us-irs-announcements-irb-2012-13-pdf•Internal Revenue Bulletin 2012-13 (PDF rendition): IRS Announcements
Internal Revenue Bulletin 2012-13 (PDF rendition): IRS Announcements
us-irs-announcements-irb-2012-13-pdfInternal Revenue Bulletin 2012-13 (PDF rendition): IRS AnnouncementsGuidance
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Bulletin No. 201 2-13 March 26, 2012 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. 2012–8, page 563. Interest rates; underpayment and overpayments.The rates for interest determined under section 6621 of the Code for the calendar quarter beginning April 1, 2012, will be 3 per- cent for overpayments (2 percent in the case of a corporation), 3 percent for the underpayments, and 5 percent for large cor- porate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 0.5 percent. REG–110980–10, page 581. Proposed regulations under section 417 of the Code provide guidance relating to the minimum present value requirements applicable to partial annuity distribution options under defined benefit pension plans. The regulations would make changes un- der section 417(e) that would permit plans to simplify the treat- ment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a more accelerated form. A public hearing is scheduled for June 1, 2012. Notice 2012–20, page 574. This notice provides guidance relating to the portfolio inter- est exception, the short term debt exception under regula- tions section 1.6049–5(b)(10), and the excise tax under sec- tion 4701 in connection with the repeal of section 163(f)(2)(B) (the bearer debt repeal) of the Code. Notice 2006–99 super- seded in part. Notice 2012–22, page 576. This notice advises State and local housing credit agencies that allocate low-income housing tax credits under section 42 of the Code, and States and other issuers of tax-exempt private activity bonds under section 141, of the population figures to use in calculating: (1) the 2012 calendar year population-based component of the State housing credit ceiling (Credit Ceiling) under section 42(h)(3)(C)(ii); (2) the 2012 calendar year volume cap (Volume Cap) under section 146; and (3) the 2012 volume limit (Volume Limit) under section 142(k)(5). EMPLOYEE PLANS REG–115809–11, page 598. Proposed regulations under section 401 of the Code relate to the purchase of longevity annuity contracts under tax-qualified defined contribution plans under section 401(a), section 403(b) plans, individual retirement annuities and accounts (IRAs) under section 408, and eligible governmental section 457 plans. The regulations will provide the public with guidance necessary to comply with the required minimum distribution rules under sec- tion 401(a)(9). The regulations will affect individuals for whom a longevity annuity contract is purchased under these plans and IRAs (and their beneficiaries), sponsors and administrators of these plans, trustees and custodians of these IRAs, and insur- ance companies that issue longevity annuity contracts under these plans and IRAs. A public hearing is scheduled for June 1, 2012. Notice 2012–24, page 578. Weighted average interest rate update; corporate bond indices; 30-year Treasury securities; segment rates. This notice contains updates for the corporate bond weighted average interest rate for plan years beginning in March 2012; the 24-month average segment rates; the funding transitional segment rates applicable for March 2012; and the minimum present value transitional rates for February 2012. (Continued on the next page) Fi nding Lists begin on page ii. Index for January through March begins on page iv. EXCISE TAX REG–113770–10, page 587. Proposed regulations under section 4191 of the Code pro- vide guidance on the new excise tax on certain medical de- vices. Specifically, the proposed rules clarify what constitutes a “taxable medical device”, what types of devices are exempt from the tax, and what types of sales of otherwise taxable de- vices may be exempt from the tax if certain requirements are met. Proposed regulations on the medical device excise tax, when finalized, will affect medical device manufacturers and im- porters, and some medical device distributors. A public hear- ing is scheduled for May 16, 2012. Notice 2012–20, page 574. This notice provides guidance relating to the portfolio inter- est exception, the short term debt exception under regula- tions section 1.6049–5(b)(10), and the excise tax under sec- tion 4701 in connection with the repeal of section 163(f)(2)(B) (the bearer debt repeal) of the Code. Notice 2006–99 super- seded in part. ADMINISTRATIVE Announcement 2012–11, page 611. This announcement withdraws a notice of proposed regulation (REG–208274–86, 1993–1 C.B. 822) under section 6039E of the Code which specifies the information that must be included and provide guidance on when the IRS may impose a $500 penalty for failure to provide that information. U.S. citizens who apply for passports from the Department of State are required by the IRS to provide certain information on the application form. March 26, 20122012–13 I.R.B. The IRS Mission Provide Americ a’s taxpayers top-quality service by helping them understa nd and meet their tax responsibilities and en- force the law wi th 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. 2012–13 I.R.B.March 26, 2012 March 26, 20122012–13 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 4221. —Certain Tax-Free Sale s A Notice of Pro posed Rulemaking (NPRM) notes that the exemp tions described in section 4221(a)(3) through (a)(6 ) will not apply to the tax imposed by section 4191 , enacted by section 1405 of the Health Care and Reco nciliation Act of 2010 (HCERA), Public Law 11 1–152 (124 Stat. 1029 (2010)), in conjunction with the Patient Protection and Afford- able Care Ac t, Public Law 111–148 (124 Stat. 119 (2010)). HC ERA amended section 4221(a) of the Internal Re venue Code to limit the types of sales to be exempt from the tax imposed by section 4191 (effective for sales after December 31, 2012). See REG-11377 0-10, page 587. A Notice of Proposed Rulemaking (NPRM) de- scribes th e circumstances under which the assembly or product ion of a “kit,” as defined in the proposed regulatio ns, constitutes further manufacture. See REG-11377 0-10, page 587. Section 6416.—Certain Taxes on Sales and Services A Notice of Proposed Rulemaking (NPRM) notes that tax paid with respect to certain specified uses and resales described in section 6416(a)(2) will not be deemed overpayments in the case of the tax imposed by section 4191, enacted by section 1405 of the Health Care and Reconciliation Act of 2010 (HCERA), Public Law 111–152 (124 Stat. 1029 (2010)), in conjunction with the Patient Protec- tion and Affordable Care Act, Public Law 111–148 (124 Stat. 119 (2010)). HCERA amended section 6416(b)(2) of the Internal Revenue Code to limit the types of sales and uses to be exempted from the tax imposed by section 4191 (effective for sales after December 31, 2012). SeeREG-113770-10, page 587. Section 6621.—Determina- tion of Rate of Interest 26 CFR 301.6621–1: Interest rate. Inter est rates; underpayment and overp ayments.The rates for interest de- term ined under section 6621 of the Code for t he calendar quarter beginning April 1, 2012 , will be 3 percent for overpayments (2 pe rcent in the case of a corporation), 3 perc ent for the underpayments, and 5 per- cen t for large corporate underpayments. The rate of interest paid on the portion of a cor porate overpayment exceeding $10,000 wil l be 0.5 percent. Rev. Rul. 2012 –8 Section 6621 of the Internal Revenue Code establish es the rates for interest on tax overpaym ents and tax underpay- ments. Under s ection 6621(a)(1), the overpayment r ate is the sum of the federal short-term ra te plus 3 percentage points (2 percentag e points in the case of a cor- poration), e xcept the rate for the portion of a corporat e overpayment of tax exceed- ing $10,000 f or a taxable period is the sum of the fe deral short-term rate plus 0.5 of a perc entage point. Under section 6621(a)(2) , the underpayment rate is the sum of the fe deral short-term rate plus 3 percentage points. Section 662 1(c) provides that for pur- poses of in terest payable under section 6601 on any large corporate underpay- ment, the u nderpayment rate under section 6621(a)(2 ) is determined by substituting “5 percent age points” for “3 percentage points.” S ee section 6621(c) and section 301.6621 –3 of the Regulations on Proce- dure and A dministration for the definition of a large corporate underpayment and for the ru les for determining the appli- cable da te. Section 6621(c) and section 301.662 1–3 are generally effective for periods after December 31, 1990. Section 6621(b)(1) provides that the Secreta ry will determine the federal short-t erm rate for the first month in each calenda r quarter. Section 6621(b)(2)(A) provid es that the federal short-term rate determ ined under section 6621(b)(1) for any mon th applies during the first calen- dar qua rter beginning after that month. Sectio n 6621(b)(2)(B) provides that in de- termi ning the addition to tax under section 6654 f or failure to pay estimated tax for any ta xable year, the federal short-term rate t hat applies during the third month follo wing the taxable year also applies duri ng the first 15 days of the fourth mont h following the taxable year. Sec- tion 6621(b)(3) provides that the federal shor t-term rate for any month is the fed- eral short-term rate determined during that mont h by the Secretary in accordance with sec tion 1274(d), rounded to the nearest ful l percent (or, if a multiple of 1 /2of 1 percent, the r ate is increased to the next highest full p ercent). Notice 88–59, 1988–1 C.B. 546, an- nounced that, in determining the quarterly interest rate s to be used for overpayments and underpay ments of tax under section 6621, the Int ernal Revenue Service will use the feder al short-term rate based on daily compou nding because that rate is most consis tent with section 6621 which, pursuant to section 6622, is subject to daily compoundin g. The federal short-term rate determined in accordan ce with section 1274(d) during January 201 2 is the rate published in Rev- enue Rulin g 2012–7, 2012–6 I.R.B. 362, to take eff ect beginning February 1, 2012. The federa l short-term rate, rounded to the nearest fu ll percent, based on daily com- pounding determined during the month of January 2 012 is 0 percent. Accordingly, an overpaym ent rate of 3 percent (2 percent in the cas e of a corporation) and an under- payment r ate of 3 percent are established for the ca lendar quarter beginning April 1, 2012. Th e overpayment rate for the por- tion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning April 1, 2012, is 0.5 percent. The under- paymen t rate for large corporate underpay- ments f or the calendar quarter beginning April 1 , 2012, is 5 percent. These rates ap- plytoa mounts bearing interest during that calend ar quarter. The 3 pe rcent rate also applies to esti- mated t ax underpayments for the second calen dar quarter in 2012. And, under sec- tion 6 621(b)(2)(B), the federal short term rate o f 3 percent applicable for March 2012 appli es for the first 15 days in April 2012 to estim ated tax underpayments made by an indi vidual with a taxable year ending De- cemb er 31. Inte rest factors for daily compound in- tere st for annual rates of 0.5 percent are publ ished in Appendix A of this Revenue Ruli ng. Interest factors for daily com- poun d interest for annual rates of 2 percent, 3per cent and 5 percent are published in Ta- ble s 57, 59, and 63 of Rev. Proc. 95–17, 199 5–1 C.B. 611, 613, and 617. Ann ual interest rates to be compounded dai ly pursuant to section 6622 that apply 2012–13 I.R.B.563March 26, 2012 for prior periods are set forth in the tables accompanying this revenue ruling. DRAFTING INFORMATION The principal author of this revenue rul- ing is Deborah Colbert-James of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Colbert-James at (202) 622–8143 (not a toll-free call). APPENDIX A 365 Day Year 0.5% Compound Rate 184 Days DaysFactorDaysFactorDaysFactor 10.000013699630.000863380 125 0.001713784 20.000027397640.000877091126 0.001727506 30.000041096 65 0.0008908011270.001741228 4 0.000054796 66 0.000904512 128 0.001754951 50.000068495 670.0009182231290.001768673 6 0.000082195 680.0009319341300.001782396 7 0.000095894 69 0.000945646 1310.001796119 8 0.000109594 70 0.000959357 1320.001809843 90.000123294710.000973069133 0.001823566 10 0.000136995 720.0009867811340.001837290 11 0.000150695 730.001000493 1350.001851013 120.000164396740.0010142061360.001864737 130.000178097 75 0.0010279181370.001878462 140.000191798760.0010416311380.001892186 150.000205499 77 0.001055344 139 0.001905910 160.00021920178 0.001069057 140 0.001919635 170.000232902790.0010827701410.001933360 180.000246604800.001096484142 0.001947085 190.000260306810.0011101971430.001960811 200.000274008820.001123911144 0.001974536 210.00028771183 0.001137625145 0.001988262 220.00030141384 0.001151339 1460.002001988 23 0.000315116850.001165054 147 0.002015714 240.000328819860.0011787681480.002029440 250.000342522 870.0011924831490.002043166 26 0.000356225 880.001206198 1500.002056893 270.000369929890.001219913 151 0.002070620 280.000383633900.001233629 152 0.002084347 290.000397336910.001247344 153 0.002098074 300.000411041920.001261060 154 0.002111801 31 0.000424745 930.001274776 1550.002125529 320.000438449940.001288492 1560.002139257 33 0.00045215495 0.001302208 1570.002152985 34 0.000465859 96 0.001315925158 0.002166713 350.000479564 970.001329641 159 0.002180441 360.00049326998 0.001343358 1600.002194169 37 0.000506974 99 0.001357075 1610.002207898 38 0.000520680 1000.0013707921620.002221627 39 0.000534386 101 0.001384510 163 0.002235356 40 0.000548092 1020.001398227164 0.002249085 41 0.000561798 103 0.0014119451650.002262815 42 0.000575504 104 0.001425663 166 0.002276544 43 0.000589211105 0.0014393811670.002290274 440.000602917106 0.001453100 1680.002304004 45 0.0006166241070.0014668181690.002317734 460.000630331108 0.001480537 170 0.002331465 470.000644039109 0.001494256 171 0.002345195 48 0.000657746 110 0.001507975 172 0.002358926 49 0.000671454 111 0.001521694 173 0.002372657 March 26, 20125642012–13 I.R.B. 365 Day Year 0.5% Compound Rate 184 Days DaysFactorDaysFactorDaysFactor 500.000685161 112 0.001535414 1740.002386388 51 0.000698869113 0.001549133175 0.002400120 520.000712578 114 0.001562853 176 0.002413851 53 0.000726286 1150.001576573 177 0.002427583 540.000739995 116 0.001590293 178 0.002441315 550.000753703 1170.001604014179 0.002455047 56 0.0007674121180.0016177341800.002468779 57 0.000781121119 0.001631455 181 0.002482511 58 0.000794831120 0.001645176 1820.002496244 590.000808540 121 0.001658897 183 0.002509977 60 0.000822250 1220.001672619184 0.002523710 61 0.000835960 1230.001686340 620.0008496701240.001700062 366 Day Year 0.5% Compound Rate 184 Days DaysFactorDaysFactorDaysFactor 10.000013661630.000861020 125 0.001709097 20.000027323640.0008746931260.001722782 30.000040984 65 0.0008883661270.001736467 4 0.000054646 660.000902040128 0.001750152 5 0.00006830867 0.000915713 1290.001763837 60.000081970680.000929387130 0.001777522 7 0.000095632 690.0009430611310.001791208 8 0.000109295 70 0.000956735 1320.001804893 9 0.000122958 710.000970409133 0.001818579 100.000136620720.000984084134 0.001832265 11 0.000150283 73 0.0009977581350.001845951 120.000163947740.001011433136 0.001859638 130.000177610 750.001025108 1370.001873324 140.000191274760.0010387831380.001887011 15 0.00020493877 0.001052459 1390.001900698 160.000218602780.001066134140 0.001914385 170.000232266790.0010798101410.001928073 18 0.000245930 800.0010934861420.001941760 19 0.000259595 810.001107162143 0.001955448 200.000273260820.0011208391440.001969136 210.00028692483 0.001134515145 0.001982824 22 0.000300590 840.001148192146 0.001996512 23 0.00031425585 0.0011618691470.002010201 240.00032792086 0.001175546 1480.002023889 250.000341586 870.001189223149 0.002037578 26 0.000355252 880.001202900 1500.002051267 270.00036891889 0.0012165781510.002064957 28 0.000382584 90 0.001230256152 0.002078646 29 0.000396251 910.001243934 153 0.002092336 300.00040991792 0.0012576121540.002106025 31 0.000423584 930.001271291 1550.002119715 32 0.000437251 940.001284969 1560.002133405 33 0.00045091895 0.001298648 157 0.002147096 34 0.000464586 960.001312327 158 0.002160786 350.000478253 970.001326006 159 0.002174477 360.00049192198 0.001339685 1600.002188168 37 0.000505589 99 0.001353365 161 0.002201859 38 0.000519257 1000.001367044162 0.002215550 2012–13 I.R.B.565March 26, 2012 366 Day Year 0.5% Compound Rate 184 Days DaysFactorDaysFactorDaysFactor 39 0.000532925 1010.0013807241630.002229242 40 0.000546594 1020.0013944041640.002242933 41 0.000560262 103 0.0014080851650.002256625 42 0.000573931 104 0.001421765 1660.002270317 43 0.0005876001050.001435446 1670.002284010 440.0006012691060.0014491271680.002297702 45 0.0006149391070.001462808169 0.002311395 460.0006286081080.001476489170 0.002325087 470.0006422781090.0014901701710.002338780 48 0.000655948 110 0.001503852 172 0.002352473 490.000669618111 0.001517533 1730.002366167 50 0.000683289112 0.001531215 1740.002379860 510.000696959 113 0.0015448971750.002393554 52 0.000710630114 0.001558580 1760.002407248 53 0.000724301 1150.001572262 1770.002420942 54 0.000737972116 0.001585945 1780.002434636 550.000751643 117 0.001599628 1790.002448331 560.000765315 1180.001613311180 0.002462025 57 0.0007789861190.001626994181 0.002475720 580.000792658 1200.001640678182 0.002489415 59 0.000806330121 0.001654361 183 0.002503110 600.000820003122 0.001668045 184 0.002516806 61 0.000833675 1230.001681729 620.000847348124 0.001695413 TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS PERIODRATE In 1995–1 C.B. DAILY RATE TABLE Before Jul. 1, 1975 6% Table 2, pg. 557 Jul. 1, 1975—Jan. 31, 1976 9% Table 4, pg. 559 Feb. 1, 1976—Jan. 31, 19787% Table 3, pg. 558 Feb. 1, 1978—Jan. 31, 19806% Table 2, pg. 557 Feb. 1, 1980—Jan. 31, 198212% Table 5, pg. 560 Feb. 1, 1982—Dec. 31, 198220% Table 6, pg. 560 Jan. 1, 1983—Jun. 30, 198316% Table 37, pg. 591 Jul. 1, 1983—Dec. 31, 198311% Table 27, pg. 581 Jan. 1, 1984—Jun. 30, 198411% Table 75, pg. 629 Jul. 1, 1984—Dec. 31, 198411% Table 75, pg. 629 Jan. 1, 1985—Jun. 30, 1985 13% Table 31, pg. 585 Jul. 1, 1985—Dec. 31, 1985 11% Table 27, pg. 581 Jan. 1, 1986—Jun. 30, 198610% Table 25, pg. 579 Jul. 1, 1986—Dec. 31, 19869% Table 23, pg. 577 March 26, 20125662012–13 I.R.B. TABLE OF INTEREST RATES FROM JAN. 1, 1987 — DEC. 31, 1998 OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Jan. 1, 1987—Mar. 31, 19878%21 575 9%23 577 Apr. 1, 1987—Jun . 30, 1987 8%21 575 9%23 577 Jul. 1, 1987—Sep. 30, 19878%21 575 9%23 577 Oct. 1, 1987—Dec. 31, 19879%23 577 10% 25579 Jan. 1, 1988—Ma r. 31, 1988 10%7362711% 75 629 Apr. 1, 1988—Jun. 30, 19889%71 625 10%73627 Jul. 1, 1988—Sep. 30, 19889%71 625 10%73627 Oct. 1, 1988—D ec. 31, 1988 10%7362711% 75 629 Jan. 1, 1989—Mar. 31, 198910% 25579 11%27 581 Apr. 1, 1989—Jun. 30, 198911%27 581 12%29 583 Jul. 1, 1989— Sep. 30, 1989 11%27 581 12%29 583 Oct. 1, 1989—Dec. 31, 198910% 25579 11%27 581 Jan. 1, 1990—Mar. 31, 199010% 25579 11%27 581 Apr. 1, 1990 —Jun. 30, 1990 10% 25579 11%27 581 Jul. 1, 1990—Sep. 30, 199010% 25579 11%27 581 Oct. 1, 1990—Dec. 31, 199010% 25579 11%27 581 Jan. 1, 199 1—Mar. 31, 1991 10% 25579 11%27 581 Apr. 1, 1991—Jun. 30, 19919%23 577 10% 25579 Jul. 1, 1991—Sep. 30, 19919%23 577 10% 25579 Oct. 1, 19 91—Dec. 31, 1991 9%23 577 10% 25579 Jan. 1, 1992—Mar. 31, 19928%696239%71 625 Apr. 1, 1992—Jun. 30, 19927%676218%69623 Jul. 1, 1 992—Sep. 30, 1992 7%676218%69623 Oct. 1, 1992—Dec. 31, 19926% 65 6197%67621 Jan. 1, 1993—Mar. 31, 19936%17 571 7%19 573 Apr. 1, 1993—Jun. 30, 1993 6%17 571 7%19 573 Jul. 1, 1993—Sep. 30, 19936%17 571 7%19 573 Oct. 1, 1993—Dec. 31, 19936%17 571 7%19 573 Jan. 1, 1994—Mar. 31, 1994 6%17 571 7%19 573 Apr. 1, 1994—Jun. 30, 19946%17 571 7%19 573 Jul. 1, 1994—Sep. 30, 19947%19 573 8%21 575 Oct. 1 , 1994—Dec. 31, 1994 8%21 575 9%23 577 Jan. 1, 1995—Mar. 31, 1995 8%21 575 9%23 577 Apr. 1, 1995—Jun. 30, 1995 9%23 577 10% 25579 Jul. 1, 1995—Sep. 30, 1995 8%21 575 9%23 577 Oct. 1, 1995—Dec. 31, 1995 8%21 575 9%23 577 Jan. 1, 1996—Mar. 31, 19968%696239%71 625 Apr . 1, 1996—Jun. 30, 1996 7%676218%69623 Jul. 1, 1996—Sep. 30, 19968%696239%71 625 Oct. 1, 1996—Dec. 31, 19968%696239%71 62 5 Ja n. 1, 1997—Mar. 31, 1997 8%21 575 9%23 577 Apr. 1, 1997—Jun. 30, 19978%21 575 9%23 577 Jul. 1, 1997—Sep. 30, 19978%21 57 5 9%23 57 7 Oc t. 1, 1997—Dec. 31, 1997 8%21 575 9%23 577 Jan. 1, 1998—Mar. 31, 19988%21 575 9%23 577 Apr. 1, 1998—Jun. 30, 19987%19 5 73 8%21 5 75 J ul. 1, 1998—Sep. 30, 1998 7 % 1 9 573 8 % 2 1 575 Oct. 1, 1998—Dec. 31, 19987%19 573 8%21 575 2012–13 I.R.B.567March 26, 2012 TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS 1995–1 C.B. RATETABLEPG Jan. 1, 1999—Mar. 31, 19997%19 573 Apr. 1, 1999—Jun. 30, 19998%21 575 Jul. 1, 1999—Sep. 30, 19998%21 575 Oct. 1, 1999—Dec. 31, 19998%21 575 Jan. 1, 2000—Mar. 31, 20008%69623 Apr. 1, 2000—Jun. 30, 20009%71 625 Jul. 1, 2000—Sep. 30, 20009%71 625 Oct. 1, 2000—Dec. 31, 20009%71 625 Jan. 1, 2001—Mar. 31, 20019%23 577 Apr. 1, 2001—Jun. 30, 20018%21 575 Jul. 1, 2001—Sep. 30, 20017%19 573 Oct. 1, 2001—Dec. 31, 20017%19 573 Jan. 1, 2002—Mar. 31, 20026%17 571 Apr. 1, 2002—Jun. 30, 20026%17 571 Jul. 1, 2002—Sep. 30, 20026%17 571 Oct. 1, 2002—Dec. 31, 20026%17 571 Jan. 1, 2003—Mar. 31, 2003 5%15569 Apr. 1, 2003—Jun. 30, 2003 5%15569 Jul. 1, 2003—Sep. 30, 2003 5%15569 Oct. 1, 2003—Dec. 31, 20034%13 567 Jan. 1, 2004—Mar. 31, 20044%61 615 Apr. 1, 2004—Jun. 30, 2004 5% 63617 Jul. 1, 2004—Sep. 30, 20044%61 615 Oct. 1, 2004—Dec. 31, 2004 5% 63617 Jan. 1, 2005—Mar. 31, 20055%15569 Apr. 1, 2005—Jun. 30, 2005 6%17 571 Jul. 1, 2005—Sep. 30, 2005 6%17 571 Oct. 1, 2005—Dec. 31, 2005 7%19 573 Jan. 1, 2006—Mar. 31, 20067%19 573 Apr. 1, 2006—Jun. 30, 20067%19 573 Jul. 1, 2006—Sep. 30, 20068%21 575 Oct. 1, 2006—Dec. 31, 20068%21 575 Jan. 1, 2007—Mar. 31, 20078%21 575 Apr. 1, 2007—Jun. 30, 20078%21 575 Jul. 1, 2007—Sep. 30, 20078%21 575 Oct. 1, 2007—Dec. 31, 20078%21 575 Jan. 1, 2008—Mar. 31, 20087%67621 Apr. 1, 2008—Jun. 30, 20086% 65 619 Jul. 1, 2008—Sep. 30, 2008 5% 63617 Oct. 1, 2008—Dec. 31, 20086% 65 619 Jan. 1, 2009—Mar. 31, 2009 5%15569 Apr. 1, 2009—Jun. 30, 20094%13 567 Jul. 1, 2009—Sep. 30, 20094%13 567 Oct. 1, 2009—Dec. 31, 20094%13 567 Jan. 1, 2010—Mar. 31, 20104%13 567 Apr. 1, 2010—Jun. 30, 20104%13 567 Jul. 1, 2010—Sep. 30, 20104%13 567 Oct. 1, 2010—Dec. 31, 20104%13 567 Jan. 1, 2011—Mar. 31, 20113%11 565 Apr. 1, 2011—June 30, 20114%13 567 Jul. 1, 2011—Sep. 30, 20114%13 567 Oct. 1, 2011—Dec. 31, 20113%11 565 Jan. 1, 2012—Mar. 31, 20123% 59 613 Apr. 1, 2012—Jun. 30, 20123% 59 613 March 26, 20125682012–13 I.R.B. TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Jan. 1, 1999—Mar. 31, 19996%17 571 7%19 573 Apr. 1, 1999—Jun . 30, 1999 7%19 573 8%21 575 Jul. 1, 1999—Sep. 30, 19997%19 573 8%21 575 Oct. 1, 1999—Dec. 31, 19997%19 573 8%21 575 Jan. 1, 2000—Ma r. 31, 2000 7%676218%69623 Apr. 1, 2000—Jun. 30, 20008%696239%71 625 Jul. 1, 2000—Sep. 30, 20008%696239%71 625 Oct. 1, 2000—D ec. 31, 2000 8%696239%71 625 Jan. 1, 2001—Mar. 31, 20018%21 575 9%23 577 Apr. 1, 2001—Jun. 30, 20017%19 573 8%21 575 Jul. 1, 2001— Sep. 30, 2001 6%17 571 7%19 573 Oct. 1, 2001—Dec. 31, 20016%17 571 7%19 573 Jan. 1, 2002—Mar. 31, 2002 5%15569 6%17 571 Apr. 1, 2002 —Jun. 30, 2002 5%15569 6%17 571 Jul. 1, 2002—Sep. 30, 2002 5%15569 6%17 571 Oct. 1, 2002—Dec. 31, 2002 5%15569 6%17 571 Jan. 1, 200 3—Mar. 31, 2003 4%13 5675%15569 Apr. 1, 2003—Jun. 30, 20034%13 5675%15569 Jul. 1, 2003—Sep. 30, 20034%13 5675%15569 Oct. 1, 20 03—Dec. 31, 2003 3%11 565 4%13 567 Jan. 1, 2004—Mar. 31, 20043% 59 6134%61 615 Apr. 1, 2004—Jun. 30, 20044%61 6155% 63617 Jul. 1, 2 004—Sep. 30, 2004 3% 59 6134%61 615 Oct. 1, 2004—Dec. 31, 20044%61 6155% 63617 Jan. 1, 2 005—Mar. 31, 2005 4%13 5675%15569 Apr. 1, 2005—Jun. 30, 20055%15569 6%17 571 Jul. 1, 2005—Sep. 30, 20055%15569 6%17 571 Oct. 1, 2005—Dec. 31, 2005 6%17 571 7%19 573 Jan. 1, 2006—Mar. 31, 2006 6%17 571 7%19 573 Apr. 1, 2006—Jun. 30, 20066%17 571 7%19 573 Jul. 1, 2006—Sep. 30, 20067%19 573 8%21 575 Oct. 1 , 2006—Dec. 31, 2006 7%19 573 8%21 575 Jan. 1, 2007—Mar. 31, 20077%19 573 8%21 575 Apr. 1, 2007—Jun. 30, 20077%19 573 8%21 575 Jul. 1, 2007—Sep. 30, 2007 7%19 573 8%21 575 Oct. 1, 2007—Dec. 31, 20077%19 573 8%21 575 Jan. 1, 2008—Mar. 31, 20086% 65 6197%67621 Apr . 1, 2008—Jun. 30, 2008 5% 636176% 65 619 Jul. 1, 2008—Sep. 30, 20084%61 6155% 63617 Oct. 1, 2008—Dec. 31, 2008 5% 636176% 65 619 Jan . 1, 2009—Mar. 31, 2009 4%13 5675%15569 Apr. 1, 2009—Jun. 30, 20093%11 565 4%13 567 Jul. 1, 2009—Sep. 30, 20093%11 56 5 4%13 56 7 Oc t. 1, 2009—Dec. 31, 2009 3%11 565 4%13 567 Jan. 1, 2010—Mar. 31, 20103%11 565 4%13 567 Apr. 1, 2010—Jun. 30, 20103%11 5 65 4%13 5 67 J ul. 1, 2010—Sep. 30, 2010 3 % 1 1 565 4 % 1 3 567 Oct. 1, 2010—Dec. 31, 20103%11 565 4%13 567 Jan. 1, 2011—Mar. 31, 20112%9 563 3%11 565 Apr. 1, 2011—June 30, 20113%11 565 4%13 567 Jul. 1, 2011—Sep. 30, 20113%11 565 4%13 567 Oct. 1, 2011—Dec. 31, 20112%9 563 3%11 565 Jan. 1, 2012—Mar. 31, 20122% 57 6113% 59 613 2012–13 I.R.B.569March 26, 2012 TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT – Continued CORPORATE OVERPAYMENTS AND UNDERPAYMENTS OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Apr. 1, 2012—Jun. 30, 20122% 57 6113% 59 613 TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991 — PRESENT 1995–1 C.B. RATETABLEPG Jan. 1, 1991—Mar . 31, 1991 13%31 585 Apr. 1, 1991—Jun. 30, 199112%29 583 Jul. 1, 1991—Sep. 30, 199112%29 583 Oct. 1, 1991—De c. 31, 1991 12%29 583 Jan. 1, 1992—Mar. 31, 199211% 75 629 Apr. 1, 1992—Jun. 30, 199210%73627 Jul. 1, 1992—S ep. 30, 1992 10%73627 Oct. 1, 1992—Dec. 31, 19929%71 625 Jan. 1, 1993—Mar. 31, 19939%23 577 Apr. 1, 1993— Jun. 30, 1993 9%23 577 Jul. 1, 1993—Sep. 30, 19939%23 577 Oct. 1, 1993—Dec. 31, 19939%23 577 Jan. 1, 1994 —Mar. 31, 1994 9%23 577 Apr. 1, 1994—Jun. 30, 19949%23 577 Jul. 1, 1994—Sep. 30, 199410% 25579 Oct. 1, 199 4—Dec. 31, 1994 11%27 581 Jan. 1, 1995—Mar. 31, 1995 11%27 581 Apr. 1, 19 95—Jun. 30, 1995 12%29 583 Jul. 1, 1995—Sep. 30, 1995 11%27 581 Oct. 1, 1995—Dec. 31, 1995 11%27 581 Jan. 1, 1996—Mar. 31, 199611% 75 629 Apr. 1, 1 996—Jun. 30, 1996 10%73627 Jul. 1, 1996—Sep. 30, 199611% 75 629 Oct. 1, 1996—Dec. 31, 199611% 75 629 Jan. 1, 1 997—Mar. 31, 1997 11%27 581 Apr. 1, 1997—Jun. 30, 199711%27 581 Jul. 1, 1997—Sep. 30, 199711%27 581 Oct. 1, 1997—Dec. 31, 1997 11%27 581 Jan. 1, 1998—Mar. 31, 199811%27 581 Apr. 1, 1998—Jun. 30, 199810% 25579 Jul. 1 , 1998—Sep. 30, 1998 10% 25579 Oct. 1, 1998—Dec. 31, 199810% 25579 Jan. 1, 1999—Mar. 31, 19999%23 577 Apr. 1, 1999—Jun. 30, 1999 10% 25579 Jul. 1, 1999—Sep. 30, 199910% 25579 Oct. 1, 1999—Dec. 31, 199910% 25579 Jan . 1, 2000—Mar. 31, 2000 10%73627 Apr. 1, 2000—Jun. 30, 200011% 75 629 Jul. 1, 2000—Sep. 30, 200011% 75 629 Oct . 1, 2000—Dec. 31, 2000 11% 75 629 Jan. 1, 2001—Mar. 31, 200111%27 581 Apr. 1, 2001—Jun. 30, 200110% 2557 9 Ju l. 1, 2001—Sep. 30, 2001 9%23 577 Oct. 1, 2001—Dec. 31, 20019%23 577 March 26, 20125702012–13 I.R.B. TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991 — PRESENT – Continued 1995–1 C.B. RATETABLEPG Jan. 1, 2002—Mar. 31, 20028%21 575 Apr. 1, 2002—Jun. 30, 20028%21 575 Jul. 1, 2002—Sep. 30, 20028%21 575 Oct. 1, 2002—Dec. 30, 20028%21 575 Jan. 1, 2003—Mar. 31, 20037%19 573 Apr. 1, 2003—Jun. 30, 20037%19 573 Jul. 1, 2003—Sep. 30, 20037%19 573 Oct. 1, 2003—Dec. 31, 20036%17 571 Jan. 1, 2004—Mar. 31, 20046% 65 619 Apr. 1, 2004—Jun. 30, 20047%67621 Jul. 1, 2004—Sep. 30, 20046% 65 619 Oct. 1, 2004—Dec. 31, 20047%67621 Jan. 1, 2005—Mar. 31, 2005 7%19 573 Apr. 1, 2005—Jun. 30, 2005 8%21 575 Jul. 1, 2005—Sep. 30, 2005 8%21 575 Oct. 1, 2005—Dec. 31, 2005 9%23 577 Jan. 1, 2006—Mar. 31, 20069%23 577 Apr. 1, 2006—Jun. 30, 20069%23 577 Jul. 1, 2006—Sep. 30, 200610% 25579 Oct. 1, 2006—Dec. 31, 200610% 25579 Jan. 1, 2007—Mar. 31, 200710% 25579 Apr. 1, 2007—Jun. 30, 200710% 25579 Jul. 1, 2007—Sep. 30, 200710% 25579 Oct. 1, 2007—Dec. 31, 200710% 25579 Jan. 1, 2008—Mar. 31, 20089%71 625 Apr. 1, 2008—Jun. 30, 20088%69623 Jul. 1, 2008—Sep. 30, 20087%67621 Oct. 1, 2008—Dec. 31, 20088%69623 Jan. 1, 2009—Mar. 31, 20097%19 573 Apr. 1, 2009—Jun. 30, 20096%17 571 Jul. 1, 2009—Sep. 30, 20096%17 571 Oct. 1, 2009—Dec. 31, 20096%17 571 Jan. 1, 2010—Mar. 31, 20106%17 571 Apr. 1, 2010—Jun. 30, 20106%17 571 Jul. 1, 2010—Sep. 30, 20106%17 571 Oct. 1, 2010—Dec. 31, 20106%17 571 Jan. 1, 2011—Mar. 31, 2011 5%15569 Apr. 1, 2011—Jun. 30, 20116%17 571 Jul. 1, 2011—Sep. 30, 20116%17 571 Oct. 1, 2011—Dec. 31, 2011 5%15569 Jan. 1, 2012—Mar. 31, 2012 5% 63617 Apr. 1, 2012—Jun. 30, 2012 5% 63617 TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995 — PRESENT 1995–1 C.B. RATETABLEPG Jan. 1, 1995—Mar. 31, 19956.5% 18 572 Apr. 1, 1995—Jun. 30, 19957.5% 20 574 Jul. 1, 1995—Sep. 30, 19956.5% 18 572 Oct. 1, 1995—Dec. 31, 19956.5% 18 572 2012–13 I.R.B.571March 26, 2012 TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS E XCEEDING $10,000 FROM JANUARY 1, 1995 — PRESENT – Continued 1995–1 C.B. RATETABLEPG Jan. 1, 1996—Mar. 31, 1996 6.5% 66620 Apr. 1, 1996—Jun. 30, 1996 5.5% 64618 Jul. 1, 1996—Sep. 30, 1996 6.5% 66620 Oct. 1, 1996—Dec. 31, 1996 6.5% 66620 Jan. 1, 1997—Mar. 31, 1997 6.5% 18 572 Apr. 1, 1997—Jun. 30, 1997 6.5% 18 572 Jul. 1, 1997—Sep. 30, 1997 6.5% 18 572 Oct. 1, 1997—Dec. 31, 1997 6.5% 18 572 Jan. 1, 1998—Mar. 31, 1998 6.5% 18 572 Apr. 1, 1998—Jun. 30, 1998 5.5% 16 570 Jul. 1, 1998—Sep. 30, 1998 5.5% 16 570 Oct. 1, 1998—Dec. 31, 1998 5.5% 16 570 Jan. 1, 1999—Mar. 31, 1999 4.5% 14 568 Apr. 1, 1999—Jun. 30, 1999 5.5% 16 570 Jul. 1, 1999—Sep. 30, 1999 5.5% 16 570 Oct. 1, 1999—Dec. 31, 1999 5.5% 16 570 Jan. 1, 2000—Mar. 31, 2000 5.5% 64618 Apr. 1, 2000—Jun. 30, 2000 6.5% 66620 Jul. 1, 2000—Sep. 30, 2000 6.5% 66620 Oct. 1, 2000—Dec. 31, 2000 6.5% 66620 Jan. 1, 2001—Mar. 31, 2001 6.5% 18 572 Apr. 1, 2001—Jun. 30, 2001 5.5% 16 570 Jul. 1, 2001—Sep. 30, 2001 4.5% 14 568 Oct. 1, 2001—Dec. 31, 2001 4.5% 14 568 Jan. 1, 2002—Mar. 31, 2002 3.5% 12 566 Apr. 1, 2002—Jun. 30, 2002 3.5% 12 566 Jul. 1, 2002—Sep. 30, 2002 3.5% 12 566 Oct. 1, 2002—Dec. 31, 2002 3.5% 12 566 Jan. 1, 2003—Mar. 31, 2003 2.5% 10 564 Apr. 1, 2003—Jun. 30, 2003 2.5% 10 564 Jul. 1, 2003—Sep. 30, 2003 2.5% 10 564 Oct. 1, 2003—Dec. 31, 2003 1.5% 8 562 Jan. 1, 2004—Mar. 31, 2004 1.5%56 610 Apr. 1, 2004—Jun. 30, 2004 2.5%58 612 Jul. 1, 2004—Sep. 30, 2004 1.5%56 610 Oct. 1, 2004—Dec. 31, 2004 2.5%58 612 Jan. 1, 2005—Mar. 31, 20052.5% 10 564 Apr. 1, 2005—Jun. 30, 20053.5% 12 566 Jul. 1, 2005—Sep. 30, 20053.5% 12 566 Oct. 1, 2005—Dec. 31, 20054.5% 14 568 Jan. 1, 2006—Mar. 31, 2006 4.5% 14 568 Apr. 1, 2006—Jun. 30, 2006 4.5% 14 568 Jul. 1, 2006—Sep. 30, 2006 5.5% 16 570 Oct. 1, 2006—Dec. 31, 2006 5.5% 16 570 Jan. 1, 2007—Mar. 31, 2007 5.5% 16 570 Apr. 1, 2007—Jun. 30, 2007 5.5% 16 570 Jul. 1, 2007—Sep. 30, 2007 5.5% 16 570 Oct. 1, 2007—Dec. 31, 2007 5.5% 16 570 Jan. 1, 2008—Mar. 31, 2008 4.5% 62616 Apr. 1, 2008—Jun. 30, 2008 3.5% 60614 Jul. 1, 2008—Sep. 30, 2008 2.5%58 612 Oct. 1, 2008—Dec. 31, 2008 3.5% 60614 Jan. 1, 2009—Mar. 31, 2009 2.5% 10 564 Apr. 1, 2009—Jun. 30, 2009 1.5% 8 562 Jul. 1, 2009—Sep. 30, 2009 1.5% 8 562 March 26, 20125722012–13 I.R.B. TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS E XCEEDING $10,000 FROM JANUARY 1, 1995 — PRESENT – Continued 1995–1 C.B. RATETABLEPG Oct. 1, 2009—Dec. 31, 2009 1.5% 8 562 Jan. 1, 2010—Mar. 31, 2010 1.5% 8 562 Apr. 1, 2010—Jun. 30, 2010 1.5% 8 562 Jul. 1, 2010—Sep. 30, 2010 1.5% 8 562 Oct. 1, 2010—Dec. 31, 2010 1.5% 8 562 Jan. 1, 2011—Mar. 31, 2011 0.5%* Apr. 1, 2011—June 30, 2011 1.5% 8 562 Jul. 1, 2011—Sep. 30, 2011 1.5% 8 562 Oct. 1, 2011—Dec. 31, 2011 0.5%* Jan. 1, 2012—Mar. 31, 2012 0.5%* Apr. 1, 2012—Jun. 30, 2012 0.5%* 2012–13 I.R.B.573March 26, 2012 Part III. Administrative, Procedural, and Miscellaneous Guidance Regarding the Repeal of Section 163(f)(2)(B) Notice 2012–20 PURPOSE This notice provides guidance related to the repeal of section 163(f)(2)(B) of the In- ternal Revenue Code (Code) and related provisions enacted by section 502 of the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111–147 (the HIRE Act). The Department of the Treasury (Treasury) and the Internal Revenue Ser- vice (IRS) intend to issue regulations im- plementing the guidance provided in this notice. SECTION 1. BACKGROUND Issuers of debt obligations that are re- quired to be in registered form but are not issued in registered form are subject to the disallowance of interest deductions under section 163(f) and the imposition of an ex- cise tax under section 4701. Any gain on the sale or other disposition of such an obligation is generally treated under sec- tion 1287 as ordinary income rather than capital gain, and, under section 165(j), no deduction is permitted for any loss sus- tained. In addition, the exception from tax for U.S. source portfolio interest re- ceived by a nonresident alien or foreign corporation under section 871(h) and sec- tion 881(c) (portfolio interest exception) is generally not available with respect to in- terest paid on debt that is not issued in reg- istered form (bearer debt). The foregoing rules generally do not ap- ply with respect to bearer debt that com- plies with the foreign-targeting rules of section 163(f)(2)(B) and the regulations thereunder. However, section 502 of the HIRE Act generally eliminated the vari- ous exceptions for foreign-targeted bearer debt, effective for obligations issued after March 18, 2012. As a result of this change in law, with respect to obligations issued after March 18, 2012, the portfolio interest exception will be available only for obli- gations issued in registered form. In the case of debt obligations in regis- tered form, the portfolio interest exception is generally available only if the United States person (U.S. person) who would otherwise be required to deduct and with- hold tax from the interest under section 1441(a) (U.S. withholding agent) receives a statement (usually on Form W–8) in- dicating that the beneficial owner of the obligation is not a U.S. person. Under section 871(h)(5), this statement gener- ally may be made by either the beneficial owner of the obligation or by a securities clearing organization, bank, or other fi- nancial institution that holds customers’ securities in the ordinary course of its trade or business. With respect to obliga- tions issued after March 18, 2012, section 871(h)(2)(B)(ii)(II) provides that the port- folio interest exception is available in the absence of such a statement if the Secre- tary has determined that such a statement is not required in order to carry out the purposes of the portfolio interest excep- tion. Section 1.871–14(e) provides that the portfolio interest exception is available for debt obligations in registered form that comply with certain foreign-targeting requirements if (1) the registered owner is a financial institution that holds cus- tomers’ securities in the ordinary course of its trade or business; and (2) the U.S. withholding agent complies with certain simplified procedures to obtain, either from the financial institution or from a beneficial owner that is a member of a clearing organization, a certification that the beneficial owner is not a U.S. person. Notice 2006–99 announced, however, that Treasury and the IRS intended to amend § 1.871–14(e) to eliminate this exception for foreign-targeted registered obligations (FTROs), retroactive to the date of the notice. Notice 2006–99, 2006–2 C.B. 907. Regulations implementing the guidance provided in Notice 2006–99 have not been issued. SECTION2.INGENERAL Treasury and the IRS have received comments regarding issues arising from the repeal of section 163(f)(2)(B), includ- ing comments requesting guidance regard- ing when obligations will be considered to be in registered form and requesting clarification with respect to certain collat- eral consequences of the repeal of section 163(f)(2)(B). In addition, Treasury and the IRS are aware that the implementation of section 501 of the HIRE Act, which added new sections 1471 to 1474 (com- monly known as FATCA) to the Code, may require changes to the documentation collected by foreign financial institutions (including qualified intermediaries) and withholding agents with respect to payees and account holders. Section 3 of this notice provides guid- ance addressing when obligations will be considered to be in registered form. Section 4 of this notice provides interim guidance with respect to the application of the portfolio interest exception to certain obligations in registered form issued after March 18, 2012, and before January 1, 2014. Section 5 of this notice addresses the continued availability of the existing exception from reporting of interest or original issue discount under section 6049 for certain foreign-targeted short-term obligations. Finally, section 6 of this no- tice provides guidance with respect to procedures requiredto comply with the foreign-targeting rules of section 4701(b) as amended by section 502 of the HIRE Act. SECTION 3. DEFINITION OF A REGISTRATION SYSTEM For purposes of determining whether a bond is in registered form under section 163(f) and the portfolio interest exception, the principles of section 149(a)(3) apply. Section 163(f)(3). Section 149(a)(3) pro- vides that a book entry bond is treated as in registered form if the right to the principal of, and stated interest on, the bond may be transferred only through a book entry con- sistent with regulations prescribed by the Secretary. In addition, § 1.871–14(c) pro- vides that for purposes of the portfolio in- terest exception, the conditions for an obli- gation to be considered in registered form are identical to the conditions described in § 5f.103–1. Generally under § 5f.103–1, an obliga- tion is in registered form if: (i) the obliga- tion is registered as to both principal and any stated interest with the issuer (or its agent) and any transfer of the obligation may be effected only by surrender of the old obligation and reissuance to the new March 26, 20125742012–13 I.R.B. holder; (ii) the right to principal and stated interest with respect to the obligation may be transferred only through a book en- try system maintained by the issuer or its agent; or (iii) the obligation is registered as to both principal and stated interest with the issuer or its agent and can be trans- ferred both by surrender and reissuance and through a book entry system. An obli- gation is considered transferable through a book entry system if the ownership of an interest in the obligation is required to be reflected in a book entry, whether or not physical securities are issued. A “book en- try” is a record of ownership that identi- fies the owner of an interest in the obliga- tion. An obligation that would otherwise be considered to be in registered form is notconsideredtobeinregisteredformas of a particular time if it can be converted at any time in the future into an obligation that is not in registered form. Notice 2006–99 addressed an arrange- ment in which no physical certificates are issued and under which ownership inter- ests in bonds are required to be represented only by book entries in a dematerialized book entry system maintained by a clear- ing organization. Notice 2006–99 pro- vided that an obligation issued under such an arrangement would be treated as in reg- istered form notwithstanding the ability of holders to obtain physical certificates in nonregistered form upon the termination of the business of the clearing organization without a successor. For obligations issued after March 18, 2012, section 163(f)(3) provides that for purposes of section 163(f), a dematerial- ized book entry system or other book en- try system specifiedby the Secretary will be treated as a book entry system described in section 149(a)(3). Comments have ex- pressed concern that the explicit reference in new section 163(f)(3) to a “dematerial- ized book entry system” may create un- certainty with respect to obligations is- sued in a manner not specifically described in Notice 2006–99. In particular, com- ments requested guidance with respect to the treatment of obligations represented by a physical global security that is nominally in bearer form, but that is “immobilized” in a clearing system. In addition, com- ments have requested guidance regarding whether an obligation will be considered to be in registered form if holders may ob- tain physical certificates in nonregistered form in certain limited circumstances not described in Notice 2006–99. Treasury and the IRS intend to issue regulations providing that an obligation will be considered to be in registered form if it is issued through: (i) a dema- terialized book entry system in which beneficial interests are transferable only through a book entry system (as de- fined in § 5f.103–1(c)(2)) maintained by a clearing organization as defined in § 1.163–5(c)(2)(i)(B)(4) (or by an agent of the clearing organization); or (ii) a clearing system in which the obligation is effectively immobilized. An obliga- tion will be considered to be effectively immobilized if: (1) the obligation is repre- sented by one or more global securities in physical form that are issued to and held by a clearing organization as defined in § 1.163–5(c)(2)(i)(B)(4) (or by a custo- dian or depository acting as an agent of the clearing organization) for the benefit of purchasers of interests in the obliga- tion under arrangements that prohibit the transfer of the global securities except to a successor clearing organization subject to the same terms; and (2) beneficial interests in the underlying obligation are transfer- able only through a book entry system maintained by the clearing organization (or an agent of the clearing organization). An interest in an obligation will be con- sidered to be transferable only through a book entry system if the interest would be considered transferable through a book en- try system under § 5f.103–1(c)(2), except that holders may obtain physical certifi- cates in bearer form inthe following cir- cumstances: (1) termination of the clear- ing organization’s business without a suc- cessor; (2) default by the issuer; or (3) issuance of definitive securities at the is- suer’s request upon a change in tax law that would be adverse to the issuer but for the issuance of physical securities in bearer form. After the occurrence of one of the above circumstances, any obligation with respect to which a holder, or a group of holders acting collectively, has a right to obtain a physical certificate in bearer form will no longer be in registered form, re- gardless of whether any option to obtain a physical certificate in bearer form has ac- tually been exercised. Treasury and the IRS request comments regarding whether any exceptions should be provided to this general rule. SECTION 4. TEMPORARY EXTENSION OF PORTFOLIO INTEREST EXCEPTION TO FOREIGN-TARGETED REGISTERED OBLIGATIONS As noted above, section 871(h)(2)(B) provides that the portfolio interest excep- tion is generally available for holders of obligations in registered form only if a U.S. withholding agent receives a state- ment that the beneficial owner of the obligation is not a U.S. person. Under § 1.871–14(c)(2), a U.S. withholding agent generally is considered to have received a statement that satisfies this requirement if it receives a statement from the foreign beneficial owner, or it receives a statement from a withholding foreign partnership, a qualified intermediary, or a U.S. branch of a foreign bank or foreign insurance company indicating that the payment will be made to a foreign beneficial owner. A U.S. withholding agent may also rely upon a statement from a financial insti- tution that holds customers’ securities in the ordinary course of its trade or business when the financial institution provides a statement that it has received a with- holding certificate on Form W–8 (or an acceptable substitute form) from each ben- eficial owner and attaches each form to its statement (including certificates from beneficial owners holding through other financial institutions acting as intermedi- aries with respect to the obligation). In each such case, the U.S. withholding agent must also satisfy the information reporting requirements of § 1.1461–1(c)(2) with respect to interest paid on the obligation. See §§ 1.1461–1(c)(2)(i) and 1.1441–2(a). Comments have noted that presently there may be difficulties obtaining state- ments satisfying the requirements of § 1.871–14(c)(2) in certain foreign mar- kets in which issuers and intermediaries have relied on the foreign-targeting rules of § 1.163–5(c)(2)(i)(D) for issuances of debt. In response to these comments, this notice provides as a limited tran- sition rule that, notwithstanding Notice 2006–99, a withholding agent (as defined in § 1.1441–7(a)) paying interest on an obligation issued in registered form after March 18, 2012, and before January 1, 2014, may apply the foreign-targeted reg- istered obligation rules of § 1.871–14(e) if the obligation satisfies the requirements 2012–13 I.R.B.575March 26, 2012 of those rules. For this purpose, a fi- nancial institution may certify that the beneficial owner of a payment of interest has not been a U.S. person (as described in § 1.871–14(e)(3)(i)(A)(1)(i)) if the fi- nancial institution has determined the non-U.S. status of the beneficial owner of interest on the obligation(s) covered by the certificate by obtaining either (1) a Form W–8 (or substitute form) satisfying the re- quirements of § 1.1441–1(e)(4), or (2) doc- umentary evidence satisfying the require- ments of § 1.6049–5(c). A withholding agent receiving such acertificate after the time described in § 1.871–14(e)(4)(ii)(A) may rely on the certificate to the extent permitted under § 1.1441–1(b)(7). As provided in § 1.871–14(e)(4)(i)(G), a withholding agent who receives a valid certificate described in § 1.871–14(e)(3)(i) that applies to a payment of portfolio interest on a foreign-targeted registered obligation is not required to report the interest payment on Form 1042–S. SECTION 5. SHORT-TERM DEBT OBLIGATIONS Section 6049 provides an exception from information reporting of interest or original issue discount with respect to debt obligations that have an original term of 183 days or less and that satisfy a number of other requirements intended to ensure that the debt is not held by U.S. non-ex- empt persons. Those requirements are provided in § 1.6049–5(b)(10) and include the following: (1) payments on the in- strument must be made outside the United States by other than a U.S. middleman; (2) the instrument must have a principal amount of at least $500,000; (3) the in- strument must satisfy the requirements of sections 163(f)(2)(B)(i) and (ii)(I) and the regulations thereunder; (4) the instrument must bear a specified legend stating that the holder represents that it is not, and does not hold on behalf of, a U.S. person that is a non-exempt recipient; and (5) if the instrument is in registered form, it must be registered in the name of an exempt recipient. Comments have requested clarification on whether the short-term debt exception provided by § 1.6049–5(b)(10) will con- tinue to be available after March 18, 2012, the effective date of the repeal of sec- tion 163(f)(2)(B) under section 502 of the HIRE Act. Treasury and the IRS intend to clarify that this short-term debt exception remains available by issuing regulations incorporating the foreign-targeting rules of § 1.163–5(c)(2)(i) into the regulations un- der section 6049 in place of the existing reference to section 163(f)(2)(B). SECTION 6. CLARIFICATION OF EXCISE TAX EXCEPTION UNDER SECTION 4701(B) Section 4701 imposes an excise tax on a “registration-required obligation” that is not in registered form. The amount of the excise tax is equal to one percent of the principal amount multiplied by the num- ber of calendar years until the obligation reaches maturity. Prior to the enactment of the HIRE Act, section 4701(b) provided that the term “registration-required obli- gation” generally had the same meaning as when used in section 163(f), which set forth the terms under which an issuer would be entitled to claim a deduction for interest paid on a registration-required obligation. In connection with repealing section 163(f)(2)(B), section 502 of the HIRE Act amended section 4701(b) to provide that registration would not be required for obligations issued after March 18, 2012, that meet criteria similar to the foreign targeting rules under existing sec- tion 163(f)(2)(B). Comments requested clarification regarding how closely the procedures required under the new ex- ception under section 4701(b) will mirror the procedures required under section 163(f)(2)(B). Treasury and the IRS intend to provide in regulations that rules identi- cal to the rules that currently apply under section 163(f)(2)(B) and the regulations thereunder will apply for purposes of sec- tion 4701(b) to obligations issued after March 18, 2012. EFFECT ON OTHER DOCUMENTS Section 4 of Notice 2006–99, 2006–2 C.B. 907, is superseded. EFFECTIVE DATE The regulations incorporating the guid- ance described in this notice will be effec- tive for obligations issued after March 18, 2012. DRAFTING INFORMATION The principal author of this notice is Susan E. Massey of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact John Sweeney at (202) 622–3840 (not a toll-free call). 2012 Calendar Year Resident Population Figures Notice 2012–22 This notice advises State and local housing credit agencies that allocate low-income housing tax credits under § 42 of the Internal Revenue Code, and States and other issuers of tax-exempt private activity bonds under § 141, of the popula- tion figures to use in calculating: (1) the 2012 calendar year population-based com- ponent of the State housing credit ceiling (Credit Ceiling) under § 42(h)(3)(C)(ii); (2) the 2012 calendar year volume cap (Volume Cap) under § 146; and (3) the 2012 volume limit (Volume Limit) under § 142(k)(5). Generally, § 146(j) requires determin- ing the population figures for the popula- tion-based component of both the Credit Ceiling and the Volume Cap for any cal- endar year on the basis of the most recent census estimate of the resident population of a State (or issuing authority) released by the U.S. Census Bureau before the be- ginning of the calendar year. Similarly, § 142(k)(5) bases the Volume Limit on the State population. Sections 42(h)(3)(H) and 146(d)(2) require adjusting for inflation the pop- ulation-based component of the Credit Ceiling and the Volume Cap. The ad- justments for the 2012 calendar year are in Rev. Proc. 2011–52, 2011–45 I.R.B. 701. Section 3.08 of Rev. Proc. 2011–52 provides that, for calendar year 2012, the amount for calculating the Credit Ceiling under § 42(h)(3)(C)(ii) is the greater of $2.20 multiplied by the State population or $2,525,000. Further, section 3.15 of Rev. Proc. 2011–52 provides that the amount for calculating the Volume Cap under § 146(d)(1) for calendar year 2012 is the greater of $95 multiplied by the State population or $284,560,000. March 26, 20125762012–13 I.R.B. For the 50 states, the District of Co- lumbia, and Puerto Rico, the population figures for calculating the Credit Ceil- ing, the Volume Cap, and the Volume Limit for the 2012 calendar year are the resident population estimates released electronically by the U.S. Census Bureau on December 21, 2011, in Press Release CB11–215. For American Samoa, Guam, the Northern Mariana Islands, and the U.S. Virgin Islands, the population figures for the 2012 calendar year are the 2010 population counts released electronically by the U.S. Census Bureau on August 24, 2011, in Press Releases CB11–CN.177, CB11–CN.179, CB11–CN.178, and CB11–CN.180, respectively. For convenience, these figures are reprinted below. Resident Population Figures Alabama4,802,740 Alaska722,718 American Samoa 55,519 Arizona 6,482,505 Arkansas2,937,979 California37,691,912 Colorado 5,116,796 Connecticut 3,580,709 Delaware 907,135 District of Columbia617,996 Florida 19,057,542 Georgia 9,815,210 Guam 159,358 Hawaii1,374,810 Idaho 1,584,985 Illinois 12,869,257 Indiana 6,516,922 Iowa3,062,309 Kansas2,871,238 Kentucky 4,369,356 Louisiana 4,574,836 Maine1,328,188 Maryland 5,828,289 Massachusetts 6,587,536 Michigan9,876,187 Minnesota 5,344,861 Mississippi 2,978,512 Missouri6,010,688 Montana998,199 Nebraska1,842,641 Nevada2,723,322 New Hampshire1,318,194 New Jersey 8,821,155 New Mexico2,082,224 New York 19,465,197 North Carolina 9,656,401 North Dakota683,932 Northern Mariana Islands 53,883 Ohio 11,544,951 Oklahoma 3,791,508 Oregon 3,871,859 Pennsylvania12,742,886 Puerto Rico3,706,690 Rhode Island 1,051,302 South Carolina4,679,230 South Dakota824,082 Tennessee 6,403,353 Texas 25,674,681 Utah2,817,222 Vermont626,431 Virginia8,096,604 Virgin Islands, U.S. 106,405 2012–13 I.R.B.577March 26, 2012 Resident Population Figures Washington6,830,038 West Virginia 1,855,364 Wisconsin 5,711,767 Wyoming 568,158 The principal authors of this no- tice are Julie Hanlon Bolton, Office of the Associate Chief Counsel (Passthroughs and Special Industries), and Timothy L. Jones, Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this notice, please contact Ms. Hanlon Bolton at (202) 622–3040 (not a toll-free call). Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates Notice 2012–24 This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code as in ef- fect for plan years beginning before 2008. It also provides guidance on the cor- porate bond monthly yield curve (and the corresponding spot segment rates), and the 24-month average segment rates under § 430(h)(2). In addition, this no- tice provides guidance as to the interest rate on 30-year Treasury securities un- der § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), and the min- imum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007. CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE Sections412(b)(5)(B)(ii)and 412(l)(7)(C)(i), as amended by the Pen- sion Funding Equity Act of 2004 and by the Pension Protection Act of 2006 (PPA), provide that the interest rates used to cal- culate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conser- vatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year. Notice 2004–34, 2004–1 C.B. 848, pro- vides guidelines for determining the cor- porate bond weighted average interest rate and the resulting permissible range of in- terest rates used to calculate current liabil- ity. That notice establishes that the corpo- rate bond weighted average is based on the monthly composite corporate bond rate de- rived from designated corporate bond in- dices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004–34 continues to apply in determining that rate. See Notice 2006–75, 2006–2 C.B. 366. The composite corporate bond rate for February 2012 is 4.49 percent. Pursuant to Notice 2004–34, the Service has de- termined this rate as the average of the monthly yields for the included corporate bond indices for that month. The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below. For Plan Years Beginning inPermissible Range MonthYear Corporate Bond Weighted Average90%to100% March2012 5.615.055.61 YIELD CURVE AND SEGMENT RATES Generally for plan years beginning after 2007 (except for delayed effective dates for certain plans under sections 104, 105, and 106 of PPA), § 430 of the Code specifies the minimum funding require- ments that apply to single employer plans pursuant to § 412. Section 430(h)(2) spec- ifies the interest rates that must be used to determine a plan’s target normal cost and funding target. Under this provision, present value is generally determined us- ing three 24-month average interest rates (“segment rates”), each of which applies to cash flows during specified periods. However, an election may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates. Sec- tion 430(h)(2)G) set forth a transitional rule applicable to plan years beginning in 2008 and 2009 under which the segment rates were blended with the corporate bond weighted average described above, includ- ing an election under § 430(h)(2)(G)(iv) foranemployertousethesegmentrates without the transitional rule. Notice 2007–81, 2007–2 C.B. 899, provides guidelines for determining the monthly corporate bond yield curve, and the 24-month average corporate bond segment rates used to compute the tar- get normal cost and the funding target. Pursuant to Notice 2007–81, the monthly corporate bond yield curve derived from February 2012 data is in Table I at the end of this notice. The spot first, second, and third segment rates for the month of Feb- ruary 2012 are, respectively, 1.56, 4.27, and 5.08. The three 24-month average corporate bond segment rates applicable for March 2012 are as follows: March 26, 20125782012–13 I.R.B. First Segment Second Segment Third Segment 1.93 4.95 6.07 The transitional rule of § 430(h)(2)(G) does not apply to plan years beginning af- ter December 31, 2009. Therefore, for a plan year beginning after 2009 with a look- back month to March 2012, the funding segment rates are the three 24-month av- erage corporate bond segment rates appli- cable for March 2012, listed above without blending for any transitional period. 30-YEAR TREASURY SECURITIES INTEREST RATES Section 417(e)(3)(A)(ii)(II) (prior to amendment by PPA) defines the appli- cable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury se- curities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)–1(d)(3) of the Income Tax Regulations provides that the applica- bleinterestrateforamonthistheannual rate of interest on 30-year Treasury secu- rities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin. The rate of interest on 30-year Treasury securities for February 2012 is 3.11 per- cent. The Service has determined this rate as the average of the yield on the 30-year Treasury bond maturing in November 2041 determined each day through Febru- ary 8, 2012, and the yield on the 30-year Treasury bond maturing in February 2042 determined each day for the balance of the month. Generally for plan years beginning after 2007, § 431 specifies the mini- mum funding requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limitation described in section 431(c)(6)(A), based on the plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the inter- est rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities dur- ing the four-year period ending on the last day before the beginning of the plan year. Notice 88–73, 1988–2 C.B. 383, provides guidelines for determining the weighted average interest rate. The following rates were determined for plan years beginning in the month shown below. For Plan Years Beginning inPermissible Range MonthYear 30-Year Treasury Weighted Average90%to105% March20124.003.604.20 MINIMUM PRESENT VALUE SEGMENT RATES Generally for plan years beginning af- ter December 31, 2007, the applicable in- terest rates under § 417(e)(3)(D) are seg- ment rates computed without regard to a 24-month average. For plan years begin- ning in 2008 through 2011, the applica- ble interest rates are the monthly spot seg- ment rates blended with the applicable rate under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning in 2007. Notice 2007–81 provides guidelines for determin- ing the minimum present value segment rates. Pursuant to that notice, the min- imum present value transitional segment rates determined for February 2012, tak- ing into account the February 2012 30-year Treasury rate of 3.11 stated above, are as follows: For Plan Years Beginning in First Segment Second Segment Third Segment 20111.874.044.69 2012 1.56 4.27 5.08 DRAFTING INFORMATION The princ ipal author of this notice is Tony Mont anaro of the Employee Plans, Tax Exemp t and Government Entities Division . Mr. Montanaro may be e-mailed atRetir ementPlanQuestions@irs.gov. 2012–13 I.R.B.579March 26, 2012 Table I Monthly Yield Curve for February 2012 DerivedfromFebruary2012Data Maturity YieldMaturity YieldMaturity YieldMaturity YieldMaturity Yield 0.5 0.49 20.5 4.94 40.5 5.09 60.55.1680.5 5.19 1.0 0.79 21.04.9541.0 5.10 61.0 5.16 81.05.19 1.51.0621.54.9541.55.1061.55.1681.55.19 2.01.3122.04.9642.0 5.10 62.0 5.16 82.05.19 2.51.5322.5 4.96 42.55.1062.55.1682.5 5.19 3.01.7223.0 4.97 43.0 5.10 63.0 5.16 83.05.19 3.5 1.90 23.5 4.97 43.55.1063.55.1683.5 5.19 4.02.0824.0 4.98 44.0 5.11 64.0 5.16 84.05.19 4.52.2624.5 4.98 44.55.1164.55.1684.55.19 5.0 2.44 25.0 4.98 45.05.1165.05.1685.0 5.19 5.5 2.62 25.5 4.99 45.55.1165.55.1685.5 5.19 6.02.8126.0 4.99 46.0 5.12 66.0 5.17 86.05.19 6.5 2.99 26.55.0046.55.1266.55.1786.5 5.19 7.03.1727.0 5.00 47.0 5.12 67.0 5.17 87.05.19 7.53.3427.55.0147.55.1267.55.1787.55.19 8.0 3.51 28.0 5.01 48.0 5.12 68.0 5.17 88.05.19 8.5 3.67 28.55.0248.55.1268.55.1788.5 5.19 9.0 3.81 29.0 5.02 49.0 5.13 69.0 5.17 89.0 5.20 9.53.9529.5 5.02 49.5 5.13 69.5 5.17 89.5 5.20 10.04.0730.0 5.0350.05.13 70.0 5.17 90.0 5.20 10.5 4.19 30.55.0350.55.1370.55.1790.55.20 11.04.2931.0 5.0451.05.13 71.0 5.17 91.0 5.20 11.5 4.38 31.55.0451.55.1371.55.17 91.5 5.20 12.04.4632.0 5.0452.05.13 72.0 5.18 92.0 5.20 12.54.5332.55.0552.55.1372.55.18 92.5 5.20 13.04.6033.0 5.0553.05.14 73.0 5.18 93.0 5.20 13.54.6533.55.0553.55.1473.55.1893.55.20 14.04.7034.0 5.0654.05.14 74.0 5.18 94.0 5.20 14.5 4.74 34.55.0654.55.1474.55.18 94.5 5.20 15.0 4.78 35.05.0655.05.1475.05.18 95.0 5.20 15.5 4.81 35.55.0755.55.1475.55.18 95.5 5.20 16.04.8336.0 5.0756.05.15 76.0 5.18 96.0 5.20 16.54.8536.55.0756.55.1576.55.1896.55.20 17.04.8737.0 5.0857.05.15 77.0 5.18 97.0 5.20 17.5 4.89 37.55.0857.55.1577.55.18 97.5 5.20 18.0 4.90 38.0 5.0858.05.15 78.0 5.18 98.0 5.20 18.5 4.91 38.55.0858.55.1578.55.18 98.5 5.20 19.04.9239.0 5.0959.0 5.15 79.0 5.18 99.0 5.20 19.5 4.93 39.55.0959.55.1579.55.1899.55.20 20.04.9440.05.0960.0 5.15 80.05.19100.0 5.20 March 26, 20125802012–13 I.R.B. Part IV. Items o fGeneralInterest Notice of Prop osed Rulemaking an dNoticeof Public Hearin g Modification s to Minimum Present Valu e Requirements for Partial A nnuity Distribution Options Und er Defined Benefit Pension Pla ns REG–110980 –10 AGENCY: In ternal Revenue Service (IRS), Tre asury. ACTION: No tice of proposed rulemaking and notice of public hearing. SUMMARY: T his document contains pro- posed regu lations providing guidance re- latingtot he minimum present value re- quiremen ts applicable to certain defined benefit p ension plans. These proposed regulati ons would change the regulations regardin g the minimum present value re- quiremen ts for defined benefit plan dis- tributi ons to permit plans to simplify the treatme nt of certain optional forms of ben- efit tha t are paid partly in the form of an annui ty and partly in a more acceler- ated for m. These regulations would af- fect sp onsors, administrators, participants, and ben eficiaries of defined benefit pen- sion pl ans. This document also provides anotic e of a public hearing on these pro- posed r egulations. DATES: Written or electronic comments must b e received by May 3, 2012. Out- lines of topics to be discussed at the public heari ng scheduled for June 1, 2012, must be rec eivedbyMay11,2012. ADDRE SSES: Send submissions to: CC:PA :LPD:PR(REG–110980–10), Room 5203, Internal Revenue Service, PO Box 7 604, Ben Franklin Station, Wash- ingt on, DC 20044. Submissions may be hand -delivered Monday through Friday betw een the hours of 8 a.m. and 4 p.m. to: C C:PA:LPD:PR (REG–110980–10), Cou rier’s Desk, Internal Revenue Ser- vic e, 1111 Constitution Avenue, NW, Washington, D C, or sent electroni- cally, via the Federal eRulemaking Por- tal athttp:// www.regulations.gov(IRS REG–110980–1 0). The public hearing will be held in the IRS Auditorium, Internal Rev enue Building, 1111 Constitutio n Avenue, NW, Washington, DC. FOR FURTHER I NFORMATION CONTACT: Con cerning the regulations, Peter J. Mar ks or Linda S. F. Marshall at (202) 622–6 090; concerning submissions of comments , the hearing, and/or being placed on th e building access list to attend the hearin g, Oluwafunmilayo (Funmi) Taylor at ( 202) 622–7180 (not toll-free numbers). SUPPLEMEN TARY INFORMATION: Backgroun d Section 40 1(a)(11) of the Internal Rev- enue Code ( Code) provides that, in or- der for a de fined benefit plan to qualify under sect ion 401(a), and except as pro- vided und er section 417, in the case of a vested pa rticipant who does not die before the annui ty starting date, the accrued ben- efit paya ble to such participant must be provided in the form of a qualified joint and surv ivor annuity. In the case of a vested p articipant who dies before the an- nuity st arting date and who has a surviving spouse, a defined benefit plan must pro- vide a qu alified preretirement survivor an- nuity t o the surviving spouse of such par- ticipa nt, except as provided under section 417. Sectio n 417(e)(1) provides that a plan may pro vide that the present value of a qualif ied joint and survivor annuity or aquali fied preretirement survivor an- nuity will be immediately distributed if that p resent value does not exceed the amoun t that can be distributed without the pa rticipant’s consent under section 411(a )(11). Section 417(e)(2) provides that , if the present value of the qualified join t and survivor annuity or the qualified prer etirement survivor annuity exceeds the a mount that can be distributed without the p articipant’s consent under section 411(a)(11), t hen a plan may immediately distribute th e present value of a qualified joint and surv ivor annuity or the qualified preretiremen t survivor annuity only if the participant a nd the spouse of the partici- pant (or wher e the participant has died, the surviving sp ouse) consent in writing to the distributio n. Section 417( e)(3)(A) provides that the present valu e shall not be less than the present valu e calculated by using the ap- plicable mo rtality table and the applicable interest ra te. 1 Section 417 (e)(3)(B) of the Code, as amended by s ection 302 of Pension Pro- tection Act of 2006 (PPA ’06), Public Law 109–280 , 120 Stat. 780 (2006), pro- vides that the term “applicable mortality table” mea ns a mortality table, modified as appropr iate by the Secretary, based on the mortal ity table specified for the plan year unde r section 430(h)(3)(A) (without regard to section 430(h)(3)(C) or (3)(D)). Section 4 17(e)(3)(C) of the Code, as amended b ysection302ofPPA’06,pro- vides tha t the term “applicable interest rate” mea ns the adjusted first, second, and third se gment rates applied under rules similar to the rules of section 430(h)(2)(C) of the Co de for the month before the date of the di stribution or such other time as the Secr etary may prescribe by regula- tions. Under section 417(e)(3)(D), these rates a re to be determined using the av- erage y ields for a month, rather than the 24-mon th average used under section 430(h) (2)(D). Section 417(e)(3)(D) also provid es special rules applicable for plan years beginning in 2008 through 2011 under which the applicable interest rate is based on a blend of the interest rates under secti on 417(e)(3)(C) and the previously appli cable 30-year Treasury rate. Secti on 411(a)(13) of the Code, as added by section 701(b) of PPA ’06, pro- vide s that an “applicable defined benefit plan ” is not treated as failing to meet the requ irements of section 417(e) with re- spec t to accrued benefits derived from empl oyer contributions solely because the present value of a participant’s ac- cru ed benefit (or any portion thereof) may be, under the terms of the plan, equal to 1 Under section 411(a)(11)(B), the same actuarial assumptions are used for purposes of determining whether the present value of a participant’s nonforfeitable accrued benefit exceeds the maximum amount that can be immediately distributed without the participant’s consent. 2012–13 I.R.B.581March 26, 2012 the amount expressed as the hypothetical account balance or as an accumulated per- centage of such participant’s final average compensation. Section 411(a)(13)(C) de- fines the term “applicable defined benefit plan” to mean a defined benefit plan under which the accrued benefit (or any por- tion thereof) is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated per- centage of the participant’s final average compensation. Section 1107(a)(2) of PPA ’06 provides that a pension plan does not fail to meet the requirements of section 411(d)(6) by reason of a plan amendment to which sec- tion 1107 applies, except as provided by the Secretary of the Treasury. Section 1107 of PPA ’06 applies to plan amend- ments made pursuant to the provisions of PPA ’06 or regulations issued thereunder that are adopted no later than a specified date, generally the last day of the first plan year beginning on or after January 1, 2009. Final regulations under section 417 re- lating to the qualified joint and survivor and qualified preretirement survivor annu- ity requirements were issued on August 22, 1988. The final regulations were amended on April 3, 1998, to reflect changes en- acted by the Uruguay Round Agreements Act, Public Law 103–465 (GATT). Section 1.417(e)–1(d)(1) provides that a defined benefit plan generally must pro- vide that the present value of any accrued benefit and the amount of any distribu- tion, including a single sum, must not be less than the amount calculated using the specified applicableinterest rate and the specified applicablemortality table. The present value of any optional form of ben- efit cannot be less than the present value of the accrued benefit determined in accor- dance with the preceding sentence. Section 1.417(e)–1(d)(6) provides an exception from the minimum present value requirements of section 417(e) and §1.417(e)–1(d). This exception applies to the amount of a distribution paid in the form of an annual benefit that either does not decrease during the life of the participant (or, in the case of a qualified preretirement survivor annuity, the life of the participant’s spouse), or that decreases during the life of the participant merely because of the death of the survivor annu- itant(butonlyifthereductionistoalevel not below 50 percent of the annual benefit payable before the death of such survivor annuitant) or the cessation or reduction of Social Security supplements or qualified disability benefits. Notice 2007–81, 2007–2 C.B. 899 (2007), (see §601.601(d)(2)(ii)(b)ofthis chapter) provides guidance on the cor- porate bond yield curve and the segment rates used under section 430, as well as the interest rates for determining minimum present values under section 417(e)(3), to implement changes to the funding rules and minimum present value requirements made in PPA ’06. Rev. Rul. 2007–67, 2007–2 C.B. 1047 (2007), (see §601.601(d)(2)(ii)(b)ofthis chapter) provides that the applicable mor- tality table for a given year applies to dis- tributions with annuity starting dates that occur during stability periods that begin during that calendar year. Under Rev. Rul. 2007–67, the applicable mortality table for 2008 was based on a fixed blend of 50 per- cent of the static male combined mortal- ity rates and 50 percent of the static female combined mortality rates promulgated un- der §1.430(h)(3)–1(c)(3) of the proposed regulations (which were later issued as fi- nal regulations). Rev. Rul. 2007–67 pro- vides that updated section 417(e)(3) ap- plicable mortality tables will be published for each calendar year in future guidance and, except as provided in that future guid- ance, will be determined from the section 430(h)(3)(A) tables on the same basis as the applicable mortality table for 2008. 2 Rev. Rul. 2007–67 provides that an amendment to determine the applicable in- terest rate under the section 417(e)(3) rules in effect for plan years beginning on or af- ter January 1, 2008, will not violate section 411(d)(6) solely because of a reduction in accrued benefits or a reduction in the amount of any distribution with an annuity starting date occurring during a plan year beginning in 2008 or in a subsequent year if the cause of such reduction is the substi- tution of the modified segment rates for the 30-year Treasury rate for the same period. Additionally, Rev. Rul. 2007–67 provides that a plan amendment to incorporate by reference the applicable mortality table un- der section 417(e)(3) that is prescribed by Rev. Rul. 2007–67 and by subsequent guidance will not violate section 411(d)(6) solely because of a reduction in accrued benefits or a reduction in the amount of any distribution with an annuity starting date occurring during a plan year beginning in 2008 or in a subsequent year if the cause of such reduction is the substitution of the applicable section 417(e)(3) mortality ta- ble for the prior applicable mortality table under section 417(e)(3). Rev. Rul. 2007–67 also pro- vides guidance regarding the appli- cable interest rate used under section 417(e)(3) pursuant to the PPA ’06 changes. Pursuant to Rev. Rul. 2007–67, the rules of §§1.417(e)–1(d)(4) and 1.417(e)–1(d)(10)(ii) regarding the time for determining the applicable interest rate continue to apply for plan years beginning on or after January 1, 2008, without regard to the change in the basis for determining the applicable interest rate. The Worker, Retiree, and Employer Re- covery Act of 2008, Public Law 109–280 (120 Stat. 780 (2008)), amended sec- tion 415(b)(2)(E)(v) to provide that the applicable mortality table under section 417(e)(3)(B) applies for purposes of ad- justing a benefit or limitation pursuant to section 415(b)(2)(B), (C), or (D). Explanation of Provisions Treatment of bifurcated accrued benefits These proposed regulations would amend the current final regulations under section 417(e) to permit plans to sim- plify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity that is excepted from the minimum present value require- ments of section 417(e)(3) pursuant to §1.417(e)–1(d)(6) and partly in a more accelerated form. Where a defined benefit plan offers a single-sum distribution or other form of accelerated distribution as an optional form of benefit in addition to the required qualified joint and survivor annuity, many participants have been re- luctant to elect lifetime payments to insure against unexpected longevity, choosing instead an accelerated distribution form in order to maximize their liquidity. How- 2 Notice 2008–85, 2008–2 C.B. 905, sets forth the section 417(e)(3) applicable mortality tables for distributions with annuity starting dates that occur during stability periods that begin during calendar years 2009 through 2013. March 26, 20125822012–13 I.R.B. ever, participants who elect a single sum or other accelerated form of distribution may face a greater challenge in protecting themselves against the risk of outliving their retirement savings. The IRS and the Treasury Department believe that many participants would be better served by having the opportunity to elect to receive a portion of their re- tirement benefits in annuity form (which provides financial protection against un- expected longevity) while receiving accel- erated payments for the remainder of the benefit to provide increased liquidity dur- ing retirement. Under current regulations, both portions of such a distribution option are subject to the minimum present value requirements of section 417(e)(3). The proposed regulations would pro- vide an exception to this rule in the case of a plan with a bifurcated accrued bene- fit as defined in the proposed regulations. Under this exception, such a plan is permit- ted to provide that, if a participant selects two different distribution options with re- spect to separate portions of the bifurcated accrued benefit, then the two different dis- tribution options are treated as two sepa- rate optional forms of benefit for purposes of applying the requirements of section 417(e)(3). Thus, if this rule applies to treat two separate distribution options selected with respect to separate portions of a bifur- cated accrued benefit as two separate op- tional forms of benefit, and one of those separate optional forms of benefit is ex- empt from the requirement to use the sec- tion 417(e)(3) assumptions, then that ex- emption would apply to that separate op- tional form of benefit. In such a case, the plan would have to apply the section 417(e)(3) assumptions only to the separate optional form of benefit that is not so ex- empted (rather than apply those assump- tions to the entire optional form of bene- fit). The primary impact of this proposed change would be to make it simpler and easier for a plan to offer an optional form of benefit that is a combination of a sin- gle-sum payment and an annuity. Allow- ing a plan to apply a bifurcated approach would permit the plan to use the section 417(e)(3) assumptions for the single-sum portion of the optional form and its usual annuity equivalence factors for the annuity portion(ratherthanbeingrequiredtomake a special calculation of the annuity portion using the section 417(e)(3) assumptions). Not only would this be simpler administra- tively, it would also yield a more intuitive result. One type of plan with a bifurcated ac- crued benefit that would be eligible for this treatment is a plan that provides for two separate portions of the accrued ben- efit that are determined without regard to any election of optional form of benefit and permits a participant to choose differ- ent forms of benefit with respect to each of those portions of the accrued benefit. An example of such a plan is a plan that has been amended to accrue benefits un- der a different plan formula, where a par- ticipant’s benefit is the sum of the partici- pant’s accrued benefitfor years of service before the amendment date, determined under the pre-amendment plan terms, plus the participant’s accrued benefit for years of service after the amendment date, de- termined under the post-amendment plan terms, with no interaction between the two formulas, and the plan permits a partici- pant to make separate elections of optional forms of benefit with respect to each of those portions of the accrued benefit. A second type of plan with a bifurcated accrued benefit that would be eligible for this treatment is a plan that provides for a participant to apply different distribution elections to different portions of the ac- crued benefit so that the amount of the dis- tribution, with respect to the distribution election applied to its respective portion of the accrued benefit, is thepro ratapor- tion of the amount of the distribution that would be determined if that distribution election had been applied to the entire ac- crued benefit. An example of such a plan is a plan that provides both a single-sum option and a joint and survivor option for the entire benefit, but allows a participant to select an optional form which is 25 per- cent of the full lump sum and 75 percent of the full joint and survivor annuity. A third type of plan with a bifurcated accrued benefit that would be eligible for this treatment is a plan that provides a sin- gle-sum distribution option with respect to only a portion of the benefit and provides a separate benefit election for the remainder of the distribution. In order to satisfy the requirements to be this type of plan with a bifurcated accrued benefit, the amount of the distribution that is not paid in a sin- gle sum must be no less than the amount that would be payable under the rules de- scribed in the prior paragraph had a single sum election been available with respect to the entire accrued benefit, where the single sum is determined as the present value of the accrued benefit payable at normal re- tirement age (or the immediate annuity if the participant is older than normal retire- ment age) determined using the applicable interest rates and the applicable mortality table. An example of such a plan is a plan that provides that a participant can elect to receive in a single sum an amount equal to the employee contributions, accumulated with interest, with the remainder of the ac- crued benefit paid under one of the annuity optional forms of benefit available under the plan in an amount sufficient to satisfy the requirements under the proposed regu- lations. As previously discussed, the proposed regulations would make the bifurcation of benefits for purposes of section 417(e)(3) conditional on the existence of plan terms that explicitly provide that, if a participant selects two different distribution options with respect to separate portions of the bi- furcated accrued benefit, then the two dif- ferent distribution options are treated as two separate optional forms of benefit for purposes of applying the requirements of section 417(e)(3). To provide for such bi- furcated treatment, a plan sponsor would be required to amend its plan to provide for use of the plan factors that generally ap- ply to annuity distributions instead of the section 417(e)(3) assumptions in these cir- cumstances. Any plan amendment must comply with the requirements of section 411(d)(6). See the discussion in this pre- amble under the heading “Effective/Appli- cability Date.” The Treasury Department and the IRS recognize that additional modifications to the regulations under section 417(e)(3) are needed in light of the enactment of PPA ’06. It is expected that additional proposed amendments to the regulations under section 417(e)(3) will be issued to reflect statutory changes and to make other clarifications. Effective/Applicability Date These regulations are proposed to be effective on the date of publication of the Treasury decision adopting these rules as final regulations in theFederal Register. 2012–13 I.R.B.583March 26, 2012 The changes under the proposed regula- tions are proposed to apply to distributions with annuity starting dates in plan years beginning after the publication date of fi- nal regulations. If the regulations are fi- nalized as proposed and a plan that pre- viously provided for a partial single-sum distribution together with a specified an- nuity distribution is amended to treat that distribution form as abifurcated accrued benefit (and applies less favorable actuar- ial factors to the portion of the benefit that is not subject to section 417(e)(3)), then the plan must comply with the require- ments of section 411(d)(6). This can be done by providing that, after the applicable amendment date under §1.411(d)–3(g)(4), the amount of each portion of a distribution is not less than the amount that would have been payable under the plan provisions in effect before the amendment applied to the participant’s accrued benefit as of the ap- plicable amendment date. 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 thatsection 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regula- tions, and because the proposed regulation does not impose a collection of informa- tion on small entities, the Regulatory Flex- ibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Ad- ministration for comment on its impact on small business. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, considera- tion will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The Treasury Department and the IRS request comments on all aspects of these proposed regulations. In particu- lar, the Treasury Department and the IRS request comments regarding whether the special rules in these proposed regula- tions regarding bifurcated accrued benefits should be extended to any types of ben- efits that are not covered by the rules in these proposed regulations. All comments will be available for public inspection or copying atwww.regulations.govor upon request. A public hearing has been scheduled for June 1, 2012, beginning at 10 a.m. in the Auditorium, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition,all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see theFOR FURTHER INFORMATION CONTACTsection of this preamble. The rules of 26 CFR 601.601(a)(3) ap- ply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments by May 3, 2012, and an outline of topics to be discussed and the amount of time to be de- voted to each topic (a signed original and eight (8) copies) by May 11, 2012. A pe- riod of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for re- ceiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information The principal authors of these regulations are Peter J. Marks 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 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.417(e)–1 is amended by: 1. Redesignating paragraph (d)(1) as newly-designated paragraph (d)(1)(i) and revising the heading of the newly-desig- nated paragraph (d)(1)(i). 2. Adding a new paragraph (d)(1)(ii). 3. Revising paragraphs (d)(7) and (d)(8)(i). 4. Adding a new paragraph (d)(8)(v). The additions and revisions read as fol- lows: §1.417(e)–1 Restrictions and valuations of distributions from plans subject to sections 401(a)(11) and 417 ***** (d)Present value requirement—(1) General rule—(i)Defined benefit plans. *** (ii)Defined contribution plans.Be- cause the accrued benefit under a defined contribution plan equals the account bal- ance, a defined contribution plan is not subject to the requirements of this para- graph (d), regardless of whether the re- quirements of section 401(a)(11) apply to the plan. ***** (7)Permitted bifurcation of certain op- tional forms of benefit—(i)General rule. A plan with a bifurcated accrued bene- fit (as described in paragraph (d)(7)(ii) of this section) is permitted to provide that, if a participant selects two different dis- tribution options with respect to separate portions of the bifurcated accrued bene- fit, then the two different distribution op- tions are treated as two separate optional forms of benefit for purposes of applying the requirements of section 417(e)(3) and this paragraph (d). Thus, if this paragraph (d)(7) applies to treat two separate distri- bution options selected with respect to sep- arate portions of a bifurcated accrued ben- efit as two separate optional forms of ben- efit, and the exception from the applica- tion of paragraph (d) of this section that is contained in paragraph (d)(6) of this section applies to one of those optional forms of benefit, then this paragraph (d) March 26, 20125842012–13 I.R.B. applies only to the optional form of bene- fit to which the exception under paragraph (d)(6) of this section does not apply. (ii)Bifurcated accrued benefit—(A) In general. A plan provides a bifurcated accrued benefit within the meaning of this paragraph (d)(7)(ii) if the plan satisfies the requirements of paragraph (d)(7)(iii) of this section (relating to separately deter- mined benefits), (d)(7)(iv) of this section (relating to separate distribution options for proportionate benefits), or (d)(7)(v) of this section (relating to single sum with separate distribution option for remain- der). (B)Rules of operation. If a plan pro- vides a bifurcated accrued benefit within the meaning of this paragraph (d)(7)(ii), and one portion of the benefits under the plan would itself be a bifurcated accrued benefit if it were the entire accrued bene- fit, then the rules of paragraph (d)(7)(i) of this section may be re-applied to such por- tion. (iii)Separately determined benefits.A plan satisfies the requirements of this para- graph (d)(7)(iii) if the plan provides for two separate portions of the accrued ben- efit that are determined without regard to any election of optional form of benefit and permits a participant to select different distribution options with respect to each of those portions of the accrued benefit. (iv)Separate elections for proportion- ate benefits. A plan satisfies the require- ments of this paragraph (d)(7)(iv) if— (A) The plan provides for a participant to select one distribution option with re- spect to a portion of the accrued benefit and a different distribution option with re- spect to the remaining portion of the ac- crued benefit; (B) The distribution option selected with respect to each of the separate por- tions of the accrued benefit is available with respect to the entire accrued benefit; and (C) The amount of the distribution with respect to each distribution option applied to its respective portion of the accrued ben- efit is thepro rataportion of the amount of the distribution that would be determined if that distribution option had been applied to the entire accrued benefit. (v)Single sum with separate election for remainder. A plan satisfies the require- ments of this paragraph (d)(7)(v) if— (A) The plan provides for a specified amount to be distributed in a single sum, with the remainder distributed as another distribution option payable under the plan; (B) A single-sum distribution is not available with respect to the participant’s entire accrued benefit; and (C) The amount of the distribution that is not paid in a single sum is not less than the amount that would be payable if— (1) A single sum election were available with respect to the entire accrued benefit, where the single sum is the present value of the accrued benefit payable at normal re- tirement age (or the immediate annuity if the participant is older than normal retire- ment age) determined using the applicable interest rates and the applicable mortality table; (2) The participant elected to receive the specified amount in a single sum; and (3) The rules of paragraph (d)(7)(iv) of this section were applied to determine the amount of the distribution that is not paid in a single sum. (vi)Examples. The following exam- ples illustrate the rules of this paragraph (d)(7). Unless otherwise indicated, these examples are based on the following as- sumptions: each plan is a single-employer defined benefit plan with a calendar-year plan year, a one-year stability period coin- ciding with the calendar year, and a one- month lookback used for determining the applicable interest rate. The normal retire- ment age is 65, and all participant elec- tions are made with proper spousal con- sent. In addition, these examples reflect the amendments to sections 417 and 411 that were made in the Pension Protection Act of 2006, Public Law 109–280, 120 Stat. 780 (2006). Example 1. (i) Plan B offers a number of op- tional forms of payment, including a qualified joint and survivor annuity and a single-sum payment. The single-sum payment is equal to the present value of the participant’s immediate benefit (but no less than the present value of the participant’s accrued benefit) using the applicable interest and mortality rates un- der section 417(e)(3). The amount of the joint and survivor annuity is determined using plan factors that are not based on the applicable interest and mortality rates under section 417(e)(3). Plan B permits a par- ticipant to elect to receive a percentage of the accrued benefit chosen by the participant as a single sum and the remainder in any annuity form provided under the plan, with both portions of the payment determined by multiplying the amount that would be payable if the entire benefit were paid in that form by the per- centage that applies to that distribution option. Plan B provides that, with respect to a distribution that is paid partly in the form of a single sum and partly in the form of an annuity, the single sum and the annuity are treated as two separate optional forms of benefit for purposes of applying the provisions of the plan implementing the requirements of section 417(e)(3) and §1.417(e)–1(d). Assume that the December 2012 segment rates are 3.21%, 5.19% and 5.67% for pur- poses of this example. (ii) Participant S retires at age 62 in 2013, with an accrued benefit of $1,000 per month payable as a straight life annuity at normal retirement age. Partic- ipant S is eligible for an unreduced early retirement benefit and can therefore collect a straight life annuity benefit of $1,000 per month beginning immediately. Alternatively, Participant S can elect to receive the benefit in other forms, including a single-sum pay- ment of $153,852 (based on the applicable interest rate and mortality table under section 417(e), which are the 2013 applicable mortality table and the De- cember 2012 segment rates), or a 100% joint and sur- vivor annuity of $850 per month (based on the plan’s annuity conversion factors). Participant S elects to re- ceive 25% of the benefit in the form of a single-sum payment and the balance as a 100% joint and survivor annuity. (iii) In accordance with paragraph (d)(7)(iv) of this section, Plan B provides for a bifurcated accrued benefit because Plan B provides for a participant to select a single-sum distribution with respect to a por- tion of the accrued benefit and an annuity distribu- tion option with respect to the remaining portion of the accrued benefit. Each distribution option is avail- able with respect to the entire accrued benefit, and the amount of the distribution with respect to each distribution option applied to its respective portion of the accrued benefit is thepro rataportion of the amount of the distribution that would be determined if that distribution option had been applied to the entire accrued benefit. Furthermore, Plan B provides that the two different distribution options selected with re- spect to each of those portions of the accrued benefit are treated as two separate optional forms of benefit for purposes of applying the provisions of Plan B im- plementing the requirements of section 417(e)(3) and §1.417(e)–1(d). Accordingly, Participant S receives a single sum payment equal to 25% of the full sin- gle sum amount, or $38,463. In addition, Participant S receives a 100% joint and survivor annuity in the amount of $637.50 per month, equal to 75% of the full joint and survivor benefit of $850 per month oth- erwise payable. The joint and survivor benefit is not subject to the minimum present value requirements of section 417(e)(3) becauseit is treated as a separate optional form of benefit under paragraph (d)(7)(i) of this section. Example 2. (i) Plan C permits participants to elect a partial single sum equal to employee contributions, accumulated with interest. Any other amounts must be paid in the form of an annuity. Under the terms of Plan C, if a participant elects to receive this partial single sum, the annuity benefit payable to the partici- pant is at least as great as the minimum amount deter- mined pursuant to paragraph (d)(7)(v)(C) of this sec- tion. Plan C provides that, with respect to a distribu- tion that is paid partly in the form of a single sum and partly in the form of an annuity, the single sum and the annuity are treated as two separate optional forms of benefit for purposes of applying the provisions of the plan implementing the requirements of section 2012–13 I.R.B.585March 26, 2012 417(e)(3) and §1.417(e)–1(d). Participant T retires at age 60 in 2013 with an accrued benefit of $1,500 per month payable as a straight life annuity payable at normal retirement age. Based on the plan’s early retirement and optional form factors (which are not based on the applicable interest and mortality rates under section 417(e)(3)), Participant T’s benefit com- mencing at age 60 in the form of a 10-year certain and continuous annuity would be $925 per month. Par- ticipant T elects to receive a single sum payment of $32,000 equal to T’s accumulated contributions with interest, and the remainder as a 10-year certain and continuous annuity. Assume that the December 2012 segment rates are the same as those assumed inEx- ample 1. Based on the applicable mortality table for 2013 and the December 2012 segment rates, the de- ferred annuity factor at age 60 for lifetime payments commencing at age 65 is 8.769. (ii) In accordance with paragraph (d)(7)(v) of this section, Plan C provides for a bifurcated accrued ben- efit because Plan C provides for a specified amount to be distributed in a single sum, with the remainder distributed as another distribution option payable un- der the plan, a single-sum distribution is not available with respect to a participant’s entire accrued bene- fit, and the amount of the distribution that is not paid in a single sum meets the requirements of paragraph (d)(7)(v)(C) of this section. Furthermore, Plan C pro- vides that, with respect to a distribution that is paid partly in the form of a single sum and partly in the form of an annuity, the single sum and the annuity are treated as two separate optional forms of benefit for purposes of applying the provisions of the plan implementing the requirements of section 417(e)(3) and §1.417(e)–1(d). Accordingly, the rule for pro- portional benefits under paragraph (d)(7)(iv) of this section is applied to determine the minimum amount of Participant T’s annuity as if a single sum payment were available, equal to the present value of T’s full accrued benefit. If Plan C had offered a single sum payment option with respect to Participant T’s full accrued benefit of $1,500 per month, the minimum present value based on the applicable mortality ta- ble for 2013 and the assumed December 2012 seg- ment rates would have been $1,500 x 12 x the de- ferred annuity factor of 8.769, or $157,842. The sin- gle sum payment actually available to Participant T under the provisions of Plan C is the amount of accu- mulated contributions with interest, or $32,000 which represents 20.27% of the single sum value of Partic- ipant T’s full accrued benefit ($32,000 ÷ $157,842 = 20.27%). (iii) Therefore, the portion of T’s accrued benefit not payable as a single sum must be at least as great as the amount based on the remaining 79.73% of T’s benefit multiplied by the accrued benefit of $1,500 per month, or $1,195.95 per month payable at normal retirement age. Based on Plan C’s early retirement and optional form factors, the annuity benefit payable to Participant T in the form of a 10-year certain and continuous annuity beginning at age 60 cannot be less than $925 times 79.73% or $737.50 per month. Par- ticipant T receives this in addition to the single sum payment of $32,000. The 10-year certain and con- tinuous benefit is not subject to the minimum present value requirements of section 417(e)(3) because it is treated as a separate optional form of benefit under paragraph (d)(7)(i) of this section. Example 3. (i) Plan D permits participants to elect a single-sum payment of up to $10,000 with the re- maining benefit payable in the form of an annuity. Under the terms of Plan D, if a participant elects to receive this partial single sum, the annuity benefit payable to the participant is at least as great as the minimum amount determined pursuant to paragraph (d)(7)(v)(C) of this section. Plan D provides that, with respect to a distribution that is paid partly in the form of a single sum and partly in the form of an annu- ity, the single sum and the annuity are treated as two separate optional forms of benefit for purposes of ap- plying the provisions of the plan implementing the re- quirements of section 417(e)(3) and §1.417(e)–1(d). Participant W retires in 2013 at age 55 with an ac- crued benefit of $1,000 per month payable at normal retirement age. Participant W is eligible for an unre- duced early retirement benefit of $1,000 per month payable as a straight life annuity. Alternatively, based on Plan D’s definition of actuarial equivalence (which is not based on the applicable interest and mortality rates under section 417(e)(3)), Participant W can re- ceive an immediate benefit in the form of a 100% joint-and-survivor annuity of $800 per month. Par- ticipant W elects to receive a single sum payment of $10,000, with the balance of the benefit payable as a 100% joint-and-survivor annuity beginning at age 55. Assume that the December 2012 segment rates are the same as those assumed inExample 1. Based on the applicable mortality table for 2013 and the Decem- ber 2012 segment rates, the deferred annuity factor at age 55 for lifetime payments commencing at age 65 is 6.558. (ii) In accordance with paragraph (d)(7)(v) of this section, Plan D provides fora bifurcated accrued ben- efit because Plan D provides for a specified amount to be distributed in a single sum, with the remainder distributed as another distribution option payable un- der the plan, a single-sum distribution is not available with respect to a participant’s entire accrued bene- fit, and the amount of the distribution that is not paid in a single sum meets the requirements of paragraph (d)(7)(v)(C) of this section. Furthermore, Plan D provides that, with respect to a distribution that is paid partly in the form of a single sum and partly in the form of an annuity, the single sum and the annuityare treated as two sepa- rate optional forms of benefit for purposes of apply- ing the provisions of the plan implementing the re- quirements of section 417(e)(3) and §1.417(e)–1(d). Accordingly, the rule for proportional benefits under paragraph(d)(7)(iv)ofthissectionisappliedtodeter- mine the minimum amount of Participant W’s annu- ity as if a single sum payment were available, equal to the present value of W’s full accrued benefit. (iii) If Plan D had offered a single sum payment option with respect to Participant W’s full accrued benefit of $1,000 per month, the minimum present value based on the applicable mortality table for 2013 and the assumed December 2012 segment rates would have been $1,000 x 12 x the deferred annuity factor of 6.558, or $78,696. The single sum payment actually available to Participant W under the provi- sions of Plan D is $10,000, which represents 12.71% of the single sum value of W’s full accrued benefit ($10,000 ÷ $78,696 = 12.71%). (iv) Therefore, the portion of Participant W’s ac- crued benefit not payable as a single sum must be at least as great as the amount based on the remain- ing 87.29% of W’s benefit multiplied by the accrued benefit of $1,000 per month, or $872.90 per month payable at normal retirement age. Based on Plan D’s early retirement and optional form factors, the annu- ity benefit payable to Participant W in the form of a 100% joint-and-survivor annuity beginning at age 55 is no less than 87.29% x $800, or $698.32 per month. Participant W receives this in addition to the single sum payment of $10,000. The joint and survivor an- nuity benefit is not subject to the minimum present value requirements of section 417(e)(3) because it is treated as a separate optional form of benefit under paragraph (d)(7)(i) of this section. Example 4. (i) Plan E was amended to freeze ben- efits under the traditional plan formula as of Decem- ber 31, 2012, and to provide benefits under a cash balance formula beginning January 1, 2013. The plan provides that participants may elect separate distribu- tion options for the portion of the benefit accrued un- der the traditional formula as of December 31, 2012, and the portion of the benefit earned under the cash balance formula. Furthermore, the plan provides that a participant may elect to receive a single-sum pay- ment only with respect to the portion of the benefit earned under the cash balance formula. Plan E pro- vides that the two distribution options selected with respect to the portion of the benefit accrued under the traditional formula as ofDecember 31, 2012, and the portion of the benefit earned under the cash balance formula are treated as two separate optional forms of benefit for purposes of applying the provisions of Plan E implementing the requirements of section 417(e)(3) and §1.417(e)–1(d). (ii) In accordance with paragraph (d)(7)(iii) of this section, Plan E provides for a bifurcated accrued benefit because the portion of the accrued benefit determined under the traditional formula and the por- tion of the accrued benefit determined under the cash balance formula are determined separately without regard to any election of optional form of benefit and Plan E permits a participant to select different distribution options with respect to both of those portions of the accrued benefit. Furthermore, as permitted by paragraph (d)(7)(i) of this section, Plan E provides that the two different distribution options selected with respect to each of those portions of the accrued benefit are treated as two separate op- tional forms of benefit for purposes of applying the provisions of Plan E implementing the requirements of section 417(e)(3) and §1.417(e)–1(d). Therefore, whether a participant elects to receive a single sum payment of the portion of the benefit earned under the cash balance formula does not affect whether the distribution elected with respect to the portion of the benefit earned as of December 31, 2012, is subject to the minimum present value requirements of section 417(e)(3). Example 5. (i) The facts are the same as inEx- ample 4, except that Plan E also permits a partici- pant to elect, with respect to the cash balance por- tion of the benefit, to receive a percentage of the ac- crued benefit chosen by the participant as a single sum and the remainder in any annuity form provided under the plan, with both portions of the payment de- termined by multiplying the amount that would be payable if the entire benefit were paid in that form by the percentage that applies to that distribution option. Plan E provides that, with respect to such a distribu- tion that is paid partly in the form of a single sum March 26, 20125862012–13 I.R.B. and partly in the form of an annuity, the single sum and the annuity are treatedas two separate optional forms of benefit for purposes of applying the provi- sions of the plan implementing the requirements of section 417(e)(3) and §1.417(e)–1(d). Participant X retires at age 65, with an accrued benefit under the traditional formula of $500 per month (earned as of December 31, 2012), and a cash balance hypotheti- cal account of $45,000. Based on Plan E’s actuarial equivalence factors, Participant X’s accrued benefit derived from the cash balance hypothetical account is $320 per month, payable as a life annuity at normal retirement. Participant Xelects to receive $15,000 of the current hypothetical account balance in the form of a single sum and to receive the remainder of the total accrued benefit as a life annuity. (ii) Under the analysis set forth inExample 4, Plan E provides for a bifurcated accrued benefit in accordance with paragraph (d)(7)(iv)(C) of this sec- tion with respect to the portion of the accrued benefit attributable to the benefit accrued as of December 31, 2012, and the portion of the accrued benefit attribut- able to the benefit earned under the cash balance for- mula. Furthermore, Plan E provides that the two differ- ent distribution options selected with respect to each of those portions of the accrued benefit are treated as two separate optional forms of benefit for pur- poses of applying the provisions of Plan E imple- menting the requirements of section 417(e)(3) and §1.417(e)–1(d). Thus, a separate distribution option may be chosen for each of these two portions, and section 417(e)(3) applies separately to each portion. (iii) In accordance with paragraphs (d)(7)(ii)(B) and (d)(7)(iv) of this section, the portion of the ac- crued benefit under Plan E earned under the cash bal- ance formula is also a bifurcated accrued benefit be- cause Plan E provides for a participant to select a sin- gle-sum distribution with respect to a portion of the cash balance formula accrued benefit and an annu- ity distribution option with respect to the remaining portion of the cash balance formula accrued benefit, each distribution option is available with respect to the entire cash balance formula accrued benefit, and the amount of the distribution with respect to each distribution option applied to its respective portion of the cash balance formula accrued benefit is thepro rataportion of the amount of the distribution that would be determined if that distribution option had been applied to the entire cash balance formula ac- crued benefit. Furthermore, Plan E provides that the two different distribution options selected with re- spect to each of those portions of the cash balance formula accrued benefit are treated as two separate optional forms of benefit for purposes of applying the provisions of Plan E implementing the requirements of section 417(e)(3) and §1.417(e)–1(d). Thus, under paragraph (d)(7)(iv) of this section, 1/3 of the cash balance hypothetical account is paid as a single sum (that is, $15,000 ÷ $45,000), and the remaining 2/3 of the cash balance hypothetical account, or $30,000, is converted to an annuity benefit of 2/3 x $320, or $213.33 per month. (iv) Participant X therefore receives a single sum payment of $15,000, representing the portion of the current hypothetical account balance that X elected to receive as a single sum. In addition, Participant X receives a monthly life annuity of $713.33 per month (equal to the $500 benefit attributable to the benefit earned as of December 31, 2012, plus the $213.33 portion of the cash balance benefit paid as an an- nuity). Participant X’s election to receive a single sum payment of part of the benefit earned under the cash balance formula does not affect whether the re- mainder of Participant X’s distribution is subject to the minimum present value requirements of section 417(e)(3). (8)Effective/applicability date—(i)In general. Except as otherwise provided in this paragraph (d)(8), this paragraph (d) applies to distributions with annuity start- ing dates in plan years beginning on or af- ter January 1, 1995. ***** (v) Paragraph (d)(7) of this section ap- plies to distributions with annuity starting dates in plan years beginning on or after the date final regulations that finalize these proposed regulations are published in the Federal Register. ***** Steven T. Miller, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on February 2, 2012, 8:45 a.m., and published in the issue of the Federal RegisterforFebruary3,2012,77F.R.5454) Notice of Proposed Rulemaking and Notice of Public Hearing Taxable Medical Devices REG–113770–10 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of Proposed Rulemaking and Notice of Public Hearing. SUMMARY: This document contains pro- posed regulations that provide guidance on the excise tax imposed on the sale of cer- tain medical devices under section 4191 of the Internal Revenue Code, enacted by the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act. The proposed regulations affect manufacturers, importers, and producers of taxable medi- cal devices. This document also provides a notice of public hearing on these proposed regulations. DATES: Written or electronic comments must be received by May 7, 2012. Out- lines of topics to be discussed at the pub- lic hearing scheduled for May 16, 2012, at 10 a.m., must be received by May 7, 2012. ADDRESSES: Send submissions to: CC:PA:LPD:PR(REG–113770–10), Room 5203, Internal Revenue Service, PO Box7604,BenFranklinStation,Wash- ington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–113770–10), Courier’s Desk, Internal Revenue Ser- vice, 1111 Constitution Avenue, NW, Washington, DC, or sent electroni- cally via the Federal eRulemaking Por- tal athttp://www.regulations.gov(IRS REG–113770–10). The public hearing will be held on May 16, 2012, in the IRS Auditorium, beginning at 10 a.m., at the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Natalie Payne or Stephanie Bland, at (202) 622–3130; concerning submission of comments, the public hear- ing, and/or to be placed on the building access list to attend the public hearing, contact Oluwafunmilayo Taylor at (202) 622–7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background Statutory Provisions This document contains proposed regu- lations that provide guidance on the excise tax imposed on the sale of certain medi- cal devices under section 4191 of the Inter- nal Revenue Code (Code), enacted by sec- tion 1405 of the Health Care and Education Reconciliation Act of 2010, Public Law 111–152 (124 Stat. 1029 (2010)), in con- junction with the Patient Protection and Affordable Care Act, Public Law 111–148 (124 Stat. 119 (2010)) (jointly, the ACA). Section 4191 imposes an excise tax on the sale of certain medical devices by the 2012–13 I.R.B.587March 26, 2012 manufacturer, producer, or importer of the device in an amount equal to 2.3 percent of the sale price. Section 4191 applies to sales of taxable medical devices after December 31, 2012. Section 4191(b)(1) provides that, in general, a “taxable medical device” is any device, as defined in section 201(h) of the Federal Food, Drug & Cosmetic Act (FFDCA), (codified as amended at 21 U.S.C. 301et seq.(2006)), that is intended for humans. Section 201(h) of the FFDCA provides generally that the term “device” means an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, that is recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them; intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease; or intended to affect the structure or any function of the body, and that does not achieve its primary intended purposes through chemical action within or on the body and that is not dependent upon being metabolized for the achievement of its primary intended purposes. Section 4191(b)(2) provides that the term “taxable medical device” does not include eyeglasses, contact lenses, hearing aids, and any other medical device de- termined by the Secretary to be of a type that is generally purchased by the general public at retail for individual use. In addition, the ACA amended section 4221(a) to limit tax-free sales of taxable medical devices to sales (i) for use by the purchaser for further manufacture, or for resale by the purchaser to a second pur- chaser for use by such second purchaser in further manufacture, and (ii) for ex- port, or for resale by the purchaser to a second purchaser for export. The ACA makes a corresponding amendment to sec- tion 6416(b)(2) with regard to claims for refund. Manufacturers Excise Tax Rules Generally TheACAaddedsection4191tochap- ter 32, subtitle D of the Code, which relates to taxes imposed upon the sales of tax- able articles by manufacturers, producers, andimporters(commonlyreferredtoas “manufacturers excise taxes”). Therefore, the existing rules governing chapter 32 ap- ply to section 4191. The substantive reg- ulations relating to manufacturers excise taxes are contained in part 48 (Manufactur- ers and Retailers Excise Tax Regulations) of Title 26 of the Code of Federal Regu- lations (CFR). The procedural regulations governing manufacturers excise taxes are contained in part 40 (Excise Tax Proce- dural Regulations) of 26 CFR. The manufacturers excise tax rules are discussed in Part VII under “Ex- planation of Provisions,” in this pre- amble. For additional information on the manufacturers excise tax rules gen- erally, see chapter 5 of IRS Publica- tion 510, “Excise Taxes,” available at http://www.irs.gov/publications/p510/ch05.html. Notice 2010–89 On December 27, 2010, the IRS pub- lished Notice 2010–89, 2010–52 I.R.B. 908, to request comments on the imple- mentation and administration of the new tax under section 4191. The IRS and the Treasury Department received numerous comments in response to the notice and considered all comments in the drafting of the proposed regulations. The comments are discussed in more detail in this pream- ble. The IRS and the Treasury Department also consulted with the Food and Drug Administration (FDA) and the Centers for Medicare and Medicaid Services (CMS) in developing these regulations. Explanation of Provisions I.Definition of “Taxable Medical Device” Section 4191(b)(1) links the definition of “taxable medical device” to the defini- tion of “device” in section 201(h) of the FFDCA. The FDA generally administers the provisions of the FFDCA, including section 201(h) and other provisions relat- ing to medical devices. The FDA generally requires owners or operators of places of business (also called establishments) that are located in the United States, or in foreign countries that export devices to the United States, and that manufacture,prepare, propagate, compound, assemble, process, repackage, or relabel medical devices intended for human use to register their establishments and list their devices upon first entering into operation, and to update this infor- mation on an annual basis with the FDA. See sections 510(a)-(d), (i), and (j) of the FFDCA, 21 CFR 807.20, and 21 CFR 807.21. Various commentators observed that the statutory definition of “taxable medi- cal device” leaves uncertainty as to which devices are included in the definition. The proposed regulations address this concern by providing that for purposes of the med- ical device excise tax, a device defined in section 201(h) of the FFDCA that is intended for humans means a device that is listed as a device with the FDA under section510(j)oftheFFDCAand21CFR Part 807, pursuant to FDA requirements. The FDA listing requirements are long- standing. Further, device manufacturers must comply with these requirements as part of the FDA’s device regulation process. Therefore, device manufacturers can be expected to know which devices fall within the definition. The FDA has promulgated classifica- tion regulations for approximately 1,700 different generic types of devices. Each classification regulation includes one or more product codes that describe a sub- category of the device type described in the regulation. Currently, manufacturers may, in certain circumstances, list multi- ple different devices that fall within the same product code under a single listing. Therefore, all devices that are listed under a single product code listing in conjunc- tion with the FDA’s device listing require- ment are “taxable medical devices” unless they fall within an exemption under sec- tion 4191(b)(2). The proposed regulations also provide that if a device is not listed with the FDA but the FDA later determines that the de- vice should have been listed as a device, the device will be deemed to have been listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required. II.The Retail Exemption Section 4191(b)(2) provides that the term “taxable medical device” does not include eyeglasses, contact lenses, hearing aids, and any other medical device de- termined by the Secretary to be of a type that is generally purchased by the general March 26, 20125882012–13 I.R.B. public at retail for individual use (the retail exemption). The FDA has grouped each of the 1,700 classification regulations into 16 medical specialties (21 CFR, Parts 862–892). Each of these generic types of devices is as- signed to one (or sometimes more than one) of three regulatory classes based on the level of control necessary to assure the safety and effectiveness of the device. The three classes of FDA devices are Class I (general controls),Class II (special con- trols), and Class III (pre-market approval). A number of device types that predate the enactment of the Medical Device Amend- ments to the Food, Drug, and Cosmetic Act of 1976 remain unclassified. With regard to the retail exemption, sec- tion 4191 makes no reference to the three regulatory classes. Further, the Joint Com- mittee on Taxation’s Technical Explana- tion of the ACA makes clear that the FDA regulatory classes do not, by themselves, determine whether a device falls within the retail exemption. Specifically, the Techni- cal Explanation states, “The exemption for such items is not limited by device class as defined in section 513 of the Federal Food, Drug, and Cosmetic Act.” Rather, the Technical Explanation notes that the exemption could cover “Class I items such as certain bandages and tipped applicators, Class II items such as certain pregnancy test kits and diabetes testing supplies, and Class III items such as certain denture ad- hesives and snake bite kits.” The Technical Explanation also emphasizes that “items would only be exempt if they are gener- ally designed and sold for individual use.” Joint Committee on Taxation, General Ex- planation of Tax Legislation Enacted in the 111th Congress (JCS–2–11), March 2011, at 366. The proposed regulations provide a facts and circumstances approach to eval- uating whether a taxable medical device is of a type that is generally purchased by the general public at retail for individual use. Under the proposed regulations, a device is considered to be of a type gen- erally purchased by the general public at retail for individual use if (i) the device is regularly available for purchase and use by individual consumers who are not medical professionals, and (ii) the device’s design demonstrates that it is not primarily intended for use in a medical institution or office, or by medical professionals. The proposed regulations provide a set of non-exclusive factors for use in evaluating whether a taxable medical device is of a type that is generally purchased by the general public at retail for individual use. The proposed regulations also include a safe harbor provision. The proposed regulations provide a non-exclusive list of factors to be con- sidered in determining whether a device is regularly available for purchase and use by individual consumers who are not medical professionals. Those factors are (i) whether consumers who are not medi- cal professionals can purchase the device through retail businesses that also sell items other than medical devices, includ- ing drug stores, supermarkets, and similar vendors; (ii) whether consumers who are not medical professionals can safely and effectively use the device for its intended medical purpose with minimal or no train- ing from a medical professional; and (iii) whether the device is classified by the FDA under Subpart D of 21 CFR Part 890 (Physical Medicine Devices). The proposed regulations also provide a non-exclusive list of factors to be con- sidered in determining whether the design of a device demonstrates that it is primar- ily intended for use in a medical institu- tion or office, or by medical profession- als, and therefore not intended for purchase and use by individual consumers. Those factors are (i) whether the device generally must be implanted, inserted, operated, or otherwise administered by a medical pro- fessional; (ii) whether the cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing ex- penditure that is not affordable for the av- erage consumer; (iii) whether the device is a Class III device under the FDA system of classification; (iv) whether the device is classified by the FDA under certain parts or subparts of 21 CFR; and (v) whether the device qualifies as durable medical equip- ment, prosthetics, orthotics, and supplies (DMEPOS) for which payment is avail- able exclusively on a rental basis under the Medicare Part B payment rules and is an “item requiring frequent and substantial servicing” as defined in 42 CFR 414.222. With regard to the regulatory classifica- tions incorporated into the fourth factor described in this preamble, the IRS and the Treasury Department have determined, based on all the facts and circumstances, that the overwhelming majority of product codes that fall within these regulatory cat- egories do not include devices that are of a type generally purchased by the general public at retail for individual use. Whether a device is of a type generally purchased by the general public at retail for individual use is determined based on all relevant facts and circumstances. Thus, there may be relevant facts and circum- stances in addition to the factors specif- ically identified in the proposed regula- tions. To provide greater certainty, the pro- posed regulations also include a safe harbor provision that identifies certain categories of taxable medical devices that the IRS and the Treasury Depart- ment have determined fall within the retail exemption. The safe harbor in- cludes (i) devices that are identified in the FDA’s IVD Home Use Lab Tests (Over- the-Counter Tests) database, available at http://www.accessdata.fda.gov/scripts/cdrh/ cfdocs/cfIVD/Search.cfm ; (ii) devices described as “OTC” or “over the counter” devices in the relevant FDA classification regulation heading; (iii) devices that are described as “OTC” or “over the counter” devices in the FDA’s product code name, the FDA’s device classification name, or the “classification name” field in the FDA’s device registration and listing database, available at http://www.accessdata.fda.gov/scripts/cdrh/ cfdocs/cfrl/rl.cfm ; and (iv) certain devices that qualify as DMEPOS for which payment is available on a purchase basis under Medicare Part B payment rules in accordance withthe fee schedule published by CMS. The IRS and the Treasury Department recognize the challenges involved in ap- plying a facts and circumstances test to the wide array of devices that are potentially subject to the medical device excise tax, including for smaller manufacturers or importers for which the application of the retail exemption may determine whether they are subject to the tax at all. The IRS and the Treasury Department intend through the rulemaking process to con- tinue their efforts to find ways to make the test easier to apply to particular cases and to provide certainty with respect to a sub- stantial majority of devices. To that end, comments are requested on additional fac- tors, examples, or safe harbors that could 2012–13 I.R.B.589March 26, 2012 be added to provide greater certainty for a larger number of devices. Comments are particularly requested on how to pro- vide greater clarity with respect to taxable medical devices that are sold primarily or exclusively through specialty medical re- tailers that sell medical devices and related materials. Comments are also requested on whether the packaging and labeling of a taxable medical device, the terms and conditions of the manufacturer’s warranty with respect to a device, and substantial sales of a device over the internet would be meaningful factors for use in estab- lishing whether a device qualifies for the retail exception, and if so, how any such factor should be described and applied. Comments are also requested on other types of DMEPOS that should be consid- ered for safe harbor treatment and how those items can be consistently and specif- ically identified. For example, “inexpen- sive equipment,” as defined in 42 CFR 414.220(a)(1), appears to describe items that may meet the retail exception under an application of the facts and circumstances test. However, comments are requested on how devices that fall under the definition would be identified given that the CMS fee schedule categorizes “inexpensive equipment” together with other medical devices that appear not to fall within the retail exception. The IRS and the Treasury Department received numerous comments suggesting that it is not feasible to base the retail exception on quantitative data that com- pares the relative number of sales of a cer- tain taxable medical device at retail to the number of sales of the device to doctors’ offices, hospitals, and other medical and health care providers and institutions. Sev- eral commentators stated that for a given device, numerical data on the proportion of sales to retail purchasers and to non-re- tail purchasers is often not available to the manufacturers and importers of the de- vice, even with respect to the devices that they manufacture or import. Further, the commentators noted that even if the data is available, a rule that looks to industry- wide data regarding the percentage of re- tail and non-retail sales of a device would require an ongoing, resource-intensive ef- fort to collect industry-wide sales informa- tion, and would not provide certainty to stakeholders because the data may change from year to year. In light of these difficul- ties, the proposed regulations do not adopt a market data approach to the retail excep- tion. One commentator suggested that the IRS and the Treasury Department provide a retail exception safe harbor based on a manufacturer’s or importer’s proportion of sales of a particular device at retail, com- pared to that manufacturer’s or importer’s overall sales of the device. Under this suggestion, if the retail sales of a particular device by a manufacturer or importer met or exceeded a certain ratio or percentage, as compared to overall sales by the man- ufacturer or importer of that device, then all sales of the device would be exempt from tax. The proposed regulations do not adopt this approach tothe retail exception because the suggested safe harbor could result in inconsistent treatment of different manufacturers of the same device. The language of section 4191 applies the re- tail exception to types of devices, not to manufacturers and importers based on the nature of their distributions or sales. Some commentators suggested that if the manufacturer or importer is able to de- termine that a particular taxable medical device is sold to consumers at retail, no tax should be imposed on any sale of that de- vice, even if the device is not of a type that is generally purchased by the general pub- lic at retail for individual use. Such an ap- proach would be contrary to the language of the statute. Therefore, the proposed reg- ulations do not adopt this approach. III.Veterinary Devices The definition of “device” in section 201(h) of the FFDCA includes devices used in veterinary medicine. However, the definition of “taxable medical de- vice” under section 4191 limits taxable medical devices to devices described in section 201(h) of the FFDCA that are “intended for humans.” The proposed regulations further limit the definition of “taxable medical device” to devices that are listed with the FDA. Under existing FDA regulations, a device intended for use exclusively in veterinary medicine must be labeled as such and is not sub- ject to several pre-market and post-market provisions of the FFDCA, including the listing requirement. Therefore, under the proposed regulations, devices intended for use exclusively in veterinary medicine are not “taxable medical devices.” A commentator has noted, however, that many medical devices used in vet- erinary practices are also used in human medicine. The commentator suggested that if the manufacturer can demonstrate that a device is sold for use in veteri- nary medicine, the excise tax should not be imposed on that sale. The proposed regulations do not adopt this suggestion because the statutory language does not limit the definition of “taxable medical device” to devices intended exclusively for humans. Therefore, a device that is in- tended for humans but that is also intended for use or used in veterinary medicine is a “taxable medical device” if it is listed as adevicewiththeFDApursuanttoFDA requirements, and does not fall within an exemption under section 4191(b)(2), such as the retail exemption. IV.Dual Use Devices Devices That Have Medical and Non-Medical Uses Many commentators expressed concern over the potential taxation of devices that have both medical and non-medical uses, such as latex gloves, and requested that the excise tax not be imposed on the sale of devices for non-medical uses. Section 4191 imposes a tax upon the sale of a taxable medical device by the manufacturer, unless the sale is for export or further manufacture. In most instances, the manufacturer does not sell directly to the end user of the device. Therefore, the manufacturer does not typically know the identity of the end user at the time of sale. Further, commentators suggest that manufacturers would have difficulty track- ing their products through the supply chain and determining the ultimate destination of their products once they are sold to a dis- tributor. Commentators also stated that, in some cases, after the manufacturer sells a device to a distributor, the distributor may package and label the device for sale for non-medical uses. Under the proposed regulations, the definition of “taxable medical device” is tied to the FDA’s listing requirements for devices. Therefore, a device that is listed with the FDA pursuant to FDA require- ments is a “taxable medical device,” unless March 26, 20125902012–13 I.R.B. it falls within an exemption under section 4191(b)(2), such as the retail exemption. “Research Use Only” Devices Several commentators stated that they manufacture devicesthat are used in clin- ical medicine to diagnose disease in hu- mans, as well as in industrial laboratory work and laboratory research. Those com- mentators further stated that when sold for non-medical purposes, such devices are labeled “Research Use Only.” The com- ments suggest that, although the devices labeled “Research Use Only” are physi- cally suitable for clinical use, FDA regula- tions prohibit the use of devices with this label in a clinical setting for human medi- cal purposes. The commentators requested that sales of devices that are labeled “Re- search Use Only” be exempt from the med- ical device excise tax because of the in- tended use of such devices. The proposed regulations define “tax- able medical device” as any device that is listed as a device with the FDA pur- suant to FDA requirements. Under 21 CFR 807.65(f) of the FDA regulations, persons that “manufacture, prepare, propagate, compound, or process devices solely for use in research, teaching, or analysis and do not introduce such devices into commercial distribution” are exempt from the FDA’s registration and listing requirements. See section 510(g) of the FFDCA. Accordingly, a device that is sold for use in research that is not listed because it satisfies the requirements of 21 CFR 807.65(f) is not a “taxable medical device” under the proposed regulations. In contrast, a device that is sold for use in research that is listed with the FDA pursuant to FDA requirements, such as a device not solely used in research or one that is introduced into commercial distribution, is a “taxable medical device” under the proposed regulations, unless it falls within an exemption under section 4191(b)(2), such as the retail exemption. V.Devices Approved by the FDA for Limited Use — Investigational Devices Several commentators requested an ex- emption for devices that are subject to an Investigational Device Exemption (IDE). The FDA permits the distribution of cer- tain devices that the FDA has not yet ap- proved for marketing under an IDE. See 21 CFR Part 812 for the FDA’s regulatory provisions regarding the IDE. Devices un- der an IDE are exempt from the FDA’s list- ing requirements. Accordingly, a device subject to an IDE is not a “taxable medical device” under the proposed regulations. VI.Dental Instruments and Equipment A commentator requested that the pro- posed regulations provide a blanket ex- clusion for dental instruments and equip- ment. The proposed regulations do not adopt this suggestion. There is no statutory basis for treating dental devices differently from other taxable medical devices. Many dental instruments and equipment items are subject to the FDA’s listing require- ment. Accordingly, those devices that are listed as devices with the FDA pursuant to FDA requirements are “taxable medical devices” under the proposed regulations, unless they fall within an exemption under section 4191(b)(2), such as the retail ex- emption. VII.Manufacturers Excise Tax Rules Generally; Application to Taxable Medical Devices The ACA added section 4191 to chap- ter 32; therefore, the existing rules govern- ing chapter 32 apply to the medical device excise tax. Those rules are longstanding. They are contained in statutory and regula- tory provisions, and have been developed further through revenue rulings, other pub- lished guidance, and case law. Several commentators requested clar- ification on the existing manufacturers excise tax rules. This section provides an overview of the rules and addresses some of the manufacturers excise tax issues raised by commentators. Liability for Tax; Definition of “Manufacturer” and “Importer” In general, the manufacturer or im- porter of a taxable article is liable for the tax upon the sale of the article. Under chapter 32, the lease or use of a taxable article by the manufacturer is generally treated as a sale. The term “manufacturer” means any person who produces a taxable article from scrap, salvage, or junk material, or from new or raw material, by processing, manipulating, or changing the form of an article or by combining or assembling two or more articles. A manufacturer that sells a taxable article in knockdown (that is, unassembled) condition is considered the manufacturer and is liable for tax on the sale of the article. For chapter 32 purposes, the term “manufacturer” also includes an “importer.” The importer of a taxable article is any person who brings the article into the United States from a source outside the United States, or withdraws an article from a customs bonded warehouse for sale or use in the United States. See §48.0–2(a)(4) for the definitions of the terms “manufacturer” and “importer.” If more than one person is involved in the manufacture or importation of an item, such as a contract manufacturing arrange- ment, the determination of which person is the manufacturer or the importer is based on the facts and circumstances of the ar- rangement. The substance rather than the form of the transaction is determinative. See Rev. Rul. 58–134, 1958–1 C.B. 395, Rev. Rul. 60–42, 1960–1 C.B. 474, and Polaroid v. U.S., 235 F2d. 276 (1st Cir. 1956), for rules regarding the determina- tion of which party is the manufacturer for chapter 32 purposes. See Rev. Rul. 68–197, 1968–1 C.B. 455, and Rev. Rul. 82–40, 1982–1 C.B. 175, for rules regard- ing the determination of which party is the importer for chapter 32 purposes. Some commentators suggested that, in determining who is liable for the tax, the IRS and the Treasury Department should apply either the section 954 contract man- ufacturing rules or the FDA’s registration and listing rules under 21 CFR Part 807. The proposed regulations do not adopt these suggestions. As noted above, the ex- isting chapter 32 framework includes defi- nitions of “manufacturer” and “importer.” Section 4191 does not provide alternate definitions for those terms. Accordingly, the definitions of “manufacturer” and “im- porter” under chapter 32 apply to section 4191. Taxable event Generally, the manufacturers excise tax attaches when the title to the taxable arti- cle passes from the manufacturer to a pur- chaser. When title passes is dependent upon the intention of the parties as gath- ered from the contract of sale and the atten- dant circumstances. In the case of a sale on 2012–13 I.R.B.591March 26, 2012 credit, the tax attaches whether or not the purchase price is actually paid. In the case of conditional or installment sales of a tax- able article, the tax attaches to each partial payment. See §48.0–2(b) for the general rules regarding the attachment of tax. Section 4218 imposes tax on certain uses of an article by the article’s manu- facturer. The tax attaches at the time the use begins. Under §48.4218–1(b), gener- ally, if the manufacturer of a taxable arti- cle uses the article for any purpose other than in the manufacture of another taxable article, then the manufacturer is liable for tax on the article as if the manufacturer had sold it. However, if a manufacturer uses a taxable article in the testing of another article of its own manufacture, the use of the taxable article by the manufacturer is not a taxable use. See Rev. Rul. 76–119, 1976–1 C.B. 345. Section 48.4218–5 pro- vides rules on how to calculate the price on which the tax is imposed in cases of the taxable use of an article by the manufac- turer. Several commentators requested guid- ance on whether taxable medical devices that are used as demonstration products are subject to the medical device excise tax. The provision or use of a taxable medical device as a demonstration prod- uct may constitute a taxable sale or use, depending on the facts and circumstances of the arrangement. For example, Rev. Rul. 72–563, 1972–2 C.B. 568, holds that a manufacturer has sold an article when it provides the article “free of charge” to an- other person for promotional purposes. In addition, Rev. Rul. 60–290, 1960–2 C.B. 331, holds that the use of a taxable article by its manufacturer for demonstration pur- poses is a taxable use for purposes of sec- tion 4218. Leases Under section 4217(a), the lease of a taxable article by the manufacturer is con- sidered a sale. If, at the time of making the lease, the manufacturer is in the busi- ness of selling the same type and model of article in arm’s length transactions, the tax attaches to each lease payment until the cumulative total of the tax payments equals the total tax. If, however, at the time of making the lease, the manufacturer is not engaged in the business of selling the same type and model of article in arm’s length transactions, the tax attaches to each lease payment if the article is leased by the manufacturer. See section 4216(c), section 4217(b), §48.4216(c)–1, and §48.4217–2 for the rules regarding the attachment and payment of tax in the context of leases. Under §48.4217–1, the term “lease” means a contract or agreement, written or verbal, that gives the lessee an exclusive, continuous right to the possession or use of a particular article for a period of time. The term includes any renewal or exten- sion of a lease, or any subsequent lease of the article. Sale price The tax imposed under section 4191 is based on the price for which a taxable medical device is sold. Under section 48.4216(a)–1(a), the price for which a taxable article is sold includes the total consideration paid forthe device, whether that consideration is in the form of money, services, or other things. The taxable sale price of a taxable ar- ticle also includes, among other things, any charge for coverings or containers (re- gardless of their nature), and any charge incident to placing the article in a condi- tion to be packed and ready for shipment. However, the taxable sale price excludes (i) the manufacturers excise tax, whether ornotitisstatedasaseparatecharge; (ii) the actual cost of transportation, de- livery, insurance, installation, and other expenses incurred by the manufacturer or importer in placing the article in the hands of the purchaser pursuant to abona fidesale (the costs of transportation of goods to a warehouse before theirbona fidesale are not excludable); (iii) dis- counts, rebates, and similar allowances actually granted to the purchaser; (iv) local advertising charges; and (v) charges for warranty paid at the purchaser’s option. See section 4216(a) and §48.4216(a)–1 for the rules regarding the charges in- cluded in sale price. See sections 4216(a) and (e), §48.4216(a)–2, §48.4216(e)–1, §48.4216(e)–2, and §48.4216(e)–3 for the rules regarding exclusions from sale price. The basic sale price rules assume that the manufacturer sells the taxable article in an arm’s length transaction (that is, in a transaction between two unrelated parties) to a wholesale distributor that then sells the taxable article to a retailer that resells to consumers. However, if a manufac- turer sells a taxable article other than to a wholesale distributor or at less than a fair market arm’s length price, the taxable sale price is determined on a constructive sale price rather than the actual sale price. The constructive sale price rules are set forth in section 4216(b), in §48.4216(b)–1, §48.4216(b)–2, §48.4216(b)–3, and §48.4216(b)–4 of the regulations, and in numerous revenue rulings. If a purchaser of a taxable article re- turns the article to the manufacturer under a warranty as to its quality or service and the manufacturer replaces the article with a new taxable article free of charge or at a reduced price, the tax on the new article is computed on the actual amount, if any, paid to the manufacturer for the new arti- cle. See §48.4216(a)–3(b) for the rules re- garding replacements under warranty. Several commentators requested clari- fication on how the sale price rules work in the context of taxable medical devices, particularly with regard to “bonus” goods and rebates. These commentators indi- cated that rebates are a common practice in the medical device industry. Under ex- isting manufacturers tax rules, if a manu- facturer sells taxable articles at the regu- lar price and includes some of the same articles as a bonus, the tax imposed un- der section 4191 applies to the total price charged for the entire order. With regard to rebates, §48.4216(a)–3(c) provides that the tax must be based on the original price of the taxable article,unless the rebate has been made prior to the close of the period for which the tax is returned. However, if a manufacturer subsequently allows a rebate for taxable articles on which tax has been paid, the manufacturer is entitled to a credit or refund for that portion of the tax that is proportionate to the part of the price that is rebated. See Rev. Rul. 68–659, 1968–2 C.B. 511, and Rev. Rul. 69–73, 1969–1 C.B. 284, for applications of the rules re- garding bonus goods, free goods, and re- bates. See §48.4216(a)–3(c) for rules re- garding readjustments in sale price for dis- counts, rebates, and bonuses. Sales by persons other than the manufacturer If title to, or ownership of, a taxable article passes from the manufacturer to a transferee by operation of law (such as March 26, 20125922012–13 I.R.B. through an inheritance or as part of the sale of a business) or as a result of any trans- action not taxable under chapter 32, tax attaches to the sale of the article by the transferee to the same extent and in the same manner as if the transferee were the manufacturer of the article. See section 4219 and §48.4219–1 for the rules regard- ing transfers of title to taxable articles by operation of law. Tax-free sales for further manufacture and export Under section 4221(a), the tax imposed by section 4191 does not apply to the sale of taxable medical devices for use by the purchaser for further manufacture (or for resale by the purchaser to a second pur- chaser for further manufacture) or for ex- port (or for resale for export). Under §48.4221–2(b), an article is sold for use in further manufacture if the article is sold for use by the purchaser as mate- rial in the production of, or as a compo- nent part of, another article taxable under chapter 32. Section 48.4221–2 sets forth rules governing tax-free sales of articles to be used or resold for further manufacture. Under §48.0–2(a)(10), an article is ex- ported if the article is severed from the mass of things belonging within the United States with the intention of uniting it with the mass of things belonging within some foreign country or within a possession of the United States. Section 48.4221–3 sets forth rules regarding tax-free sales of arti- cles for export. To make a tax-free sale for further manufacture or export, the manufacturer, the first purchaser, and in some cases the second purchaser must be registered by the IRS. A manufacturer or purchaser applies for registration by filing a Form 637, “Application for Registration (For Certain Excise Tax Activities),” in accor- dance with the instructions on the form. See §48.4222(a)–1 for the registration requirements for tax-free sales. Foreign purchasers of articles sold or resold for export are exempt from the registration requirement. See §48.4222(b)–1(b). Generally, the purchaser of a taxable article must provide the purchaser’s reg- istration number to the manufacturer and certify the exempt purpose for which the article will be used. The information must be in writing and may be noted on the purchase order or other document furnished by the purchaser to the manu- facturer in connection with the sale. See §48.4221–1(c). A credit or refund of the manufacturers excise tax may be available if a tax-paid article is exported or used for an exempt purpose, such as further manufacture. See 6416 and the corresponding regulations for the conditions to allowance of a claim for credit or refund of tax and for the docu- mentation required to support a claim for credit or refund. Procedural rules Part 40 of 26 CFR contains the proce- dural rules applicable to manufacturers ex- cise taxes with regard to returns, deposits, and payments. Subtitle F of the Code contains the pro- cedural rules applicable to “internal rev- enue taxes” (including manufacturers ex- cise taxes) with regard to assessment, col- lection, penalties, overpayments, refunds, and statutes of limitations. VIII.Other Issues Raised in Comments on Notice 2010–89 Kits Several commentators requested clari- fication on the taxation of kits, often re- ferred to as “convenience kits.” In general, a convenience kit is two or more different medical devices, or a combination of med- ical devices and other items, packaged to- gether for the convenience of the user. According to commentators, a number of different types of businesses, including device manufacturers and distributors, en- gage in the practice of creating such con- venience kits. A manufacturer may as- semble a kit containing a combination of items that it manufactures and items that it purchases from other manufacturers, im- porters, or distributors. A kit may also be assembled by a distributor that purchases the items contained in the kit from one or more manufacturers or importers. Some kits are designed to be used by medical or health care professionals for the perfor- mance of a particular medical procedure. Other kits are available to the general pub- lic at retail, such as first aid kits and home pregnancy test kits. Several commentators expressed con- cern over the potential for double taxation when one or more taxable medical devices are included in a kit. Some commenta- tors suggested that tax should not be im- posed on both the taxable medical devices used as components of the kit and the kit itself. Other commentators recommended imposing tax on the taxable medical de- vices included in the kit, but not on the assembled kit. Other commentators sug- gested that the assembly of a kit does not constitute manufacture because the items included in the kit are not transformed. Under the proposed regulations, a kit is a “taxable medical device” if the kit is listed as a device with the FDA pursuant to FDA requirements. The proposed regu- lations define “kit” as a set of two or more articles packaged in a single bag, tray, or box for the convenience of the end user. Moreover, the existing manufacturers excise tax rules apply to kits in determin- ing who is liable for the tax and which sale is subject to tax. Under these exist- ing rules, if a manufacturer sells a taxable medical device to a distributor that uses the device to produce a kit that is a distinct tax- able medical device, the distributor’s as- sembly of the kit constitutes further manu- facture because the distributor has created a new taxable article. The proposed regu- lations clarify that if a kit is a taxable med- ical device, then the use of other taxable medical devices in the assembly of the kit constitutes further manufacture by the per- son who assembles the kit. In some circumstances, the manufac- turer may make a tax-free sale of a tax- able medical device to the distributor for use in the production or assembly of a kit; tax will attach, however, upon the sale of the kit by the distributor. If the manufac- turer sells a taxable medical device to the distributor for use in the production or as- sembly of a kit at a tax-included price, the distributor may be eligible to claim a credit or refund for the overpayment of tax pur- suant to section 6416(b)(3). The rules re- garding tax-free sales for further manufac- ture and the credit and refund provisions of section 6416(b)(3)provide a mechanism for avoiding double taxation when a tax- able medical device is included in a kit that is also a taxable medical device. See §48.4221–2(b) for the circumstances under which a taxable article is sold for use in further manufacture. See section 4221 and §48.4221–1, §48.4221–2, §48.4222(a)–1, 2012–13 I.R.B.593March 26, 2012 and §48.4223–1 for the rules regarding tax-free sales for further manufacture. Generally, under §48.4216(a)–1(e), if a taxable and nontaxable article are sold by the manufacturer as a unit, the tax at- taches to that portion of the unit that is properly allocable to the taxable article. In the case of a kit that is a separate tax- able medical device, the taxable and non- taxable articles used in the kit’s production or assembly have lost their identity as sep- arate articles. Accordingly, the proposed regulations clarify that the provisions of §48.4216(a)–1(e) do not apply to the sale of kits that are separate taxable medical devices. The proposed regulations further clarify that under such circumstances, the entire sale price of the kit is subject to tax under section 4191. Associated Devices and Components of Devices Several commentators requested clari- fication on the tax treatment of an associ- ated or secondary device that is sold with a primary device, such as a monitor that is sold as part of an x-ray system. Commen- tators also requested information on the tax treatment of components of a device. Under the proposed regulations, the definition of “taxable medical device” is tied to the FDA’s listing requirements for devices. Therefore, associated devices or components that are listed as devices with the FDA pursuant to FDA requirements are “taxable medical devices” for purposes of section 4191, unless they fall within an exemption under section 4191(b)(2), such as the retail exemption. However, if a manufacturer uses an associated device or component in creating a new device that must be listed with the FDA, then the rules under section 4221 and the corresponding regulations regarding further manufacture apply. Combination products Combination products are therapeu- tic and diagnostic products that combine drugs, devices, and/or biological prod- ucts. See 21 CFR 3.2(e). The IRS and the Treasury Department received a comment regarding combination products consist- ing of a device component and a drug component, such as prefilled syringes and inhalers. The commentator suggested that the sale of a combination product should not be subject to the medical device tax if its drug component is taken into account in computing the branded prescription drug (BPD) fee enacted under section 9008 of the ACA. The commentator suggested that the combination product be subject to either the BPD fee or the medical de- vice tax, but not both, based on the FDA’s determination of a combination product’s primary mode of action. The ACA enacted both the medical de- vice excise tax and the BPD fee, but pro- vided no coordination between the pro- visions. Under the proposed regulations, the definition of “taxable medical device” is tied to the FDA’s listing requirements for devices. In general, the annual BPD fee is allocated among covered entities en- gaged in the business of manufacturing or importing branded prescription drugs with aggregate branded prescription drug sales of over $5 million to specified gov- ernment programs. See section 9008 of the ACA and 26 CFR Part 51. For this purpose, each branded prescription drug is identified based on its National Drug Code (NDC). Based on consultation with the FDA, the IRS and the Treasury De- partment anticipate that few, if any, com- bination products will be subject to both the medical device excise tax and the BPD fee. The IRS and the Treasury Department request comments on the extent to which combination products may be subject to the medical device excise tax and taken into account in computing the BPD fee, and the mechanisms by which any such impact could be avoided. Contracts for medical software and IT systems A commentator requested transition re- lief for sales contracts for medical software and IT systems. According to the com- mentator, sellers of software and IT sys- tems frequently provide medical devices, such as medical device data systems, un- der long-term, multi-year contracts. Un- der these contracts, the manufacturer often delivers software and IT systems in stages, with partial payments due at various times during the contract term. The commen- tator requested that contracts, leases, and other agreements entered into before Jan- uary 1, 2013, not be subject to the medical device excise tax, even if payments on the contract are received after December 31, 2012. The proposed regulations apply the ex- isting manufacturers excise tax rules for sales contracts. Under section 4216 and §48.4216(c)–1(b), generally, when a tax- able article is sold under an installment payment contract with title reserved in the seller, or under another arrangement that creates a security interest and under which payments are to be made in installments, tax is computed and paid on each payment made by the purchaser. The tax payable with each payment is a percentage of each payment based on the rate of the tax, if any, in effect on the date the payment is due. The proposed regulations do not adopt the request for transition relief. The statute was enacted on March 30, 2010, with an effective date of January 1, 2013. The statute did not provide an exception or spe- cial rule for sales pursuant to contracts in existence prior to the effective date of the tax. The proposed regulations track the statute. Availability of IRS Documents The IRS notice and revenue rulings cited in this preamble are published in the Internal Revenue Cumulative Bulletin and are available from the Superintendent of Documents, P.O. Box 979050, St. Louis, MO 63197–9000. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Execu- tive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Ad- ministrative Procedure Act (5 U.S.C. chap- ter 5) does not apply to these regulations, and because these regulations do not im- pose a collection of information on small entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Ad- ministration for comment on its impact on small business. March 26, 20125942012–13 I.R.B. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed origi- nal and eight (8) copies) or electronic com- ments that are submitted timely to the IRS. The IRS and the Treasury Department re- quest comments on the clarity of the pro- posed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing has been scheduled for May 16, 2012, at 10 a.m., in the IRS Auditorium, Internal Revenue Service, 1111 Constitution Avenue, NW, Wash- ington, DC. Due to building security procedures, visitors must enter at the Con- stitution Avenue entrance. In addition, all visitors must presentphoto identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER IN- FORMATION CONTACT section of this preamble. The rules of 26 CFR 601.601(a)(3) ap- ply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments by May 7, 2012 and an outline of the topics tobediscussedandthetimetobedevoted to each topic (signed original and eight (8) copies) by May 7, 2012. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the schedule of speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be avail- able free of charge at the hearing. Drafting Information The principal author of these regu- lations is Natalie Payne, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the Treasury Department participated in their develop- ment. ***** Proposed Amendments to the Regulations Accordingly, 26 CFR part 48 is pro- posed to be amended as follows: PART 48—MANUFACTURERS AND RETAILERS EXCISE TAXES Paragraph 1. The authority citation for part 48 is amended by adding entries in numerical order to read in part as follows: Authority: 26 U.S.C. 7805. * * * Section 48.4191–1 also issued under 26 U.S.C. 4191. Section 48.4191–2 also issued under 26 U.S.C. 4191(b)(2). §48.0–1 [Amended] Par. 2. The fourth sentence of §48.0–1 is amended by removing the language “and sporting goods” and adding “sporting goods, and taxable medical devices” in its place. Par. 3. Subpart L, consisting of §§48.4191–1 and 48.4191–2, is added to read as follows: Subpart L — Taxable Medical De- vices Sec. 48.4191–1 Imposition and rate of tax. 48.4191–2 Taxable medical device. §48.4191–1 Imposition and rate of tax. (a)Imposition of tax. Under section 4191(a), tax is imposed on the sale of any taxable medical device by the manufac- turer, producer, or importer of the device. For the definition of the termtaxable med- ical device, see §48.4191–2. (b)Rate of tax. Tax is imposed on the sale of a taxable medical device at the rate of 2.3 percent of the price for which the device is sold. For the defini- tion of the termprice, see section 4216 and §§48.4216(a)–1 through 48.4216(e)–3. (c)Liability for tax. The manufacturer, producer, or importer making the sale of a taxable medical device is liable for the tax imposed by section 4191(a). For rules re- lating to the determination of who the man- ufacturer, producer, or importer is for pur- poses of section 4191, see §48.0–2(a)(4). For the definition of the termsale,see §48.0–2(a)(5). For rules relating to the lease of an article by the manufacturer, producer, or importer, see section 4217 and §48.4217–1 through §48.4217–2. For rules relating to the use of an article by the manufacturer, producer, or importer, see section 4218 and §48.4218–1 through §48.4218–5. (d)Procedural rules. For the proce- dural rules relating to section 4191, see part 40 of this chapter. (e)Tax-free sales for further manufac- ture or export. For rules relating to tax-free sales of taxable medical devices for further manufacture or export, see section 4221 and §48.4221–1 through §48.4221–3. (f)Effective/applicability date.This section applies to sales of taxable medical devices on and after January 1, 2013. §48.4191–2 Taxable medical device. (a)Taxable medical device—(1)In gen- eral. A taxable medical device is any de- vice, as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act, that is intended for humans. For purposes of this section, a device defined in sec- tion 201(h) of the Federal Food, Drug, and Cosmetic Act that is intended for humans means a device that is listed as a device with the Food and Drug Administration (FDA)undersection510(j)oftheFederal Food, Drug, and Cosmetic Act and 21 CFR Part 807, pursuant to FDA requirements. (2)Devices that should have been listed with the FDA. If a device is not listed as a device with the FDA but the FDA determines that the device should have been listed as a device, the device will be deemed to be listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required. (b)Exemptions—(1)In general.The term taxable medical devicedoes not in- clude eyeglasses, contact lenses, hearing aids, and any other device of a type that is generally purchased by the general public at retail for individual use (the retail excep- tion). (2)Retail exemption. A device will be considered to be of a type generally pur- chased by the general public at retail for individual use if it is regularly available for purchase and use by individual consumers who are not medical professionals, and if the design of the device demonstrates that it is not primarily intended for use in a 2012–13 I.R.B.595March 26, 2012 medical institution or office or by a med- ical professional. Whether a device is of a type described in the preceding sentence is evaluated based on all the relevant facts and circumstances. Factors relevant to this evaluation are listed in paragraphs (b)(2)(i) and (ii) of this section. There may be facts and circumstances that are relevant in eval- uating whether a device is of a type gener- ally purchased by the general public at re- tail for individual use in addition to those described in paragraphs (b)(2)(i) and (ii) of this section. The fact that a device is of a type that requires a prescription is not a factor in the determination of whether or not the device falls under the retail exemp- tion. (i)Regularly available for purchase and use by individual consumers.The following factors suggest that a device is of a type that is regularly available for purchase and use by individual consumers who are not medical professionals: (A) Consumers who are not medical professionals canpurchase the device through retail businesses that also sell items other than medical devices, such as drug stores, supermarkets, and similar vendors. (B) Consumers who are not medical professionals can use the device safely and effectively for its intended medical pur- pose with minimal or no training from a medical professional. (C) The device is classified by the FDA under Subpart D of 21 CFR Part 890 (Phys- ical Medicine Devices). (ii)Primarily for use in a medical in- stitution or office or by a medical profes- sional. The following factors suggest that the device is designed primarily for use in a medical institution or office or by a med- ical professional: (A) The device generally must be im- planted, inserted, operated, or otherwise administered by a medical professional. (B) The cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing expen- diture that is not affordable for the average consumer. (C) The device is a Class III device un- der the FDA system of classification. (D) The device is classified by the FDA under— (1) 21 CFR Part 862 (Clini- cal Chemistry and Clinical Toxi- cology Devices), 21 CFR Part 864 (Hematology and Pathology Devices), 21 CFR Part 866 (Immunology and Microbiology Devices), 21 CFR Part 868 (Anesthesiology Devices), 21 CFR Part 870 (Cardiovascular Devices), 21 CFR Part 874 (Ear, Nose, and Throat Devices), 21 CFR Part 876 (Gastroenterology — Urology Devices), 21 CFR Part 878 (General and Plastic Surgery Devices), 21 CFR Part 882 (Neurological Devices), 21 CFR Part 886 (Ophthalmic Devices), 21 CFR Part 888 (Orthopedic Devices), or 21 CFR Part 892 (Radiology Devices); (2) Subpart B, Subpart D, or Subpart E of 21 CFR Part 872 (Dental Devices); (3) Subpart B, Subpart C, Subpart D, Subpart E, or Subpart G of 21 CFR Part 884 (Obstetrical and Gynecological De- vices); or (4) Subpart B of 21 CFR Part 890 (Physical Medicine Devices). (E) The device qualifies as durable medical equipment, prosthetics, orthotics, and supplies for which payment is avail- able exclusively on a rental basis under the Medicare Part B payment rules, and is an “item requiring frequent and substantial servicing” as defined in 42 CFR 414.222. (iii)Safe Harbor. The following de- vices will be considered to be of a type generally purchased by the general public at retail for individual use: (A) Devices that are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests)database,availableat http://www.accessdata.fda.gov/scripts/cdrh/ cfdocs/cfIVD/Search.cfm . (B) Devices that are described as “OTC” or “over the counter” devices in the relevant FDA classification regulation heading. (C) Devices that are described as “OTC” or “over the counter” devices in the FDA’s product code name, the FDA’s device classification name, or the “classifi- cation name” field in the FDA’s device reg- istration and listing database, available at http://www.accessdata.fda.gov/scripts/cdrh/ cfdocs/cfrl/rl.cfm . (D) Devices that qualify as durable medical equipment, prosthetics, orthotics, and supplies, as described in Subpart C of 42 CFR Part 414 (Parenteral and En- teral Nutrition) and Subpart D of 42 CFR Part 414 (Durable Medical Equipment and Prosthetic and Orthotic Devices), for which payment is available on a purchase basis under Medicare Part B payment rules, and are— (1) “Prosthetic and orthotic devices,” as defined in 42 CFR 414.202, that do not re- quire implantation or insertion by a medi- cal professional; (2) “Parenteral and enteral nutrients, equipment, and supplies” as defined in 42 CFR 411.351 and described in 42 CFR 414.102(b); (3) “Customized items” as described in 42 CFR 414.224; (4) “Therapeutic shoes,” as described in 42 CFR 414.228(c); or (5) Supplies necessary for the effective use of DME, as described in section 110.3 of chapter 15 of the Medicare Benefit Policy Manual (Centers for Medicare and Medicaid Studies Publication 100–02). (iv)Examples. The following examples illustrate the rules of this paragraph (b). Example 1. X manufactures non-sterile absorbent tipped applicators. X sells the applicators to distrib- utors Y and Z, which, in turn, sell the applicators to medical institutions and offices, medical profes- sionals, and to retail establishments. The FDA re- quires manufacturers and importers of non-sterile ab- sorbent tipped applicators to list the applicators as a device with the FDA. The applicators are classified by the FDA under 21 CFR Part 880 (General Hos- pital and Personal Use Devices) and product code KXF. Absorbent tipped applicators do not fall within a retail exception safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determina- tion of whether the absorbent tipped applicators are devices of a type generally purchased by the gen- eral public at retail for individual use must be made on a facts and circumstances basis. Individual con- sumers who are not medical professionals can reg- ularly purchase the absorbent tipped applicators at drug stores, supermarkets, cosmetic supply stores and other similar establishments, and can use the applica- tors safely and effectively for their intended medical purpose without training from a medical professional. Further, the absorbent tipped applicators do not need to be implanted, inserted, operated, or otherwise ad- ministered by a medical professional, do not require a large investment and/or ongoing expenditure, are not a Class III device, are not classified by the FDA un- der a category described in paragraph (b)(2)(ii)(D) of this section, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222. Thus, the applicators have multiple factors that tend to show they are regularlyavailable for purchase and use by individual consumers and none of the factors that tend to show they are designed primarily for use in a medical institution or office or by medical pro- fessionals. Based on the totality of the facts and cir- cumstances, the applicators are devices that are of a type that are generally purchased by the general pub- lic at retail for individual use. Example 2. X manufactures adhesive bandages. X sells the adhesive bandages to distributors Y and Z, which, in turn, sell the bandages to medical institu- tions and offices, medical professionals, and to retail March 26, 20125962012–13 I.R.B. establishments. The FDA requires manufacturers and importers of adhesive bandages to list the bandages as a device with the FDA. The adhesive bandages are classified by the FDA under 21 CFR Part 880 (Gen- eral Hospital and Personal Use Devices) and prod- uct code KGX. Adhesive bandages do not fall within a retail exception safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determina- tion of whether the adhesive bandages are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis. Individual consumers who are not medical professionals can regularly purchase the adhesive bandages at drug stores, supermarkets and other similar establishments, and can use the adhe- sive bandages safely and effectively for their intended medical purpose without training from a medical pro- fessional. Further, the adhesive bandages do not need to be implanted, inserted, operated, or otherwise ad- ministered by a medical professional, do not require a large investment and/or ongoing expenditure, are not Class III devices, are not classified by the FDA un- der a category described in paragraph (b)(2)(ii)(D) of this section, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222. Thus, the bandages have multiple factors that tend to show they are regularly available for purchase and use by individual consumers and none of the factors that tend to show they are designed primarily for use in a medical institution or office or by medical pro- fessionals. Based on the totality of the facts and cir- cumstances, the adhesivebandages are devices that are of a type that are generally purchased by the gen- eral public at retail for individual use. Example 3. X manufactures snake bite suction kits. X sells the snake bite suction kits to distribu- tors Y and Z, which, in turn, sell the kits to medical institutions and offices, medical professionals, and to retail establishments. The FDA requires manufactur- ers and importers of snake bite suction kits to list the kits as a device with the FDA. The FDA classifies the snake bit suction kits under 21 CFR Part 880 (Gen- eral Hospital and Personal Use Devices) and product code KYP. Snake bite suction kits do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determina- tion of whether the snake bite suction kits are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis. Individual consumers who are not medical professionals can regularly purchase the snake bite suction kits at sporting goods stores, camping stores, and other similar establishments, and can use the kits safely and effectively for their in- tended medical purpose without training from a med- ical professional. Further, the snake bite suction kits do not need to be implanted, inserted, operated or otherwise administered by a medical professional, do not require a large investment and/or ongoing expen- diture, are not Class III devices, are not classified by the FDA under a category described in paragraph (b)(2)(ii)(D) of this section, and are not “items requir- ing frequent and substantial servicing” as defined in 42 CFR 414.222. Thus, the snake bite suction kits have multiple factors that tend to show they are reg- ularly available for purchase and use by individual consumers and none of the factors that tend to show they are designed primarily for use in a medical insti- tution or office or by medical professionals. Based on the totality of the facts and circumstances, the snake bite suction kits are devices that are of a type that are generally purchased by the general public at retail for individual use. Example 4. X manufactures denture adhesives. X sells the denture adhesives to distributors Y and Z, which, in turn, sell the adhesives to dental offices and retail establishments. The FDA requires manufac- turers and importers of denture adhesives to list the adhesive as a device with the FDA. The FDA clas- sifies the denture adhesives under 21 CFR Part 872 (Dental Devices) and product code KXX. The den- ture adhesives do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. Therefore, the determination of whether the denture adhesives are devices of a type generally pur- chased by the general public at retail for individual use must be made on a facts and circumstances ba- sis. Individual consumers who are not medical pro- fessionals can regularly purchase the denture adhe- sives at drug stores, supermarkets, and other simi- lar establishments, and can use the adhesives safely and effectively for their intended medical purpose with minimal or no training from a medical profes- sional. Further, the denture adhesives do not need to be implanted, inserted, operated, or otherwise ad- ministered by a medical professional, do not require a large investment and/or ongoing expenditure, are not Class III devices, are not classified by the FDA un- der a category described in paragraph (b)(2)(ii)(D) of this section, and are not “items requiring frequent and substantial servicing” as defined in 42 CFR 414.222. Thus, the denture adhesives have multiple factors that tend to show they are regularly available for purchase and use by individual consumers and none of the fac- tors that tend to show they are designed primarily for use in a medical institution or office or by medical professionals. Based on the totality of the facts and circumstances, the denture adhesives are devices that are of a type that are generally purchased by the gen- eral public at retail for individual use. Example 5. X manufactures mobile x-ray sys- tems. X sells the x-ray systems to distributors Y and Z, which, in turn, sell the systems generally to med- ical institutions and offices, and medical profession- als. The FDA requires manufacturers and importers of mobile x-ray systems to list the systems as a de- vice with the FDA. The FDA classifies the mobile x-ray systems under 21 CFR Part 892 (Radiology De- vices) and product code IZL. Mobile x-ray systems do not fall within a retail exemption safe harbor set forth in paragraph (b)(2)(iii) of this section. There- fore, the determination of whether the mobile x-ray systems are devices of a type generally purchased by the general public at retail for individual use must be made on a facts and circumstances basis. Indi- vidual consumers who are not medical profession- als cannot regularly purchase the mobile x-ray sys- tems at drug stores, supermarkets, and other simi- lar establishments, and cannot use the x-ray systems safely and effectively for their intended medical pur- pose without training from a medical professional. Although the mobile x-ray systems are not Class III devices and are not “items requiring frequent and sub- stantial servicing” as defined in 42 CFR 414.222, they need to be operated by a medical professional, require a large investment and/orongoing expenditure, and are of a type classified by the FDA under 21 CFR Part 892 (Radiology Devices). Thus, the x-ray systems do not meet any of the factors that tend to show that they are regularly available for purchase and use by individual consumers. However, the x-ray systems do meet several of the factors that tend to show they are designed primarily for use in a medical institu- tion or office or by medical professionals. Based on the totality of the facts and circumstances, the mo- bile x-ray systems are not devices that are of a type generally purchased by the general public at retail for individual use. Example 6. X manufactures pregnancy test kits. X sells the kits to distributors Y and Z, which, in turn, sell the pregnancy test kits to medical institu- tions and offices, medical professionals, and to retail establishments. The FDA requires manufacturers and importers of pregnancy test kits to list the kits as a device with the FDA. The FDA classifies the kits un- der 21 CFR Part 862 (Clinical Chemistry and Clini- cal Toxicology Devices) and product code LCX. The pregnancy test kits are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests) database. Therefore, the over the counter pregnancy test kits fall within the safe harbor set forth in para- graph (b)(2)(iii)(A) of this section. Further, the FDA product code name for LCX is “Kit, Test, Pregnancy, HCG, Over The Counter.” Therefore, the pregnancy test kits also fall within the safe harbor set forth in paragraph (b)(2)(iii)(C) of this section. Accordingly, the pregnancy test kits are devices that are of a type generally purchased by the general public at retail for individual use. Example 7. X manufactures blood glucose mon- itors, blood glucose test strips, and lancets. X sells the blood glucose monitors, test strips and lancets to distributors Y and Z, which, in turn, sell the mon- itors, test strips, and lancets to medical institutions and offices, medical professionals, and to retail es- tablishments. The FDA requires manufacturers and importers of blood glucose monitors, test strips, and lancets to list the items as devices with the FDA. The FDA classifies the blood glucose monitors under 21 CFR Part 862 (Clinical Chemistry and Clinical Toxicology Devices) and product code NBW. The FDA classifies the test strips under 21 CFR Part 862 (Clinical Chemistry and Clinical Toxicology Devices) and product code NBW. The FDA classifies the lancets under 21 CFR 878 (General and Plastic Surgery Devices) and product code FMK. The blood glucose monitors and test strips are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests) database. Therefore, the blood glucose monitors and test strips fall within the safe harbor set forth in paragraph (b)(2)(iii)(A) of this section. Further, the FDA product code name for NBW is “System, Test, Blood Glucose, Over the Counter.” Therefore, the blood glucose monitors and test strips also fall within the safe harbor set forth in paragraph (b)(2)(iii)(C) of this section. In addition, the lancets are supplies necessary for the effective use of DME as described in chapter 15 of the Medicare Policy Benefit Manual. Therefore, the lancets fall within the safe harbor set forth in paragraph (b)(2)(iii)(D)(5) of this section. Accordingly, the blood glucose monitors, test strips, and lancets are devices that are of a type generally purchased by the general public at retail for individual use. 2012–13 I.R.B.597March 26, 2012 (c)Effective/applicability date.This section applies to sales of taxable medical devices on and after January 1, 2013. Par. 4. Section 48.4221–1 is amended by adding paragraph (a)(2)(vii) to read as follows: §48.4221–1 Tax-free sales; general rule. (a) * * * (2) * * * (vii) The exemptions under section 4221(a)(3) through (a)(6) do not apply to the tax imposed by section 4191 (medical device tax). ***** Par. 5. Section 48.4221–2 is amended by adding headings to paragraphs (b)(1) and (b)(2) and adding paragraph (b)(3). The additions read as follows: (b) * * * (1)In general.*** (2)Material in the manufacture or pro- duction of another article.*** (3)Kits—(i) The process of producing or assembling a kit that is a taxable medi- cal device (as defined in §48.4191–2) con- stitutes further manufacture. Under such circumstances, the taxable and nontaxable articles used in the production or assem- bly of the kit lose their identity as sep- arate articles once they are incorporated into the kit because the kit is a new tax- able article. Accordingly, the provisions of §48.4216(a)–1(e) do not apply upon the sale of a kit that is a taxable medical de- vice, and the entire sale price of the kit is subject to tax under section 4191. (ii) For purposes of this section, the termkitmeans a set of two or more articles that is enclosed in a single package, such as a bag, tray, or box, for the convenience of a medical or health care professional or the end user. A kit may contain a combination of one or more taxable medical devices and other articles. (iii) The following example illustrates the rule of this paragraph (b)(3). Example. X is a manufacturer of scalpels. X is registered with the IRS as a manufacturer of taxable medical devices in accordance with §48.4222(a)–1. Y is a distributor of taxable medical devices. Y is registered with the IRS as a manufacturer of taxable medical devices and as a buyer of taxable medical devices for use in further manufacture in accordance with §48.4222(a)–1. Y purchases scalpels from X for inclusion in surgical kits that Y produces. Both the scalpels and the kits are “taxable medical devices” as defined in §48.4191–2. Accordingly, X may sell the scalpels to Y tax free, provided Y furnishes its registration number to X and certifies in writing that the scalpels will be used in further manufacture. (iv) This paragraph (b)(3) applies to sales of taxable medical devices on and af- ter January 1, 2013. ***** Par. 6. Section 48.6416(b)(2)–2 is amended by adding paragraph (a)(4) to read as follows: §48.6416(b)(2)–2 Exportations, uses, sales and resales included. (a) * * * (4) Beginning on January 1, 2013, sec- tions 6416(b)(2)(B), (C), (D), and (E) do not apply to any tax paid under section 4191 (medical device tax). ***** Steven T. Miller, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on February 3, 2012, 11:15 a.m., and published in the issue of the Federal RegisterforFebruary7,2012,77F.R.6028) Notice of Proposed Rulemaking and Notice of Public Hearing Longevity Annuity Contracts REG–115809–11 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. SUMMARY: This document contains proposed regulations relating to the pur- chase of longevity annuity contracts under tax-qualified defined contribution plans under section 401(a) of the Internal Rev- enue Code (Code), section 403(b) plans, individual retirement annuities and ac- counts (IRAs) under section 408, and eligible governmental section 457 plans. These regulations will provide the pub- lic with guidance necessary to comply with the required minimum distribution rules under section 401(a)(9). The regu- lations will affect individuals for whom a longevity annuity contract is purchased under these plans and IRAs (and their ben- eficiaries), sponsors and administrators of these plans, trustees and custodians of these IRAs, and insurance companies that issue longevity annuity contracts under these plans and IRAs. This document also provides a notice of a public hearing on these proposed regulations. DATES: Written or electronic comments must be received by May 3, 2012. Out- lines of topics to be discussed at the public hearing scheduled for June 1, 2012 must be received by May 11, 2012. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–115809–11), 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–115809–11), 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–115809–11). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, N.W., Washington, D.C. FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jamie Dvoretzky at (202) 622–6060; concerning submission of comments, the hearing, and/or being placed on the building access list to attend the hearing, Oluwafunmilayo (Funmi) Taylor) at (202) 622–7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Manage- ment and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). The collection of information in these proposed regulations is in §1.401(a)(9)–6, A–17(a)(6) (disclo- sure that a contract is intended to be a qualifying longevity annuity contract) and §1.6047–2 (an initial report must be pre- pared and an initial disclosure statement March 26, 20125982012–13 I.R.B. must be furnished to qualifying longevity annuity contract owners, and an annual statement must be provided to qualifying longevity annuity contract owners and their surviving spouses containing infor- mation required to be furnished to the IRS). The information in §1.401(a)(9)–6, A–17(a)(6), is required in order to notify participants and beneficiaries, plan spon- sors, and the IRS that the proposed regula- tions apply to a contract. The information in the annual statement in §1.6047–2 is required in order to apply the dollar and percentage limitations in §1.401(a)(9)–6, A–17(b) and §1.408–8, Q&A–12(b) and to comply with other requirements of the proposed regulations, and the information in the initial report and disclosure state- ment in §1.6047–2 is required in order for individuals to understand the features and limitations of a qualifying longevity an- nuity contract. The information would be used by plans and individuals to comply with the required minimum distribution rules. Comments on the collection of infor- mation should be sent to theOffice of Management and Budget, Attn: Desk Officer for the Department of the Trea- sury, Office of Information and Regu- latory Affairs, Washington, DC 20503, with copies to the Internal Revenue Ser- vice, Attn: IRS Reports Clearance Offi- cer, SE:W:CAR:MP:T:M:S; Washington, DC 20224. Comments on the collec- tion of information should be received by April 3, 2012. Comments are specifically requested concerning: Whether the proposed collection of in- formation is necessary for the proper per- formance of the functions of the IRS, in- cluding whether the information will have practical utility; The accuracy of the estimated burden associated with the proposed collection of information; How the quality, utility, and clarity of the information to be collected may be en- hanced; How the burden of complying with the proposed collections of information may be minimized, including through the appli- cation of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of service to provide information. Estimated total average annual record- keeping burden: 35,661 hours. Estimated average annual burden per response: 10 minutes. Estimated number of responses: 213,966. Estimated number of recordkeepers: 150. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Of- fice of Management and Budget. Books or records relating to a collection of 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 return information are confidential, as required by 26 U.S.C. 6103. Background This document contains proposed amendments to the Income Tax Reg- ulations (26 CFR part 1) under sec- tions 401(a)(9), 403(b)(10), 408(a)(6), 408(b)(3), 408A(c)(5), and 6047(d) of the Code. Section 401(a)(9) prescribes required minimum distribution rules for a qualified trust under section 401(a). In general, un- der these rules, distribution of each partic- ipant’s entire interest must begin by the re- quired beginning date. The required be- ginning date generallyis April 1 of the cal- endar year following the later of (1) the calendar year in which the participant at- tains age 70 1 /2or (2) the calendar year in which the participant retires. However, the ability to delay distribution until the calen- dar year in which a participant retires does not apply in the case of a 5-percent owner or an IRA owner. If the entire interest of the participant is not distributed by the required beginning date, section 401(a)(9)(A) provides that the entire interest of the participant must be distributed, beginning not later than the re- quired beginning date, in accordance with regulations, over the life of the partici- pant or lives of the participant and a des- ignated beneficiary (or over a period not extending beyond the life expectancy of the participant or the life expectancy of the participant and a designated beneficiary). Section 401(a)(9)(B) prescribes required minimum distribution rules that apply af- ter the death of the participant. Section 401(a)(9)(G) provides that any distribution required to satisfy the incidental death ben- efit requirement of section 401(a) is treated as a required minimum distribution. Section 403(b) plans, IRAs described in section 408, and eligible deferred com- pensation plans under section 457(b) also are subject to the required minimum distribution rules of section 401(a)(9) pur- suant to sections 408(a)(6) and (b)(3), 403(b)(10), and 457(d)(2), respectively, and the regulations under those sections. However, pursuant to section 408A(c)(5), the minimum distribution and minimum distribution incidental benefit (MDIB) requirements do not apply to Roth IRAs during the life of the participant. Section 408(i) provides that the trustee of an individual retirement account and the issuer of an endowment contract or an in- dividual retirement annuity must make re- ports regarding such account, contract, or annuity to the Secretary and to the indi- viduals for whom the account, contract, or annuity is maintained with respect to such matters as the Secretary may require. Pursuant to this provision, the IRS pre- scribes Form 5498 (IRA Contribution In- formation), which requires annual report- ing with respect to an IRA, including a statement of the fair market value of the IRA as of the prior December 31. Section 6047(d) states that the Secretary shall by forms or regulations require that the em- ployer maintaining, or the plan administra- tor of, a plan from which designated distri- butions (as defined in section 3405(e)(1)) may be made, and any person issuing any contract under which designated distribu- tions may be made, make returns and re- ports regarding the plan or contract to the Secretary, to the participants and benefi- ciaries of the plan or contract, and to such other persons as the Secretary may by reg- ulations prescribe. These sections also provide that the Secretary may, by forms or regulations, prescribe the manner and time for filing these reports. Section 6693 prescribes monetary penalties for failure to comply with section 408(i), and sec- tions 6652 and 6704 prescribe monetary penalties for failure to comply with section 6047(d). Section 1.401(a)(9)–6 of the Income Tax Regulations sets forth the minimum distribution rules that apply to a defined benefit plan and to annuity contracts un- 2012–13 I.R.B.599March 26, 2012 der a defined contribution plan. Under §1.401(a)(9)–6, A–12, if an annuity con- tract held under a defined contribution plan has not yet been annuitized, the in- terest of a participant or beneficiary under that contract is treated as an individual account for purposes of section 401(a)(9). Thus, the value of that contract is included in the account balance used to determine required minimum distributions from the participant’s individual account. If an annuity contract has been annu- itized, the periodic annuity payments must be nonincreasing, subject to certain excep- tions that are set forth in §1.401(a)(9)–6, A–14. In addition, annuity payments must satisfy the MDIB requirement of sec- tion 401(a)(9)(G). Under §1.401(a)(9)–6, A–2(b), if a participant’s sole beneficiary, as of the annuity starting date, is his or her spouse and the distributions satisfy section 401(a)(9) without regard to the MDIB requirement, the distributions to the participant are deemed to satisfy the MDIB requirement. However, if distribu- tions are in the form of a joint and survivor annuity for a participant and a non-spouse beneficiary, the MDIB requirement is not satisfied unless the periodic annuity pay- ment payable to the survivor does not exceed an applicablepercentage of the amount that is payable to the participant, with the applicable percentage to be deter- mined using the table in §1.401(a)(9)–6, A–2(c). The regulations under sections 403(b)(10),408(a)(6),408(b)(3), 408A(c)(5), and 457(d)(2) prescribe how the required minimum distribution rules apply to other types of retirement plans and accounts. Section 1.403(b)–6(e)(1) provides that a section 403(b) contract must meet the requirements of section 401(a)(9). Section 1.403(b)–6(e)(2) pro- vides, with certain exceptions, that the section 401(a)(9) required minimum dis- tribution rules are applied to section 403(b) contracts in accordance with the provisions in §1.408–8. Section 1.408–8, Q&A–1, provides, with certain modifica- tions, that an IRA is subject to the rules of §§1.401(a)(9)–1 through 1.401(a)(9)–9. Onesuchmodificationissetforthin §1.408–8, Q&A–9, which prescribes a rule under which an IRA generally does not fail to satisfy section 401(a)(9) merely because the required minimum distribution with respect to the IRA is distributed instead from another IRA. Section 1.408A–6, Q&A–14(a), provides that no minimum distributions are required to be made from a Roth IRA during the life of the par- ticipant. Section 1.408A–6, Q&A–15, provides that a participant who is required to receive minimum distributions from his or her traditional IRA cannot choose to take the amount of the required minimum distributions from a Roth IRA. Section 1.457–6(d) provides that a section 457(b) eligible plan must meet the requirements of section 401(a)(9) and the regulations under that section. On February 2, 2010, the Department of Labor, the IRS, and the Department of the Treasury issued a Request for Infor- mation Regarding Lifetime Income Op- tions for Participants and Beneficiaries in Retirement Plans in theFederal Register (75 FR 5253). That Request for Infor- mation included questions relating to how the required minimum distribution rules affect defined contribution plan sponsors’ and participants’ interest in the offering and use of lifetime income. In particular, the Request for Information asked whether there were changes to the rules that could or should be considered to encourage ar- rangements under which participants can purchase deferred annuities that begin at an advanced age (sometimes referred to as longevity annuities or longevity insur- ance). A number of commentators identified the required minimum distribution rules as an impediment to the utilization of these types of annuities. One such impediment that they noted is the requirement that, prior to annuitization, the value of the annuity be included in the account bal- ance that is used to determine required minimum distributions. This requirement raises the risk that, if the remainder of the account has been depleted, the participant would have to commence distributions from the annuity earlier than anticipated in order to satisfy the required minimum distribution rules. Some commentators stated that if the deferred annuity permits a participant to accelerate the commence- ment of benefits, then, in order to take that contingency into account, the premium would be higher for a given level of an- nuity income regardless of whether the participant actually commences benefits at an earlier date. Some commentators also noted that longevity annuities often do not provide a commutation benefit, cash surrender value, or other similar feature. The Treasury Department and the IRS have concluded that there are substantial advantages to modifying the required min- imum distribution rules in order to facili- tate a participant’s purchase of a deferred annuity that is scheduled to commence at an advanced age — such as age 80 or 85 — using a portion of his or her account. Under the proposed amendments to these rules, prior to annuitization, the partici- pant would be permitted to exclude the value of a longevity annuity contract that meets certain requirements from the ac- count balance used to determine required minimum distributions. Thus, a partici- pant would never need to commence dis- tributions from the annuity contract before the advanced age in order to satisfy the re- quired minimum distribution rules and, ac- cordingly, the contract could be designed with a fixed annuity starting date at the ad- vanced age (and would not need to provide an option to accelerate commencement of the annuity). Purchasing longevity annuity contracts could help participants hedge the risk of drawing down their benefits too quickly and thereby outliving their retirement savings. This risk is of particular import because of the substantial, and unpre- dictable, possibility of living beyond one’s life expectancy. Purchasing a longevity annuitycontractwouldalsohelpavoid the opposite concern that participants may live beneath their means in order to avoid outliving their retirement savings. If the longevity annuity provides a predictable stream of adequate income commencing at a fixed date in the future, the partici- pant would still face the task of managing retirement income over that fixed period until the annuity commences, but that task generally is far less challenging than man- aging retirement income over an uncertain period. The Treasury Department and the IRS have concluded that any special treatment under the required minimum distribution rules to facilitate the purchase of such a longevity annuity contract should be lim- ited to a portion of a participant’s account balance, such as 25 percent. A percentage limit is necessary in order to be consistent with section 401(a)(9)(A), which requires the entire interest of each participant to be distributed, beginning by the required March 26, 20126002012–13 I.R.B. beginning date, in accordance with reg- ulations, over the life or life expectancy of the participant (or the participant and a designated beneficiary). The pattern of required minimum payments implemented in the existing regulations under section 401(a)(9) limits the extent to which tax-fa- vored retirement savings can be used for purposes other than retirement income (such as transmitting accumulated wealth to a participant’s heirs). Limiting the spe- cial treatment for a longevity annuity to those contracts purchased with no more than 25 percent of the account balance is consistent with the intent of section 401(a)(9)(A) because, for a typical par- ticipant who will need to draw down the entire account balance during the period prior to commencement of the annuity, the overall pattern of payments would not provide more deferral than would other- wise normally be available for lifetime payments under the section 401(a)(9)(A) rules. However, because a participant is re- quired to receive only required minimum distributions during the period before the annuity begins (and would not under these proposed regulations be required to draw down the entire remaining balance on an accelerated basis), the Treasury Depart- ment and the IRS have concluded that, in addition to the percentage limitation, the amount used to purchase an annuity for which the minimum distribution require- ments would be eased should be subject to a dollar limitation, such as $100,000. This dollar limitation would be applied in order to constrain the extent to which the combi- nation of payments from the account bal- ance (determined by excluding the value of the annuity before the annuity com- mences) and later payments from the annu- ity contract might result in an overall pat- tern of payouts from the plan that permits undue deferral of distribution of the partic- ipant’s entire interest. Such a limit would still allow signifi- cant income to be provided beginning at age 85. For example, if at age 70 a partic- ipant used $100,000 of his or her account balance to purchase an annuity that will commence at age 85, the annuity could provide an annual income that is estimated to range between $26,000 and $42,000 (depending on the actuarial assumptions used by the issuer and the form of the annuity elected by the participant, such as whether the form elected is a straight life annuity or a joint and survivor annuity). These illustrations assume a three-percent interest rate, no pre-annuity-starting-date death benefit, use of the Annuity 2000 Mortality Table for males and females, 1 no indexation for inflation, and no load for expenses. These amounts would be higher if the interest rate used by the issuer to determine the annuity amount were higher. For ex- ample, the $42,000 amount would be in- creased to approximately $50,000 if the annuity were purchased assuming a four- percent interest rate, rather than a three- percent rate. In addition, a participant who purchases a contract before age 70 could obtain the same income with a lower premium or could obtain larger income with the same premium. For example, even assuming a three-percent interest rate, the $42,000 amount would be approximately $51,000 if the annuity were purchased at age 65 rather than age 70. Furthermore, a partic- ipant who purchases increments of annu- ities over his or her career could hedge the risk of interest-rate fluctuation by purchas- ing these increments in different interest rate environments and effectively averag- ing annuity purchase rates over time. To facilitate compliance with the dol- lar and percentage limitations and other requirements that longevity annuity con- tracts must satisfy in order to qualify for the special treatment, certain disclosure and reporting requirements would apply for the issuers of these contracts. Because longevity annuities would not begin un- til contract owners reach an advanced age, annual statements would also serve as an important reminder to those owners (and persons assisting them with their financial affairs) of their right to receive the annu- ities. Explanation of Provisions These proposed regulations would modify the required minimum distribution rules in order to facilitate the purchase of deferred annuities that begin at an ad- vanced age. The proposed regulations would apply to contracts that satisfy cer- tain requirements, including the require- ment that distributions commence not later than age 85. Prior to annuitization, the value of these contracts, referred to as “qualifying longevity annuity contracts” (QLACs), would be excluded from the ac- count balance used to determine required minimum distributions. I.Definition of QLAC A.Limitations on premiums The proposed regulations provide that, in order to constitute a QLAC, the amount of the premiums paid for the contract un- der the plan on a given date may not ex- ceed the lesser of a dollar or a percentage limitation. The proposed regulations pre- scribe rules for applying these limitations to participants who purchase multiple con- tracts or make multiple premium payments for the same contract. Under the dollar limitation, the amount of the premiums paid for a contract un- der the plan may not exceed $100,000. If, on or before the date of a premium pay- ment, an employee has paid premiums for the same contract or for any other contract that is intended to be a QLAC and that is purchased for the employee under the plan or under any other plan, annuity or account, the $100,000 limit is reduced by the amount of those other premium pay- ments. 2 Under the percentage limitation, the amount of the premiums paid for a contract under the plan may not exceed an amount equal to 25 percent of the employee’s ac- count balance on the date of payment. If, on or before the date of a premium pay- ment, an employee has paid premiums for the same contract or for any other contract thatisintendedtobeaQLACandthatis held or purchased for the employee under the plan, the maximum amount under the 25-percent limit is reduced by the amount of those other payments. For purposes of determining whether premiums for a contract exceed the dollar or percentage limitation, unless the plan administrator has actual knowledge to the 1 If the annuity is provided under an employer plan, unisex mortality assumptions would be required. 2 As discussed under the heading “II. IRAs,” a contract that is purchased or held under a Roth IRA is not treated as a contract that is intended to be a QLAC (even if it otherwise meets the requirements to be a QLAC). 2012–13 I.R.B.601March 26, 2012 contrary, the plan administrator would generally be permitted to rely on an em- ployee’s representation of the amount of premiums paid on or before that date un- der any other contract that is intended to be a QLAC and that is purchased for an employee under any other plan, annuity, or account. However, this reliance is not available with respect to a plan, annuity, or account that is maintained by an employer (or an entity that is treated as a single employer with the employer under sec- tion 414(b), (c), (m), or (o)) with respect to purchases for an employee under any other plan, annuity, or account maintained by that employer. If a premium for a contract causes the total premiums to exceed either the dol- lar or percentage limitation, the contract would fail to be a QLAC as of the date on which the excess premiums were paid. Thus, beginning on that date, the value of the contract would no longer be excluded from the account balance used to deter- mine required minimum distributions. For calendar years beginning on or after January 1, 2014, the dollar limita- tion would be adjusted at the same time and in the same manner as under section 415(d), except that (1) the base period would be the calendar year quarter begin- ning July 1, 2012, and (2) any increase that is not a multiple of $25,000 would be rounded to the next lowest multiple of $25,000. If a contract failed to be a QLAC immediately before an adjustment because the premiums exceeded the dollar limitation, an adjustment of the dollar limitation would not cause the contract to become a QLAC. B.Maximum age at commencement The proposed regulations provide that, in order to constitute a QLAC, the con- tract must provide that distributions un- der the contract commence not later than a specified annuity starting date set forth in the contract. The specified annuity start- ing date must be no later than the first day of the month coincident with or next fol- lowing the employee’s attainment of age 85. This age reflects the approximate life expectancy of an employee at retirement, and was recommended in a number of the comments received in response to the Re- quest for Information. Any contract for which premiums are paid after the latest permissible specified annuity starting date would not be a QLAC, because such a contract could not require distributions to commence by that date. The proposed regulations would permit a QLAC to allow a participant to elect an earlier annuity starting date than the spec- ified annuity starting date. For example, if the specified annuity starting date under a contract were the date on which a partici- pant attains age 85, the contract would not fail to be a QLAC solely because it allows the participant to commence distributions at an earlier date. On the other hand, these rules would not require a QLAC to pro- vide an option to commence distributions before the specified annuity starting date, so that a QLAC could provide that distri- butions must commence only at the speci- fied annuity starting date. For a given pre- mium, such a contract could provide a sub- stantially higher periodic annuity payment beginning on the specified annuity start- ing date than a contract with an accelera- tion option. Similarly, premiums could be lower for a given level of periodic annu- ity payment, leaving a larger portion of the remaining account balance for the partici- pant to use for living expenses before the specified annuitystarting date. The proposed regulations provide that the maximum age may also be adjusted to reflect changes in mortality. The ad- justed age (if any) would be prescribed by the Commissioner in revenue rul- ings, notices, or other guidance published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b)). The Treasury De- partment and the IRS anticipate that such changes will not occur more frequently than the adjustment of the $100,000 limit describedinsubheadingI.A.“Limitations on premiums.” If a contract failed to be a QLAC immediately before an adjustment because it failed to provide that distribu- tions must commence by the requisite age, an adjustment of the age would not cause the contract to become a QLAC. C.Benefits payable after death of the employee Under a QLAC, the only benefit permit- ted to be paid after the employee’s death is a life annuity, payable to a designated ben- eficiary, that meets certain requirements. Thus, for example, a contract that provides a distribution form with a period certain or a refund of premiums in the case of an employee’s death would not be a QLAC. These types of payments are inconsistent with the purpose of providing lifetime in- come to employees and their beneficiaries, as described in the Background section of this preamble. A contract that provides a given lifetime periodic annuity payment to an employee would be less expensive if it provided for a life annuity payable to a des- ignated beneficiary upon the employee’s death rather than additional features such as an optional single-sum death benefit. After paying a lower premium for such a life annuity, the employee would be able to retain a larger portion of his or her account, maximizing the employee’s lifetime bene- fits, while also leaving larger death bene- fits for a beneficiary, from the remaining amount of the account. The proposed regulations provide that if the sole beneficiary of an employee un- der the contract is the employee’s surviv- ing spouse, the only benefit permitted to be paid after the employee’s death is a life an- nuity payable to the surviving spouse that does not exceed 100 percent of the annu- ity payment payable to the employee. The proposed regulations include a special ex- ception that would allow a plan to comply with any applicable requirement to provide a qualified preretirement survivor annuity 3 (which would have an effect only if the em- ployee has a substantially older spouse). If the employee’s surviving spouse is not the sole beneficiary under the con- tract, 4 the only benefit permitted to be paid after the employee’s death is a life annu- ity payable to a designated beneficiary. In order to satisfy the MDIB requirements of section 401(a)(9)(G), the life annuity is not 3 A qualified preretirement survivor annuity is defined in section 417(c)(2) as an annuity for the life of the surviving spouse the actuarial equivalent of which is not less than 50 percent of the portion of the account balance of the participant (as of the date of death) to which the participant had a nonforfeitableright (within the meaning of section 411(a) of the Code). Section 205(e)(2) of the Employee Retirement Income Security Act of 1974, Public Law 93–406 (88 Stat. 829 (1974)), as amended (ERISA), includes a parallel definition. See Rev. Rul. 2012–3 for rules relating to qualified preretirement survivor annuities. 4 If the surviving spouse is one of the designated beneficiaries, this rule is applied as if the contract were a separate contract for the surviving beneficiary, but only if certain conditions are satisfied, including a separate account requirement. See §1.401(a)(9)–8, A–2(a) and A–3. March 26, 20126022012–13 I.R.B. permitted to exceed an applicable percent- age of the annuity payment payable to the employee. The applicable percentage is determined under one of two alternative ta- bles, and the determination of which table applies depends on the different types of death benefits that are payable to the des- ignated beneficiary. Under the first alternative, the applica- ble percentage is the percentage described in the existing table in §1.401(a)(9)–6, A–2(c). Because the existing applicable percentage table does not take into account the potential for a death benefit to be paid to the non-spouse designated beneficiary during the period between the required beginning date and the annuity starting date, this table is available only if, under the contract, no death benefits are payable to such a beneficiary if the employee dies before the specified annuity starting date. Furthermore, in order to address the pos- sibility that an employee with a shortened life expectancy could accelerate the an- nuity starting date in order to avoid this rule, this table is available only if, under the contract, no benefits are payable in any case in which the employee selects an annuity starting date that is earlier than the specified annuity starting date under the contract and the employee dies less than 90 days after making that election, even if the employee’s death occurs after his or her selected annuity starting date. Under the second alternative, the ap- plicable percentage is the percentage de- scribedinanewtablesetforthinthepro- posed regulations. The table is available for use when the contract provides a pre- annuity-starting-date death benefit to the non-spouse designated beneficiary. The table takes into account that a significant portion of the premium is used to provide death benefits to a designated beneficiary if death occurs during the deferral period between age 70 1 /2and age 85. In order to limit the portion of the premium that is used to provide death benefits to a desig- nated beneficiary, use of the table is limited to contracts under which any non-spouse designated beneficiary must be irrevoca- bly selected as of the required beginning date. Accordingly, the applicable percent- ages in the table are based on the expected longevity for the designated beneficiary, determined as of the employee’s required beginning date. The Treasury Department and the IRS considered whether to prescribe a special rule under which a QLAC could provide for a pre-annuity-starting-date death bene- fit to a non-spouse designated beneficiary and also allow the designated beneficiary to be changed at any time before the an- nuity starting date. However, in order to satisfy the MDIB requirements in such a case, the applicable percentages would need to be much smaller than the percent- ages set forth in the special table. This is because a larger portion of the cost of the contract would be allocable to death ben- efits if, after the required beginning date and before the annuity starting date, the participant were able to replace a desig- nated beneficiary who has died (or to re- place a designated beneficiary who has a short life expectancy with one who has a longer life expectancy). Comments are re- quested on whether the proposed regula- tions should be modified to permit alterna- tive death benefits that would be subject to such lower applicable percentages. Iftheemployeediesbeforethespeci- fied annuity starting date under the con- tract, the date by which benefits must com- mence to the designated beneficiary de- pends on whether the beneficiary is the employee’s surviving spouse. If the sole beneficiary under the contract is the em- ployee’s surviving spouse, the life annu- ity is not required to commence until the employee’s specifiedannuity starting date under the contract (in lieu of the otherwise applicable rule that would require distribu- tions to commence by the later of the end of the calendar year following the calen- dar year in which the employee died or the end of the calendar year in which the em- ployee would have attained age 70 1 /2). If theemployee’ssolebeneficiary under the contract is not the surviving spouse, the life annuity payable to the designated benefi- ciary must commence by the last day of the calendar year immediately following the calendar year of the employee’s death. The proposed regulations include a rule for applying the limitations on amounts payable to a surviving spouse or a des- ignated beneficiary in the event the em- ployee dies before the annuity starting date. Under this rule, if the contract does not allow an employee to select an annuity starting date that is earlier than the date on which the annuity payable to the em- ployee would have commenced under the contract if the employee had not died, the contract must nonetheless provide a way to determine the periodic annuity payments that would have been payable if payments to the employee had commenced imme- diately prior to the date on which benefit payments to the designated beneficiary commence. D.Other QLAC requirements Under the proposed regulations, a QLAC would not include a variable con- tract under section 817, equity-indexed contract, or similar contract, because the purpose of a QLAC is to provide a participant with a predictable stream of lifetime income. In addition, exposure to equity-based returns is available through control over the remaining portion of the account balance so that a participant can achieve adequate diversification. The proposed regulations also provide that, in order to be a QLAC, the contract is not permitted to make available any com- mutation benefit, cash surrender value, or other similar feature. As in the case of the limitations on benefits payable after death, these limitations would allow an annuity contract to maximize the annuity payments that are made while a participant or beneficiary is alive. In addition, having a limited set of options available to pur- chasers would make these contracts more readily understandable and enhance pur- chasers’ ability to compare products across providers. Ease of comparison will be par- ticularly important to the extent that con- tracts provided under plans are priced on a unisex basis, while contracts offered under IRAs generally take gender into account in establishing premiums. The proposed regulations provide that a contract is not a QLAC unless it states, when issued, that it is intended to be a “qualifying longevity annuity contract” or a “QLAC.” This rule would ensure that the issuer, participant, plan sponsor, and IRS know that the rules applicable to QLACs apply to this contract. The proposed regulations provide that distributions under a QLAC must satisfy the generally applicable section 401(a)(9) requirements relating to annuities at §1.401(a)(9)–6, other than the require- ment that annuity payments commence on or before the employee’s required be- ginning date. Thus, for example, the 2012–13 I.R.B.603March 26, 2012 limitation on increasing payments under §1.401(a)(9)–6, A–1(a), applies to the contract. II.IRAs The proposed regulations provide that, in order to constitute a QLAC, the amount of the premiums paid for the contract un- der an IRA on a given date may not ex- ceed $100,000. If, on or before the date of a premium payment, a participant has paid premiums for the same contract or for any other contract that is intended to be a QLAC and that is purchased for the par- ticipant under the IRA or under any other IRA, plan, or annuity, the $100,000 limit is reduced by the amount of those other pre- mium payments. The proposed regulations also pro- vide that in order to constitute a QLAC, the amount of the premiums paid for the contract under an IRA on a given date generally may not exceed 25 percent of a participant’s IRA account balances. Consistent with the rule under which a required minimum distribution from an IRA could be satisfied by a distribution from another IRA (applied separately to traditional IRAs and Roth IRAs), the pro- posed regulations would allow a QLAC that could be purchased under an IRA within these limitations to be purchased instead under another IRA. Specifically, the amount of the premiums paid for the contract under an IRA may not exceed an amount equal to 25 percent of the sum of the account balances (as of December 31 of the calendar year before the calendar year in which a premium is paid) of the IRAs (other than Roth IRAs) that an indi- vidual holds as the IRA owner. If, on or before the date of a premium payment, an individual has paid other premiums for the same contract or for any other contract that is intended to be a QLAC and that is held or purchased for the individual under his or her IRAs, the premium payment cannot exceed the amount determined to be 25 percent of the individual’s IRA account balances, reduced by the amount of those other premiums. The proposed regulations provide that, for purposes of both the dollar and percent- age limitations, unless the trustee, custo- dian, or issuer of an IRA has actual knowl- edge to the contrary, the trustee, custodian, or issuer may rely on the IRA owner’s rep- resentations of the amount of the premi- ums (other than the premiums paid under the IRA) and, for purposes of applying the percentage limitation, the amount of the in- dividual’s account balances (other than the account balance under the IRA). Under the proposed regulations, an an- nuity purchased under a Roth IRA would not be treated as a QLAC. This is because aRothIRA(unlikeadesignatedRoth account under a plan, as described in sec- tion 402A) is not subject to the section 401(a)(9)(A) requirement that the indi- vidual’s benefits commence and be paid over the lives or life expectancy of the individual and a designated beneficiary (but, after the death of the individual, ben- efits must be paid under the same section 401(a)(9)(B) rules that apply to tradi- tional IRAs). Because the rules of section 401(a)(9)(A) do not apply to a Roth IRA owner, a longevity annuity contract pur- chased using a portion of the individual’s Roth IRA would not need to provide the right to accelerate payments in order to ensure compliance with those rules. Thus, there is no need to permit the value of a longevity annuity contract to be excluded from the account balance that is used to determine required minimum distributions during the life of a Roth IRA owner. Ac- cordingly, the proposed regulations would not apply the rules regarding QLACs to Roth IRAs. The proposed regulations would not preclude the use of assets in a Roth IRA to purchase a longevity annuity contract, nor would such a contract be subject to the same restrictions as a QLAC. For example, a longevity annuity contract pur- chased using assets of a Roth IRA could have an annuity starting date that is later than age 85 and offer features, such as a cash surrender right, that are not permitted under a QLAC. Although such a contract could not be excluded from the account balance used to determine required min- imum distributions, this exclusion is not necessary because the required minimum distribution rules do not apply during the life of a Roth IRA owner. In addition, the dollar and percentage limitations on premiums that apply to a QLAC would not take into account premi- ums paid for a contract that is purchased or held under a Roth IRA, even if the contract satisfies the requirements to be a QLAC. If a QLAC is purchased or held under a plan, annuity, contract, or traditional IRA that is later rolled over or converted to a Roth IRA, the QLAC would cease to be a QLAC (and would cease to be treated as intended to be a QLAC) after the date of the rollover or conversion. In that case, the premiums would then be disregarded in applying the dollar and percentage limitations to premi- ums paid for other contracts after the date of the rollover or conversion. 5 Comments are requested on whether the regulations should be modified to apply the QLAC rules to a Roth IRA or to reduce the availability of the section 401(a)(9) re- lief for purchases of QLACs by the amount of assets that the individual holds in a Roth IRA. Comments are also requested as to whether any special rules should apply where a QLAC is purchased using assets of a Roth IRA, such as special disclosure in order to minimize any potential confu- sion. III.Section 403(b) plans The proposed regulations apply the tax- qualified plan rules, instead of the IRA rules, to the purchase of a QLAC under a section 403(b) plan. For example, the 25-percent limitation on premiums would be separately determined for each section 403(b) plan in which an employee partici- pates. The proposed regulations also pro- vide that the tax-qualified plan rules relat- ing to reliance on representations, rather than the IRA rules, apply to the purchase of a QLAC under a section 403(b) plan. The proposed regulations provide that, if the sole beneficiary of an employee un- der a contract is the employee’s surviving spouse and the employee dies before the annuity starting date under the contract, a life annuity that is payable to the surviv- ing spouse after the employee’s death is permitted to exceed the annuity that would have been payable to the employee to the extent necessary to satisfy the requirement to provide a qualified preretirement sur- 5 Section 1.408A–4, Q&A–14, describes the amount includible in gross income when part or all of a traditional IRA that is an individual retirement annuity described in section 408(b) is converted to a Roth IRA, or when a traditional IRA that is an individual retirement account described in section 408(a) holds an annuity contract as an account asset and the traditional IRA is converted to a Roth IRA. Those rules would also apply when a contract is rolled over from a plan into a Roth IRA. March 26, 20126042012–13 I.R.B. vivor annuity (as discussed for qualified plans under subheading I.C. “Benefits payable after death of the employee”). A section 403(b) plan may be subject to this requirement under ERISA, whereas IRAs are generally not subject to this require- ment. See §1.401(a)–20, Q&A–3(d), and §1.403(b)–5(e). IV.Section 457(b) plans Section 1.457–6(d) provides that an eligible section 457(b) plan must meet the requirements of section 401(a)(9) and the regulations under section 401(a)(9). Thus, these proposed regulations relating to the purchase of a QLAC under a tax-qualified defined contribution plan would automat- icallyapplytoaneligiblesection457(b) plan. However, the rule relating to QLACs is limited to eligible governmental section 457(b) plans. Becausesection 457(b)(6) requires that an eligible section 457(b) plan that is not a governmental plan be un- funded, the purchase of an annuity contract under such a plan would be inconsistent with this requirement. V.Defined benefit plans Although defined benefit plans are sub- ject to the minimum required distribution rules, they offer annuities which provide longevity protection. Because this protec- tion is therefore already available, these proposed regulations would not apply to defined benefit plans. 6 VI. Disclosure and annual reporting requirements Under the proposed regulations, the is- suer of a QLAC would be required to cre- ate a report containing the following infor- mation about the QLAC: •A plain-language description of the dollar and percentage limitations on premiums; •The annuity starting date under the contract, and, if applicable, a descrip- tion of the employee’s ability to elect to commence payments before the an- nuity starting date; •The amount (or estimated amount) of the periodic annuity payment that is payable after the annuity starting date as a single life annuity (including, if an estimated amount, the assumed interest rate or rates used in making this deter- mination), and a statement that there is no commutation benefit or right to sur- render the contract in order to receive its cash value; •A statement of any death benefit payable under the contract, includ- ing any differences between benefits payable if the employee dies before the annuity starting date and benefits payable if the employee dies on or after the annuity starting date; •A description of the administrative procedures associated with an em- ployee’s elections under the contract, including deadlines, how to obtain forms, and where to file forms, and the identity and contact information of a person from whom the employee may obtain additional information about the contract; and •Such other information that the Com- missioner may require. This report is not required to be filed with the Internal Revenue Service. Each issuer required to create a report would be required to furnish to the individual in whose name the contract has been purchased a statement containing the in- formation in the report. This statement must be furnished prior to or at the time of purchase. In addition, in order to avoid duplicating state law disclosure re- quirements, the statement would not be required to include information that the issuer has already provided to the em- ployee in order to satisfy any applicable state disclosure law. Comments are re- quested on whether the information listed is appropriate, and whether (and, if so, the extent to which) this list would duplicate disclosure requirements under existing state law. Comments are also requested on whether there is other information that should be included in the disclosure, such as the special tax attributes of a QLAC. The proposed regulations prescribe an- nual reporting requirements under section 6047(d) which would require any person issuing any contract that states that it is in- tended to be a QLAC to file annual calen- dar-year reports and provide a statement to the individual in whose name the contract has been purchased regarding the status of the contract. The Commissioner will pre- scribe an applicableform and instructions for this purpose, which will contain the fil- ing deadline and other information. The report will be required to identify that the contract is intended to be a QLAC and to include, at a minimum, the follow- ing items of information: •The name, address, and identifying number of the issuer of the contract, along with information on how to con- tact the issuer for more information about the contract; •The name, address, and identifying number of the individual in whose name the contract has been purchased; •If the contract was purchased under a plan, the name of the plan, the plan number, and the Employer Identifica- tion Number (EIN) of the plan sponsor; •If payments have not yet commenced, the annuity starting date on which the annuity is scheduled to commence, the amount of the periodic annuity payable on that date, and whether that date may be accelerated; and •The amount of each premium paid for the contract, along with the date of pay- ment. 7 Each issuer required to file the report with respect to a contract would also be required to provide to the individual in whose name the contract has been pur- chased a statement containing the informa- tion that is required to be furnished in the report. This requirement may be satisfied by providing the individual with a copy of the required form, or in another form that contains the following language: “This in- formationisbeingfurnishedtotheInter- nal Revenue Service.”The statement is re- quired to be furnished to the individual on or before January 31 following the calen- dar year for which the report is required. An issuer that is subject to these annual reporting requirements must comply with 6 See also Rev. Rul. 2012–4 (relating to rollovers to defined benefit plans). 7 For IRAs, the fair market value of the account on December 31 must be provided to the IRA owners by January 31 of the following year. Trustees, custodians, and issuers are responsible for ensuring that all IRA assets (including those nottraded on an established securities market or with otherwise readily determinable value) are valued annually at their fair market value. This includes the value of a contractthat is intended to be a QLAC. 2012–13 I.R.B.605March 26, 2012 the requirements for each calendar year be- ginning with the year in which premiums are first paid and ending with the earlier of the year in which the individual for whom the contract has been purchased attains age 85 (as adjusted in calendar years begin- ning on or after January 1, 2014) or dies. However, if the individual dies and the sole beneficiary under the contract is the indi- vidual’s spouse (so that the spouse’s annu- ity might not commence until the individ- ual would have attained age 85), the an- nual reporting requirement continues until the year in which the distributions to the spouse commence. Proposed Effective Date The proposed regulations regarding disclosure and reporting will be effective upon publication in theFederal Register of the Treasury decision adopting these rules as final regulations. Otherwise, these regulations are proposed to be effective for contracts purchased on or after the date of publication of the Treasury decision adopting these rules as final regulations in theFederal Registerand for determining required minimum distributions for dis- tribution calendar years beginning on or after January 1, 2013. Until regulations finalizing these proposed regulations are issued, taxpayers may not rely on the rules set forth in these proposed regulations (and the existing rules under section 401(a)(9) continue to apply). Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory as- sessment is not required. It also has been determined that section 553(b) of the Ad- ministrative Procedure Act (5 U.S.C. chap- ter 5) does not apply to these regulations. It is hereby certified that the collection of information in these proposed regulations will not have a significant economic im- pact on a substantial number of small en- tities. This certification is based upon the fact that an insubstantial number of entities of any size will be impacted by the regula- tion. In addition, IRS and Treasury expect that any burden on small entities will be minimal because required disclosures are expected to take 10 minutes to prepare. In addition, the entities that will be impacted will be insurance companies, very few of which are small entities. Therefore, a reg- ulatory flexibility analysis under the Reg- ulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, this notice of proposed rule- making has been submitted to the Chief Counsel for Advocacy of the Small Busi- ness Administration for comment on its impact on small business. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. Comments are requested on benefits payable to a non-spouse bene- ficiary (under the subheading “C. Benefits payable after death of the employee”), Roth IRAs (under the heading “II. IRAs”), and disclosure (under the heading “VI. Disclosure and annual reporting require- ments”). Comments are also requested on whether an insurance product that provides guaranteedlifetime withdrawal benefits could constitute a QLAC, taking into account the rules precluding the use of a variable annuity and a commutation of benefits and the rules relating to the provi- sion of benefits to a designated beneficiary after an employee’s death (under which benefits can be paid only in the form of a life annuity). The IRS and the Treasury Department further request comments on all aspects of the proposed rules. All comments will be available for public inspection and copying at www.regulations.govor upon request. A public hearing has been scheduled for June 1, 2012, beginning at 1 p.m. in the Auditorium, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see theFOR FURTHER INFORMATION CONTACTsection of this preamble. The rules of 26 CFR 601.601(a)(3) ap- ply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments by May 3, 2012, and an outline of topics to be discussed and the amount of time to be de- voted to each topic (a signed original and eight (8) copies) by May 11, 2012. A pe- riod of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for re- ceiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information The principal authors of these regulations are Cathy Pastor and Jamie Dvoretzky, 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 ofthese 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 in nu- merical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.6047–2 is also issued under 26 U.S.C. 6047(d). * * * Par. 2. Section 1.401(a)(9)–5 is amended by: 1. Revising paragraph A–3(a). 2. Redesignating paragraph A–3(d) as new paragraph A–3(e) and revising newly designated paragraph A–3(e). 3. Adding new paragraph A–3(d). The revisions and addition read as fol- lows: §1.401(a)(9)–5 Required minimum distributions from defined contribution plans ***** A–3. (a) In the case of an individual ac- count, the benefit used in determining the March 26, 20126062012–13 I.R.B. required minimum distribution for a distri- bution calendar year is the account balance as of the last valuation date in the calen- dar year immediately preceding that dis- tribution calendar year (valuation calen- dar year) adjusted in accordance with para- graphs (b), (c), and (d) of this A–3. ***** (d) The account balance does not in- clude the value of any qualifying longevity annuity contract described in A–17 of §1.401(a)(9)–6 that is held under the plan. This paragraph (d) only applies for pur- poses of determining required minimum distributions for distribution calendar years beginning on or after January 1, 2013. (e) If an amount is distributed from a plan and rolled over to another plan (re- ceiving plan), A–2 of §1.401(a)(9)–7 pro- vides additional rules for determining the benefit and required minimum distribution under the receiving plan. If an amount is transferred from one plan (transferor plan) to another plan (transferee plan) in a trans- fer to which section 414(l) applies, A–3 and A–4 of §1.401(a)(9)–7 provide addi- tional rules for determining the amount of the required minimum distribution and the benefit under both the transferor and trans- feree plans. ***** Par. 3. Section 1.401(a)(9)–6 is amended by revising the last sentence in A–12(a) and adding Q&A–17 to read as follows: §1.401(a)(9)–6 Required minimum distributions for defined benefit plans and annuity contracts. ***** A–12. (a) * * * See A–1(e) of §1.401(a)(9)–5 for rules relating to the satisfaction of section 401(a)(9) in the year that annuity payments commence, A–3(d) of §1.401(a)(9)–5 for rules re- lating to qualifying longevity annuity contracts described in A–17 of this sec- tion, and A–2(a)(3) of §1.401(a)(9)–8 for rules relating to the purchase of an annuity contract with a portion of an employee’s account balance. ***** Q–17. What is a qualifying longevity annuity contract? A–17. (a)Definition of qualifying longevity annuity contract. A qualifying longevity annuity contract (QLAC) is an annuity contract (that is not a variable contract under section 817, equity-indexed contract, or similar contract) that is pur- chased from an insurance company for an employee and that satisfies each of the following requirements— (1) Premiums for the contract satisfy the requirements of paragraph (b) of this A–17; (2) The contract provides that distribu- tions under the contract must commence not later than a specified annuity starting date that is no later than the first day of the month coincident with or next follow- ing the employee’s attainment of age 85; (3) The contract provides that, after dis- tributions under the contract commence, those distributions must satisfy the re- quirements of this section (other than the requirement in A–1(c) of this section that annuity payments commence on or before the required beginning date); (4) The contract does not make avail- able any commutation benefit, cash surren- der right, or other similar feature; (5) No benefits are provided under the contract after the death of the employee other than the life annuities payable to a designated beneficiary that are described in paragraph (c) of this A–17; and (6) The contract, when issued, states that it is intended to be a QLAC. (b)Limitations on premium—(1)In general. The premiums paid for the con- tract on a date do not exceed the lesser of the dollar limitation in paragraph (b)(2) of this A–17 or the percentage limitation in paragraph (b)(3) of this A–17. (2)Dollar limitation. The dollar limita- tion is an amount equal to the excess of— (i) $100,000, over (ii) The sum of— (A) The premiums paid before that date under the contract, and (B) The premiums paid on or before that date under any other contract that is in- tended to be a QLAC and that is purchased for the employee under the plan, or any other plan, annuity, or account described in section 401(a), 403(a), 403(b), or 408 or eligible governmental section 457(b) plan. (3)Percentage limitation. The percent- age limitation is an amount equal to the ex- cess of— (i) 25 percent of the employee’s account balance under the plan determined on that date, over (ii) The sum of— (A) The premiums paid before that date under the contract, and (B) The premiums paid on or before that date under any other contract that is intended to be a QLAC and that is held or was purchased for the employee under the plan. (c)Payments after death of the em- ployee—(1)Surviving spouse is sole bene- ficiary—(i)In general. Except as provided in paragraph (c)(1)(ii)(B) of this A–17, if the sole beneficiary of an employee under the contract is the employee’s surviving spouse, the only benefit permitted to be paid after the employee’s death is a life annuity payable to the surviving spouse where the periodic annuity payment is not in excess of 100 percent of the periodic annuity payment that is payable to the em- ployee (or, in the case of the employee’s death before the employee’s annuity start- ing date, the periodic annuity payment that would have been payable to the employee as of the date that benefits to the surviv- ing spouse commence under paragraph (c)(1)(ii)(A) of this A–17). (ii)Death before employee’s annuity starting date. If the employee dies before the employee’s annuity starting date and the employee’s surviving spouse is the sole beneficiary under the contract— (A) The life annuity, if any, payable to the surviving spouse under paragraph (c)(1)(i) of this A–17 must commence not later than the date on which the annuity payable to the employee would have com- menced under the contract if the employee had not died; and (B) The amount of the periodic annuity payment payable to the surviving spouse is permitted to exceed 100 percent of the periodic annuity payment that is payable to the employee to the extent necessary to satisfy the requirement to provide a quali- fied preretirement survivor annuity (as de- fined under section 417(c)(2) of the In- ternal Revenue Code (Code) or section 205(e)(2) of the Employee Retirement In- come Security Act of 1974, Public Law 93–406 (88 Stat. 829 (1974)), as amended (ERISA)) pursuant to sections 401(a)(11) and 417 of the Code or section 205(a)(2) of ERISA. 2012–13 I.R.B.607March 26, 2012 (2)Surviving spouse is not sole desig- nated beneficiary—(i)In general.Ifthe employee’s surviving spouse is not the sole beneficiary under the contract, the only benefit permitted to be paid after the em- ployee’s death is a life annuity payable to a designated beneficiary where the pe- riodic annuity payment is not in excess of the applicable percentage (determined under paragraph (c)(2)(iv) of this A–17) of the periodic annuity payment that is payable to the employee (or, in the case of the employee’s death before the em- ployee’s annuity starting date, the appli- cable percentage of the periodic annuity payment that would have been payable to the employee as of the date that benefits to the designated beneficiary commence under this paragraph (c)(2)(i)). In addi- tion,nobenefitispermittedtobepaidafter the employee’s death unless the contract satisfies the requirements of either para- graph (c)(2)(ii) or paragraph (c)(2)(iii) of this A–17. Moreover, except as provided in paragraph (c)(1)(ii)(A) of this A–17, in any case in which the employee dies before the employee’s annuitystarting date, any life annuity payable to a designated bene- ficiary must commence by the last day of the calendar year immediately following the calendar year of the employee’s death. (ii)No pre-annuity starting date death benefit. The contract satisfies the require- ments of this paragraph (c)(2)(ii) if the contract provides that no benefit is permit- tedtobepaidtoabeneficiaryotherthan the employee’s surviving spouse after the employee’s death— (A) In any case in which the employee dies before the selected annuity starting date under the contract; and (B) In any case in which the employee selects an annuity starting date that is ear- lier than the specified annuity starting date under the contract and the employee dies less than 90 days after making that elec- tion. (iii)Pre-annuity starting date death benefit. The contract satisfies the require- ments of this paragraph (c)(2)(iii) if the contract provides that in any case in which the beneficiary under the contract is not the employee’s surviving spouse, benefits are payable to the beneficiary only if the beneficiary was irrevocably selected on or before the employee’s required beginning date. (iv)Applicable percentage. If the con- tract is described in paragraph (c)(2)(ii) of this A–17, the applicable percentage is the percentage described in the table in para- graph A–2(c) of this section. If the con- tract is described in paragraph (c)(2)(iii) (and not in (c)(2)(ii)) of this A–17, the ap- plicable percentage is the percentage de- scribedinthetablesetforthinthispara- graph (c)(2)(iv). The applicable percent- age is based on the adjusted employee/ben- eficiary age difference, determined in the same manner as in paragraph A–2(c) of this section. Adjusted employee/beneficiary agedifferenceApplicable percentage 2 years or less100% 388% 478% 5 70% 663% 7 57% 8 52% 948% 1044% 1141% 1238% 1336% 1434% 15 32% 1630% 1728% 1827% 1926% 20 25% 2124% 2223% 2322% 2421% 25 and greater 20% (3)Calculation of early annuity pay- ments. For purposes of paragraphs (c)(1)(i) and (c)(2)(i) of this A–17, to the extent the contract does not provide an op- tion for the employee to select an annuity starting date that is earlier than the date on which the annuity payable to the employee would have commenced under the contract if the employee had not died, the contract must provide a way to determine the pe- riodic annuity payment that would have been payable if the employee were to have an option to accelerate the payments and the payments had commenced to the em- ployee immediately prior to the date that benefit payments to the surviving spouse or designated beneficiary commence. (d)Rules of application—(1)Reliance on representations. For purposes of the limitation on premiums described in para- graphs (b)(2) and (b)(3) of this A–17, unless the plan administrator has actual knowledge to the contrary, the plan admin- March 26, 20126082012–13 I.R.B. istrator may rely on an employee’s repre- sentation (made in writing or such other form as may be prescribed by the Com- missioner) of the amount of the premiums described in paragraphs (b)(2)(ii)(B) and (b)(3)(ii)(B) of this A–17, but only with respect to premiums that are not paid under a plan, annuity, or contract that is maintained by the employer or an entity that is treated as a single employer with the employer under section 414(b), (c), (m), or (o). (2)Consequences of excess premiums. If a contract fails to be a QLAC solely be- cause a premium for the contract exceeds thelimitsunderparagraph(b)ofthisA–17 on the date of the payment of that pre- mium, the contract is not a QLAC begin- ning on that date. In such a case, none of the value of the contract may be disre- garded under §1.401(a)(9)–5, Q&A–3(d), as of the date on which the contract ceases to be a QLAC. (3)Dollar and age limitations subject to adjustments—(i)Dollar limitation.In the case of calendar years beginning on or after January 1, 2014, the $100,000 amount under paragraph (b)(2)(i) of this A–17 will be adjusted at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter beginning July 1, 2012, and any increase under this para- graph (d)(3)(i) that is not a multiple of $25,000 shall be rounded to the next low- est multiple of $25,000. (ii)Age limitation. The maximum age set forth in paragraph (a)(2) of this A–17 may also be adjusted to reflect changes in mortality, with any such adjusted age to be prescribed by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter). (iii)Prospective application of adjust- ments. If a contract fails to be a QLAC because it does not satisfy the dollar lim- itation in paragraph (b)(2) of this A–17 or the age limitation in paragraph (a)(2) of this A–17, any subsequent adjustment that is made pursuant to paragraph (d)(3)(i) or paragraph (d)(3)(ii) of this A–17 will not cause the contract to become a QLAC. (4)Multiple beneficiaries.Ifanem- ployee has more than one designated beneficiary under a QLAC, the rules in §1.401(a)(9)–8, A–2(a), apply for pur- poses of paragraphs (c)(1)(i) and (c)(2)(i) of this A–17. (5)Roth IRAs. A contract that is pur- chased under a Roth IRA is not treated as a contract that is intended to be a QLAC for purposes of applying the dollar and percentage limitation rules in paragraphs (b)(2)(ii)(B) and (b)(3)(ii)(B) of this A–17. See §1.408A–6, A–14(d). If a QLAC is purchased or held under a plan, annuity, account, or traditional IRA, and that con- tract is later rolled over or converted to a Roth IRA, the contract is not treated as a contract that is intended to be a QLAC af- ter the date of the rollover or conversion. Thus, premiums paid for the contract will not be taken into account under paragraph (b)(2)(ii)(B) or paragraph (b)(3)(ii)(B) of this A–17 after the date of the rollover or conversion. (e)Effective/applicability date.This Q&A–17 applies to contracts purchased on or after the date of publication of the Trea- sury decision adoptingthese rules as final regulations in theFederal Registerand for determining required minimum distri- butions for distribution calendar years be- ginning on or after January 1, 2013. Par. 4. Section 1.403(b)–6 is amended by adding paragraph (e)(9) to read as fol- lows: §1.403(b)–6 Timing of distributions and benefits. ***** (e) * * * (9)Special rule for qualifying longevity annuity contracts.Therules in §1.401(a)(9)–6, A–17(b) (relating to limitations on premiums for a qualifying longevity annuity contract (QLAC), and §1.401(a)(9)–6, A–17(d)(1) (relating to reliance on representations with respect to a QLAC), apply to the purchase of a QLAC under a section 403(b) plan (rather than the rules in §1.408–8, A–12(b) and (c)). ***** Par. 5. Section 1.408–8, Q&A–12, is added to read as follows: §1.408–8 Distribution requirements for individual retirement plans. ***** Q–12. How does the special rule in §1.401(a)(9)–5, A–3(d), for a qualifying longevity annuity contract (QLAC), de- fined in §1.401(a)(9)–6, A–17, apply to an IRA? A–12. (a)General rule. The special rule in §1.401(a)(9)–5, A–3, for a QLAC, defined in §1.401(a)(9)–6, A–17, ap- plies to an IRA, subject to the exceptions set forth in this A–12. See §1.408A–6, A–14(d) for special rules relating to Roth IRAs. (b)Limitations on premium—(1)In general. In lieu of the limitations de- scribed in §1.401(a)(9)–6, A–17(b), the premiums paid for the contract on a date are not permitted to exceed the lesser of the dollar limitation in paragraph (b)(2) of this A–12 or the percentage limitation in paragraph (b)(3) of this A–12. (2)Dollar limitation. The dollar limita- tion is an amount equal to the excess of— (i) $100,000, over (ii) The sum of— (A) The premiums paid before that date under the contract, and (B) The premiums paid on or before that date under any other contract that is in- tended to be a QLAC and that is purchased for the IRA owner under the IRA, or any other plan, annuity, or account described in section 401(a), 403(a), 403(b), or 408 or eligible governmental section 457(b) plan. (3)Percentage limitation. The percent- age limitation is an amount equal to the ex- cess of— (i) 25 percent of the total account bal- ances of the IRAs (other than Roth IRAs) that an individual holds as the IRA owner as of December 31 of the calendar year im- mediately preceding the calendar year in which a premium is paid, over (ii) The sum of— (A) The premiums paid before that date under the contract, and (B) The premiums paid on or before that date under any other contract that is intended to be a QLAC and that is held or was purchased for the individual under those IRAs. (c)Reliance on representations.For purposes of the limitations described in paragraphs (b)(2) and (b)(3) of this A–12, unless the trustee, custodian, or issuer of an IRA has actual knowledge to the con- trary, the trustee, custodian, or issuer may rely on the IRA owner’s representation (madeinwritingorsuchotherformasmay be prescribed by the Commissioner) of the amount of the premiums described in 2012–13 I.R.B.609March 26, 2012 paragraphs (b)(2)(ii)(B) and (b)(3)(ii)(B) of this A–12 that are not paid under the IRA, and the amount of the account bal- ances described in paragraph (b)(3)(i) of this A–12, other than the account balance under the IRA. (d)Roth IRAs. A contract that is pur- chased under a Roth IRA is not treated as a contract that is intended to be a QLAC for purposes of applying the dollar and percentage limitation rules in paragraphs (b)(2)(ii)(B) and (b)(3)(ii)(B) of this A–12. See §1.408A–6, A–14(d). If a QLAC is purchased or held under a plan, annuity, account, or traditional IRA, and that con- tractislaterrolledoverorconvertedtoa Roth IRA, the contract is not treated as a contract that is intended to be a QLAC af- ter the date of the rollover or conversion. Thus, premiums paid for the contract will not be taken into account under paragraph (b)(2)(ii)(B) or paragraph (b)(3)(ii)(B) of this A–12 after the date of the rollover or conversion. (e)Effective/applicability date.This Q&A–12 applies to contracts purchased on or after the date of publication of the Trea- sury decision adopting these rules as final regulations in theFederal Registerand for determining required minimum distri- butions for distribution calendar years be- ginning on or after January 1, 2013. Par. 6. Section 1.408A–6 is amended by adding paragraph A–14(d) to read as follows: §1.408A–6 Distributions. ***** A–14. * * * (d) The special rules in §1.401(a)(9)–5, A–3, and §1.408–8, Q&A–12, for a QLAC, defined in §1.401(a)(9)–6, A–17, do not apply to a Roth IRA. ***** Par. 7. Section 1.6047–2 is added to read as follows: §1.6047–2 Information relating to qualifying longevity annuity contracts. (a)Requirement and form of re- port—(1)In general. Any person issuing any contract that states that it is intended to be a qualifying longevity annuity con- tract (QLAC), defined in §1.401(a)(9)–6, Q&A–17, shall make reports required by this section. This requirement applies only to contracts purchased or held under any plan, annuity, or account described in sec- tion 401(a), 403(a), 403(b), or 408 (other than a Roth IRA) or eligible governmental section 457(b) plan. (2)Initial disclosure. The issuer shall be required to prepare a report identify- ing that the contract is intended to be a QLAC and containing the following infor- mation— (i) A plain-language description of the dollar and percentage limitations on pre- miums; (ii) The annuity starting date under the contract, and, if applicable, a description of the individual’s ability to elect to com- mence payments before the annuity start- ing date; (iii) The amount (or estimated amount) of the periodic annuity payment that is payable after the annuity starting date as a single life annuity (including, if an esti- mated amount, the assumed interest rate or rates used in making this determination), and a statement that there is no commuta- tion benefit or right to surrender the con- tract in order to receive its cash value; (iv) A statement of any death benefit payable under the contract, including any differences between benefits payable if the individual dies before the annuity starting date and benefits payable if the individual dies on or after the annuity starting date; (v) A description of the administrative procedures associated with an individual’s elections under the contract, including deadlines, how to obtain forms, and where to file forms, and the identity and contact information of a person from whom the individual may obtain additional informa- tion about the contract; and (vi) Such other information as the Com- missioner may require. (3)Annual report. The issuer shall make annual calendar-year reports on the applicable form prescribed by the Com- missioner for this purpose concerning the status of the contract. The report shall identify that the contract is intended to be a QLAC and shall contain the following in- formation— (i) The name, address, and identifying number of the issuer of the contract, along with information on how to contact the is- suer for more information about the con- tract; (ii) The name, address, and identifying number of the individual in whose name the contract has been purchased; (iii) If the contract was purchased under a plan, the name of the plan, the plan num- ber, and the Employer Identification Num- ber (EIN) of the plan sponsor; (iv) If payments have not yet com- menced, the annuity starting date on which the annuity is scheduled to commence, the amount of the periodic annuity payable on that date, and whether that date may be accelerated; (v) The amount of each premium paid for the contract, along with the date of the premium payment; and (vi) Such other information as the Com- missioner may require. (b)Manner and time for filing—(1)Ini- tial disclosure. The report required by paragraph (a)(2) of this section shall not be filed with the Internal Revenue Service. (2)Annual report—(i)Timing.There- port required by paragraph (a)(3) of this section shall be filed in accordance with the forms and instructions prescribed by the Commissioner. Such a report must be filed for each calendar year beginning with the year in which premiums for a con- tract are first paid and ending with the ear- lier of the year in which the individual in whose name the contract has been pur- chased attains age 85 (as adjusted pursuant to §1.401(a)(9)–6, A–17(d)(3)(ii)) or dies. (ii)Surviving spouse. If the individual dies and the sole beneficiary under the con- tract is the individual’s spouse (in which case the spouse’s annuity would not be re- quired to commence until the individual would have attained age 85), the report must continue to be filed for each calen- dar year until the calendar year in which the distributions to the spouse commence or in which the spouse dies, if earlier. (c)Issuer statements.(1)Initial disclo- sure. Each issuer required to make a report required by paragraph (a)(2) of this sec- tion shall furnish to the individual in whose name the contract has been purchased a statement containing the information in the report. The statement shall be furnished at the time of purchase. The statement is not required to include information that the is- suer has already provided to the individ- ual in order to comply with any applicable state disclosure law. (2)Annual report. Each issuer required to file the report required by paragraph March 26, 20126102012–13 I.R.B. (a)(3) of this section shall furnish to the individual in whose name the contract has been purchased a statement containing the informationrequiredtobefurnishedinthe report,exceptthatsuchstatementshallbe furnished to a surviving spouse to the ex- tent that the report is required to be filed under paragraph (b)(2)(ii) of this section. A copy of the required form may be used to satisfy the statement requirement of this paragraph (c)(2). If a copy of the re- quired form is not used to satisfy the state- ment requirement of this paragraph (c)(2), the statement shall contain the following language: “This information is being fur- nished to the Internal Revenue Service.” The statement required by this paragraph (c)(2) shall be furnished on or before Jan- uary 31 following the calendar year for which the report required by paragraph (a)(3) of this section is required. (d)Effective/applicability date.This section applies on or after the date of pub- lication of the Treasury decision adopting these rules as final regulations in theFed- eral Register. Steven T. Miller, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on February 2, 2012, 8:45 a.m., and published in the issue of the Federal Register for February 3, 2012, 77 F.R. 5443) Information Reporting by Passport Applicants; Withdrawal Announcement 2012–11 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Withdrawal of notice of pro- posed rulemaking; notice of proposed rule- making. SUMMARY: This document contains pro- posed regulations that provide information reporting rules for certain passport appli- cants. These regulations do not provide information reporting rules for individuals applying to become permanent residents (green card holders). This document also withdraws the notice of proposed rulemak- ing (57 FR 61373) published in theFed- eral Registeron December 24, 1992. DATES: Comments and requests for a public hearing must be received by April 25, 2012. ADDRESSES: Send submissions to CC:PA:LPD:PR (REG–208274–86), room 5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washing- ton, DC 20044. Submissions may be hand-delivered Monday through Friday betweenthehoursof8a.m. and4p.m. to CC:PA:LPD:PR (REG–208274–86), Courier’s Desk, Internal Revenue Ser- vice, 1111 Constitution Avenue, NW, Washington, DC, or sent electroni- cally via the Federal eRulemaking Por- tal athttp://www.regulations.gov(IRS REG–208274–86). FOR FURTHER INFORMATION CONTACT: Concerning the proposed reg- ulations, Lynn Dayan or Quyen Huynh at (202) 622–3880; concerning submis- sions of comments and requests for public hearing, Oluwafunmilayo Taylor, (202) 622–7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collections of information con- tained in this notice of proposed rulemak- ing have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduc- tion Act of 1995 (44 U.S.C. 3507(d)) and, pending receipt and evaluation of public comments approved by the Office of Man- agement and Budget under control number 1545–1359. Comments on the collections of information should be sent to theOf- fice of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Reg- ulatory Affairs, Washington, DC 20503, with copies to theInternal Revenue Ser- vice, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:M:S, Washington, DC 20224. Comments on the collection of in- formation should be received by March 26, 2012. Comments are specifically requested concerning: Whether the proposed collection of in- formation is necessary for the proper per- formance of the duties of the Internal Rev- enue Service, including whether the infor- mation will have practical utility; The accuracy of the estimated burden associated with the proposed collection of information; How the quality, utility, and clarity of the information to be collected may be en- hanced; How the burden of complying with the proposed collection of information may be minimized, including through the appli- cation of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of service to provide information. The collection of information in these proposed regulation is in § 301.6039E–1(b). The information is required to be provided by individuals who apply for a United States passport or a renewal of a United States passport. The information provided by passport ap- plicants will be used by the IRS for tax compliance purposes. Estimated total annual reporting bur- den: 1,213,354 hours. Estimated average annual burden hours per respondent: four to ten minutes. Estimated number of respondents: 12,133,537. Estimated annual frequency of re- sponses: one. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Of- fice of Management and Budget. Books or records relating to a collection of 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 return information are confidential, as required by 26 U.S.C. 6103. Background This document contains proposed amendments to 26 CFR part 301 under sec- tion 6039E of the Internal Revenue Code. Section 6039E provides rules concerning information reporting by U.S. passport and permanent resident applicants, and requires specified federal agencies to pro- vide certain information to the IRS. On December 24, 1992, the Trea- sury Department and the IRS pub- lished a notice of proposed rulemaking 2012–13 I.R.B.611March 26, 2012 (REG–208274–86, 1993–1 C.B. 822) in theFederal Register(57 FR 61373) under section 6039E (the 1992 proposed regu- lations). The 1992 proposed regulations provided guidance for both passport and permanent resident applicants to comply with information reporting rules under section 6039E, and indicated the respon- sibilities of specified federal agencies to provide certain information to the IRS. No requests were received to testify on the 1992 proposed regulations and, ac- cordingly, no public hearing was held. One written comment letter responding to the 1992 proposed regulations was received, which recommended modifica- tions to Form 9003, “Additional Questions to be Completed by All Applicants for Per- manent Residence in the United States”. Because Form 9003 is no longer in use and these proposed regulations do not address information reporting rules for permanent resident applicants, the comment was not considered in drafting these regulations. The proposed regulations do not provide rules concerning information reporting by individuals applying to become perma- nent residents; therefore such individuals are not within the scope of the proposed regulations. The information required to be pro- vided by passport applicants under section 6039E is collected on the U.S. passport application form submitted by such appli- cants to the Department of State. The proposed regulations also with- draw the 1992 proposed regulations. Explanation of Provisions The proposed regulations set forth rules concerning information reporting by pass- port applicants under section 6039E. Sec- tion 301.6039E–1(a) requires an individ- ual applying for a U.S. passport (passport applicant), other than an individual who applies for an official passport, diplomatic passport or passport for use on other offi- cial U.S. governmentbusiness, to provide certain information with his or her passport application. Section 301.6039E–1(b)(1) describes the required information to be provided by passport applicants: the applicant’s full name and, if applicable, previous name; address of regular or principal place of residence within the country of residence and, if different, mailing address; taxpayer identifying number (TIN); and date of birth. Section 301.6039E–1(b)(2) pro- vides that the required information must be submitted with the passport application, regardless of where the applicant resides at the time it is submitted. Section 301.6039E–1(c) provides guid- ance on the circumstances under which the IRS may impose a $500 penalty amount on any passport applicant who fails to provide the required information. Section 301.6039E–1 is proposed to be applicable to passport applications submit- ted after the date of publication of the Trea- sury decision adoptingthese rules as final regulations in theFederal Register. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory 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 reg- ulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexi- bility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Request for Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are sub- mitted timely to the IRS as prescribed in this preamble under the “Addresses” head- ing. The IRS and the Treasury Depart- ment request comments on all aspects of the proposed rules. All comments will be available for public inspection and copy- ing. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in theFederal Register. Drafting Information The principal author of these regula- tions is Quyen P. Huynh of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development. ***** Withdrawal of Proposed Regulations Accordingly, under the author- ity of 26 U.S.C. 7805, the notice of proposed rulemaking (INTL–978–86; REG–208274–86) that was published in theFederal Registeron December 24, 1992 (57 FR 61373) is withdrawn. Proposed Amendments to the Regulations Accordingly, 26 CFR part 301 is pro- posed to be amended as follows: PART 301— PROCEDURE AND ADMINISTRATION Paragraph 1. The authority citation for part 301 is amended by adding an entry in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 301.6039E–1 also issued under 26 U.S.C. 6039E. Par. 2. Section 301.6039E–1 is added to read as follows: § 301.6039E–1 Information reporting by passport applicants. (a)In general. Every individual who applies for a U.S. passport (passport appli- cant), other than an individual who applies for a U.S. passport for use in diplomatic, military, or other official U.S. government business, shall include with his or her pass- port application the information described in paragraph (b) of this section. (b)Required information—(1)In gen- eral. The information required under para- graph (a) of this section shall include the following information: (i) The passport applicant’s full name and, if applicable, previous name; (ii) Address of the passport applicant’s regular or principal place of residence within the country of residence and, if different, mailing address; March 26, 20126122012–13 I.R.B. (iii) The passport applicant’s taxpayer identifying number (TIN), if such a num- ber has been issued to the passport appli- cant. A TIN means the individual’s social security number (SSN) issued by the So- cial Security Administration. A passport applicant who does not have an SSN must enter zeros in the appropriate space on the passport application; and (iv) The passport applicant’s date of birth. (2)Time for furnishing information.A passport applicant must provide the infor- mation required by this section at the time of submitting his or her passport applica- tion, whether by personal appearance or mail, to the Department of State (includ- ing United States Embassies and Consular posts abroad). (c)Penalties—(1)In general.Ifthein- formation required by paragraph (b)(1) of this section is incomplete or incorrect, or the information is not timely filed, then the passport applicant shall be subject to a penalty equal to $500 per application. Before assessing a penalty under this sec- tion, the IRS will ordinarily provide to the passport applicant written notice of the po- tential assessment of the $500 penalty, re- questing the information being sought, and offering the applicant an opportunity to ex- plain why such information was not pro- vided at the time the passport application was submitted. A passport applicant has 60 days (90 days if the notice is addressed to an applicant outside the United States) to respond to the notice. If, after consider- ing all the surrounding circumstances, the passport applicant demonstrates to the sat- isfaction of the Commissioner or his del- egate that the failure is due to reasonable cause and not due to willful neglect, then the IRS will not assess the penalty. (2)Example. The following example illustrates the provisions of paragraph (c) this section. Example. C, a citizen of the United States, makes an error in supplying information on his passport ap- plication. Based on the nature of the error and C’s timely response to correct the error after being con- tacted by the IRS, and considering all the surround- ing circumstances, the Commissioner concludes that the mistake is due to reasonable cause and not due to willful neglect. Accordingly, no penalty is assessed. (d)Effective/applicability date.The rules of this section apply to passport applications submitted after the date of publication of the Treasury decision adopt- ing these rules as final regulations in the Federal Register. Steven T. Miller, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on January 25, 2012, 8:45 a.m., and published in the issue of the Federal Register for January 26, 2012, 77 F.R. 3964) 2012–13 I.R.B.613March 26, 2012 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. March 26, 2012i2012–13 I.R.B. Numerical Finding List 1 Bulletins 2012–1 through 2012–13 Announcements: 2012-1, 2012-1 I.R.B.249 2012-2, 2012-2 I.R.B.285 2012-3, 2012-4 I.R.B.335 2012-4, 2012-4 I.R.B.335 2012-5, 2012-5 I.R.B.348 2012-6, 2012-6 I.R.B.366 2012-7, 2012-6 I.R.B.367 2012-8, 2012-7 I.R.B.373 2012-9, 2012-7 I.R.B.377 2012-11, 2012-13 I.R.B.611 2012-12, 2012-12 I.R.B.562 Notices: 2012-1, 2012-2 I.R.B.260 2012-3, 2012-3 I.R.B.289 2012-4, 2012-3 I.R.B.290 2012-5, 2012-3 I.R.B.291 2012-6, 2012-3 I.R.B.293 2012-7, 2012-4 I.R.B.308 2012-8, 2012-4 I.R.B.309 2012-9, 2012-4 I.R.B.315 2012-10, 2012-5 I.R.B.343 2012-11, 2012-5 I.R.B.346 2012-12, 2012-6 I.R.B.365 2012-13, 2012-9 I.R.B.421 2012-14, 2012-8 I.R.B.411 2012-15, 2012-9 I.R.B.424 2012-16, 2012-9 I.R.B.427 2012-17, 2012-9 I.R.B.430 2012-18, 2012-10 I.R.B.438 2012-19, 2012-10 I.R.B.440 2012-20, 2012-13 I.R.B.574 2012-21, 2012-10 I.R.B.450 2012-22, 2012-13 I.R.B.576 2012-23, 2012-11 I.R.B.483 2012-24, 2012-13 I.R.B.578 Proposed Regulations: REG-109369-10, 2012-9 I.R.B.434 REG-110980-10, 2012-13 I.R.B.581 REG-113770-10, 2012-13 I.R.B.587 REG-113903-10, 2012-11 I.R.B.486 REG-120282-10, 2012-11 I.R.B.487 REG-130302-10, 2012-8 I.R.B.412 REG-149625-10, 2012-2 I.R.B.279 REG-102988-11, 2012-4 I.R.B.326 REG-115809-11, 2012-13 I.R.B.598 REG-124627-11, 2012-8 I.R.B.417 REG-130777-11, 2012-5 I.R.B.347 REG-135071-11, 2012-12 I.R.B.561 REG-145474-11, 2012-11 I.R.B.495 Revenue Procedures: 2012-1, 2012-1 I.R.B.1 2012-2, 2012-1 I.R.B.92 2012-3, 2012-1 I.R.B.113 2012-4, 2012-1 I.R.B.125 2012-5, 2012-1 I.R.B.169 2012-6, 2012-1 I.R.B.197 2012-7, 2012-1 I.R.B.232 2012-8, 2012-1 I.R.B.235 2012-9, 2012-2 I.R.B.261 2012-10, 2012-2 I.R.B.273 2012-11, 2012-7 I.R.B.368 2012-12, 2012-2 I.R.B.275 2012-13, 2012-3 I.R.B.295 2012-14, 2012-3 I.R.B.296 2012-15, 2012-7 I.R.B.369 2012-16, 2012-10 I.R.B.452 2012-17, 2012-10 I.R.B.453 2012-18, 2012-10 I.R.B.455 2012-21, 2012-11 I.R.B.484 Revenue Rulings: 2012-1, 2012-2 I.R.B.255 2012-2, 2012-3 I.R.B.286 2012-3, 2012-8 I.R.B.383 2012-4, 2012-8 I.R.B.386 2012-5, 2012-5 I.R.B.337 2012-6, 2012-6 I.R.B.349 2012-7, 2012-6 I.R.B.362 2012-8, 2012-13 I.R.B.563 2012-9, 2012-11 I.R.B.475 Treasury Decisions: 9559, 2012-2 I.R.B.252 9560, 2012-4 I.R.B.299 9561, 2012-5 I.R.B.341 9562, 2012-5 I.R.B.339 9563, 2012-6 I.R.B.354 9565, 2012-8 I.R.B.378 9566, 2012-8 I.R.B.389 9567, 2012-8 I.R.B.395 9568, 2012-12 I.R.B.499 9569, 2012-11 I.R.B.465 9570, 2012-11 I.R.B.477 9571, 2012-11 I.R.B.468 9572, 2012-11 I.R.B.471 9573, 2012-12 I.R.B.498 9574, 2012-12 I.R.B.559 1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin 2011–52, dated December 27, 2011. 2012–13 I.R.B.iiMarch 26, 2012 Finding List of Current Actions on Previously Published Items 1 Bulletins 2012–1 through 2012–13 Announcements: 2002-44 Supplemented by Notice 2012-13, 2012-9 I.R.B.421 2010-19 Obsoleted by Ann. 2012-12, 2012-12 I.R.B.562 2011-63 Corrected by Ann. 2012-9, 2012-7 I.R.B.377 Notices: 2006-87 Superseded by Notice 2012-19, 2012-10 I.R.B.440 2006-99 Superseded in part by Notice 2012-20, 2012-13 I.R.B.574 2007-25 Superseded by Notice 2012-19, 2012-10 I.R.B.440 2007-77 Superseded by Notice 2012-19, 2012-10 I.R.B.440 2008-107 Superseded by Notice 2012-19, 2012-10 I.R.B.440 2010-27 Superseded by Notice 2012-19, 2012-10 I.R.B.440 2010-88 As modified by Ann. 2011-40, is superseded by Notice 2012-1, 2012-2 I.R.B.260 2011-8 Superseded by Notice 2012-19, 2012-10 I.R.B.440 2011-28 Superseded by Notice 2012-9, 2012-4 I.R.B.315 Proposed Regulations: REG-208274-86 Withdrawn by Ann. 2012-11, 2012-13 I.R.B.611 Revenue Procedures: 2000-43 Amplified, modified and superseded by Rev. Proc. 2012-18, 2012-10 I.R.B.455 2003-61 Superseded by Notice 2012-8, 2012-4 I.R.B.309 2007-44 Modified by Ann. 2012-3, 2012-4 I.R.B.335 2011-1 Superseded by Rev. Proc. 2012-1, 2012-1 I.R.B.1 2011-2 Superseded by Rev. Proc. 2012-2, 2012-1 I.R.B.92 2011-3 Superseded by Rev. Proc. 2012-3, 2012-1 I.R.B.113 2011-4 Superseded by Rev. Proc. 2012-4, 2012-1 I.R.B.125 2011-5 Superseded by Rev. Proc. 2012-5, 2012-1 I.R.B.169 2011-6 Superseded by Rev. Proc. 2012-6, 2012-1 I.R.B.197 2011-7 Superseded by Rev. Proc. 2012-7, 2012-1 I.R.B.232 2011-8 Superseded by Rev. Proc. 2012-8, 2012-1 I.R.B.235 2011-9 Superseded by Rev. Proc. 2012-9, 2012-2 I.R.B.261 2011-10 Superseded by Rev. Proc. 2012-10, 2012-2 I.R.B.273 2011-37 Obsoleted in part by Rev. Proc. 2012-16, 2012-10 I.R.B.452 2011-40 Corrected by Ann. 2012-6, 2012-6 I.R.B.366 2011-49 Modified by Ann. 2012-3, 2012-4 I.R.B.335 Revenue Procedures— Continued: 2011-50 Corrected by Ann. 2012-6, 2012-6 I.R.B.366 2011-51 Corrected by Ann. 2012-6, 2012-6 I.R.B.366 2012-8 Corrected by Ann. 2012-7, 2012-6 I.R.B.367 Revenue Rulings: 92-19 Supplemented in part by Rev. Rul. 2012-6, 2012-6 I.R.B.349 2008-40 Modified by Notice 2012-6, 2012-3 I.R.B.293 2011-1 Modified by Notice 2012-6, 2012-3 I.R.B.293 Treasury Decision: 9517 Corrected by Ann. 2012-4, 2012-4 I.R.B.335 Ann. 2012-5, 2012-5 I.R.B.348 1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–27 through 2011–52 is in Internal Revenue Bulletin 2011–52, dated December 27, 2011. March 26, 2012iii2012–13 I.R.B. INDEX Internal Revenue Bulletins 2012–1 through 2012–13 The abbreviation and number in parenthesis following the index entry refer to the specific item; numbers in roman and italic type following the parentheses refer to the Internal Revenue Bulletin in which the item may be found and the page number on which it appears. Key to Abbreviations: AnnAnnouncement CDCourt Decision DODelegation Order EOExecutive Order PLPublic Law PTEProhibited Transaction Exemption RPRevenue Procedure RRRevenue Ruling SPRStatement of Procedural Rules TCTax Convention TDTreasury Decision TDOTreasury Department Order EMPLOYEE PLANS Determination letters, issuing procedures (RP 6) 1,197 Full funding limitations, weighted average interest rates, seg- ment rates for: January 2012 (Notice 10) 5,343 February 2012 (Notice 16) 9,498 March 2012 (Notice 24) 13,578 Letter rulings: And determination letters, areas which will not be issued from: Associates Chief Counsel and Division Counsel (TE/GE) (RP 3) 1,113 Associate Chief Counsel (International) (RP 7) 1,232 And general information letters, procedures (RP 4) 1,125 User fees, request for letter rulings (RP 8) 1,235; correction (Ann 7) 6,367 Longevity annuity contracts (REG–115809–11) 13,598 Modifications to minimum present value requirements for par- tial annuity distribution options under defined benefit pension plans (REG–110980–10) 13,581 Proposed Regulations: 26 CFR 1.401(a)(9)–5, –6, amended; 1.403(b)–6, amended; 1.408–8, amended; 1.408A–6, amended; 1.6047–2, added; longevity annuity contracts (REG–115809–11) 13,598 26 CFR 1.417(e)–1, amended; modifications to mini- mum present value requirements for partial annuity distribution options under defined benefit pension plans (REG–110980–10) 13,581 Qualified plans: Accrued benefits (RR 4) 8,386 Determination letters (Ann 3) 4,335 Group trusts (Notice 6) 3,293 Qualified joint and survivors annuities (RR 3) 8,383 EMPLOYEE PLANS—Cont. Retirement plans, covered compensation, permitted disparity (RR 5) 5,337 Technical advice to IRS employees (RP 5) 1,169 EMPLOYMENT TAX Employer’s annual federal tax return and modifications to the deposit rules (TD 9566) 8,389 Interim guidance for cost of health care coverage reporting on Form W-2 (Notice 9) 4,315 Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Regulations: 26 CFR 31.6011(a)–1, –4, amended; 31.6011(a)–1T, –4T, re- moved; 31.6071(a)–1, amended; 31.6302–0, –1, amended; 31.6302–0T, –1T, removed; employer’s annual federal tax return and modifications to the deposit rules (TD 9566) 8, 389 Technical Advice Memoranda (RP 2) 1,92 Work opportunity tax credit (WOTC) (Notice 13) 9,492 ESTATE TAX Extension of time to file estate tax return to elect portability of a deceased spousal unused exclusion amount under section 2010(c) (Notice 21) 10,450 Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Technical Advice Memoranda (RP 2) 1,92 EXCISE TAX Frequently asked questions, Patient Protection and Affordable Care Act (Notice 17) 9,501 Guidance regarding the repeal of section 163(f)(2)(B) (Notice 20) 13,574 Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Proposed Regulations: 26 CFR 48.4191–1, –2, added; 48.4221–1, –2, amended; 48.6416(b)(2)–2, amended; taxable medical devices (REG–113770–10) 13,587 Taxable medical devices (REG–113770–10) 13,587 Technical Advice Memoranda (RP 2) 1,92 EXEMPT ORGANIZATIONS Annual notice to donors regarding pending and settled declara- tory judgment suits (Ann 1) 1,249 Application for recognition as a 501(c)(29) organization (TD 9574) 12,559; (REG–135071–11) 12,561 2012–13 I.R.B.ivMarch 26, 2012 EXEMPT ORGANIZATIONS—Cont. Certain filing changes for tax-exempt organizations (Notice 4) 3, 290 Letter rulings: And determination letters: Areas which will not be issued from Associates Chief Counsel and Division Counsel (TE/GE) (RP 3) 1,113 Qualified nonprofit health insurance issuers, procedures (RP 11) 7,368 And general information letters, procedures (RP 4) 1,125 Exemption application determination letter rulings under sec- tions 501, 509, 4940, and 4942 (RP 10) 2,273 Exemption application determination letter rulings under sec- tions 501 and 521 (RP 9) 2,261 User fees, request for letter rulings (RP 8) 1,235; correction (Ann 7) 6,367 Procedures for charitable trusts to obtain Type III supporting or- ganization classification rulings (Ann 12) 12,562 Proposed Regulations: 26 CFR 1.501(c)(29)–1, added; application for recognition as a 501(c)(29) organization (REG–135071–11) 12,561 Regulations: 26 CFR 1.1501(c)(29)–1T, added;application for recognition as a 501(c)(29) organization (TD 9574) 12,559 Technical advice to IRS employees (RP 5) 1,169 GIFT TAX Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Technical Advice Memoranda (TAMs) (RP 2) 1,92 INCOME TAX Adequate notice revenue procedure renewal (RP 15) 7,369 Allocation and apportionment of interest expense (TD 9571) 11, 468; (REG–113903–10) 11,486 Application of the segregation rules to small shareholders (REG–149625–10) 2,279 Basis reporting by securities brokers and basis determination for debt instruments and options (REG–102988–11) 4,326 Bonds, national and area median gross income figures guidance for 2012 (RP 16) 10,452 Changes affecting tax year 2011 filing of information returns (Ann 6) 6,366 Conduit financing arrangements (TD 9562) 5,339 Continuing education provider and accrediting organization (RP 12) 2,275 Corporate reorganization, guidance on the measurement of con- tinuity of interest (TD 9565) 8,378; (REG–124627–11) 8,417 Credits: Iowa credit disaster relief (Notice 7) 4,308 New markets tax credit (TD 9560) 4,299 INCOME TAX—Cont. Reimbursements under section 1603 of American Recovery and Reinvestment Tax Act (ARRTA) of 2009 (Notice 23) 11,483 Low-income housing credit: 2012 population figures used for calculations (Notice 22) 13,576 Work opportunity tax credit (WOTC) (Notice 13) 9,492 Current refundings of tax-exemptbonds in certain disaster relief bond programs (Notice 3) 3,289 Damages received on account of personal physical injuries or physical sickness (TD 9573) 12,498 Determination of housing cost amounts eligible for exclusion or deduction for 2012 (Notice 19) 10,440 Disciplinary actions involving attorneys, certified public ac- counts, enrolled agents, and enrolled actuaries (Ann 8) 7,373 Dividend equivalents from sources within the United States (TD 9527) 11,471; (REG–120282–10) 11,487 Electronic filing of K–1s (RP 17) 10,453 Equitable relief under section 66(c) or section 6015(f) (Notice 8) 4,309 Ex parte communications between appeals and other Internal Revenue Service employees (RP 18) 10,455 Extension of time to file estate tax return to elect portability of a deceased spousal unused exclusion amount under section 2010(c) (Notice 21) 10,450 Foreign earned income exclusion, 2011 update (RP 21) 11,484 Forms: 1097, 1098, 3921, 3922, 5498, 8935, and W-2, requirements for filing electronically; correction to Rev. Proc. 2011–40 (Ann 2) 2,285 Gross income, exclusions, restitution payments under the Traf- ficking Victims Protection Act of 2000 (Notice 12) 6,365 Guidance regarding foreign base company sales income (TD 9563) 6,354 Guidance regarding the repeal of section 163(f)(2)(B) (Notice 20) 13,574 Health savings accounts (HSAs),Indian health service (Notice 14) 8,411 Information reporting by passport applicants (Ann 11) 13,611 Insurance tax, insurance companies, interest rate tables (RR 6) 6, 349 Interest: Investment: Federal short-term, mid-term, and long-term rates for: January (RR 2) 3,286 February (RR 7) 6,362 March (RR 9) 11,475 Rates: Underpayment and overpayments, quarter beginning: April 1, 2012 (RR 8) 13,563 Letters rulings: And determination letters, areas which will not be issued from: Associate Chief Counsel and Division Counsel (TE/GE) (RP 3) 1,113 Associate Chief Counsel (International) (RP 7) 1,232 March 26, 2012v2012–13 I.R.B. INCOME TAX—Cont. And information letters issued by Associate Offices, determi- nation letters issued by Operating Divisions (RP 1) 1,1 Maximum vehicle values, specialvaluation rules, 2012 (RP 13) 3,295 Physical inspection pilot program (Notice 18) 10,438 Proposed Regulations: 26 CFR 1.275–7, revised; treasury inflation-protected securi- ties issued at a premium (REG–130777–11) 5,347 26 CFR 1.368–1, amended; corporate reorganizations, guidance on the measurement of continuity of interest (REG–124627–11) 8,417 26 CFR 1.382–3, amended; application of section 382 seg- regation rules to small shareholders (REG–149625–10) 2, 279 26 CFR 1.469–0, amended; 1.469–5, –5T, –9, revised; mate- rial participation of limited partners (REG–109369–10) 9, 434 26 CFR 1.482–7, amended; use of differential income stream as an application of the income method and as a consider- ation in assessing the best method (REG–145474–11) 11, 495 26 CFR 1.861–9, –11, revised; allocation and apportionment of interest expense (REG–113903–11) 11,486 26 CFR 1.863–7, amended; 1.871–15, –16, added; 1.881–2, added; 1.892–3, added; 1.894–1, added; 1.1441–2, –3, –4, –6, –7, amended; 1.1461.1, amended; dividend equivalents from sources within the United States (REG–120282–10) 11,487 26 CFR 1.6038D–0 thru –8, added; reporting of specified for- eign financial assets (REG–130302–10) 8,412 26 CFR 1.6045–1, amended; 1.6045A–1, amended; 1.6045B–1, amended; basis reporting by securities brokers and basis determination for debt instruments and options (REG–102988–11) 4,326 Publications: 1187, specifications for filing Form 1040–S, foreign person’s U.S. source income subject to withholding, electronically; correction (Ann 6) 6,366 1220, specifications for filing Forms 1097, 1098, 3921, 3922, 5498, 8935, and W-2 electronically; correction to Rev. Proc. 2011–40 (Ann 2) 2,285; correction (Ann 6) 6,366 1239, specifications for filing Form 8027, employer’s annual information return of tip income and allocated tips, elec- tronically; correction (Ann 6) 6,366 Recurring item exception (RR 1) 2,255 Regulations: 26 CFR 1.45D–1, added; 1.45D–1, amended; new markets tax credit (TD 9560) 4,299 26 CFR 1.104–1, revised; damages received on account of personal physical injuries or physical sickness (TD 9573) 12,498 26 CFR 1.275–7T, added; treasury inflation-protected securi- ties issued at a premium (TD 9561) 5,341 26 CFR 1.367(a)–1, –1T, amended; 1.482–0, –1, –2, –4, –5, –8, –9, amended; 1.482–0T, –1T, –2T, –4T, –7T, –8T, –9T, removed; 1.482–7, added; 1.861–17, amended; 1.6662–6, INCOME TAX—Cont. amended; 301.7701–1, amended; 602.101, revised; section 482, methods to determine taxable income in connection with a cost sharing arrangement (TD 9568) 12,499 26 CFR 1.368–1, amended; 1.368–1T, removed; corporate reorganizations, guidance on the measurement of continuity of interest (TD 9565) 8,378 26 CFR 1.482–7, amended; 1.482–7T, added; use of differen- tial income stream as an application of the income method and as a consideration in assessing the best method (TD 9569) 11,465 26 CFR 1.861–9T, amended; 1.861–11T, amended; reduc- tion of foreign tax credit limitation categories under section 904(d) (TD 9571) 11,468 26 CFR 1.863–7, amended; 1.863–7T, added; 1.871–15T, added; 1.871–16T, added; 1.881–2, amended; 1.881–2T, added; 1.1441–2, –3, –4, –7, amended; 1.144–2T, –3T, –4T, –7T, added; 1.1461–1, amended; 1.1461–1T, added; divi- dend equivalents from sources within the United States (TD 9572) 11,471 26 CFR 1.881–3, amended; conduit financing arrangements (TD 9562) 5,339 26 CFR 1.954–3, amended; 1.954–3T, removed; guidance re- garding foreign base company sales income (TD 9563) 6, 354 26 CFR 300.0, amended; 300.12, revised; 300.13, added; user fee to take the registered tax return preparer competency examination (TD 9559) 2,252 26 CFR 901.11, amended; regulations governing the perfor- mance of actuarial services under the Employee Retirement Income Security Act (ERISA)of 1974; correction (Ann 4) 4,335;correction(Ann5)5,348 26 CFR 1.6038D–0T, thru –8T, added; reporting of specified foreign financial assets (TD 9567) 8,395 26 CFR 1.6695–2, revised; tax return preparer penalties under section 6695 (TD 9570) 11,479 Regulations governing the performance of actuarial services un- der the Employee Retirement Income Security Act (ERISA) of 1974; correction (Ann 4) 4,335; correction (Ann 5) 5,348 Reporting of specified foreign financial assets (TD 9567) 8,395; (REG–130302–10) 8,412 Safe harbor reporting: Eligible REMICs required to report on Schedule Q informa- tion with respect to REMIC assets (Notice 5) 3,291 Guidance for REIT investing in certain REMIC regular and residual interests (RP 14) 3,296 Section 304 transactions (Notice 15) 9,495 Section 482, methods to determine taxable income in connection with a cost sharing arrangement (TD 9568) 12,499 Standard mileage rates, 2012 (Notice 1) 2,260 Tax return preparer penalties under section 6695 (TD 9570) 11, 479 Technical Advice Memoranda (TAMs) (RP 2) 1,92 Transitional relief for section 6045B issuer returns and state- ments for 2011 organizational actions (Notice 11) 5,346 Treasury inflation-protected securities issued at a premium (TD 9561) 5,341; (REG–130777–11) 5,347 2012–13 I.R.B.viMarch 26, 2012 INCOME TAX—Cont. Use of differential income streamas an application of the income method and as a consideration in assessing the best method (TD 9569) 11,465; (REG–145474–11) 11,495 User fee to take the registered tax return preparer competency examination (TD 9559) 2,252 SELF-EMPLOYMENT TAX Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1 Technical Advice Memoranda (TAMs) (RP 2) 1,92 March 26, 2012vii2012–13 I.R.B. Internal Revenue Service W ashington,DC20224 Official Business Penalty for Private Use, $300 INTERNAL REVENUE BULLETIN The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin- tendent of Documents when their subscriptions must be renewed. 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