annuity benefit formula means
any benefit formula under a defined ben-
efit plan which provides that the amount
payable is periodically adjusted by refer-
ence to the difference between the rate of
return of plan assets (or specified market
indices) and a specified assumed interest
rate.
(e)Effective/applicability date—(1)
Statutory effective/applicability date—(i)
In general. Except as provided in para-
graphs (e)(1)(ii) and (e)(1)(iii) of this
section, section 411(a)(13) applies for pe-
riods beginning on or after June 29, 2005.
(ii)Calculation of benefits. Section
411(a)(13)(A) applies to distributions
made after August 17, 2006.
(iii)Vesting—(A)Plans in existence on
June 29, 2005—(1)General rule.Inthe
case of a plan that is in existence on June
29, 2005 (regardless of whether the plan
is a statutory hybrid plan on that date),
section 411(a)(13)(B) applies to plan years
beginning on or after January 1, 2008.
(2)Hour of service required.[Re-
served]
(3)Exception for plan sponsor elec-
tion. See §1.411(b)(5)–1(f)(1)(iii)(A)(2)
for a special election for early application
of section 411(a)(13)(B).
(B)Plans not in existence on June 29,
2005—(1)In general. In the case of a
plan not in existence on June 29, 2005,
section 411(a)(13)(B) applies for periods
beginning on or after June 29, 2005.
(2)Hour of service required.[Re-
served]
(C)Collectively bargained plans.
Notwithstanding paragraphs (e)(1)(iii)(A)
and (B) of this section, in the case of a
collectively bargained plan maintained
pursuant to one or more collective bar-
gaining agreements between employee
representatives and one or more employers
ratified on or before August 17, 2006, the
requirements of section 411(a)(13)(B) do
not apply for plan years beginning before
the earlier of—
(1) The later of—
(i) The date on which the last of those
collective bargaining agreements termi-
nates (determined without regard to any
extension thereof on or after August 17,
2006), or
(ii) January 1, 2008; or
(2) January 1, 2010.
(D)
Treatment of plans with both collec-
tively bargained and non-collectively bar-
gained employees. In the case of a plan
where a collective bargaining agreement
applies to some, but not all, of the plan par-
ticipants, the plan is considered a collec-
tively bargained plan for purposes of para-
graph (e)(1)(iii)(C) of this section if at least
25 percent of the participants in the plan
are members of collective bargaining units
for which the benefit levels under the plan
are specified under a collective bargaining
agreement.
(2)Effective/applicability date of regu-
lations. This section applies for plan years
beginning on or after January 1, 2009 (or,
if later, the date applicable under para-
graph (e)(1)(iii)(C) of this section). For
the periods after the statutory effective date
set forth in paragraph (e)(1) of this section
and before the regulatory effective date set
forth in the preceding sentence, a plan must
comply with section 411(a)(13). During
these periods, a plan is permitted to rely
on the provisions of this section for pur-
poses of satisfying the requirements of sec-
tion 411(a)(13).
Par. 3. Section 1.411(b)(5)–1 is added
to read as follows:
§1.411(b)(5)–1 Reduction in rate of
benefit accrual under a defined benefit
plan.
(a)In general. This section sets forth
certain rules related to reduction in the
rate of benefit accrual under a defined
benefit plan. Paragraph (b) of this section
describes certain plan design-based safe
harbors (including statutory hybrid plans)
that are deemed to satisfy the age discrim-
ination rules under section 411(b)(1)(H).
Paragraph (c) of this section describes
rules relating to statutory hybrid plan con-
version amendments. Paragraph (d) of this
section describes rules restricting interest
credits (or equivalent amounts) under a
statutory hybrid plan to a market rate of re-
turn. Paragraphs (e) and (f) of this section
contain definitions and effective/applica-
bility dates, respectively.
(b)Safe harbors for certain plan
designs—(1)Accumulated benefit test-
ing—(i)In general. Pursuant to section
411(b)(5)(A), and subject to paragraph
(b)(1)(ii) of this section, a plan is not
treated as failing to meet the requirements
2008–11 I.R.B.608March 17, 2008

of section 411(b)(1)(H)(i) if, as of any date,
the accumulated benefit of a participant
would not be less than the accumulated
benefit of any similarly situated, younger
participant. This test requires a compar-
ison of the accumulated benefit of each
individual who is or could be a participant
in the plan with the accumulated benefit
of each other similarly situated, younger
individual who is or could be a participant
in the plan. See paragraph (b)(5) of this
section for rules regarding whether each
younger individual who is or could be a
participant is similarly situated to a partic-
ipant. The comparison described in this
paragraph (b)(1)(i) is based on—
(A) The annuity payable at normal re-
tirement age (or current age, if later) if the
accumulated benefit ofthe participant un-
der the terms of the plan is expressed as an
annuity payable at normal retirement age
(or current age, if later);
(B) The balance of a hypothetical ac-
count if the accumulated benefit of the par-
ticipant under the terms of the plan is ex-
pressed as a hypothetical account balance;
or
(C) The current value of an accumu-
lated percentage of the participant’s final
average compensation if the accumulated
benefit of the participant under the terms
of the plan is expressed as an accumulated
percentage of final average compensation.
(ii)Benefit formulas for compari-
son—(A)In general. The safe harbor
provided by section 411(b)(5)(A) and
paragraph (b)(1)(i) of this section does not
apply to a plan if the accumulated bene-
fit of a participant under the plan is not
described in paragraph (b)(1)(i)(A), (B)
or (C) of this section. In addition, except
as provided in paragraph (b)(1)(ii)(B) of
this section, that safe harbor also does
not apply to a plan if the comparison re-
quired under paragraph (b)(1)(i) of this
section involves comparing accumulated
benefits that are described in different
subparagraphs of paragraph (b)(1)(i) of
this section. Thus, for example, if a plan
provides an accumulated benefit that is
expressed under the terms of the plan as
an annuity payable at normal retirement
age as described in paragraph (b)(1)(i)(A)
of this section for participants who are
age 55 or over, and the plan provides an
accumulated benefit that is expressed as
the balance of a hypothetical account as
described in paragraph (b)(1)(i)(B) of this
section for participants who are younger
than age 55, the safe harbor described
in section 411(b)(5)(A) and paragraph
(b)(1)(i) of this section does not apply to
the plan.
(B)Greater-of and sum-of benefit for-
mulas. If a plan provides that a partici-
pant’s accumulated benefit is equal to the
sum of accumulated benefits that are de-
scribed in different subparagraphs of para-
graph (b)(1)(i) of this section, then the plan
is deemed to satisfy paragraph (b)(1)(i) of
this section if the plan satisfies the compar-
ison described in paragraph (b)(1)(i) of this
section separately for each of the different
accumulated benefits. Similarly, if a plan
provides that a participant’s accumulated
benefit is equal to the greater of accumu-
lated benefits that are described in differ-
ent subparagraphs of paragraph (b)(1)(i) of
this section, then the plan is deemed to sat-
isfy paragraph (b)(1)(i) of this section if
the plan satisfies the comparison described
in paragraph (b)(1)(i)of this section sepa-
rately for each of the different accumulated
benefits. For purposes of this paragraph
(b)(1)(ii)(B), a similarly situated, younger
participant is treated as having an accumu-
lated benefit of zero under a benefit for-
mula if the benefit formula does not apply
to the participant.
(iii)Disregard of certain subsidized
benefits. For purposes of paragraph
(b)(1)(i) of this section, any subsidized
portion of any early retirement benefit that
is included in a participant’s accumulated
benefit is disregarded. For this purpose,
the subsidized portion of an early retire-
ment benefit is the retirement-type subsidy
within the meaning of §1.411(d)–3(g)(6)
that is contingent on a participant’s sev-
erance from employment and commence-
ment of benefits before normal retirement
age.
(2)Indexed benefits—(i)In gen-
eral. Except as provided in paragraph
(b)(2)(iv) of this section, pursuant to
section 411(b)(5)(E) and this paragraph
(b)(2)(i), a defined benefit plan is not
treated as failing to meet the requirements
of section 411(b)(1)(H) solely because
a benefit formula under the plan (other
than a lump sum-based benefit formula)
provides for the periodic adjustment of
accrued benefits under the plan, but only
if the adjustment is by means of the appli-
cation of a recognized investment index
or methodology described in paragraph
(b)(2)(ii) of this section and the plan satis-
fies paragraph (b)(2)(iii) of this section. A
statutory hybrid plan that is not treated as
failing to satisfy section 411(b)(1)(H) pur-
suant to the preceding sentence must nev-
ertheless satisfy the qualification require-
ments otherwise applicable to statutory
hybrid plans, including the requirements
of §1.411(a)(13)–1(c) (relating to mini-
mum vesting standards), paragraph (c) of
this section (relating to plan conversion
amendments), and paragraph (d) of this
section (relating to market rates of return).
(ii)Recognized investment index or
methodology. An adjustment is made pur-
suant to a recognized investment index or
methodology if it is made pursuant to—
(A) An eligible cost-of-living index as
described in §1.401(a)(9)–6, A–14(b);
(B) The rate of return on the aggregate
assets of the plan; or
(C) The rate of return on the annuity
contract for the employee issued by an in-
surance company licensed under the laws
of a State.
(iii)Similarly situated participant test.
A plan satisfies this paragraph (b)(2)(iii)
if the aggregate periodic adjustments of
each participant’s accrued benefit under
the plan (determined as a percentage of
the unadjusted accrued benefit) would not
be less than the aggregate periodic adjust-
ments of any similarly situated, younger
participant. This test requires a compari-
son of the aggregate periodic adjustments
of each individual who is or could be a par-
ticipant in the plan for any specified period
with the aggregate periodic adjustments of
each other similarly situated, younger in-
dividual who is or could be a participant
in the plan for the same period. See para-
graph (b)(5) of this section for rules re-
garding whether each younger individual
who is or could be a participant is similarly
situated to a participant.
(iv)Protection against loss—(A)In
general. Paragraph (b)(2)(i) of this section
does not apply unless the plan satisfies
section 411(b)(5)(E)(ii) and paragraph
(d)(2)(ii) of this section (relating to preser-
vation of capital).
(B)Exception for variable annuity ben-
efit formulas. The requirement to satisfy
section 411(b)(5)(E)(ii) and paragraph
(d)(2)(ii) of this section does not apply
in the case of a benefit provided under
a variable annuity benefit formula, but
only if the adjustments under the variable
March 17, 20086092008–11 I.R.B.

annuity benefit formula are based on the
rate of return on the aggregate assets of
the plan or the rate of return on the annuity
contract for the employee issued by an in-
surance company licensed under the laws
of a State.
(3)Certain offsets permitted.Aplanis
not treated as failing to meet the require-
ments of section 411(b)(1)(H) solely be-
cause the plan provides offsets against ben-
efits under the plan to the extent the off-
sets are allowable in applying the require-
ments of section 401(a) and the applicable
requirements of the Employee Retirement
Income Security Act of 1974, Public Law
93–406 (88 Stat. 829), and the Age Dis-
crimination in Employment Act of 1967,
Public Law 90–202 (81 Stat. 602).
(4)Permitted disparities in plan contri-
butions or benefits. A plan is not treated as
failing to meet the requirements of section
411(b)(1)(H) solelybecause the plan pro-
vides a disparity in contributions or bene-
fits with respect to which the requirements
of section 401(l) are met.
(5)Definition of similarly situated.For
purposes of paragraphs (b)(1) and (b)(2) of
this section, an individual is similarly situ-
ated to another individual if the individual
is identical to that other individual in ev-
ery respect that is relevant in determining
a participant’s benefit under the plan (in-
cluding period of service, compensation,
position, date of hire, work history, and
any other respect) except for age. In deter-
mining whether an individual is similarly
situated to another individual, any char-
acteristic that is relevant for determining
benefits under the plan and that is based
directly or indirectly on age is disregarded.
For example, if a particular benefit formula
applies to a participant on account of the
participant’s age, an individual to whom
the benefit formula does not apply and who
is identical to the participant in all other re-
spects is similarly situated to the partici-
pant. By contrast, an individual is not sim-
ilarly situated to a participant if a differ-
ent benefit formula applies to the individ-
ual and the application of the different for-
mula is not based directly or indirectly on
age.
(c)Special rules for plan conversion
amendments—(1)In general.Pursuantto
section 411(b)(5)(B)(ii), (iii), and (iv), if
there is a conversion amendment within
the meaning of paragraph (c)(4) of this sec-
tion with respect to a defined benefit plan,
then the plan is treated as failing to meet
the requirements of section 411(b)(1)(H)
unless the plan, after the amendment, sat-
isfies the requirements of paragraph (c)(2)
of this section.
(2)Separate calculation of post-conver-
sion benefit—(i)In general.Astatutory
hybrid plan satisfies the requirements of
this paragraph (c)(2) if the plan provides
that, in the case of an individual who was
a participant in the plan immediately be-
fore the date of adoption of the conversion
amendment, the participant’s benefit at any
subsequent annuity starting date is not less
than the sum of:
(A) The participant’s section 411(d)(6)
protected benefit (as defined in
§1.411(d)–3(g)(14)) with respect to ser-
vice before the effective date of the con-
version amendment, determined under the
terms of the plan as in effect immediately
before the effective date of the amend-
ment; and
(B) The participant’s section 411(d)(6)
protected benefit with respect to service
on and after the effective date of the con-
version amendment, determined under the
terms of the plan as in effect after the ef-
fective date of the amendment.
(ii)Rules of application. For purposes
of this paragraph (c)(2), except as pro-
vided in paragraph (c)(3) of this section,
the benefits under paragraph (c)(2)(i)(A)
and (B) of this section must each be deter-
mined in the same manner as if they were
provided under separate plans that are
independent of each other (for example,
without any benefit offsets), and, except
to the extent permitted under §1.411(d)–3
or §1.411(d)–4 (or other applicable law),
each optional form of payment provided
under the terms of the plan with respect to
a participant’s section 411(d)(6) protected
benefit as in effect before the amendment
must be available thereafter to the extent
of the plan’s benefits for service prior to
the effective date of the amendment.
(3)Establishment of opening hypothet-
ical account balance—(i)In general.Pro-
vided that the requirements of paragraph
(c)(3)(ii) of this section are satisfied, a
statutory hybrid plan under which an open-
ing hypothetical account balance or open-
ing accumulated percentage of the partici-
pant’s final average compensation is estab-
lished as of the effective date of the con-
version amendment does not fail to satisfy
the requirements of paragraph (c)(2) of this
section merely becausebenefits attribut-
able to that opening hypothetical account
balance or opening accumulated percent-
age (that is, benefits that are not described
in paragraph (c)(2)(i)(B) of this section)
are substituted for benefits described in
paragraph (c)(2)(i)(A) of this section.
(ii)Comparison of benefits—(A)Test-
ing requirement. For any optional form
of benefit payable at an annuity starting
date where there was an optional form of
benefit within the same generalized op-
tional form of benefits (within the meaning
1.411(d)–3(g)(8)) that would have been
available to the participant at that annuity
starting date under the terms of the plan as
in effect immediately before the effective
date of the conversion amendment, the re-
quirements of this paragraph (c)(3)(ii) are
satisfied only if the plan provides that the
amount of the benefit under that optional
form of benefit available to the partici-
pant under the lump sum-based benefit
formula that is attributable to the opening
hypothetical account balance or opening
accumulated percentage as described in
paragraph (c)(3)(i) of this section, deter-
mined under the terms of the plan as of the
annuity starting date (including actuarial
conversion factors), is not less than the
benefit under that optional form of benefit
described in paragraph (c)(2)(i)(A) of this
section. To satisfy this requirement, if the
benefit under an optional form attribut-
able to the opening hypothetical account
balance or opening accumulated percent-
age is less than the benefit described in
paragraph (c)(2)(i)(A) of this section, then
the benefit attributable to the opening
hypothetical account balance or opening
accumulated percentage must be increased
to the extent necessary to provide the min-
imum benefit described in this paragraph
(c)(3)(ii)(A). Thus, if a plan is using the
option under this paragraph (c)(3) to sat-
isfy paragraph (c)(2) of this section with
respect to a participant, the participant
must receive a benefit equal to not less
than the sum of:
(1) The greater of the benefit attribut-
able to the opening hypothetical account
balance as described in this paragraph
(c)(3)(ii) and the benefit described in para-
graph (c)(2)(i)(A) of this section, and
(2)The benefit described in paragraph
(c)(2)(i)(B) of this section.
(B)Special rule for post-conversion
optional forms of benefit. If an optional
2008–11 I.R.B.610March 17, 2008

form of benefit is available on the annuity
starting date with respect to the benefit
attributable to the opening hypothetical
account balance or opening accumulated
percentage, but no optional form within the
same generalized optional form of benefit
(within the meaning of §1.411(d)–3(g)(8))
was available at that annuity starting date
under the terms of a plan as in effect im-
mediately prior to theeffectivedateofthe
conversion amendment, then, for purposes
of this paragraph (c)(3)(ii), the plan is
treated as if such an optional form of bene-
fit were available immediately prior to the
effective date of the conversion amend-
ment. In that event, paragraph (c)(3)(ii)(A)
of this section must be applied by taking
into account the optional form of benefit
that is treated as if it were available on
the annuity starting date under the terms
of the plan as in effect immediately prior
to the effective date of the conversion
amendment. Thus, for example, if a single
sum optional form of payment is not avail-
able under the plan terms applicable to
the accrued benefit described in paragraph
(c)(2)(i)(A) of this section, but a single
sum form of payment is available with
respect to the benefit attributable to the
opening hypothetical account balance or
opening accumulated percentage as of the
annuity starting date, then, for purposes of
paragraph (c)(3)(ii)(A) of this section, the
plan is treated as if a single sum (to which
section 417(e)(3) applies) were available
under the terms of the plan as in effect
immediately prior to the effective date of
the conversion amendment.
(4)Conversion amendment—(i)In
general. An amendment is a conversion
amendment that is subject to the require-
ments of this paragraph (c) with respect to
a participant if—
(A) The amendment reduces or elimi-
nates the benefits that, but for the amend-
ment, the participant would have accrued
after the effective date of the amendment
under a benefit formula that is not a statu-
tory hybrid benefit formula (and under
which the participant was accruing bene-
fits prior to the amendment); and
(B) After the effective date of the
amendment, all or a portion of the par-
ticipant’s benefitaccruals under the plan
are determined under a statutory hybrid
benefit formula.
(ii)Rules of application—(A)In gen-
eral. Paragraphs (c)(4)(iii), (iv), and (v)
of this section describe special rules that
treat certain arrangements as conversion
amendments. The rules described in those
paragraphs apply both separately and in
combination. Thus, for example, in an
acquisition described in §1.410(b)–2(f),
if the buyer adopts an amendment under
which a participant’s benefits under the
seller’s plan that is not a statutory hybrid
plan are coordinated with a separate plan
of the buyer that is a statutory hybrid plan,
such as through an offset of the partici-
pant’s benefit under the buyer’s plan by
the participant’s benefit under the seller’s
plan, the seller and buyer are treated as a
single employer under paragraph (c)(4)(iv)
of this section and they are treated as
having adopted a conversion amendment
under paragraph (c)(4)(iii) of this section.
However, pursuant to paragraph (c)(4)(iii)
of this section, if there is no coordination
between the two plans, there is no conver-
sion amendment.
(B)Covered amendments.Only
amendments that eliminate or reduce
accrued benefits described in section
411(a)(7), or a retirement-type subsidy
describedinsection411(d)(6)(B)(i),that
would otherwise accrue as a result of fu-
ture service are treated as amendments
described in paragraph (c)(4)(i)(A) of this
section.
(C)Operation of plan terms treated as
covered amendment. If, under the terms
of a plan, a change in the conditions of a
participant’s employment results in a re-
duction of the participant’s benefits that
would have accrued in the future under a
benefit formula that is not a statutory hy-
brid benefit formula, the plan is treated
for purposes of this paragraph (c)(4) as if
such plan terms constitute an amendment
that reduces the participant’s benefits that
would have accrued after the effective date
of the change under a benefit formula that
is not a statutory hybrid benefit formula.
Thus, for example, if a participant trans-
fers from an operating division that is cov-
ered by a non-statutory hybrid benefit for-
mula to an operating division that is cov-
ered by a statutory hybrid benefit formula,
there has been a conversion amendment as
of the date of the transfer.
(iii)Multiple plans.Anemployeris
treated as having adopted a conversion
amendment if the employer adopts an
amendment under which a participant’s
benefits under a plan that is not a statutory
hybrid plan are coordinated with a separate
plan that is a statutory hybrid plan, such as
through a reduction (offset) of the benefit
under the plan that is not a statutory hybrid
plan.
(iv)Multiple employers.Iftheem-
ployer of an employee changes as a
result of a transaction described in
§1.410(b)–2(f), then the two employers
are treated as a single employer for pur-
poses of this paragraph (c)(4).
(v)Multiple amendments—(A)In gen-
eral—(1)General rule. For purposes of
this paragraph (c)(4), a conversion amend-
ment includes multiple amendments that
result in a conversion amendment even
if the amendments are not conversion
amendments individually. For example,
an employer is treated as having adopted
a conversion amendment if the employer
first adopts an amendment described in
paragraph (c)(4)(i)(A) of this section and,
at a later date, adopts an amendment that
adds a benefit under a statutory hybrid
benefit formula as described in paragraph
(c)(4)(i)(B) of this section, if they are con-
solidated under paragraph (c)(4)(v)(A)(2)
of this section.
(2)Delay between plan amendments.In
the case of an amendment to provide a ben-
efit under a statutory hybrid benefit for-
mula that is adopted within three years af-
ter adoption of an amendment to reduce
non-statutory hybrid benefit formula bene-
fits, those amendments are consolidated in
determining whether a conversion amend-
ment has been adopted. Thus, the later
adoption of the statutory hybrid benefit
formula will cause the earlier amendment
to be treated as a conversion amendment.
In the case of an amendment to provide a
benefit under a statutory hybrid benefit for-
mula that is adopted more than three years
after adoption of an amendment to reduce
benefits under a non-statutory hybrid ben-
efit formula, there is a presumption that
the amendments are not consolidated un-
less the facts and circumstances indicate
that adoption of the amendment to provide
a benefit under a statutory hybrid benefit
formula was intended at the time of reduc-
tion in the non-statutory hybrid benefit for-
mula.
(B)Multiple conversion amendments.
If an employer adopts multiple amend-
ments reducing benefits described in para-
graph (c)(4)(i)(A) of this section, each
amendment is treated as a separate conver-
March 17, 20086112008–11 I.R.B.

sion amendment, provided that paragraph
(c)(4)(i)(B) of this section is applicable
at the time of the amendment (taking into
account the rules of thisparagraph (c)(4)).
(vi)Effective date of a conversion
amendment. The effective date of a con-
version amendment is, with respect to
a participant, the date as of which the
reduction of the participant’s benefits de-
scribed in paragraph (c)(4)(i)(A) of this
section occurs. In accordance with section
411(d)(6), the date of a reduction of those
benefits cannot be earlier than the date of
adoption of the conversion amendment.
(5)Examples. The following examples
illustrate the application of paragraph (c)
of this section:
Example 1.(i)Facts where plan does not estab-
lish opening hypothetical account balance for partic-
ipants and participant elects life annuity at normal
retirement age. Employer N sponsors Plan E, a de-
fined benefit plan that provides an accumulated ben-
efit, payable as a straight life annuity commencing
at age 65 (which is Plan E’s normal retirement age),
based on a percentage of highest average compen-
sation times the participant’s years of service. Plan
E permits any participant who has had a severance
from employment to elect payment in the following
optional forms of benefit (with spousal consent if ap-
plicable), with any payment not made in a straight life
annuity converted to an equivalent form based on rea-
sonable actuarial assumptions: a straight life annuity;
and a 50 percent, 75 percent, or 100 percent joint and
survivor annuity. The payment of benefits may com-
mence at any time after attainment of age 55, with
an actuarial reduction if the commencement is before
normal retirement age. In addition, the plan offers a
single sum payment after attainment of age 55 equal
to the present value of the normal retirement benefit
using the applicable interest rate and mortality table
under section 417(e)(3) in effect under the terms of
the plan on the annuity starting date.
(ii)Facts relating to the conversion amendment.
On January 1, 2010, Plan E is amended to eliminate
future accruals under the highest average compensa-
tion benefit formula and to base future benefit accru-
als on a hypothetical account balance. For service on
or after January 1, 2010, each participant’s hypothet-
ical account balance is credited monthly with a pay
credit equal to a specified percentage of the partici-
pant’s compensation during the month and also with
interestbasedonthethirdsegment rate described in
section 430(h)(2)(C)(iii). With respect to benefits un-
der the hypothetical account balance attributable to
service on and after January 1, 2010, a participant is
permitted to elect (with spousal consent if applica-
ble) payment in the same generalized optional forms
of benefit (even though different actuarial factors ap-
ply) as under the terms of the plan in effect before
January 1, 2010, and also as a single sum distribu-
tion. The plan provides for the benefits attributable
to service before January 1, 2010, to be determined
under the terms of the plan as in effect immediately
before the effective date of the amendment, and the
benefits attributable to service on and after January
1, 2010 to be determined separately, under the terms
of the plan as in effect after the effective date of the
amendment, with neither benefit offsetting the other
in any manner. Thus, each participant’s benefits are
equal to the sum of the benefits attributable to service
before January 1, 2010 (to be determined under the
terms of the plan as in effect immediately before the
effective date of the amendment), plus the benefits
attributable to the participant’s hypothetical account
balance.
(iii)Factsrelatingtoanaffectedparticipant.Par-
ticipant A is age 62 on January 1, 2010 and, on De-
cember 31, 2009, A’s benefit for years of service be-
fore January 1, 2010, payable as a straight life an-
nuity commencing at A’s normal retirement age (age
65) which is January 1, 2013, is $1,000 per month.
Participant A has a severance from employment on
January 1, 2013, and, on January 1, 2013, the hypo-
thetical account balance, withpay credits and interest
from January 1, 2010, to January 1, 2013, has become
$11,000. Using the conversion factors under the plan
as amended on January 1, 2013, that balance is equiv-
alent to a straight life annuity of $100 per month com-
mencing on January 1, 2013. This benefit is in addi-
tion to the benefit attributable to service before Jan-
uary 1, 2010. Participant A elects (with spousal con-
sent) a straight life annuity of $1,100 per month com-
mencing January 1, 2013.
(iv)Conclusion. Participant A’s benefit satisfies
the requirements of paragraph (c)(3)(ii)(A) of this
section because Participant A’s benefit is not less than
the sum of Participant A’s section 411(d)(6) protected
benefit (as defined in §1.411(d)–3(g)(14)) with re-
spect to service before the effective date of the con-
version amendment, determined under the terms of
the plan as in effect immediately before the effective
date of the amendment, and Participant A’s section
411(d)(6) protected benefit with respect to service on
and after the effective date of the conversion amend-
ment, determined under the terms of the plan as in
effect after the effective date of the amendment.
Example 2.(i)Facts involving plan’s establish-
ment of opening hypothetical account balance and
payment of pre-conversion accumulated benefit in life
annuity at normal retirement age. The facts in this
Example 2are the same as the facts under paragraph
(i) ofExample 1.
(ii)Facts relating to the conversion amendment.
On January 1, 2010, Plan E is amended to eliminate
future accruals under the highest average compensa-
tion benefit formula and to base future benefit accru-
als on a hypothetical account balance. An opening
hypothetical account balance is established for each
participant, and, under the plan’s terms, that balance
is equal to the present value of the participant’s accu-
mulated benefit on December 31, 2009 (payable as a
straight life annuity at normal retirement age or im-
mediately, if later), using the applicable interest rate
and applicable mortality table under section 417(e)(3)
on January 1, 2010. Under Plan E, the account based
on this opening hypothetical account balance is main-
tained as a separate account from the account for ac-
cruals on or after January 1, 2010. The hypotheti-
cal account balance maintained for each participant
for accruals on or after January 1, 2010, is credited
monthly with a pay credit equal to a specified per-
centage of the participant’s compensation during the
month. A participant’s hypothetical account balance
(including both of the separate accounts) is credited
monthly with interest based on the third segment rate
described in section 430(h)(2)(C)(iii).
(iii)Facts relating to optional forms of benefit.
Following severance from employment and attain-
ment of age 55, a participant is permitted to elect
(with spousal consent if applicable) payment in the
same generalized optional forms of benefit as under
the plan in effect prior to January 1, 2010, with the
amount payable calculated based on the hypothetical
account balance on the annuity starting date and the
applicable interest rate and applicable mortality table
on the annuity starting date. The single sum distribu-
tion is equal to the hypothetical account balance.
(iv)Facts relating to conversion protection.The
plan provides that, as of a participant’s annuity start-
ing date, the plan will determine whether the ben-
efit attributable to the opening hypothetical account
payable in the particular optional form of benefit se-
lected is greater than or equal to the benefit accrued
under the plan through the date of conversion and
payable in the same generalized optional form of ben-
efit with the same annuity starting date. If the ben-
efit attributable to the opening hypothetical account
balance is greater, the plan provides that such ben-
efit is paid in lieu of the pre-conversion benefit, to-
gether with the benefit attributable to post-conver-
sion contribution credits. If the benefit attributable
to the opening hypothetical account balance is less,
the plan provides that such benefit is increased suffi-
ciently to provide the pre-conversion benefit, together
with the benefit attributable to post-conversion con-
tribution credits.
(v)Facts relating to an affected participant.On
January 1, 2010, the opening hypothetical account
balance established for Participant A is $80,000,
which is the present value of Participant A’s straight
life annuity of $1,000 per month commencing at
January 1, 2013, using the applicable interest rate and
applicable mortality table under section 417(e)(3) in
effect on January 1, 2010. On January 1, 2010, the
applicable interest rate for Participant A is equivalent
to a level rate of 5.5 percent.Thereafter, Participant
A’s hypothetical account balance for subsequent ac-
cruals is credited monthly with a pay credit equal to
a specified percentage of the participant’s compen-
sation during the month. In addition, Participant A’s
hypothetical account balance (including both of the
separate accounts) is credited monthly with interest
basedonthethirdsegmentratedescribedinsection
430(h)(2)(C)(iii).
(vi)Facts relating to calculation of the partici-
pant’s benefit. Participant A has a severance from
employment on January 1, 2013 at age 65, and elects
(with spousal consent) a straight life annuity com-
mencing January 1, 2013. On January 1, 2013, the
opening hypothetical account balance, with interest
credits from January 1, 2010, to January 1, 2013, has
become $95,000, which, using the conversion factors
under the plan on January 1, 2013, is equivalent to a
straight life annuity of $1,005 per month commencing
on January 1, 2013 (which is greater than the $1,000 a
month payable at age 65 under the terms of the plan in
effect before January 1, 2010). This benefit is in addi-
tion to the benefit determined using the hypothetical
account balance for service after January 1, 2010.
(vii)Conclusion. The benefit satisfies the re-
quirements of paragraph (c)(3)(ii)(A) of this section
with respect to Participant A because A’s benefit is
not less than the sum of (A) the greater of Participant
2008–11 I.R.B.612March 17, 2008

A’s benefits attributable to the opening hypothetical
account balance and A’s section 411(d)(6) protected
benefit (as defined in §1.411(d)–3(g)(14)) with
respect to service before the effective date of the
conversion amendment, determined under the terms
of the plan as in effect immediately before the ef-
fective date of the amendment, and (B) Participant
A’s section 411(d)(6) protected benefit with respect
to service on and after the effective date of the con-
version amendment, determined under the terms of
theplanasineffectaftertheeffectivedateofthe
amendment.
Example 3.(i)Facts involving a subsequent de-
crease in interest rates. The facts are the same as
inExample 2, except that, because of a decrease in
bond rates after January 1, 2010, and before January
1, 2013, the rate of interest credited in that period
averages less than 5.5 percent, and, on January 1,
2013, the effective applicable interest rate under sec-
tion 417(e)(3) under the plan’s terms is 4.7 percent.
As a result, Participant A’s opening hypothetical ac-
count balance plus attributable interest credits has in-
creased to only $87,000 on January 1, 2013, and, us-
ing the conversion factors under the plan on January
1, 2013, is equivalent to a straight life annuity com-
mencing on January 1, 2013, of $775 per month. Un-
der the terms of Plan E, the benefit attributable to
A’s opening account balance is increased so that A’s
straight life annuity commencing on January 1, 2013,
is $1,000 per month. This benefit is in addition to the
benefit attributable to the hypothetical account bal-
ance for service after January 1, 2010.
(ii)Conclusion. The benefit satisfies the require-
ments of paragraph (c)(3)(ii)(A) of this section with
respect to Participant A because A’s benefit is not less
than the sum of (A) the greater of A’s benefits attribut-
able to the opening hypothetical account balance and
A’s section 411(d)(6) protected benefit (as defined in
§1.411(d)–3(g)(14)) with respect to service before the
effective date of the conversion amendment, deter-
mined under the terms of the plan as in effect imme-
diately before the effective date of the amendment,
and (B) A’s section 411(d)(6) protected benefit with
respect to service on and after the effective date of the
conversion amendment, determined under the terms
of the plan as in effect after the effective date of the
amendment.
Example 4.(i)Facts involving payment of a subsi-
dized early retirement benefit. The facts are the same
as inExample 2, except that under the terms of Plan
E on December 31, 2009, a participant who retires
before age 65 and after age 55 with 30 years of ser-
vice has only a 3 percent per year actuarial reduction.
Participant A has a severance from employment on
January 1, 2011, when A is age 63 and has 30 years
of service. On January 1, 2011, A’s opening hypo-
thetical account balance, with interest from January
1, 2010, to January 1, 2011, has become $86,000,
which, using the conversion factors under the plan
(as amended) on January 1, 2011, is equivalent to a
straight life annuity commencing on January 1, 2011,
of $850 per month.
(ii)Facts relating to calculation of the partici-
pant’s benefit. Under the terms of Plan E on Decem-
ber 31, 2009, Participant A is entitled to a straight life
annuity commencing on January 1, 2011, equal to at
least $940 per month ($1,000 reduced by 3 percent
for each of the 2 years that A’s benefits commence be-
fore normal retirement age). Under the terms of Plan
E, the benefit attributable to A’s opening account bal-
ance is increased so that A is entitled to a straight life
annuity of $940 per month commencing on January
1, 2013. This benefit is in addition to the benefit de-
termined using the hypothetical account balance for
service after January 1, 2010.
(iii)Conclusion. The benefit satisfies the require-
ments of paragraph (c)(3)(ii)(A) of this section with
respect to Participant A because A’s benefit is not
less than the sum of (A) the greater of Participant A’s
benefits attributable to the opening hypothetical ac-
count balance (increased by attributable interest cred-
its) and A’s section 411(d)(6) protected benefit (as de-
fined in §1.411(d)–3(g)(14)) with respect to service
before the effective date of the conversion amend-
ment, determined under the terms of the plan as in
effect immediately before the effective date of the
amendment, and (B) Participant A’s section 411(d)(6)
protected benefit with respect to service on and after
the effective date of the conversion amendment, de-
termined under the terms of the plan as in effect after
the effective date of the amendment.
Example 5.(i)Facts involving addition of a sin-
gle sum payment option. The facts are the same as
inExample 2, except that, before January 1, 2010,
Plan E did not offer payment in a single sum dis-
tribution for amounts in excess of $5,000. Plan E,
as amended on January 1,2010, offers payment in
any of the available annuity distribution forms com-
mencing at any time following severance from em-
ployment as were provided under Plan E before Jan-
uary 1, 2010. In addition, Plan E, as amended on Jan-
uary 1, 2010, offers payment in the form of a single
sum attributable to service before January 1, 2010,
which is the greater of the opening hypothetical ac-
count balance (increased by attributable interest cred-
its) or a single sum distribution of the straight life an-
nuity payable at age 65 using the same actuarial fac-
tors as are used for mandatory cashouts for amounts
equal to $5,000 or less under the terms of the plan on
December 31, 2009. Participant B is age 40 on Jan-
uary 1, 2010, and B’s opening hypothetical account
balance (increased by attributable interest credits) is
$33,000 (which is the present value, using the con-
version factors under the plan (as amended) on Jan-
uary 1, 2010, of Participant B’s straight life annuity
of $1,000 per month commencing at January 1, 2035,
which is when B will be age 65). Participant B has
a severance from employment on January 1, 2013,
and elects (with spousal consent) an immediate sin-
gle sum distribution. Participant B’s opening hypo-
thetical account balance (increased by attributable in-
terest) on January 1, 2013, is $45,000. The present
value, on January 1, 2013, of Participant B’s benefit
of $1,000 per month, commencing immediately using
the actuarial factors for mandatory cashouts under the
terms of the plan on December 31, 2009, would re-
sult in a single sum payment of $44,750. Participant
B is paid a single sum distribution equal to the sum of
$45,000 plus an amount equal to B’s January 1, 2013,
hypothetical account balance for benefit accruals for
service after January 1, 2010.
(ii)Conclusion. Because, under Plan E, Partici-
pant B is entitled to the sum of (A) The greater of the
$45,000 opening hypothetical account balance (in-
creased by attributable interest credits) and $44,750
(present value of the benefit with respect to service
prior to January 1, 2010, using the actuarial factors for
mandatory cashout distributions under the terms of
the plan on December 31, 2009), plus (B) An amount
equal to B’s hypothetical account balance for benefit
accruals for service after January 1, 2010, the benefit
satisfies the requirements of paragraph (c)(3)(ii)(A)
of this section with respect to Participant B. If Par-
ticipant B’s hypothetical account balance under Plan
E was instead less than $44,750 on January 1, 2013,
Participant B would be entitled to a single sum pay-
ment equal to the sum of $44,750 and an amount
equal to B’s hypothetical account balance for bene-
fit accruals for service after January 1, 2010.
Example 6.(i)Facts involving addition of new
annuity optional form of benefit. The facts are the
same as inExample 2, except that, after December 31,
2009, and before January 1, 2013, Plan E is amended
to offer payment in a 5-, 10-, or 15-year term cer-
tain and life annuity, using the same actuarial assump-
tions that apply for other optional forms of distribu-
tion. When Participant A has a severance from em-
ployment on January 1, 2013, A elects (with spousal
consent) a 5-year term certain and life annuity com-
mencing immediately equal to $935 per month. Ap-
plication of the same actuarial assumptions to Par-
ticipant A’s benefit of $1,000 per month (under Plan
E as in effect on December 31, 2009), commencing
immediately on January 1, 2013, would result in a
5-year term certain and life annuity commencing im-
mediately equal to $955 per month. Under the terms
of Plan E, the benefit attributable to A’s opening ac-
count balance is increased so that, using the conver-
sion factors under the plan (as amended) on January
1, 2013, A’s opening hypothetical account balance
(increased by attributable interest credits) produces a
5-year term certain and life annuity commencing im-
mediately equal to $955 per month commencing on
January 1, 2013. This benefit is in addition to the
benefit determined using the January 1, 2013, hypo-
thetical account balance for service after January 1,
2010.
(ii)Conclusion. This benefit satisfies the require-
ments of paragraph (c)(3)(ii)(A) of this section with
respect to Participant A.
Example 7.(i)Facts involving addition of distri-
bution option before age 55. The facts are the same as
inExample 5, except that Participant B (age 43) elects
(with spousal consent) a straight life annuity. Under
Plan E, the straight life annuity attributable to Partici-
pant B’s opening hypothetical account balance at age
43 is $221 per month. Application of the same actu-
arial assumptions to Participant B’s benefit of $1,000
per month (under Plan E as in effect on December 31,
2009), commencing immediately on January 1, 2013,
would result in a straight life annuity at age 43 equal
to $219 per month.
(ii)Conclusion. Because, under its terms, Plan E
provides that Participant B is entitled to an amount
not less than the present value (using the same ac-
tuarial assumptions as apply on January 1, 2013, in
converting the $45,000 hypothetical account balance
attributable to the opening hypothetical account bal-
ance to the $221 straight life annuity) of Participant
B’s straight life annuity of $1,000 per month com-
mencing at January 1, 2035, and the $221 straight
life annuity is in addition to the benefit accruals for
service after January 1, 2010, payment of the $221
monthly annuity would satisfy the requirements of
paragraph (c)(3)(ii)(A) of this section with respect to
Participant B.
March 17, 20086132008–11 I.R.B.

(d)Market rate of return—(1)In gen-
eral—(i)Basic test. Subject to paragraph
(d)(3) of this section, a statutory hybrid
plan satisfies the requirements of section
411(b)(1)(H) and this paragraph (d) only if,
for any plan year, the interest crediting rate
under the terms of the plan is no greater
than a market rate of return.
(ii)Definition of interest crediting rate
and interest credit. For purposes of this
paragraph (d), a plan’s interest crediting
rate means the rate by which a partici-
pant’s benefit is increased under the on-
going terms of the plan to the extent the
amount of the increase is not conditioned
on current service, regardless of how the
amount of that increase is calculated. The
amount of such an increase is an interest
credit. Thus, whether the amount is an in-
terest credit for this purpose is determined
without regard to whether the amount is
calculated by reference to a rate of inter-
est, a rate of return, an index, or otherwise.
(iii)Single rates. Except as is otherwise
provided in this paragraph (d)(1), an inter-
est crediting rate is not in excess of a mar-
ket rate of return only if the plan provides
an interest credit for the year at a rate that
is equal to one of the following rates that
is specified in the terms of the plan:
(A) The interest rate on long-term in-
vestment grade corporate bonds (as de-
scribed in paragraph (d)(4) of this section);
(B) An interest rate that is deemed to
be not in excess of a market rate of return
under paragraph (d)(5) of this section; or
(C) An interest rate that is described in
paragraph (d)(6) of this section.
(iv)Timing rules—(A)In general.A
plan must specify the timing for determin-
ing the plan’s interest crediting rate that
will apply for each plan year (or portion
of a plan year) using either of the methods
described in paragraph (d)(1)(iv)(B) of this
section and must specify the frequency of
interest crediting under the plan pursuant
to paragraph (d)(1)(iv)(C) of this section.
(B)Methods to determine interest cred-
iting rate. A plan is permitted to provide
daily interest credits using a daily inter-
est crediting rate based on the permitted
rates specified in paragraph (d)(1)(iii) of
this section. Alternatively, a plan is per-
mitted to provide an interest credit for a
stability period that is based on the inter-
est crediting rate for a specified lookback
month with respect to that stability period.
The stability period and lookback month
must satisfy the rules for selecting the sta-
bility period and lookback month under
§1.417(e)–1(d)(4). (However, the interest
rates can be any of the rates in paragraph
(d)(1)(iii) of this section and the stability
period and lookback month need not be the
same as those used under the plan for pur-
poses of section 417(e)(3).)
(C)Frequency of interest crediting.In-
terest credits under a plan must be made
on an annual or more frequent periodic ba-
sis. If a plan provides for the crediting of
interest more frequently than annually (for
example, monthly or quarterly), then the
interest credit for that period must be apro
rataportion of the annual interest credit.
Thus, for example, if a plan’s terms pro-
vide for interest to be credited monthly and
for the interest crediting rate to be equal
to the interest rate on long-term invest-
ment grade corporate bonds (as described
in paragraph (d)(4) of this section), and
that interest rate for a plan year is 6 per-
cent, the accumulated benefits at the be-
ginning of each month would be increased
by 0.5 percent per month during the plan
year. Interest credits under the terms of a
plan are not treated ascreating an effective
rate of return that is in excess of a market
rate of return merely because an otherwise
permissible interest crediting rate is com-
pounded more frequently than annually.
(v)Lesser rates. An interest crediting
rate is not in excess of a market rate of re-
turn if the plan provides an interest cred-
iting rate that, under all circumstances, is
always less than one of the rates described
in paragraph (d)(1)(iii) of this section.
(vi)Greater-of rates. If a statutory hy-
brid plan provides for an interest credit that
is equal to the interest credits determined
under the greater of 2 or more different in-
terest crediting rates, the effective interest
crediting rate is not in excess of a market
rate of return only if each of the differ-
ent rates satisfies the requirements of para-
graph (d)(1)(ii) of this section and the ad-
ditional requirements of paragraph (d)(7)
of this section are satisfied.
(2)Preservation of capital require-
ment—(i)In general. A statutory hybrid
plan is treated as failing to meet the re-
quirements of section 411(b)(1)(H) if the
requirements of paragraph (d)(2)(ii) of this
section are not satisfied.
(ii)Preservation of capital de-
fined—(A)In general. The requirements
of this paragraph (d)(2)(ii) are satisfied
if the plan provides that, as of the partic-
ipant’s annuity starting date, the partic-
ipant’s benefit under the plan is no less
than the benefit determined as of that
date based on the sum of the hypothetical
contributions credited under the plan (or
the accumulated percentage of the partic-
ipant’s final average compensation, or the
participant’s accrued benefits determined
without regard to any indexing under sec-
tion 411(b)(5)(E), as applicable).
(B)Hypothetical contributions defined.
For purposes of this paragraph (d)(2)(ii),
a hypothetical contribution is any amount
credited under a statutory hybrid plan other
than an interest credit (as defined in para-
graph (d)(1)(ii) of this section). Thus, if
an opening hypothetical account balance
or opening accumulated percentage of the
participant’s final average compensation is
established pursuant to paragraph (c)(3) of
this section, that opening hypothetical ac-
count balance or opening accumulated per-
centage as of the date established is treated
as a hypothetical contribution and, thus,
is taken into account for purposes of the
preservation of capital requirement of this
paragraph (d)(2)(ii).
(3)Plan termination—(i)In general.
Except as provided in paragraph (d)(3)(ii)
of this section, a statutory hybrid plan is
treated as meeting the requirements of
paragraph (d)(1) of this section only if
the terms of the plan provide that, upon
termination of the plan, a participant’s
benefit as of the termination is determined
using the interest rate and mortality table
otherwise applicable for determining that
benefit under the plan (without regard to
termination of the plan).
(ii)Variable interest rates. A statutory
hybrid plan is treated as meeting the re-
quirements of paragraph (d)(1) of this sec-
tion only if the terms of the plan provide
that, upon termination of the plan, any in-
terest rate used to determine a participant’s
benefits under the plan (including any in-
terest crediting rate and any interest rate
used to determine annuity benefits) that is
a variable rate is determined as the average
of the rates of interest used under the plan
for that purpose during the 5-year period
ending on the termination date.
(4)Long-term investment grade corpo-
rate bonds. For purposes of this para-
graph (d), the rate of interest on long-term
investment grade corporate bonds means
the third segment rate described in sec-
2008–11 I.R.B.614March 17, 2008

tion 430(h)(2)(C)(iii) (determined with or
without regard to the transition rules of
section 430(h)(2)(G)), provided that such
rate floats on a periodic basis not less fre-
quently than annually. However, for plan
years beginning prior to January 1, 2008,
the rate of interest on long-term investment
grade corporate bonds means the rate de-
scribed in section 412(b)(5)(B)(ii)(II) prior
to amendment by the Pension Protection
Act of 2006, Public Law 109–280 (120
Stat. 780) (PPA ’06).
(5)Safe harbor rates of interest—(i)
Rates based on Treasury bonds with mar-
gins. An interest crediting rate is deemed
to be not in excess of a market rate of re-
turn if the rate is adjusted at least annually
and is equal to the sum of any of the fol-
lowing rates of interest for Treasury bonds
and the associated margin for that interest
rate:
Treasury bond interest ratesAssociated Margin
The discount rate on 3-month Treasury Bills
175 basis points
The discount rate on 12-month or shorter Treasury Bills
150 basis points
The yield on 1-year Treasury Constant Maturities100 basis points
The yield on 3-year or shorter Treasury bonds
50 basis points
The yield on 7-year or shorter Treasury bonds
25 basis points
The yield on 30-year or shorter Treasury bonds0 basis points
(ii)Eligible cost-of-living indices.An
interest crediting rate is deemed to be
not in excess of a market rate of re-
turn if the rate is adjusted no less fre-
quently than annually and is equal to the
rate of increase with respect to an eli-
gible cost-of-living index described in
§1.401(a)(9)–6, A–14(b), except that for
purposes of this paragraph (d)(5)(ii), the
eligible cost-of-living index described in
§1.401(a)(9)–6, A–14(b)(2), is increased
by 300 basis points.
(iii)Additional safe harbors.TheCom-
missioner may, in guidance of general ap-
plicability, specify additional interest cred-
iting rates that are deemed to be not in
excess of a market rate of return. See
§601.601(d)(2)(ii)(b)ofthischapter.
(6)Other interest rates—(i)Reason-
able minimum guaranteed rate of return.
[Reserved]
(ii)Equity-based rates.[Reserved]
(7)Combinations of rates of return—(i)
In general. If a plan provides an interest
crediting rate that is equal to the interest
credits determined under the greater of 2
or more different interest crediting rates
where each of the different rates satisfies
the requirements of paragraph (d)(1)(iii)
of this section, then the interest credits
provided by the plan satisfy this paragraph
(d)(7) only if one or more of the differ-
ent interest crediting rates under the plan
are adjusted as provided in paragraphs
(d)(7)(iii) or (d)(7)(iv) of this section in
order to provide that the effective interest
crediting rate resulting from the use of
the greater of 2 or more rates does not
exceed a market rate of return. This para-
graph (d)(7) provides the exclusive rules
thatmaybeusedforthispurposeand,
therefore, a plan does not satisfy the re-
quirements of this paragraph (d) if the plan
provides for interest credits determined
using the greater of 2 or more interest
crediting rates and that combination of
interest crediting rates is not specifically
permitted by this paragraph (d)(7).
(ii)Coordination with preservation of
capital rule. No adjustment under this
paragraph (d)(7) is required merely be-
cause the plan satisfies the requirements of
paragraph (d)(2) of this section.
(iii)Combination of fixed and variable
interest rates.[Reserved]
(iv)Other combinations.[Reserved]
(8)Section 411(d)(6)—(i)General
rule. Except as provided in this paragraph
(d)(8), to the extent that benefits have ac-
crued under the terms of a statutory hybrid
plan that entitle the participant to future
interest credits, an amendment to the
plan to change the interest crediting rate
for such interest credits violates section
411(d)(6) if the revised rate under any cir-
cumstances could result in a lower interest
crediting rate as of any date after the appli-
cable amendment date of the amendment
(within the meaning of §1.411(d)–3(g)(4))
changing the interest crediting rate. For
additional rules, see §1.411(d)–3(a)(1).
(ii)Adoption of long-term investment
grade corporate bond rate or safe har-
bor rate. An amendment to a statutory
hybrid plan to change the interest credit-
ing rate for future periods from an inter-
est crediting rate described in paragraph
(d)(5) of this section to the interest cred-
iting rate described inparagraph (d)(4) of
this section does not constitute a decrease
of an accrued benefit and, therefore, does
not violate section 411(d)(6). However,
an amendment described in this paragraph
(d)(8)(ii) cannot be effective less than 30
days after adoption and, on the effective
date of the amendment, the new interest
crediting rate cannot be less than the inter-
est crediting rate that would have applied
in the absence of the amendment.
(iii)Other changes not treated as pro-
hibited reduction of accrued benefit.[Re-
served]
(e)Definitions—(1)In general.The
definitions in this paragraph (e) apply for
purposes of this section.
(2)Accumulated benefit. A partici-
pant’s accumulated benefit at any date
means the participant’s benefit, as ex-
pressed under the terms of the plan, ac-
crued to that date. For this purpose, the
accumulated benefit of a participant may
be expressed under the terms of the plan
as either the balance of a hypothetical
account or the current value of an accumu-
lated percentage of the participant’s final
average compensation, even if the plan
defines the participant’s accrued benefit as
an annuity beginning at normal retirement
age that is actuarially equivalent to that
balance or value.
(3)Lump sum-based benefit for-
mula—(i)In general. A lump sum-based
benefit formula means a benefit formula
used to determine all or any part of a
participant’s accumulated benefit under a
defined benefit plan under which the bene-
fit provided under the formula is expressed
as the balance of a hypothetical account
maintained for the participant or as the
current value of the accumulated per-
centage of the participant’s final average
compensation. Whether a benefit formula
is a lump sum-based benefit formula is
March 17, 20086152008–11 I.R.B.

determined based on how the accumulated
benefit of a participant is expressed under
the terms of the plan, and does not depend
on whether the plan provides an optional
form of benefit in the form of a single sum
payment.
(ii)Exception for contributory plans.A
participant is not treated as having a lump
sum-based benefit formula merely because
the participant is entitled to a benefit under
a defined benefit plan that is equal to the
greater of the otherwise applicable benefit
formula and the benefit properly attribut-
able to after-tax employee contributions.
(4)Statutory hybrid benefit formula.A
statutory hybrid benefit formula means a
statutory hybrid benefit formula as defined
in §1.411(a)(13)–1(d)(3).
(5)Statutory hybrid plan.Astatutory
hybrid plan means a defined benefit plan
that contains a statutory hybrid benefit for-
mula.
(6)Variable annuity benefit formula.A
variable annuity benefit formula means a
variable annuity benefit formula as defined
in §1.411(a)(13)–1(d)(4).
(f)Effective/applicability date—(1)
Statutory effective/applicability dates—(i)
In general. Except as provided in para-
graph (f)(1)(iii) of this section, section
411(b)(5) applies for periods beginning on
or after June 29, 2005.
(ii)Conversion amendments.There-
quirements of section 411(b)(5)(B)(ii),
(iii), and (iv) apply to a conversion amend-
ment (as defined in paragraph (c)(4) of
this section) that is adopted after, and takes
effect after, June 29, 2005.
(iii)Market rate of return—(A)Plans
in existence on June 29, 2005—(1)In gen-
eral. In the case of a plan that is in ex-
istence on June 29, 2005 (regardless of
whether the plan is a statutory hybrid plan
on that date), section 411(b)(5)(B)(i) only
applies to plan years beginning on or after
January 1, 2008.
(2)Exception for plan sponsor
election.Notwithstanding paragraph
(f)(1)(iii)(A)(1) of this section, a plan
sponsor of a plan that is in existence on
June 29, 2005 (regardless of whether
the plan is a statutory hybrid plan on
that date) may elect to have the require-
ments of section 411(a)(13)(B) and section
411(b)(5)(B)(i) apply for any period after
June 29, 2005, and before the first plan
year beginning after December 31, 2007.
In accordance with section 1107 of the
PPA ’06, an employer is permitted to adopt
an amendment to make this election as late
as the last day of the first plan year that be-
gins on or after January 1, 2009 (January
1, 2011, in the case of a governmental plan
asdefinedinsection414(d))iftheplan
operates in accordance with the election.
(B)Plans not in existence on June 29,
2005. In the case of a plan not in existence
on June 29, 2005, section 411(b)(5)(B)(i)
applies to the plan on and after the later
of June 29, 2005, and the date the plan
becomes a statutory hybrid plan.
(2)Effective/applicability date of regu-
lations. This section applies for plan years
beginning on or after January 1, 2009 (or,
if later, the date applicable under para-
graph (f)(3) of this section). For the pe-
riods after the statutory effective date set
forth in paragraph (f)(1) or (f)(3) of this
section and before the regulatory effective
date set forth in the preceding sentence, a
plan must comply with section 411(b)(5).
During these periods, a plan is permitted
to rely on the provisions of this section for
purposes of satisfying the requirements of
section 411(b)(5).
(3)Collectively bargained plans—(i)
In general. Notwithstanding paragraph
(f)(1)(iii) of this section, in the case of
a collectively bargained plan maintained
pursuant to one or more collective bar-
gaining agreements between employee
representatives and one or more employers
ratified on or before August 17, 2006, the
requirements of section 411(b)(5)(B)(i) do
notapplytoplanyearsbeginningbefore
the earlier of—
(A)Thelaterof—
(1) The date on which the last of those
collective bargaining agreements termi-
nates (determined without regard to any
extension thereof on or after August 17,
2006), or
(2) January 1, 2008; or
(B) January 1, 2010.
(ii)Treatment of plans with both collec-
tively bargained and non-collectively bar-
gained employees. In the case of a plan
where a collective bargaining agreement
applies to some, but not all, of the plan par-
ticipants, the plan is considered a collec-
tively bargained plan for purposes of para-
graph (f)(3)(i) of thissection if at least 25
percent of the participants in the plan are
members of collective bargaining units for
which the benefit levels under the plan are
specified under the collective bargaining
agreement.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 27,
2007, 8:45 a.m., and published in the issue of the Federal
Register for December 28, 2007, 72 F.R. 73680)
Notice of Proposed
Rulemaking
Diversification Requirements
for Certain Defined
Contribution Plans
REG–136701–07
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of Proposed Rulemak-
ing.
SUMMARY: This document contains pro-
posed regulations under section 401(a)(35)
of the Internal Revenue Code (Code) re-
lating to diversification requirements for
certain defined contribution plans and to
publicly traded employer securities. These
regulations will affectadministrators of,
employers maintaining, participants in,
and beneficiaries of defined contribution
plans that are invested in employer secu-
rities.
DATES: Written or electronic comments
and requests for a public hearing must be
received by April 2, 2008.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–136701–07), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, D.C. 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–136701–07),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, N.W.,
Washington, D.C., or sent electroni-
cally via the Federal eRulemaking Por-
tal athttp://www.regulations.gov(IRS
REG–136701–07).
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
2008–11 I.R.B.616March 17, 2008

R. Lisa Mojiri-Azad or Dana Barry at
(202) 622–6060; concerning submission
of comments or to request a public hear-
ing, Kelly Banks at (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed reg-
ulations under section 401(a)(35) of the
Code, which was added by section 901 of
the Pension Protection Act of 2006, Public
Law 109–280, 120 Stat. 780 (PPA ’06).
1
Section 401(a)(35)(A) provides that a
trust which is part of an applicable defined
contribution plan is not a qualified trust
under section 401(a) unless the plan sat-
isfies the diversification requirements of
sections 401(a)(35)(B), (C), and (D). Un-
der section 401(a)(35)(B), each individual
must have the right to direct the plan to
divest employer securities allocated to the
individual’s account that are attributable to
employee contributions or elective defer-
rals and to reinvest an equivalent amount
in other investment options meeting the re-
quirements of section 401(a)(35)(D).
2
Under section 401(a)(35)(C), each indi-
vidual who is a participant who has com-
pleted at least three years of service, a
beneficiary of a participant who has com-
pleted at least three years of service, or a
beneficiary of a deceased participant must
be permitted to elect to direct the plan
to divest employer securities allocated to
the individual’s account and to reinvest an
equivalent amount in other investment op-
tions meeting the requirements of section
401(a)(35)(D).
Section 401(a)(35)(D)(i) requires an
applicable defined contribution plan to
offer individuals not less than three in-
vestment options, other than employer
securities, to which the individuals may
direct the proceeds from the divestment
of employer securities, each of which is
diversified and has materially different
risk and return characteristics.
Under section 401(a)(35)(D)(ii)(I), a
plan does not fail to meet the requirements
of section 401(a)(35)(D) if it allows in-
dividuals to divest employer securities
and reinvest the proceeds at periodic, rea-
sonable opportunities occurring no less
frequently than quarterly.
Under section 401(a)(35)(D)(ii)(II), a
plan is not permitted to impose restrictions
or conditions with respect to the invest-
ment of employer securities that are not
imposed on the investment of other assets
of the plan. However, this rule does not
apply to restrictions or conditions imposed
to comply with securities laws. The Secre-
tary is authorized to issue regulations pro-
viding additional exceptions to the require-
ments of section 401(a)(35)(D)(ii)(II).
An applicable defined contribution
plan under section 401(a)(35) is a defined
contribution plan that holds any publicly
traded employer securities. A publicly
traded employer security is defined as an
employer security under section 407(d)(1)
of the Employee Retirement Income Se-
curity Act of 1974, Public Law 93–406,
88 Stat. 829 (ERISA) which is readily
tradable on an established securities mar-
ket. Section 401(a)(35)(F)(i) provides that
a plan that does not hold publicly traded
employer securities is nevertheless treated
as holding publicly traded employer se-
curities if any employer corporation or
any member of a controlled group of cor-
porations which includes the employer
(determined by applying section 1563(a),
except substituting 50 percent for 80 per-
cent) has issued a class of stock that is a
publicly traded employer security. How-
ever, section 401(a)(35)(F) does not apply
to a plan if no employer corporation, or
parent corporation (as defined in section
424(e)) of an employer corporation, has
issued any publicly traded employer secu-
rity and no employer or parent corporation
has issued any special class of stock which
grants particular rights to, or bears par-
ticular risks for, the holder or issuer with
respect to any corporation described in
section 401(a)(35)(F)(i) which has issued
any publicly tradedemployer security.
Section 401(a)(35)(E) provides that
section 401(a)(35) does not apply to an
employee stock ownership plan within the
meaning of section 4975(e)(7) (ESOP)
that holds no contributions (or earnings
thereunder) that are subject to section
401(k) or (m) (generally relating to elec-
tive deferrals and matching and employee
after-tax contributions) and the ESOP is
a separate plan for purposes of section
414(l) with respect to any other defined
benefit plan or defined contribution plan
maintained by the same employer or em-
ployers. Section 401(a)(35)(E) further
provides that section 401(a)(35) does not
apply to one-participant retirement plans.
Section 401(a)(35) is generally effec-
tive for plan years beginning after De-
cember 31, 2006. Section 401(a)(35)(H)
generally provides a three year phase-in
rule with respect to an individual’s right
to direct the divestment of employer se-
curities attributable to employer contribu-
tions, except with respect to certain par-
ticipants who have attained age 55. Sec-
tion 901(c)(2) of PPA ’06 includes a spe-
cial rule for a plan maintained pursuant to
one or more collective bargaining agree-
ments between employee representatives
and one or more employers that was rat-
ified on or before August 17, 2006. Un-
der this rule, section 401(a)(35) is not ef-
fective until plan years beginning after the
earlier of (1) the later of (a) December 31,
2007 or (b) the date on which the last of
such collective bargaining agreements ter-
minates (determined without regard to any
extension thereof after August 17, 2006) or
(2) December 31, 2008.
Notice 2006–107, 2006–2 C.B.
1114 (December 18, 2006) (see
§601.601(d)(2)(ii)(b)ofthischapter),in-
cludes guidance and transitional rules with
respect to the diversification requirements
of section 401(a)(35).
3
Notice 2006–107
provides that a plan (and an investment op-
tion described in section 401(a)(35)(D)(i))
is not treated as holding employer secu-
1
Section 901 of PPA ’06 also added a parallel provision at section 204(j) of the Employee Retirement Income Security Act of 1974, PublicLaw 93–406, 88 Stat. 829 (ERISA). Under section
101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of Treasury has interpretative jurisdictionover the subject matter addressed inthese proposed regulations for purposes
of section 204(j) of ERISA. Thus, the guidance provided in these proposedregulations with respect to section 401(a)(35) of the Code also applies for purposes of section 204(j) of ERISA.
2
Section 401(a)(28) provides certain diversification rights to participants in an employee stock ownership plan within the meaning of section 4975(e)(7) (ESOP). Section 401(a)(28)(B) also
generally requires that the plan offer at least three alternative investment options. Section 401(a)(28)(B) permits a plan to satisfy these diversification requirements by distributing, within 90
days after the period during which the election may be made, the portion of the participant’s account that is subject to section 401(a)(28)(B). Section 401(a)(28)(B) was amended by section
901(a)(2)(A) of PPA ’06 not to apply to a plan to which section 401(a)(35) applies.
3
Notice 2006–107 also includes guidance regarding the related notice requirements of section 101(m) of ERISA, including a model notice.
March 17, 20086172008–11 I.R.B.

rities to which section 401(a)(35) applies
with respect to any securities held through
either an investment company registered
under the Investment Company Act of
1940 or a similar pooled investment vehi-
cle that is regulated and subject to periodic
examination by a State or Federal agency
and with respect to which investment in
securities is made both in accordance with
the stated investment objectives of the
investment vehicle and independent of
the employer and any affiliate thereof,
but only if the holdings of the investment
company or similar investment vehicle
are diversified so as to minimize the risk
of large losses. Notice 2006–107 also
provides that investment options satisfy
the requirement that investment options
be diversified and have materially differ-
ent risk and return characteristics under
section 401(a)(35)(D)(i) if the investment
options satisfy the requirements of section
2550.404c–1(b)(3) of the Department of
Labor regulations.
Notice 2006–107 further provides that,
for purposes of section 401(a)(35), the
date on which a participant completes
three years of service occurs immediately
after the end of the third vesting compu-
tation period provided for under the plan
that constitutes the completion of a third
year of service under section 411(a)(5).
For a plan using the elapsed time method
of crediting service for vesting purposes
(or a plan that provides for immediate
vesting without using a vesting compu-
tation period or elapsed time method of
determining vesting), the date on which
a participant completes three years of
service is the third anniversary of the par-
ticipant’s date of hire.
Notice 2006–107 includes special rules
regarding restrictions or conditions with
respect to employer securities under sec-
tion 401(a)(35)(D)(ii)(II). An impermis-
sible restriction or condition is either a
restrictiononanindividual’srighttodi-
vest an investment in employer securities
that is not imposed on an investment that
is not in employer securities or a bene-
fit that is conditioned on an investment in
employer securities. Examples of restric-
tions or conditions that are prohibited by
section 401(a)(35)(D)(ii)(II) under Notice
2006–107 include: (1) a plan allows an in-
dividual the right to divest employer secu-
rities on a quarterly basis but permits di-
vestiture of another investment on a more
frequent basis; (2) a plan provides that
a participant who divests his or her ac-
count of employer securities receives less
favorable treatment (such as a lower rate
of matching contributions) than a partic-
ipant whose account remains invested in
employer securities; and (3) a plan that
provides if a participant divests his or her
account balance with respect to investment
in a class of employer securities, the par-
ticipant is not permitted for a period of
time to reinvest in that class of securi-
ties where that restriction is not imposed
on other investments. Notice 2006–107
also provided examples of restrictions or
conditions that are not prohibited by sec-
tion 401(a)(35)(D)(ii)(II): (1) a provision
that limits the extent to which an individ-
ual’s account balance can be invested in
employer securities; (2) a provision un-
der which an employer securities fund is
closed; (3) a restriction imposed by rea-
son of application of securities laws or a
restriction that is reasonably designed to
ensure compliance with such laws; (4) an
imposition of fees on other investment op-
tions under the plan but not on investments
in employer securities; and (5) a plan re-
striction on the availability of otherwise
applicable diversification rights under the
plan for up to 90 days following an initial
public offering of the employer’s stock.
Notice 2006–107 provides certain tran-
sition rules. For example, for the period
prior to January 1, 2008, a plan does not
impose a restriction or condition pro-
hibited by section 401(a)(35)(D)(ii)(II)
merely because the plan, as in effect on
December 18, 2006, (1) does not impose
an otherwise applicable restriction on a
stable value fund or (2) allows individuals
the right to divest employer securities on
a periodic basis (at least quarterly), but
permits divestiture of another investment
on a more frequent basis, provided that
the other investment is not a generally
available investment.
Explanation of Provisions
Overview
The proposed regulations would pro-
vide guidance with respect to the require-
ments of section 401(a)(35) that incor-
porates much of the guidance provided
under Notice 2006–107. The regulations
would clarify the scope of the rule in sec-
tion 401(a)(35)(D)(ii)(II) that generally
prohibits restrictions and conditions on in-
vestment in employer securities, but would
specifically permit certain restrictions and
conditions on such investment that are
consistent with the statute, and would also
define when employersecurities are pub-
licly traded on an established securities
market under section 401(a)(35)(D).
Basic diversification rights
The proposed regulations incorporate
the guidance on the basic diversifica-
tion rights of section 401(a)(35) that is
contained in Notice 2006–107. Thus, if
an applicable defined contribution plan
holds employee contributions (including
rollover contributions) or elective defer-
rals with respect to an individual that are
invested in employer securities, the plan
must provide that the individual is given
the opportunity to divest the employer se-
curities and reinvest an equivalent amount
in another investment. These rights must
be provided to each participant, to each
alternate payee who has an account under
the plan, and to each beneficiary of a de-
ceased participant.
If employer contributions (other than
elective deferrals) are invested in em-
ployer securities under the plan, the di-
vestment right must be provided to each
participant who has completed at least
three years of service, to each alternate
payee who has an account under the plan
with respect to a participant who has at
least three years of service, and to each
beneficiary of a deceased participant (re-
gardless of whether the participant had
completed at least three years of service).
For this purpose, the regulations would
provide that a participant has completed
three years of service on the last day of
the vesting computation period as deter-
mined under the plan that constitutes the
completion of the third year of service (or
thethirdanniversaryofhireforaplanthat
either uses the elapsed time method or that
does not define the vesting computation
period because the plan provides for full
and immediate vesting).
The regulations would require a plan
to provide individuals who have section
401(a)(35) diversification rights the oppor-
tunity to divest the employer securities and
reinvest an equivalent amount in another
investment at least quarterly. The individ-
2008–11 I.R.B.618March 17, 2008

uals must be permitted to select among no
less than three investment options, each
of which is diversified and has materi-
ally different risk and return characteris-
tics. For this purpose, investment options
that constitute a broad range of invest-
ment alternatives within the meaning of
Department of Labor Regulations section
2550.404c–1(b)(3) are treated as being di-
versified and having materially different
risk and return characteristics.
Plans subject to section 401(a)(35)
Under the proposed regulations, a de-
fined contribution plan which holds pub-
licly-traded employer securities (referred
to as an applicable defined contribution
plan) is subject to the diversification re-
quirements of section 401(a)(35), unless it
is exempted under section 401(a)(35)(E)
as a stand-alone ESOP or as a one-partici-
pant retirement plan. For this purpose, an
employer security is defined by reference
to section 407(d)(1) of ERISA.
Under section 401(a)(35)(G)(v), an em-
ployer security is a publicly traded em-
ployer security if it is readily tradable on
an established securities market. The reg-
ulations would provide separate rules for
securities traded on domestic securities ex-
changes and foreign securities exchanges.
If a security is traded on a securities ex-
change that is registered under section 6
of the Securities Exchange Act of 1934,
then the security would be deemed to be
readily tradable on an established secu-
rities market. This definition is consis-
tent with the definition of publicly traded
found in §54.4975–7(b)(1)(iv), but deletes
the reference to a system sponsored by the
National Association of Securities Deal-
ers (NASDAQ) registered under section
15A(b) of the Act (15 U.S.C. 78o) because
NASDAQ is now registered as a securities
exchange under section 6 of the Securities
Exchange Act of 1934. Thus, if a security
is not traded on a national securities ex-
change that is registered under section 6 of
the Securities Exchange Act of 1934, then
the security would not be publicly traded
for purposes of section 401(a)(35), (unless
it is traded on a foreignsecurities exchange
and has a “ready market” as described in
the next paragraph). This would apply to
U.S. securities that are only traded on the
“Over-The-Counter Bulletin Board” and
the “pink sheets.”
Under the proposed regulations, if a se-
curity is not listed on a securities exchange
that is registered under section 6 of the
Securities Exchange Act of 1934, but is
traded on a foreign national securities ex-
change that is officially recognized, sanc-
tioned, or supervised by a governmental
authority, then under the proposed regu-
lations, the security would be traded on
an established securities market. The pro-
posed regulations would provide that such
a security is readily tradable if the secu-
rity is deemed by the Securities and Ex-
change Commission (SEC) as having a
“ready market” under SEC Rule 15c3–1
(17 CFR 240.15c3–1).
4
The proposed regulations would reflect
section 401(a)(35)(F), which, subject to
certain exceptions, treats a plan holding
employer securities that are not publicly
traded as nonetheless subject to the rules of
section 401(a)(35) if any employer spon-
soring the plan, or any member of the con-
trolled group of corporations (determined
by applying section 1563(a), except substi-
tuting 50 percent for 80 percent) has issued
a class of stock which is publicly traded (as
defined above).
Section 401(a)(35)(E)(ii) provides that
an ESOP that is a separate plan holding
no contributions that are subject to section
401(k) or section 401(m) is not an appli-
cable defined contribution plan. (As noted
earlier in this preamble, such a plan is sub-
ject to the diversification requirements of
section 401(a)(28)(B).) The proposed reg-
ulations would clarify that a plan does not
lose this exemption merely because it re-
ceives rollover contributions of amounts
from another plan that are held in a sep-
arate account, even if those amounts were
attributable to contributions that were sub-
ject to section 401(k) or 401(m) in the
other plan. In addition, the proposed reg-
ulations would reflect the exemption for
one-participant retirement plans under sec-
tion 401(a)(35)(E)(iv).
Notice 2006–107 provides that em-
ployer securities held by an investment
company registered under the Investment
Company Act of 1940 or similar pooled
investment vehicle are not treated as be-
ing held by the plan. Some comments
on Notice 2006–107 had recommended
a broader rule, under which a commin-
gled fund that holds employer securities
and other securitieswould not be treated
as holding employer securities that are
subject to the section 401(a)(35) diver-
sification requirement. The proposed
regulations would not adopt this broad
exemption from the diversification rules.
The proposed regulations, however,
clarify the types of pooled investment
vehicles that are exempt from the diversi-
fication requirements. Under the proposed
regulations, in order to be exempt from the
diversification requirements, the pooled
investment vehicle must be a common
or collective trust fund or pooled invest-
ment fund maintained by a bank or trust
company supervised by a State or Federal
agency, a pooled investment fund of an
insurance company that is qualified to do
business in a State, or an investment fund
designated by the Commissioner in rev-
enue rulings, notices, or other guidance
published in the Internal Revenue Bulletin.
As under Notice 2006–107, the regula-
tions would include the requirement that
in order to be exempt from the diversifica-
tion requirements the pooled investment
fund that holds the employer securities
must have stated investment objectives
and the investment must be independent
of the employer and any affiliate thereof.
The proposed regulations would add a
percentage limitation rule to ensure that
the investment in the employer securities
through a pooled fund is not an attempt
to evade the rules of section 401(a)(35).
Under this rule, if the employer securities
held by such fund is more than 10 percent
of the total value of all of the fund’s in-
vestment, then the fund is not considered
to be independent of the employer.
Prohibition on restrictions or conditions
The proposed regulations would pro-
vide that the section 401(a)(35)(D)(ii)(II)
prohibition on restrictions or conditions
with respect to the investment of employer
securities which are not imposed on the in-
vestment of other assets of the plan applies
to a direct or indirect restriction on an in-
dividual’s rights to divest an investment in
employer securities that is not imposed on
an investment that is not employer secu-
rities as well as a direct or indirect ben-
4
Under the current SEC rules, a security is deemed to have a readymarket if it is included on the FTSE Group (FTSE) World Index.
March 17, 20086192008–11 I.R.B.

efit that is conditioned on investment in
employer securities. However, like Notice
2006–107, the regulations would not ap-
ply this prohibition to restrictions that are
imposed by reason of the application of se-
curities laws and in certain other situations
described below.
Like Notice 2006–107, the proposed
regulations would allow a plan to impose
a restriction on divestiture that is reason-
ablydesignedtocomplywithsecurities
law, even if the restriction is broader than
the minimum restriction needed to comply
with securities laws. The proposed reg-
ulations incorporate the example of such
a restriction from Notice 2006–107. This
is merely an example and broader restric-
tions on divestiture are permitted, provided
they are reasonably designed to comply
with securities law. For example, in some
smaller entities a broad restriction allow-
ing divestiture to occur only once a quar-
ter might be a restriction that is reasonably
designed to comply with securities law.
Notice 2006–107 includes a rule that
permits a plan to restrict the otherwise ap-
plicable diversification rights under sec-
tion 401(a)(35) for a period of up to 90
days following an initial public offering of
the employer’s stock. The proposed regu-
lations would extend this rule to apply to
the first 90 days after the plan becomes an
applicable defined contribution plan. This
could happen, for example, when some
other entity in the controlled group first
issues stock which is publicly traded or
when a stand-alone ESOP first provides
for contributions thatare subject to section
401(k) or section 401(m).
Notice 2006–107 permits a plan to
impose a restriction on an investment in
employer securities that is not imposed on
a stable value fund. The proposed regu-
lations extend this rule to a fund that is
similar to a stable value fund. Specifically,
the proposed regulations would provide
that in the case of a plan that has sev-
eral investment funds, including a fund
invested in employer securities, a fund
which is a stable value or similar fund,
and other funds which are not invested
in employer securities, the plan does not
impose a restriction prohibited under sec-
tion 401(a)(35)(D)(ii)(II) merely because
the plan permits transfers to be made
into the stable value or similar fund more
frequently than into the fund invested in
employer securities (assuming the plan
does not impose a restriction on transfers
to or from the employer securities fund
that it does not impose with respect to the
other funds).
While the proposed regulations would
generally prohibit indirect restrictions on
an individual’s exercise of diversification
rights (such as a plan provision that lim-
its the right of an individual who diversi-
fies out of employer securities by provid-
ing that such a participant is not permit-
ted to reinvest in employer securities for
a period of time), the rules would permit
certain indirect restrictions, as well as cer-
tain indirect benefits that are conditioned
on investment in employer securities. Un-
der the proposed regulations, a plan would
be permitted to limit the extent to which
an individual’s account balance can be in-
vested in employer securities. For exam-
ple, a plan would not be treated as im-
posing a restriction that violates section
401(a)(35)(D)(ii)(II) merely because the
plan prohibits a participant from investing
additional amounts inemployer securities
if more than 10 percent of that participant’s
account balance is (or would be after the
change) invested in employer securities.
In addition, an applicable defined contri-
bution plan does not violate a prohibition
against reinvestment in employer securi-
ties if the plan has terminated any further
investment in employer securities.
The proposed regulations would pro-
vide that a plan is not providing an indirect
benefit that is conditioned on investment
in employer securities merely because the
plan imposes fees on other investment op-
tions that are not imposed on the invest-
ment in employer securities. In addition,
aplanisnotprovidingarestrictiononthe
right to divest an investment in employer
securities merely because the plan imposes
a reasonable fee for the divestment of em-
ployer securities.
The proposed regulations would per-
mit a restriction on the frequency of in-
vestment elections that was not in Notice
2006–107. Under this rule, a plan would
be permitted to impose reasonable restric-
tions on the timing and number of invest-
ment elections that an individual can make
to invest in employer securities, provided
that the restrictions are designed to limit
short-term trading in the employer secu-
rities. For example, a fund could limit
the purchase of employer securities if there
has been a sale within a short period of
time, such as 7 days. The regulations,
however, would not permit a plan to limit
an individual’s right to divest employer se-
curities.
Proposed Effective Date
Section 401(a)(35) is applicable to plan
years beginning on or after January 1,
2007, subject to certain deferred effective
dates and transition rules. The proposed
regulations would provide guidance on
these effective dates andtransitionrules.
In particular, the regulations would pro-
vide that a plan is eligible for the deferred
effective date applicable to collectively
bargained plans only if at least 25 percent
of the participants in the plan are members
of collective bargaining units for which the
contributions under the plan are specified
under a collective bargaining agreement.
The regulations under section
401(a)(35) are proposed to be effective for
plan years beginning on or after January 1,
2009. Until the regulations go into effect,
Notice 2006–107 will continue to apply.
For this purpose, the transitional relief
provided for the period prior to January 1,
2008, in paragraph 4 of Section III.D. of
Notice 2006–107 will continue to apply
after 2007 until the regulations go into ef-
fect.
5
In addition, plans are also permitted
to apply the proposed regulations for plan
years before the regulations go into effect.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also has
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and, because §1.401(a)(35)–1 would
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,
5
The Treasury and IRS are issuing a notice to reflect this extension. The notice is expected to be published as Notice 2008–7 in the 2008–3 issue of the I.R.B. on January 22, 2008, (see
§601.601(d)(2)(ii)(b) of this chapter).
2008–11 I.R.B.620March 17, 2008

this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (one signed
and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and the Treasury Department
specifically request comments on the clar-
ity of the proposed regulations and how
they can be made easier to understand.
In particular, the IRS and Treasury De-
partment request comments on whether
the determination of when an employer se-
curity is readily tradable on an established
securities market under these proposed
regulations should also be applied for
purposes of determining whether an em-
ployer security is readily tradable on an
established securities market in apply-
ing other provisions relating to qualified
plans, given that the same words used
in interrelated provisions of the Code
are presumed to have the same meaning.
These interrelated provisions include sec-
tion 401(a)(28)(C) (requiring the use of
an independent appraiser for valuation of
employer securities that are not readily
tradable on an established securities mar-
ket), section 409(h)(1)(B) (relating to put
options for employer securities that are not
readilytradableonanestablished market),
the definition of employer securities under
section 409(l)(1) (including regulations
under section 4975), and the special rules
under section 1042 (providing nonrecog-
nition treatment for certain sales to an
ESOP).
All comments will be available for
public inspection and copying. A public
hearing will be scheduled if requested in
writing by any person who timely submits
written comments. If a public hearing is
scheduled, notice of the date, time, and
place of the public hearing will be pub-
lished in theFederal Register.
Drafting Information
The principal authors of these
regulations are Dana A. Barry and
Lisa Mojiri-Azad, Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities).
However, other personnel from the IRS
and the Treasury participated in the
development of these regulations.
*****
Proposed Ame
ndments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
Part1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.401(a)(35)–1 is also issued
under 26 U.S.C. 401(a)(35). * * *
Par. 2. Section 1.401(a)(35)–1 is added
to read as follows:
§1.401(a)(35)–1 Diversification
Requirements for Certain Defined
Contribution Plans.
(a)General rule—(1)Diversification
requirements. Section 401(a)(35) imposes
diversification requirements on applicable
defined contribution plans. A trust that is
part of an applicable defined contribution
plan is not a qualified trust under section
401(a) unless the plan—
(i) Satisfies the diversification election
requirements for elective deferrals and em-
ployee contributions set forth in paragraph
(b)ofthissection;
(ii) Satisfies the diversification election
requirements for employer nonelective
contributions set forth in paragraph (c) of
this section;
(iii) Satisfies the investment option re-
quirement set forth in paragraph (d) of this
section; and
(iv) Does not apply any restrictions or
conditions on investments in employer se-
curities that violate the requirements of
paragraph (e) of this section.
(2)Definitions, effective dates, and
transition rules. The definitions of appli-
cable defined contribution plan, employer
security, parent corporation, and publicly
traded are set forth in paragraph (f) of this
section. Effective/applicability dates and
transition rules are set forth in paragraph
(g)ofthissection.
(b)Diversification requirements for
elective deferrals and employee contribu-
tions invested in employer securities—(1)
General rule. With respect to any in-
dividual described in paragraph (b)(2)
of this section, if any portion of the in-
dividual’s accountunder an applicable
defined contribution plan attributable to
elective deferrals (as described in sec-
tion 402(g)(3)(A)), after-tax employee
contributions, or rollover contributions
is invested in employer securities, then
the plan satisfies the requirements of this
paragraph (b) if the individual may elect
to divest those employer securities and
reinvest an equivalent amount in other
investment options. The plan may limit
the time for divestment and reinvestment
to periodic, reasonable opportunities oc-
curring no less frequently than quarterly.
(2)Applicable individual with respect
to elective deferrals and employee contri-
butions. An individual is described in this
paragraph (b)(2) if the individual is—
(i) A participant;
(ii) An alternate payee who has an ac-
count under the plan; or
(iii) A beneficiary of a deceased partic-
ipant.
(c)Diversification requirements for em-
ployer nonelective contributions invested
in employer securities—(1)General rule.
With respect to any individual described in
paragraph (c)(2) of this section, if a por-
tion of the individual’s account under an
applicable defined contribution plan attrib-
utable to employer nonelective contribu-
tions, other than elective deferrals, is in-
vested in employer securities, then the plan
satisfies the requirements of this paragraph
(c) if the individual may elect to divest
those employer securities and reinvest an
equivalent amount in other investment op-
tions. The plan may limit the time for
divestment and reinvestment to periodic,
reasonable opportunities occurring no less
frequently than quarterly.
(2)Applicable individual with respect
to employer nonelective contributions.An
individual is described in this paragraph
(c)(2) if the individual is—
(i) A participant who has completed at
least three years of service;
(ii) An alternate payee who has an ac-
count under the plan with respect to a par-
ticipant who has completed at least three
years of service; or
March 17, 20086212008–11 I.R.B.

(iii) A beneficiary of a deceased partic-
ipant.
(3)Completion of 3 years of service.
For purposes of paragraph (c)(2) of this
section, a participant completes three years
of service on the last day of the vesting
computation period provided for under
the plan that constitutes the completion
of the third year of service under section
411(a)(5). However, for a plan that uses
the elapsed time method of crediting ser-
vice for vesting purposes (or a plan that
provides for immediate vesting without
using a vesting computation period or the
elapsed time method of determining vest-
ing), a participant completes three years of
service on the day immediately preceding
the third anniversary of the participant’s
date of hire.
(d)Investment option. An applicable
defined contribution plan must offer not
less than three investment options, other
than employer securities, to which an in-
dividual who has the right to divest under
paragraph(b)(1)or(c)(1)ofthissection
may direct the proceeds from the divest-
ment of employer securities. Each of the
three investment options must be diversi-
fied and have materially different risk and
return characteristics. For this purpose, in-
vestment options that constitute a broad
range of investment alternatives within the
meaning of Department of Labor Regula-
tion section 2550.404c–1(b)(3) are treated
as being diversified and having materially
different risk and return characteristics.
(e)Restrictions or conditions on in-
vestments in employer securities—(1)Im-
permissible restrictions or conditions—(i)
General rule. Except as provided in para-
graph (e)(2) of this section, an applicable
defined contribution plan violates the re-
quirements of this paragraph (e) if the
plan imposes restrictions or conditions
with respect to the investment of employer
securities that are not imposed on the in-
vestment of other assets of the plan. A
restriction or condition with respect to
employer securities means—
(A) A restriction on an individual’s
right to divest an investment in employer
securities that is not imposed on an invest-
ment that is not employer securities; and
(B) A benefit that is conditioned on in-
vestment in employer securities.
(ii)Indirect restrictions or conditions.
Except as provided in paragraph (e)(3) of
this section, a plan violates the require-
ments of this paragraph (e) if the plan im-
poses a restriction or condition in para-
graph (e)(1)(i)(A) or (B) of this section ei-
ther directly or indirectly. For example, a
plan imposes an indirect restriction on an
individual’s right to divest an investment
in employer securities if the plan provides
that a participant who divests his or her ac-
count balance with respect to investment in
employer securities is not permitted for a
period of time thereafter to reinvest in em-
ployer securities.
(2)Permitted restrictions or condi-
tions—(i)In general. An applicable de-
fined contribution plan does not violate
the requirements of this paragraph (e)
merely because it imposes a restriction or
a condition set forth in paragraph (e)(2)(ii)
or (e)(2)(iii) of this section.
(ii)Securities laws.Aplanispermit-
tedtoimposearestrictionorconditionon
the divestiture of employer securities that
is either required in order to ensure com-
pliance with applicable securities laws or
is reasonably designed to ensure compli-
ance with applicable securities laws. For
example, it is permissible for a plan to
limit divestiture rights for participants who
are subject to section 16(b) of the Secu-
rities Exchange Act of 1934 to a reason-
able period (such as 3 to 12 days) follow-
ing publication of the employer’s quarterly
earnings statements because it is reason-
ably designed to ensure compliance with
Rule 10b–5 of the Securities and Exchange
Commission.
(iii)Deferred application of the diver-
sification requirements. An applicable
defined contribution plan is permitted to
restrict the application of the diversifica-
tion requirements of section 401(a)(35)
and this section for up to 90 days after
the plan becomes an applicable defined
contribution plan (for example, the date on
which the employer securities held under
the plan become publicly traded).
(3)Permitted indirect restrictions or
conditions—(i)In general. An applicable
defined contribution plan does not vio-
late the requirements of this paragraph
(e) merely because it imposes an indirect
restriction or condition set forth in para-
graphs (e)(3)(ii) through (e)(3)(v) of this
section.
(ii)Limitation on investment in em-
ployer securities. The plan is permitted to
limit the extent to which an individual’s
account balance can be invested in em-
ployer securities, provided the limitation
applies without regard to a prior exercise
of rights to divest employer securities. For
example, a plan does not impose a restric-
tion that violates this paragraph (e) merely
because the plan prohibits a participant
from investing additional amounts in em-
ployer securities if more than 10 percent
of that participant’s account balance is
invested in employer securities.
(iii)Trading frequency. A plan is per-
mitted to impose reasonable restrictions
on the timing and number of investment
elections that an individual can make to
invest in employer securities, provided
that the restrictions are designed to limit
short-term trading in the employer secu-
rities. For example, a plan could provide
that a participant may not elect to invest
in employer securities if the employee
has elected to divest employer securities
within a short period of time, such as seven
days.
(iv)Frozen funds. A plan is permitted
to prohibit any further investment in em-
ployer securities.
(v)Fees. The plan has not provided an
indirect benefit that is conditioned on in-
vestment in employer securities merely be-
cause the plan imposes fees on other in-
vestment options that are not imposed on
the investment in employer securities. In
addition, the plan has not provided a re-
striction on the right to divest an invest-
ment in employer securities merely be-
cause the plan imposes a reasonable fee for
the divestment of employer securities.
(vi)Transfers to stable value fund.In
the case of a plan that has several invest-
ment funds, including one or more funds
invested in employer securities, a fund
which is a stable value or similar fund,
and other funds which are not invested
in employer securities, the plan does not
impose a restriction prohibited under this
paragraph (e) merely because the plan per-
mits transfers to be made into the stable
value or similar fund more frequently than
other funds (including funds invested in
employer securities).
(f)Definitions—(1)Application of def-
initions. This paragraph (f) contains defi-
nitions that are applicable for purposes of
this section.
(2)Applicable defined contribution
plan—(i)General rule. Except as pro-
vided in this paragraph (f)(2), an applica-
ble defined contribution plan means any
2008–11 I.R.B.622March 17, 2008

defined contribution plan which holds em-
ployer securities thatare publicly traded.
See paragraph (f)(2)(iv) of this section
for a special rule that treats certain plans
that hold employer securities that are not
publicly traded as applicable defined con-
tribution plans and paragraph (f)(3)(ii) of
this section for a special rule that treats
certain plans as not holding publicly traded
employer securities for purposes of this
section.
(ii)Exception for certain ESOPs.An
employee stock ownership plan (ESOP),
as defined in section 4975(e)(7), is not
an applicable defined contribution plan if
the plan is a separate plan for purposes of
section 414(l) with respect to any other de-
fined benefit plan or defined contribution
plan maintained by the same employer
or employers and holds no contributions
(or earnings thereunder) that are (or were
ever) subject to section 401(k) or 401(m).
Thus, an employee stock ownership plan
is an applicable defined contribution plan
if that ESOP is a portion of a larger plan
(whether or not that larger plan includes
contributions that are subject to section
401(k) or 401(m)). For purposes of this
paragraph (f)(2)(ii), a plan is not con-
sidered to hold amounts ever subject to
section 401(k) or 401(m) merely because
the plan holds amounts attributable to
rollover amounts in a separate account that
were previously subject to section 401(k)
or 401(m).
(iii)Exception for one-participant
plans. A one-participant plan, as defined
in section 401(a)(35)(E)(iv), is not an ap-
plicable defined contribution plan.
(iv)Certain defined contribution plans
treated as holding publicly traded em-
ployer securities—(A)General rule.Ade-
fined contribution plan holding employer
securities that are not publicly traded is
treated as an applicable defined contri-
bution plan if any employer maintaining
the plan or any member of a controlled
group of corporations that includes such
employer has issued a class of stock which
is publicly traded. For purposes of this
paragraph (f)(2)(iv), a controlled group of
corporation has the meaning given such
term by section 1563(a), except that “50
percent” is substituted for “80 percent”
each place it appears.
(B)Exception for certain plans. Para-
graph (f)(2)(iv)(A) of this section does not
applytoaplanif—
(1)Noemployermaintainingtheplan
(or a parent corporation with respect to
such employer) has issued stock that is
publicly traded; and
(2)Noemployermaintainingtheplan
(or parent corporation with respect to such
employer) has issued any special class of
stock which grants to the holder or issuer
particular rights, or bears particular risks
for the holder or issuer, with respect to
any employer maintaining the plan (or any
member of a controlled group of corpora-
tions that includes such employer) which
has issued any stock that is publicly traded.
(3)Employer security—(i)General
rule. Employer security has the meaning
given such term by section 407(d)(1) of
the Employee Retirement Income Security
Act of 1974, as amended.
(ii)Certain defined contribution plans
or investment funds not treated as holding
employer securities—(A)Exception for
certain flow-through investments. Subject
to paragraph (f)(3)(ii)(B) and (C) of this
section, a plan (and an investment option
described in paragraph (d) of this section)
is not treated as holding employer secu-
rities for purposes of this section to the
extent the employer securities are held
indirectly through—
(1) An investment company registered
under the Investment Company Act of
1940;
(2) A common or collective trust fund
or pooled investment fund maintained by
a bank or trust company supervised by a
State or a Federal agency;
(3) A pooled investment fund of an in-
surance company that is qualified to do
business in a State; or
(4) Any other investment fund desig-
nated by the Commissioner in revenue rul-
ings, notices, or other guidance published
in the Internal Revenue Bulletin.
(B)Investment must be independent.
The exception set forth in paragraph
(f)(3)(ii)(A) of this section applies only if
the investment in the employer securities
are held in a fund under which—
(1) There are stated investment objec-
tives of the fund; and
(2) The investment is independent of
the employer and any affiliate thereof.
(C)Percentage limitation rule. For pur-
poses of paragraph (f)(3)(ii)(B)(2)ofthis
section, an investment in employer secu-
ritiesinafundisconsideredtobeinde-
pendent of the employer and any affiliate
thereof only if the aggregate value of the
employer securities held in the fund is not
in excess of 10 percent of the total value of
all of the fund’s investments.
(4)Parent corporation. Parent corpora-
tion has the meaning given such term by
section 424(e).
(5)
Publicly traded—(i)In general.A
security is publicly traded if it is readily
tradable on an established securities mar-
ket.
(ii)Established securities market.For
purposes of this paragraph (f)(5), a secu-
rity is traded on an established securities
market if—
(A) The security is traded on a national
securities exchange that is registered under
section 6 of the Securities and Exchange
Act of 1934 (15 U.S.C. 78f); or
(B) The security is traded on a for-
eign national securities exchange that is of-
ficially recognized, sanctioned, or super-
vised by a governmental authority.
(iii)Readily tradable. For purposes of
this paragraph (f)(5), except as provided by
the Commissioner in revenue rulings, no-
tices, or other guidance published in the In-
ternal Revenue Bulletin, a security is read-
ily tradable if—
(A) The security is traded on a secu-
rities exchange that is described in para-
graph (f)(5)(ii)(A) of this section; or
(B) The security is traded on a secu-
rities exchange that is described in para-
graph (f)(5)(ii)(B) of this section and the
security is deemed by the Securities and
Exchange Commission (SEC) as having a
“ready market” under SEC Rule 15c3–1
(17 CFR 240.15c3–1).
(g)Effective date and transition
rules—(1)Statutory effective date—(i)
General rule. Except as otherwise pro-
vided in this paragraph (g), section
401(a)(35) is effective for plan years be-
ginning after December 31, 2006.
(ii)Collectively bargained plans—(A)
Delayed effective date. In the case of a
plan maintained pursuant to one or more
collective bargaining agreements between
employee representatives and one or more
employers ratified on or before August 17,
2006, section 401(a)(35) is effective for
plan years beginning after the earlier of
(1)thelaterof—
(i) December 31, 2007; or
(ii) the date on which the last such col-
lective bargaining agreement terminates
March 17, 20086232008–11 I.R.B.

(determined without regard to any exten-
sion thereof); or
(2) December 31, 2008.
(B)Definition of collectively bargained
plans. For purposes of this paragraph
(g)(1)(ii), in the case of a plan for which
one or more collective bargaining agree-
ments apply to some, but not all, of the
plan participants, theplan is considered a
collectively bargained plan if at least 25
percent of the participants in the plan are
members of collective bargaining units
for which the contributions under the plan
are specified under a collective bargaining
agreement.
(iii)Special rule for certain employer
securitiesheldinanESOP. Section
901(c)(3)(A) and (B) of the Pension Pro-
tection Act of 2006, Public Law 109–280,
120 Stat. 780 (PPA ’06), provides a spe-
cial effective date for an employee stock
ownership plan that holds a class of pre-
ferred stock with a guaranteed minimum
value, as described in that section.
(2)Statutory transition rules—(i)
General rule.Pursuant to section
401(a)(35)(H), in the case of the portion
of an account to which paragraph (c) of
this section applies and that consists of
employer securities acquired in a plan year
beginning before January 1, 2007, the re-
quirements of paragraph (c) of this section
only apply to the applicable percentage of
such securities.
(ii)Applicable percentage—(A)
Phase-in percentage. For purposes of this
paragraph (g)(2), the applicable percent-
age is determined as follows—
Plan year to which paragraph (c) of this section applies:The applicable percentage is:
1st ..................................................... 33
2nd .................................................... 66
3rdandfollowing ........................................ 100
(B)Special rule. For a plan described
in paragraph (g)(1)(iii) of this section for
which the special effective date under
section 901(c)(3) of PPA ’06 applies, the
applicable percentage under this paragraph
(g)(2)(ii) is determined without regard
to the delayed effective date in section
901(c)(3)(A) and (B) of PPA ’06.
(iii)Nonapplication for participants
age 55 with three years of service. Para-
graph (g)(2)(i) of this section does not
apply to an individual who is a participant
who attained age 55 and had completed at
least three years of service (as defined in
paragraph (c)(3) of this section) before the
first day of the first plan year beginning
after December 31, 2005.
(iv)Separate application by class of se-
curities. This paragraph (g)(2) applies sep-
arately with respect to each class of secu-
rities.
(3)Regulatory effective date. This sec-
tion is effective for plan years beginning
on or after January 1, 2009.
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on January 2,
2008, 8:45 a.m., and published in the issue of the Federal
Register for January 3, 2008, 73 F.R. 421)
Update to Publication 1187,
Specifications for Filing Form
1042–S, Foreign Person’s
U.S. Source Income Subject
to Withholding, Electronically
or Magnetically,revised
September 2006
Announcement 2008–19
This announcement supersedes An-
nouncement 2008–6 and corrects a ty-
pographical error. The reference to the
state code table in the second bullet was
changed to Sec. 17. Publicly Traded
Partnership (PTP) was added the ‘Q’
record descriptions below which reference
NQI/FLW-THR. Continue to use Publica-
tion 1187,Specifications for Filing Form
1042–S, Foreign Person’s U.S. Source
Income Subject to Withholding, Electroni-
cally or Magnetically, revised September
2006 along with the changes listed below
for your Tax Year 2007 filing. The fol-
lowing changes are effective for Tax Year
2007 filed in calendar year 2008.
•An explanatory note was added to the
Recipient ‘Q’ Record which reads: If
you are a nominee that is the withhold-
ing agent under Code Section 1446, en-
ter the Publicly Traded Partnership’s
(PTP) name and other information in
the NQI/FLW-THR/PTP fields; posi-
tions 401–666.
•In the Recipient ‘Q’ Record, a new
field, NQI/FLW-THR/PTP State
Code, was added to positions 643–644.
Enter the two-alpha character state
code (see table Part A, Sec. 17). If a
state code or APO/FPO is not applica-
ble then blank fill.
•Additional instructions were added
to the Recipient ‘Q’ Record,
NQI/FLW-THR/PTP Country Code,
positions 647–648. The instructions
read: Enter the two-character Coun-
try Code abbreviation, where the
NQI/FLW-THR/PTP is located. Enter
blanks if the NQI/FLW-THR/PTP has
aU.S.address.
•The Field Title was changed and
additional instructions were added
to the Recipient ‘Q’ Record,
NQI/FLW-THR/PTP Postal Code/ZIP
Code, positions 649–657. The instruc-
tions read: Enter the alpha/numeric
foreign postal code or U.S. ZIP Code
for all U.S. addresses including territo-
ries, possessions and APO/FPO. Enter
the code in the left most position and
blank fill the remaining positions.DO
NOTuse hyphens or blanks between
numbers or letters (e.g., if the postal
code is written as A6B 3C5 input as
A6B3C5). Left-justify.
•Some of the Canadian Province codes
changed. Use the chart below to code
your file.
2008–11 I.R.B.624March 17, 2008

Province CodeProvince
ABAlberta
BCBritish Columbia
MBManitoba
NBNew Brunswick
NLNewfoundland & Labrador
NSNova Scotia
NTNorthwest Territories
NUNunavut
ONOntario
PEPrince Edward Island
QCQuebec
SKSaskatchewan
YTYukon Territory
If you have questions concerning the
filing of Form 1042–S,Foreign Per-
son’s U.S. Source Income Subject to
Withholding,please contact the Internal
Revenue Service ECC-MTB toll-free at
866–455–7438.
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2008–20
The Internal Revenue Service has re-
voked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on March 17, 2008,
andwouldendonthedatethecourtfirst
determines that the organization is not de-
scribed in section 170(c)(2) as more partic-
ularly set forth in section 7428(c)(1). For
individual contributors, the maximum de-
duction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were the
basis for revocation.
Drive for Youth 2020
Missouri City, TX
Rise and Shine, Inc.
Medical Lake, WA
Bluegrass Gymnastic Boosters, Inc.
Lexington, KY
DebtTech
Columbia, MD
Nexum Credit Counseling, Inc.
Vero Beach, FL
NewHomeGallery,Inc.
Louisville, KY
Alban Community Services Foundation
Lititz, PA
Union Oaks, Inc.
Omaha, NE
Shiloh Ministries of Hagerstown, Inc.
Hagerstown, MD
Credicure, Inc.
Martinsburg, WV
Newton Family Foundation
West Jordan, UT
Alliance to Rebuild LA
Santa Monica, CA
The Down Payment Assistance Group
San Diego, CA
Phillip J. Kronzer Foundation for
Religious Research
Los Gatos, CA
Credit Success Company
Jacksonville, FL
Mario C. and Elva G. Rapanotti Charitable
Supporting Organization
San Antonio, TX
Anthony & Megan Wolfenden Charitable
Supporting Organization
Santa Clara, CA
March 17, 20086252008–11 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2008–11 I.R.B.iMarch 17, 2008

Numerical Finding List
1
Bulletins 2008–1 through 2008–11
Announcements:
2008-1, 2008-1 I.R.B.246
2008-2, 2008-3 I.R.B.307
2008-3, 2008-2 I.R.B.269
2008-4, 2008-2 I.R.B.269
2008-5, 2008-4 I.R.B.333
2008-6, 2008-5 I.R.B.378
2008-7, 2008-5 I.R.B.379
2008-8, 2008-6 I.R.B.403
2008-9, 2008-7 I.R.B.444
2008-10, 2008-7 I.R.B.445
2008-11, 2008-7 I.R.B.445
2008-12, 2008-7 I.R.B.446
2008-13, 2008-8 I.R.B.480
2008-14, 2008-8 I.R.B.481
2008-15, 2008-9 I.R.B.511
2008-16, 2008-9 I.R.B.511
2008-17, 2008-9 I.R.B.512
2008-19, 2008-11 I.R.B.624
2008-20, 2008-11 I.R.B.625
Notices:
2008-1, 2008-2 I.R.B.251
2008-2, 2008-2 I.R.B.252
2008-3, 2008-2 I.R.B.253
2008-4, 2008-2 I.R.B.253
2008-5, 2008-2 I.R.B.256
2008-6, 2008-3 I.R.B.275
2008-7, 2008-3 I.R.B.276
2008-8, 2008-3 I.R.B.276
2008-9, 2008-3 I.R.B.277
2008-10, 2008-3 I.R.B.277
2008-11, 2008-3 I.R.B.279
2008-12, 2008-3 I.R.B.280
2008-13, 2008-3 I.R.B.282
2008-14, 2008-4 I.R.B.310
2008-15, 2008-4 I.R.B.313
2008-16, 2008-4 I.R.B.315
2008-17, 2008-4 I.R.B.316
2008-18, 2008-5 I.R.B.363
2008-19, 2008-5 I.R.B.366
2008-20, 2008-6 I.R.B.406
2008-21, 2008-7 I.R.B.431
2008-22, 2008-8 I.R.B.465
2008-23, 2008-7 I.R.B.433
2008-24, 2008-8 I.R.B.466
2008-25, 2008-9 I.R.B.484
2008-26, 2008-9 I.R.B.487
2008-27, 2008-10 I.R.B.543
2008-28, 2008-10 I.R.B.546
2008-31, 2008-11 I.R.B.592
2008-32, 2008-11 I.R.B.593
Proposed Regulations:
REG-147290-05, 2008-10 I.R.B.576
REG-104713-07, 2008-6 I.R.B.409
REG-104946-07, 2008-11 I.R.B.596
REG-111583-07, 2008-4 I.R.B.319
REG-114126-07, 2008-6 I.R.B.410
REG-136701-07, 2008-11 I.R.B.616
REG-139236-07, 2008-9 I.R.B.491
REG-141399-07, 2008-8 I.R.B.470
REG-147832-07, 2008-8 I.R.B.472
REG-149475-07, 2008-9 I.R.B.510
Revenue Procedures:
2008-1, 2008-1 I.R.B.1
2008-2, 2008-1 I.R.B.90
2008-3, 2008-1 I.R.B.110
2008-4, 2008-1 I.R.B.121
2008-5, 2008-1 I.R.B.164
2008-6, 2008-1 I.R.B.192
2008-7, 2008-1 I.R.B.229
2008-8, 2008-1 I.R.B.233
2008-9, 2008-2 I.R.B.258
2008-10, 2008-3 I.R.B.290
2008-11, 2008-3 I.R.B.301
2008-12, 2008-5 I.R.B.368
2008-13, 2008-6 I.R.B.407
2008-14, 2008-7 I.R.B.435
2008-15, 2008-9 I.R.B.489
2008-16, 2008-10 I.R.B.547
2008-17, 2008-10 I.R.B.549
2008-18, 2008-10 I.R.B.573
2008-19, 2008-11 I.R.B.594
Revenue Rulings:
2008-1, 2008-2 I.R.B.248
2008-2, 2008-2 I.R.B.247
2008-3, 2008-2 I.R.B.249
2008-4, 2008-3 I.R.B.272
2008-5, 2008-3 I.R.B.271
2008-6, 2008-3 I.R.B.271
2008-7, 2008-7 I.R.B.419
2008-8, 2008-5 I.R.B.340
2008-9, 2008-5 I.R.B.342
2008-11, 2008-10 I.R.B.541
2008-12, 2008-10 I.R.B.520
2008-13, 2008-10 I.R.B.518
2008-14, 2008-11 I.R.B.578
2008-16, 2008-11 I.R.B.585
Tax Conventions:
2008-8, 2008-6 I.R.B.403
Treasury Decisions:
9368, 2008-6 I.R.B.382
9369, 2008-6 I.R.B.394
Treasury Decisions— Continued:
9370, 2008-7 I.R.B.428
9371, 2008-8 I.R.B.447
9372, 2008-8 I.R.B.462
9373, 2008-8 I.R.B.463
9374, 2008-10 I.R.B.521
9375, 2008-5 I.R.B.344
9376, 2008-11 I.R.B.587
9377, 2008-11 I.R.B.578
9382, 2008-9 I.R.B.482
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin
2007–52, dated December 26, 2007.
March 17, 2008ii2008–11 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2008–1 through 2008–11
Announcements:
2008-6
Superseded by
Ann. 2008-19, 2008-11 I.R.B.624
Notices:
2001-16
Modified by
Notice 2008-20, 2008-6 I.R.B.406
2001-60
Modified and superseded by
Notice 2008-31, 2008-11 I.R.B.592
2006-77
Clarified and amplified by
Notice 2008-25, 2008-9 I.R.B.484
2006-107
Modified by
Notice 2008-7, 2008-3 I.R.B.276
2007-30
Modified and superseded by
Notice 2008-14, 2008-4 I.R.B.310
2007-54
Clarified by
Notice 2008-11, 2008-3 I.R.B.279
Proposed Regulations:
REG-209020-86
Corrected by
Ann. 2008-11, 2008-7 I.R.B.445
REG-113891-07
Hearing scheduled by
Ann. 2008-4, 2008-2 I.R.B.269
Revenue Procedures:
2002-9
Modified by
Rev. Proc. 2008-18, 2008-10 I.R.B.573
2007-1
Superseded by
Rev. Proc. 2008-1, 2008-1 I.R.B.1
2007-2
Superseded by
Rev. Proc. 2008-2, 2008-1 I.R.B.90
2007-3
Superseded by
Rev. Proc. 2008-3, 2008-1 I.R.B.110
Revenue Procedures— Continued:
2007-4
Superseded by
Rev. Proc. 2008-4, 2008-1 I.R.B.121
2007-5
Superseded by
Rev. Proc. 2008-5, 2008-1 I.R.B.164
2007-6
Superseded by
Rev. Proc. 2008-6, 2008-1 I.R.B.192
2007-7
Superseded by
Rev. Proc. 2008-7, 2008-1 I.R.B.229
2007-8
Superseded by
Rev. Proc. 2008-8, 2008-1 I.R.B.233
2007-26
Obsoleted in part by
Rev. Proc. 2008-17, 2008-10 I.R.B.549
2007-31
Obsoleted in part by
Rev. Proc. 2008-19, 2008-11 I.R.B.594
2007-39
Superseded by
Rev. Proc. 2008-3, 2008-1 I.R.B.110
2007-52
Superseded by
Rev. Proc. 2008-9, 2008-2 I.R.B.258
2008-13
Corrected by
Ann. 2008-15, 2008-9 I.R.B.511
Revenue Rulings:
2007-4
Supplemented and superseded by
Rev. Rul. 2008-3, 2008-2 I.R.B.249
Treasury Decisions:
9362
Corrected by
Ann. 2008-9, 2008-7 I.R.B.444
Ann. 2008-12, 2008-7 I.R.B.446
9363
Corrected by
Ann. 2008-10, 2008-7 I.R.B.445
9375
Corrected by
Ann. 2008-16, 2008-9 I.R.B.511
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin 2007–52, dated December 26,
2007.
2008–11 I.R.B.iiiMarch 17, 2008

March 17, 20082008–11 I.R.B.

2008–11 I.R.B.March 17, 2008

March 17, 20082008–11 I.R.B.

INTERNAL REVENUE BULLETIN
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Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-
tendent of Documents when their subscriptions must be renewed.
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