us-irs-announcements-irb-2012-6-pdf•Internal Revenue Bulletin 2012-6 (PDF rendition): IRS Announcements
Internal Revenue Bulletin 2012-6 (PDF rendition): IRS Announcements
us-irs-announcements-irb-2012-6-pdfInternal Revenue Bulletin 2012-6 (PDF rendition): IRS AnnouncementsGuidance
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Bulletin No. 201 2-6 February 6, 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. 2012–6, page 349. Insurance companies; interest rate tables.Prevailing state assumed interest rates are provided for the determina- tion of reserves under section 807 of the Code for contracts issued in 2011 and 2012. Rev. Rul. 92–19 supplemented in part. Rev. Rul. 2012–7, page 362. Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate.For pur- poses of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for February 2012. T.D. 9563, page 354. Final regulations under section 954 of the Code provide guid- ance relating to foreign base company sales income in cases in which personal property sold by a controlled foreign corpo- ration is purchased, sold, manufactured, produced, grown or extracted by one or more branches of the controlled foreign corporations. Announcement 2012–6, page 366. This document contains changes to Publication 1220,Spec- ifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G Electronically(Rev. 9–2011), Publication 1187,Specification for Filing Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Electronically (Rev. 10–2011), and Publication 1239,Specifications for Filing Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, Electronically(Rev. 10–2011). Rev. Procs. 2011–40, 2011–50, and 2011–51 corrected. EMPLOYEE PLANS Announcement 2012–7, page 367. This document contains a correction to Rev. Proc. 2012–8, 2012–1 I.R.B. 235, which contains a typographical error in section 6.07(5). This announcement corrects that error. Rev. Proc. 2012–8 corrected. ADMINISTRATIVE Notice 2012–12, page 365. Restitution payments to victims of human trafficking. This notice advises taxpayers that mandatory restitution pay- ments awarded to victims of human trafficking under 18 U.S.C. section 1593 are excluded from gross income under section 61 of the Code for federal income tax purposes. Announcement 2012–6, page 366. This document contains changes to Publication 1220,Spec- ifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G Electronically(Rev. 9–2011), Publication 1187,Specification for Filing Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Electronically (Rev. 10–2011), and Publication 1239,Specifications for Filing Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, Electronically(Rev. 10–2011). Rev. Procs. 2011–40, 2011–50, and 2011–51 corrected. Finding Lists begin on page ii. 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. February 6, 20122012–6 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 42.—L ow-Income Housing Credi t The adjusted a pplicable federal short-term, mid- term, and long -term rates are set forth for the month of February 20 12. See Rev. Rul. 2012-7, page 362. Section 280G.—Golden Parachute Payments Federal short-term, mid-term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change The adjusted applicable federal long-term rate is set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 412.—Minimum Funding Standards The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 467.—Certain Payments for the Use of Property or Services The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 482.— Allocation of Income and D eductions Among Taxpaye rs Federal short -term, mid-term, and long-term rates are set forth f or the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 483.—Interest on Certain Deferred Payments The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 642.—Special Rules for Credits and Deductions Federal short-term, mid-term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 807.—Rules for Certain Reserves The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Insurance companies; interest rate tables.Prevailing state assumed interest rates are provided for the determination of reserves under section 807 of the Code for contracts issued in 2011 and 2012. Rev. Rul. 92–19 supplemented in part. Rev. Rul. 2012–6 For purposes of § 807(d)(4) of the In- ter nal Revenue Code, for taxable years be- gin ning after December 31, 2010, this rul- ing supplements the schedules of prevail- ing state assumed interest rates set forth in Rev. Rul. 92–19, 1992–1 C.B. 227. Th is information is to be used by insurance co mpanies in computing their reserves for (1 ) life insurance and supplementary total an d permanent disability benefits, (2) in- dividual annu ities and pure endowments, and (3) group a nnuities and pure endow- ments. As § 807 (d)(2)(B) requires that the interest rat e used to compute these reserves be the greate r of (1) the applicable federal interest rat e, or (2) the prevailing state as- sumed intere st rate, the table of applicable federal int erest rates in Rev. Rul. 92–19 is also supple mented. Following a re supplements to schedules A, B, C, and D to Part III of Rev. Rul. 92–19, prov iding prevailing state assumed interest ra tes for insurance products with different features issued in 2011 and 2012, and a suppl ement to the table in Part IV of Rev. Rul. 9 2–19, providing the applica- ble federa l interest rates under § 807(d) for 2011 and 20 12. This ruling does not sup- plement P arts I and II of Rev. Rul. 92–19. This is th e twentieth supplement to the interest rates provided in Rev. Rul. 92–19. Earlier s upplements were published in Rev. Rul. 93–58, 1993–2 C.B. 241 (inter- est rates for insurance products issued in 1992 and 1 993); Rev. Rul. 94–11, 1994–1 C.B. 196 (1993 and 1994); Rev. Rul. 95–4, 19 95–1 C.B. 141 (1994 and 1995); Rev. Rul . 96–2, 1996–1 C.B. 141 (1995 and 1996 ); Rev. Rul. 97–2, 1997–1 C.B. 134 (19 96 and 1997); Rev. Rul. 98–2, 1998–1 C.B. 259 (1997 and 1998); Rev. Rul. 99 –10, 1999–1 C.B. 671 (1998 and 1999); Rev. Rul. 2000–17, 2000–1 C.B. 842 (19 99 and 2000); Rev. Rul. 2001–11, 2001– 1 C.B. 780 (2000 and 2001); Rev. Rul. 2 002–12, 2002–1 C.B. 624 (2001 and 2002) ; Rev. Rul. 2003–24, 2003–1 C.B. 557 (2 002 and 2003); Rev. Rul. 2004–14, 2004– 1 C.B. 511 (2003 and 2004); Rev. Rul. 2005–29, 2005–1 C.B. 1080 (2004 and 2 005); Rev. Rul. 2006–25, 2006–1 C.B. 882 (2005 and 2006); Rev. Rul. 2007 –10, 2007–1 C.B. 660 (2006 and 2007 ); Rev. Rul. 2008–19, 2008–1 C.B. 669 ( 2007 and 2008); Rev. Rul. 2009–3, 200 9–5 I.R.B. 382 (2008 and 2009); Rev. Rul . 2010–7, 2010–8 I.R.B. 417 (2009 and 201 0); and Rev. Rul. 2011–23, 2011–43 I.R .B. 585 (2010 and 2011). 2012–6 I.R.B.349February 6, 2012 Part III. Prevailing State Assumed Interest Rates — Products Issued in Years After 1982* Schedule A STATUTORY VALUATION INTEREST RATES BASED ON THE 1980 AMENDMENTS TO THE N AICSTANDARDVALUATIONLAW A. Life insurance valuation: Guarantee Duration ( years) Calendar Year of Issue 2 012 10 or fewer 4.50** More than 10 but not more than 204.25** More than 204.00** Source: Rates calculated from the monthly averages, ending June 30, 2011, of Moody’s Composite Yield on Seasoned Corporate Bonds. *The terms used in the schedules in this ruling and in Part III of Rev. Rul. 92–19 are those used in the Standard Valuation Law; the terms are defined in Rev. Rul. 92–19. **As these rates exceed the applicable federal interest rate for 2012of 2.89 percent, the valuation interest rate to be used for this product under § 807 is the applicable rate specified in this table. February 6, 20123502012–6 I.R.B. Part III. Schedule B STATUTORY VALUATION INTEREST RATES BASED ON THE 1980 AMENDMENTS TO THE N AICSTANDARDVALUATIONLAW B. Single premium immediate annuities and annuity benefits involving life contingencies arising from other annuities with cash settlement options and from guaranteed interest contracts with cash settlement options: C alendarYearofIssueValuationInterestRate 2011 5.00* Source: Rates calculated from the monthly averages, ending June 30, 2011, of Moody’s Composite Yield on Seasoned Corporate Bonds (formerly known as Moody’s Corporate Bond Yield Average — Monthly Average Corporates). The terms used in this schedule are those used in the Standard Valuation Law as defined in Rev. Rul. 92–19. *As this prevailing state assumed interest rate exceeds the applicable federal interest rate for 2011 of 3.46 percent, the valuation interest rate of 5.00 percent is to be used for this product under § 807. 2012–6 I.R.B.351February 6, 2012 Part III. Schedule C24 — 2011 STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR 2011 CALENDAR YEAR BUSINESS G OVERNEDBYTHE1980AMENDMENTS C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis: Valuation Interest Rate (%) For Plan Type Cash Settlement O ptions? Future Interest G uarantee? Guarantee Duration ( years)ABC YesYes 5 or fewer5.00*4.50*4.25* More than 5, but not more than 10 4.75*4.50*4.25* More than 10, but not more than 20 4.50*4.25* 4.00* More than 204.00* 3.75*3.75* YesNo 5 or fewer5.00*4.50*4.25* More than 5, but not more than 10 5.00*4.50*4.25* More than 10, but not more than 20 4.75*4.25*4.25* More than 20 4.25* 4.00*4.00* NoYes or No 5 or fewer5.00* More than 5, but not more than 10 4.75* NOT APPLICABLE More than 10, but not more than 20 4.50* More than 204.00* Source: Rates calculated from the monthly averages, ending June 30, 2011, of Moody’s Composite Yield on Seasoned Corporate Bonds. *As these rates exceed the applicable federal interest rate for 2011 of 3.46 percent, the valuation interest rate to be used for this product under § 807 is the applicable rate specified in the above table. February 6, 20123522012–6 I.R.B. Part III. Schedule D24 — 2011 STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR 2011 CALENDAR YEAR BUSINESS G OVERNEDBYTHE1980AMENDMENTS D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement options and that are valued on a change in fund basis: Valuation Interest Rate For Plan Type Cash Settlement O ptions? Future Interest G uarantee? Guarantee Duration ( years)ABC YesYes 5 or fewer5.25*5.00*4.25* More than 5, but not more than 10 5.25*5.00*4.25* More than 10, but not more than 20 5.00*4.75*4.25* More than 20 4.50*4.50* 4.00* YesNo 5 or fewer5.25*5.25*4.50* More than 5, but not more than 10 5.25*5.25*4.50* More than 10, but not more than 20 5.00*5.00*4.25* More than 20 4.50*4.50* 4.00* Source: Rates calculated from the monthly averages, ending June 30, 2011, of Moody’s Composite Yield on Seasoned Corporate Bonds. *As these rates exceed the applicable federal interest rate for 2011 of 3.46 percent, the valuation interest rate to be used for this product under § 807 is the applicable rate specified in the above table. 2012–6 I.R.B.353February 6, 2012 Part IV. Applicable Federal Interest Rates TABLE OF APPLICABLE FEDERAL INTEREST RATES F ORPURPOSESOF§807 YearInterestRate 20113.46 20122.89 Sources: Rev. Rul. 2004–106, 2004–2 C.B. 893, for the 2005 rate; Rev. Rul. 2005–77, 2005–2 C.B. 1071, for the 2006 rate; Rev. Rul. 2006–61, 2006–2 C.B 1028 for the 2007 rate; Rev. Rul. 2007–70, 2007–2 C.B. 1158 for the 2008 rate; Rev. Rul. 2008–53, 2008–2 C.B. 1231 for the 2009 rate; Rev. Rul. 2009–38, 2009–49 I.R.B. 736 for the 2010 rate; Rev. Rul. 2010–29, 2010–50 I.R.B. 818 for the 2011 rate; and Rev. Rul. 2011–31, 2011–49 I.R.B. 829 for the 2012 rate. EFFECT ON OTHER REVENUE RULINGS Rev. Rul. 92–19 is supplemented by the addition to Part III of that ruling of pre- vailing state assumed interest rates under § 807 for certain insurance products issued in 2011 and 2012 and is further supple- mented by an addition to the table in Part IV of Rev. Rul. 92–19 listing applicable federal interest rates. Parts I and II of Rev. Rul. 92–19 are not affected by this ruling. DRAFTING INFORMATION The principal author of this revenue ruling is Linda K. Boyd of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact her at (202) 622–3970 (not a toll-free call). Section 846.—Discounted Unpaid Losses Defined The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 954.—Foreign Base Comp any Income 26 CFR 1.954–3: Foreign base company sales in- come. T.D. 9563 Guidance Regarding Foreign Base Company Sales Income AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. SUMMARY: This document contains final regulations that provide guidance relating to foreign base company sales income when personal property sold by a controlled foreign corporation (CFC) is purchased, sold, manufactured, produced, constructed, grown or extracted by one or more branches of the CFC. The regu- lations finalize proposed regulations and withdraw temporary regulations published on December 29, 2008. These regula- tions, in general, affect controlled foreign corporations and their United States share- holders. DATES:Effective Date:These regulations are effective on December 19, 2011. Applicability Date:These regulations apply to taxable years of CFCs beginning after June 30, 2009, and for taxable years of United States shareholders in which or with which such taxable years of the CFCs end. FOR FURTHER INFORMATION CONTACT: Barbara E. Rasch, (202) 622–3840 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background On February 28, 2008, the IRS and the Treasury Department published a notice of proposed rulemaking in theFed- eral Register(REG–124590–07, 2008–1 C.B. 801 [73 FR 10716], as corrected at 73 FR 20201), which proposed amend- ments to §1.954–3, including rules that addressed the application of the section 954(d)(2) branch rules under the foreign base company sales income (FBCSI) rules. Written comments were received in response to the notice of proposed rulemaking, and a public hearing on the proposed regulations was held on July 29, 2008. On December 29, 2008, the IRS and the Treasury Department published final and temporary regulations under section 954(d) (T.D. 9438, 2009–5 I.R.B. 387 [73 FR 79334–01], as corrected at 74 FR 11843–01) in theFederal Register. On the same date, the IRS and the Treasury Department published a notice of proposed rulemaking (REG–150066–08, 2009–5 I.R.B. 423 [73 FR 79421–01]) in the Federal Registercross-referencing the temporary regulations. The temporary and proposed regulations address the treatment under the FBCSI rules of the sale by a CFC of personal property that is purchased, sold, manufactured, produced, constructed, grown or extracted by one or more branches of the CFC. Written February 6, 20123542012–6 I.R.B. comments were received, and are available atwww.regulations.govor upon request. A public hearing was not requested and none was held. This Treasury decision adopts the proposed regulation with the changes described below as a final regulation and removes the corresponding temporary regulations. Explanation of Provisions These regulations amend the provisions of §1.954–3(b) that address the application of the FBCSI rules to CFCs with branches or similar establishments (branches), and, in particular manufacturing branches. A.Branch Rule Section 954(d)(1) defines FBCSI to meanincomederivedbyaCFCincon- nection with: (i) the purchase of personal property from a related person and its sale to any person; (ii) the sale of personal property to any person on behalf of a re- lated person; (iii) the purchase of personal property from any person and its sale to a related person; or (iv) the purchase of per- sonal property from any person on behalf of a related person, provided (in all of these cases) that the property is manufactured, produced, grown or extracted outside of the CFC’s country of organization and is sold for use, consumption or disposition outside of such country. There are certain exceptions to the FBCSI rules, including an exception that applies if a CFC sells personal property that it manufactured, produced, constructed, grew or extracted. See section 954(d)(1)(A), §1.954–3(a)(4). Section 954(d)(2) applies the FBCSI rules to a CFC that has a branch outside the CFC’s country of incorporation (branch rule). The branch rule applies if the CFC carries on purchasing, selling, manufac- turing, producing, constructing, growing or extracting activities by or through the branch, and the carrying on of such activ- ities has substantially the same tax effect as if the branch were a wholly-owned sub- sidiary of the CFC, as provided in regu- lations. If so, the branch and the remain- der of the CFC will be treated as separate corporations for purposes of determining FBCSI of such CFC. The “substantially same tax ef- fect” determination is made pur- suant to a tax rate disparity test set forth in §1.954–3(b)(1)(i)(b)and §1.954–3(b)(1)(ii)(b). With respect to a sales or purchase branch, the tax rate dis- parity test is applied by comparing the rate of tax imposed on the income derived from the purchasing or selling activities of the branch with the rate of tax that would apply if the income were earned by the remainder of the CFC. With respect to a manufacturing branch, the tax rate disparity test is applied by comparing the rate of tax imposed on the income derived from the purchasing and selling activities oftheCFCwiththerateoftaxthatwould apply to such income under the laws of the country in which the manufacturing branch is located. These final regulations provide guid- ance on the application of the branch rule, in particular with respect to a CFC that has multiple branches. For example, the regu- lations set forth rules on how to determine whether a CFC earns FBCSI if purchase and sales activities are conducted by mul- tiple branches and if multiple branches are involved in the manufacture of either a sin- gle or multiple items of personal property that is sold by the CFC. B.Summary of Comments 1. Demonstrably greater contribution Section 1.954–3T(b)(1)(ii)(c)(3)(iii) provides that if none of the branches or the remainder of a CFC independently sat- isfies the substantial contribution test, but the CFC as a whole made a substantial con- tribution, then for purposes of applying the tax rate disparity test, the location of man- ufacture, production or construction is the “tested manufacturing location” unless the “tested sales location” provided a “demon- strably greater” contribution. Comments were received seeking clarification on the meaning of the word “demonstrably” and expressing concern that it could be interpreted to provide an evidentiary rule regarding the standard of proof required with respect to the determination of the location of manufacture of an item pur- suant to §1.954–3T(b)(1)(ii)(c)(3)(iii). The IRS and the Treasury Department did not intend the word “demonstrably” to refer to an elevated standard of proof. In order to eliminate uncertainty, the word “demonstrably” has been deleted from §1.954–3(b)(1)(ii)(c)(3)(iii). 2. Grouping of branches Comments sought clarification of the rule in §1.954–3T(b)(2)(ii)(a) that gener- ally provides for the grouping of branches that do not have tax rate disparity with a purchasing or selling branch, or with the remainder of the CFC treated as purchas- ing or selling on behalf of a manufacturing branch. This grouping rule applies for pur- poses of §1.954–3T(b)(2)(ii), which sets forth the rules that apply after it has been determined that a branch and the remain- der of a CFC will be treated as separate cor- porations. Comments suggested that this grouping rule could be interpreted to group not only the activities of the branches but also the income of those branches and rec- ommended that the rule be clarified by specifically stating that the rule groups the “activities” of the relevant branches. The rules in §1.954–3T(b)(2)(ii) ap- ply to determine whether the income of a branch or remainder of a CFC is FBCSI rather than to determine the amount of the income of the branch or remainder of the CFC. The purpose of this grouping rule is to allow a CFC to aggregate the activities of branches that do not have tax rate disparity with a sales or purchas- ing branch (or remainder) when applying the separate corporation analysis to de- termine whether the sales income of the sales or purchase branch (or remainder) is FBCSI. §1.954–3(b)(1)(ii)(c)(3)(v), Example 1. The IRS and the Treasury Department believe that the grouping rule in §1.954–3T(b)(2)(ii)(a) properly aggre- gates the activities of the relevant branches (or remainder). However, for clarity, the phrase “the activities of” was added to §1.954–3(b)(2)(ii)(a). C.Deletion of §1.954–3(b)(2)(ii)(d) The final regulations delete paragraph (d) of §1.954–3(b)(2)(ii), which provided that income that is FBCSI as a result of the application of §1.954–3(b)(1)(i) (pur- chasing or selling branch rules) is not again classified as FBCSI as a result of the ap- plication of §1.954–3(b)(1)(ii) (manufac- turing branch rules). This paragraph is no longer needed as a result of the addition of the rule in §1.954–3(b)(1)(ii)(c)(1), which provides that if one or more sales or pur- chasing branches are used in addition to a 2012–6 I.R.B.355February 6, 2012 manufacturing branch, then only the man- ufacturing branch rules apply. D.Future Guidance The IRS and the Treasury Department continue to study additional FBCSI is- sues, and are considering whether to issue additional guidance, including guidance regarding when a branch should be treated as a separate corporation under section 954(d)(2), and the scope of, and relation- ship between, FBCSI and foreign base company services income. The IRS and the Treasury Department welcome com- ments on these issues. Special Analyses It has been determined that this Trea- sury decision is not a significant regula- tory action as defined in Executive Order 12866; therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. In addition, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply because the reg- ulations do not impose a collection of in- formation on small entities. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking that preceded these final and temporary regulations was sub- mitted to the Chief Counsel for Advocacy of the Small BusinessAdministration for comment on its impact on small business. Drafting Information The principal author of these regula- tions is Barbara E. Rasch of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development. ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for 26 CFR part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.954–3 is amended by: 1. Revising paragraphs (b)(1)(i)(c), (b)(1)(ii)(a), and (b)(1)(ii)(c). 2. Revising paragraphs (b)(2)(i)(b), (b)(2)(ii)(a), and (b)(2)(ii)(b). 3. Removing and reserving paragraph (b)(2)(ii)(d). 4. Revising paragraph (b)(2)(ii)(e). 5. Revising paragraph (b)(4) introduc- tory text. 6. RevisingExample 3in paragraph (b)(4). 7. AddingExamples 8and9in para- graph (b)(4). 8. Revising paragraphs (c) and (d). The revisions and additions read as fol- lows: §1.954–3 Foreign base company sales income. ***** (b) * * * (1) * * * (i) * * * (c)Use of more than one branch.If a controlled foreign corporation carries on purchasing or selling activities by or through more than one branch or similar establishment located outside the country under the laws of which such corporation is created or organized, then paragraph (b)(1)(i)(b) of this section shall be applied separately to the income derived by each such branch or similar establishment (by treating such purchasing or selling branch or similar establishment as if it were the only branch or similar establishment of the controlled foreign corporation and as if any such other branches or similar es- tablishments were separate corporations) in determining whether the use of such branch or similar establishment has sub- stantially the same tax effect as if such branch or similar establishment were a wholly owned subsidiary corporation of the controlled foreign corporation. See paragraph (b)(1)(ii)(c)(1)ofthissection for rules applicable to a controlled for- eign corporation that carries on purchase or sales activities by or through one or more branches or similar establishments in addition to carrying on manufactur- ing activities by or through one or more branches or similar establishments. (ii)Manufacturing branch—(a)In gen- eral. If a controlled foreign corporation carries on manufacturing, producing, con- structing, growing, orextracting activities by or through a branch or similar estab- lishment located outside the country un- der the laws of which such corporation is created or organized and the use of the branch or similar establishment for such activities with respect to personal property purchased or sold by or through the re- mainder of the controlled foreign corpora- tion has substantially the same tax effect as if the branch or similar establishment were a wholly owned subsidiary corpora- tion of such controlled foreign corporation, the branch or similar establishment and the remainder of the controlled foreign corpo- ration will be treated as separate corpora- tions for purposes of determining the for- eign base company sales income of such corporation. See section 954(d)(2). The provisions of this paragraph (b)(1)(ii) will apply only if the controlled foreign corpo- ration (including any branches or similar establishments of suchcontrolled foreign corporation) manufactures, produces, or constructs such personal property within the meaning of paragraph (a)(4)(i) of this section, or carries on growing or extract- ing activities with respect to such personal property. ***** (c)Use of more than one branch—(1) Use of one or more sales or purchase branches in addition to a manufacturing branch. If, with respect to personal prop- erty manufactured, produced, constructed, grown, or extracted by or through a branch or similar establishment located outside the country under the laws of which the controlled foreign corporation is created or organized, purchasing or selling activi- ties are carried on by or through more than one branch or similar establishment, or by or through one or more branches or sim- ilar establishments located outside such country, of such corporation, then para- graph (b)(1)(ii)(b) of this section shall be applied separately to the income derived by each such purchasing or selling branch or similar establishment (by treating such purchasing or selling branch or similar establishment as though it alone were the remainder of the controlled foreign corporation) for purposes of determining whether the use of such manufacturing, producing, constructing, growing, or ex- tracting branch or similar establishment February 6, 20123562012–6 I.R.B. has substantially the same tax effect as if such branch or similar establishment were a wholly owned subsidiary corporation of the controlled foreign corporation. If this rule applies, the sales or purchase branch rules contained in paragraph (b)(1)(i) of this section do not apply. The application of this paragraph (b)(1)(ii)(c)(1) is illus- trated by the following example: Example.All activities of controlled foreign cor- poration conducted through sales branches and man- ufacturing branch.(i)Facts. FS, a controlled foreign corporation organized under the laws of country M, operates three branches. Branch A, located in coun- try A, manufactures Product X under the principles of paragraph (a)(4)(i) of this section. Branch B, lo- cated in Country B, sells Product X manufactured by Branch A to customers for use outside of Country B. Branch C, located in Country C sells Product X man- ufactured by Branch A to customers for use outside of Country C. FS does not conduct any manufacturing or selling activities apart from the activities of Branches A, B and C. Country M imposes an effective rate of tax on sales income of 0%. Country A imposes an ef- fective rate of tax on sales income of 20%. Country B imposes an effective rate of tax on sales income of 20%. Country C imposes an effective rate of tax on sales income of 18%. (ii)Result.Pursuant to this paragraph (b)(1)(ii)(c)(1), paragraph (b)(1)(ii)(b)ofthissection is applied to the sales income derived by Branch B by treating Branch B as though it alone were the remainder of the controlled foreign corporation. The use of Branch B does not have the same tax effect as if Branch B were a wholly owned subsidiary of FS because the tax rate applicable to the income allocated to Branch B under paragraph (b)(1)(ii)(b) of this section (20%) is not less than 90% of, and at least 5 percentage points less than, the effective rate of tax which would apply to such income un- der the laws of Country A (20%), the country in which Branch A is located. In addition, paragraph (b)(1)(ii)(b) of this section is applied separately to the sales income derived by Branch C by treating Branch C as though it alone were the remainder of the controlled foreign corporation. The use of Branch C does not have the same tax effect as if Branch C were a wholly owned subsidiary of FS because the tax rate applicable to the income allocated to Branch C under paragraph (b)(1)(ii)(b)ofthissection(18%) is not less than 90% of, and at least 5 percentage points less than, the effective rate of tax which would apply to such income under the laws of Country A (20%), the country in which Branch A is located. Pursuant to this paragraph (b)(1)(ii)(c)(1), the rules under paragraph (b)(1)(i) of this section for deter- mining whether a sales or purchase branch is treated as a separate corporation from the remainder of the controlled foreign corporation do not apply. (2)Use of more than one branch to manufacture, produce, construct, grow, or extract separate items of personal prop- erty. If a controlled foreign corporation carries on manufacturing, producing, con- structing, growing, or extracting activi- ties with respect to separate items of per- sonal property by or through more than one branch or similar establishment lo- cated outside the country under the laws of which such corporation is created or orga- nized, then paragraphs (b)(1)(ii)(b)and(c) of this section will be applied separately to each such branch or similar establishment (by treating such manufacturing branch or similar establishment as if it were the only such branch or similar establishment of the controlled foreign corporation and as if any other such branches or similar es- tablishments were separate corporations) for purposes of determining whether the use of such branch or similar establishment has substantially the same tax effect as if such branch or similar establishment were a wholly owned subsidiary corporation of the controlled foreign corporation. The ap- plication of this paragraph (b)(1)(ii)(c)(2) is illustrated by the following example: Example.Multiple branches that satisfy para- graph (a)(4)(i).(i)Facts. FS is a controlled foreign corporation organized in Country M. FS operates two branches, Branch A and Branch B located in Country A and Country B, respectively. Branch A and Branch B each manufacture separate items of personal prop- erty (Product X and Product Y, respectively) within the meaning of paragraph (a)(4)(ii) or (iii) of this sec- tion. Raw materials used in the manufacture of Prod- uct X and Product Y are purchased by FS from an unrelated person. FS engages in activities in Coun- try M to sell Product X and Product Y to a related person for use, disposition or consumption outside of Country M. Employees of FS located in Country M perform only sales functions. The effective rate of tax imposed in Country M on the income from the sales of Product X and Product Y is 10%. Country A im- poses an effective rate of tax on sales income of 20%. Country B imposes an effective rate of tax on sales income of 12%. (ii)Result.Pursuant to this paragraph (b)(1)(ii)(c)(2), paragraph (b)(1)(ii)(b) of this section is applied separately to Branch A and Branch B with respect to the sales income of FS attributable to Product X (manufactured by Branch A) and Product Y (manufactured by Branch B). Because the effec- tive rate of tax on FS’s sales income from the sale of Product X in Country M (10%) is less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such income in the country in which Branch A is located (20%), the use of Branch A to manufacture Product X has substantially the same tax effect as if Branch A were a wholly owned subsidiary corporation of FS. Be- cause the effective rate of tax on FS’s sales income from the sale of Product Y in Country M (10%) is not less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such income in the country in which Branch B is located (12%), the use of Branch B to manufacture Product Y does not have substantially the same tax effect as if Branch B were a wholly owned subsidiary corporation of FS. Consequently, only Branch A is treated as a separate corporation apart from the remainder of FS for purposes of determining foreign base company sales income from the sales of Product X. (3)Use of more than one manufactur- ing branch, or one or more manufactur- ing branches and the remainder of the controlled foreign corporation, to man- ufacture, produce, or construct the same item of personal property—(i)In general. This paragraph (b)(1)(ii)(c)(3) applies to determine the location of manufacture, production, or construction of personal property for purposes of applying para- graph (b)(1)(i)(b) or (b)(1)(ii)(b)ofthis section where more than one branch or similar establishment of a controlled for- eign corporation, or one or more branches or similar establishments of a controlled foreign corporation and the remainder of the controlled foreign corporation, each engage in manufacturing, producing, or constructing activities with respect to the same item of personal property which is then sold by the controlled foreign cor- poration. This paragraph (b)(1)(ii)(c)(3) is applied separately with respect to the income derived by each purchasing or selling branch or similar establishment or purchasing or selling remainder of the controlled foreign corporation as provided under paragraphs (b)(1)(i) and (b)(1)(ii) of this section. The location of manufacture, production, or construction is determined under paragraph (b)(1)(ii)(c)(3)(ii)ofthis section if one or more branches or similar establishments or the remainder of the controlled foreign corporation indepen- dently satisfies paragraph (a)(4)(i) of this section with respect to an item of personal property. The location of manufacture, production, or construction is determined under paragraph (b)(1)(ii)(c)(3)(iii)ofthis section if none of the branches or similar establishments or the remainder of the controlled foreign corporation indepen- dently satisfies paragraph (a)(4)(i) of this section with respect to an item of personal property, but the controlled foreign cor- poration as a whole makes a substantial contribution to the manufacture, produc- tion or construction of that property within the meaning of paragraph (a)(4)(iv) of this section. For purposes of this paragraph (b)(1)(ii)(c)(3), the location of any activity with respect to the manufacture, produc- tion, or construction of an item of personal property is determined under paragraph (b)(1)(ii)(c)(3)(iv)ofthissection. For 2012–6 I.R.B.357February 6, 2012 purposes of this paragraph (b)(1)(ii)(c)(3), if multiple branches or similar establish- ments are located in a single jurisdiction, then the activities of those branches will be aggregated for purposes of determin- ing whether a branch or remainder of the controlled foreign corporation satisfies paragraph (a)(4)(i) of this section. (ii)Manufacture, production, or con- struction in one or more locations.Ifonly one branch or similar establishment or only the remainder of a controlled for- eign corporation independently satisfies paragraph (a)(4)(i) of this section with respect to an item of personal property, then that branch or similar establishment or the remainder of the controlled foreign corporation will be the location of manu- facture, production, or construction of that property for purposes of applying para- graph (b)(1)(i)(b)or(b)(1)(ii)(b)ofthis section to the income from the sale of that property. See paragraph (b)(1)(ii)(c)(3)(v) Example 1of this section. If more than one branch or similar establishment or one or more branches or similar establish- ments and the remainder of the controlled foreign corporation, each independently satisfy paragraph (a)(4)(i)ofthissection with respect to an item of personal prop- erty, then the location of manufacture, production, or construction of that prop- erty for purposes of applying paragraph (b)(1)(i)(b)or(b)(1)(ii)(b)ofthissection will be the location of that branch or simi- lar establishment or the jurisdiction under the laws of which the remainder of the controlled foreign corporation is orga- nized that satisfies paragraph (a)(4)(i) of this section and that would, after applying paragraph (b)(1)(ii)(b)ofthissectionto such branch or similar establishment or paragraph (b)(1)(i)(b) of this section to the remainder of the controlled foreign corporation, imposethe lowest effective rate of tax on the income allocated to such branch or the remainder of the controlled foreign corporation under such section (that is, either paragraph (b)(1)(i)(b)or (b)(1)(ii)(b) of this section). See para- graph (b)(1)(ii)(c)(3)(v)Example 2of this section. (iii)No location independently satisfies manufacturing test.Ifnobranchorsimilar establishment or the remainder of the con- trolled foreign corporation independently satisfies paragraph (a)(4)(i) of this section with respect to an item of personal prop- erty but the controlled foreign corporation as a whole makes a substantial contribu- tion to the manufacture, production, or construction of that property within the meaning of paragraph (a)(4)(iv) of this section, then for purposes of applying paragraph (b)(1)(i)(b)or(b)(1)(ii)(b)of this section, the location of manufacture, production, or construction with respect to the income derived by a purchasing or selling branch or similar establishment or the purchasing or selling remainder of the controlled foreign corporation in con- nection with the purchase or sale of that property will be the “tested manufacturing location” unless the “tested sales loca- tion” provides a greater contribution to the manufacture, production, or construction of the property. The tested manufacturing location is the location of any branch or similar establishment or remainder of the controlled foreign corporation that con- tributes to the manufacture, production, or construction of the personal property, if any, that would, after applying paragraph (b)(1)(ii)(b)ofthissectiontosuchbranch or similar establishment or paragraph (b)(1)(i)(b) of this section to the remain- der of the controlled foreign corporation, be treated as a separate corporation and would impose the lowest effective rate of tax on the income allocated to such branch or similar establishment or to the remain- der of the controlled foreign corporation under such section (that is, either para- graph (b)(1)(i)(b)or(b)(1)(ii)(b)ofthis section). The tested sales location is the lo- cation of the purchasing or selling branch or similar establishment or the remainder of the controlled foreign corporation by or through which the purchasing or selling activities are carried on with respect to the personal property. For purposes of this paragraph (b)(1)(ii)(c)(3)(iii), the contri- bution to the manufacture, production, or construction of the personal property by the tested sales location will be deemed to include the activities of any branch or similar establishment or remainder of the controlled foreign corporation that would not be treated as a corporation separate from the tested sales location after the application of paragraph (b)(1)(i)(b)or (b)(1)(ii)(b) of this section. For purposes of this paragraph (b)(1)(ii)(c)(3)(iii), the contribution of the tested manufacturing location to the manufacture, production, or construction of the personal property will be deemed to include any activities of any branch or similar establishment or remainder of the controlled foreign corporation that would be treated as a corporation separate from the tested sales location after the application of paragraph (b)(1)(i)(b)or(b)(1)(ii)(b) of this section. Whether the tested sales location provides a greater contribution to the manufacture, production, or construction of the personal property is determined by weighing the relative contributions to the manufacture, production, or construction of that prop- erty by the tested sales location and the tested manufacturing location under the facts and circumstances test provided in paragraph (a)(4)(iv) of this section. See paragraph (b)(1)(ii)(c)(3)(v)Examples 3, 4,5,and6of this section. If the tested sales location provides a greater contri- bution to the manufacture, production, or construction of the personal property than the tested manufacturing location or if there is no tested manufacturing loca- tion, then the tested sales location is the location of manufacture, production, or construction of that property and the rules of paragraphs (b)(1)(i)(a) and (b)(1)(ii)(a) of this section will not apply with respect to the income derived by the tested sales location in connection with the purchase or sale of that property and the use of that purchasing or selling branch or similar establishment or thepurchasing or selling remainder will not result in a branch be- ing treated as a separate corporation for purposes of paragraph (b)(2)(ii) of this section. (iv)Location of activity. For purposes of paragraph (b)(1)(ii)(c)(3) of this section, the location of any activity with respect to the manufacture, production, or construc- tion of an item of personal property is the location where the employees of the con- trolled foreign corporation perform such activity. For example, the location of any activity concerning intellectual property is determined based on where employees of the controlled foreign corporation develop or direct the use or development of the in- tellectual property, not on the formal as- signment of that intellectual property. (v)Examples. The following examples illustrate the application of this paragraph (b)(1)(ii)(c)(3): Example 1.Multiple branches contribute to the manufacture of a single product, only one branch sat- isfies paragraph (a)(4)(i).(i)Facts. FS is a con- February 6, 20123582012–6 I.R.B. trolled foreign corporation organized in Country M. FS operates three branches, Branch A, Branch B, and Branch C, located respectively in Country A, Country B, and Country C. Branch A, Branch B, and Branch C each performs different manufacturing activities with respect to the manufacture of Product X. Branch A, through the activities of employees of FS located in Country A, designs Product X. Branch B, through the activities of employees of FS located in Coun- try B, provides quality control and oversight and di- rection. Branch C, through the activities of employ- ees of FS located in Country C, manufactures Prod- uct X (within the meaning of paragraph (a)(4)(ii) or (a)(4)(iii of this section) using the designs developed by Branch A and under the oversight of the qual- ity control personnel of Branch B. The activities of Branch A and Branch B do not independently satisfy paragraph (a)(4)(i) of this section. Employees of FS located in Country M purchase the raw materials used in the manufacture of Product X from a related person and control the work-in-process and finished goods throughout the manufacturing process. Employees of FS located in Country M also manage the manufac- turing costs and capacities related to Product X. Fur- ther, employees of FS located in Country M oversee the coordination between the branches. The activities of the remainder of FS in Country M do not indepen- dently satisfy paragraph (a)(4)(i) of this section. Em- ployees of FS located in Country M sell Product X to unrelated persons for use outside of Country M. The sales income from the sale of Product X is taxed in Country M at an effective rate of tax of 10%. Coun- try C imposes an effective rate of tax of 20% on sales income. (ii)Result. Country C is the location of manufac- ture for purposes of applying paragraph (b)(1)(ii)(b) of this section because only the activities of Branch C independently satisfy paragraph (a)(4)(i) of this sec- tion. The use of Branch C has substantially the same tax effect as if Branch C were a wholly owned sub- sidiary corporation of FS because the effective rate of tax on the sales income (10%) is less than 90% of, and at least 5 percentage points less than, the effec- tive rate of tax that would apply to such income in the country in which Branch C is located (20%). There- fore, sales of Product X by the remainder of FS are treated as sales on behalf of Branch C. In determin- ing whether the remainder of FS will qualify for the manufacturing exception under paragraph (a)(4)(iv) of this section, the activities of FS will include the activities of Branch A or Branch B, respectively, if each of those branches would not be treated as a sep- arate corporation under paragraph (b)(1)(ii)(b) of this section, if that paragraph were applied independently to each of Branch A and Branch B. See paragraph (b)(2)(ii)(a)ofthissection. Example 2.Multiple branches satisfy paragraph (a)(4)(i) with respect to the same product sold by the controlled foreign corporation.(i)Facts. Assume the samefactsasinExample 1, except for the follow- ing. In addition to the design of Product X, Branch A also performs in Country A other manufacturing activities, including those ascribed to FS inExample 1, that are sufficient to qualify as manufacturing un- der paragraph (a)(4)(iv) of this section with respect to Product X. Country A imposes an effective rate of tax of 12% on sales income. (ii)Result.BranchAandBranchCthroughtheir activities each independently satisfy the requirements of paragraph (a)(4)(i) of this section. Therefore, para- graph (b)(1)(ii)(b) of this section is applied by com- paring the effective rate of tax imposed on the income from the sales of Product X against the lowest ef- fective rate of tax that would apply to the sales in- come in either Country A or Country C if paragraph (b)(1)(ii)(b) of this section were applied separately to Branch A and Branch C. Country A imposes the lower effective rate of tax, and therefore, Branch A is treated as the location of manufacture for purposes of applying paragraph (b)(1)(ii)(b)ofthissection. The effective rate of tax in Country B is not considered be- cause Branch B does not satisfy paragraph (a)(4)(i) of this section. Neither Branch A nor Branch C is treated as a separate corporation because the effective rate of tax on the sales income of FS from the sale of Product X (10%) is not less than 90% of, and at least 5 per- centage points less than, the effective rate of tax that would apply to such income in the country in which Branch A is located (12%). Sales of Product X by the remainder of the controlled foreign corporation are not treated as made on behalf of any branch. Example 3.Determining the location of man- ufacture when manufacturing activities performed by multiple branches and no branch independently satisfies paragraph (a)(4)(i).(i)Facts. FS, a con- trolled foreign corporation organized in Country M, purchases raw materials from a related person. The raw materials are manufactured (under the principles of paragraph (a)(4)(ii) or (a)(4)(iii) of this section) into Product X by CM, an unrelated corporation, pur- suant to a contract manufacturing arrangement. CM physically performs the substantial transformation, assembly, or conversion of the raw materials in Coun- try C. FS has two branches, Branch A and Branch B, located in Country A and Country B respectively. Branch A, through the activities of employees of FS located in Country A, designs Product X. Branch B, through the activities of employees of FS located in Country B, controls manufacturing related logistics, provides oversight and direction during the manu- facturing process, and controls the raw materials and work-in-process. FS manages the manufacturing costs and capacities related to the manufacture of Product X through employees located in Country M. Further, employees of FS located in Country M oversee the coordination between the branches. Em- ployees of FS located in Country M also sell Product X to unrelated persons for use outside of Country M. Country M imposes an effective rate of tax on sales income of 10%. Country A imposes an effective rate of tax on sales income of 20%, and Country B imposes an effective rate of tax on sales income of 24%. Neither the remainder of FS, nor any branch of FS independently satisfies paragraph (a)(4)(i) of this section. However, under the facts and circumstances of the business, FS as a whole provides a substantial contribution to the manufacture of Product X within the meaning of paragraph (a)(4)(iv) of this section. (ii)Result. Based on the facts, neither the remain- der of FS (through the activities of its employees in Country M) nor any branch of FS independently sat- isfies paragraph (a)(4)(i) of this section with respect to Product X, but FS, as a whole, provides a substan- tial contribution through the activities of its employ- ees to the manufacture of Product X. The remainder of FS, Branch A, and Branch B each provides a con- tribution through the activities of employees to the manufacture of Product X. Therefore, FS must de- termine the location of manufacture under paragraph (b)(1)(ii)(c)(3)(iii) of this section. The tested sales lo- cation is Country M because the selling activities with respect to Product X are carried on by the remainder of FS. The location of Branch A is the tested man- ufacturing location because the effective rate of tax imposed on FS’s sales income by Country M (10%) is less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such income in Country A (20%), and Country A has the lowest effective rate of tax among the manufac- turing branches that would,after applying paragraph (b)(1)(ii)(b) of this section, be treated as a separate corporation. The activities of Branch B will be in- cluded in the contribution of Branch A for purposes of determining the location of manufacture of Prod- uct X because the effective rate of tax imposed on the sales income by Country M (10%) is less than 90% of, and at least 5 percentage points less than, the ef- fective rate of tax that would apply to such income in Country B (24%). Under the facts and circumstances of the business, the activities of the remainder of FS would not provide a greater contribution to the man- ufacture of Product X than the activities of Branch A and Branch B, considered together. Therefore, the location of manufacture is Country A, the location of Branch A. Example 4.Manufacturing activities performed by multiple branches, no branch independently satis- fies paragraph (a)(4)(i), selling activities carried on by remainder of the controlled foreign corporation, remainder contribution includes branch manufactur- ing activities.(i)Facts. The facts are the same asEx- ample 3, except that the effective rate of tax on sales income in Country B is 12%. In addition, under the facts of the particular business, the activities of em- ployees of FS located in Country B and Country M, if considered together, would provide a greater con- tribution to the manufacture of Product X than the ac- tivities of employees of FS located in Country A. (ii)Result. Based on the facts, neither the re- mainder of FS (through activities of its employees in Country M) nor any branch of FS independently sat- isfies paragraph (a)(4)(i) of this section with respect to Product X, but FS, as a whole, provides a substan- tial contribution through the activities of its employ- ees to the manufacture of Product X. The remainder of FS, Branch A, and Branch B each provide a con- tribution through the activities of their employees to the manufacture of Product X. Therefore, FS must de- termine the location of manufacture under paragraph (b)(1)(ii)(c)(3)(iii) of this section. The tested sales lo- cation is Country M because the selling activities with respect to Product X are carried on by the remainder of FS. The location of Branch A is the tested man- ufacturing location because the effective rate of tax imposed on FS’s sales income by Country M (10%) is less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such income in Country A (20%), and Branch A is the only branch that would, after applying paragraph (b)(1)(ii)(b) of this section, be treated as a separate corporation. The activities of Branch B will be in- cluded in the contribution of the remainder of FS for purposes of determining the location of manufacture of Product X because the effective rate of tax imposed on the sales income by Country M (10%) is not less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such in- 2012–6 I.R.B.359February 6, 2012 come in Country B (12%). Under a facts and circum- stances analysis, considered together, the activities of Branch B and the remainder of FS would provide a greater contribution to the manufacture of Product X than the activities of Branch A. Therefore, the rules of paragraph (b)(1)(ii)(a) of this section will not ap- ply with respect to the income derived by the remain- der of FS in connection with the sale of Product X, and neither Branch A nor Branch B will be treated as a separate corporation for purposes of paragraph (b)(2)(ii) of this section. Example 5.Manufacturing activities performed by multiple branches, no branch independently satis- fies paragraph (a)(4)(i), sales carried on by remain- der of the controlled foreign corporation and a sales branch.(i)Facts. The facts are the same asExam- ple 3, except that sales of Product X are also carried on through Branch D in Country D, and Country D imposes a 16% effective rate of tax on sales income. In addition, under the facts and circumstances of the business, the activities of employees of FS located in Country A and Country M, considered together, would provide a greater contribution to the manufac- ture of Product X than the activities of employees of FS located in Country B. (ii)Result. Based on the facts, neither the re- mainder of FS nor any branch of FS independently satisfies paragraph (a)(4)(i) of this section with re- spect to Product X, but FS, as a whole, provides a substantial contribution through the activities of its employees to the manufacture of Product X. The re- mainder of FS, Branch A, and Branch B each pro- vide a contribution through the activities of their em- ployees to the manufacture of Product X. Therefore, FS must determine the location of manufacture under paragraph (b)(1)(ii)(c)(3)(iii) of this section. Further, pursuant to paragraph (b)(1)(ii)(c)(1)ofthissection, paragraph (b)(1)(ii)(c)(3)(iii) of this section must be applied separately to the sales income derived by the remainder of FS and Branch D respectively. The re- sults with respect to the income derived by the re- mainder of FS in connection with the sale of Prod- uct X in thisExample 5are the same as inExample 3. However, paragraph (b)(1)(ii)(c)(3)(iii)ofthissec- tion must also be applied with respect to Branch D be- cause the sale of Product X is also carried on through Branch D. Thus, for purposes of that sales income, the location of Branch D is the tested sales location. The location of Branch B is the tested manufactur- ing location because the effective rate of tax imposed on Branch D’s sales income by Country D (16%) is less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such income in Country B (24%), and Branch B is the only branch that would, after applying para- graph (b)(1)(ii)(b) of this section, be treated as a sep- arate corporation. The manufacturing activities per- formed in Country M by the remainder of FS and the manufacturing activities performed in Country A by Branch A will be included in Branch D’s contribu- tion to the manufacture of Product X for purposes of determining the location of manufacture of Prod- uct X with respect to Branch D’s sales income be- cause the effective rate of tax imposed on the sales income by Country D (16%) is not less than 90% of, and at least 5 percentage points less than, the effec- tive rate of tax that would apply to such income in Country M (10%) and Country A (20%). Under the facts and circumstances ofthe business, the activi- ties of Branch D, Branch A, and the remainder of FS, considered together, would provide a greater contri- bution to the manufacture of Product X than the ac- tivities of Branch B. Therefore, the rules of paragraph (b)(1)(ii)(a) of this section will not apply with respect to the income derived by Branch D in connection with the sale of Product X and the use of Branch D to sell Product X will not result in a branch being treated as a separate corporation for purposes of paragraph (b)(2)(ii) of this section. Example 6.Determining the location of manufac- ture when employees of remainder of controlled for- eign corporation travel to location of unrelated con- tract manufacturer to perform manufacturing activ- ities.(i)Facts. FS, a controlled foreign corpora- tion organized in Country M, purchases raw materials from a related person. The raw materials are manu- factured (under the principles of paragraph (a)(4)(ii) or (a)(4)(iii) of this section) into Product X by CM, an unrelated corporation, pursuant to a contract man- ufacturing arrangement. CM physically performs the substantial transformation, assembly, or conversion of the raw materials in Country C. Employees of FS located in Country M sell Product X to unrelated per- sons for use outside of Country M. Employees of FS located in Country M engage in product design, man- age the manufacturing costs and capacities with re- spect to Product X, and direct the use of intellectual property for the purpose of manufacturing Product X. Quality control and oversight and direction of the manufacturing process are conducted in Country C by employees of FS who are employed in Country M but who regularly travel to Country C. Branch A, located in Country A, is the only branch of FS. Prod- uct design with respect to Product X conducted by employees of FS located in Country A is supplemen- tal to the bulk of the design work, which is done by employees of FS located in Country M. At all times, employees of Branch A control the raw materials, work-in-process and finished goods. Employees of FS located in Country A also control manufacturing related logistics with respect to Product X. Country M imposes an effective rate of tax on sales income of 10%. Country A imposes an effective rate of tax on sales income of 20%. Neither the remainder of FS nor Branch A independently satisfies paragraph (a)(4)(i) of this section. However, under the facts and circumstance of the business, FS as a whole (includ- ing Branch A) provides a substantial contribution to the manufacture of Product X within the meaning of paragraph (a)(4)(iv) of this section. (ii)Result. Based on the facts, neither the re- mainder of FS nor Branch A independently satisfies paragraph (a)(4)(i) of this section with respect to Product X, but FS, as a whole, provides a substantial contribution through the activities of its employees to the manufacture of Product X. The remainder of FS and Branch A each provide a contribution through the activities of employees to the manufacture of Product X. Therefore, FS must determine the location of manufacture under paragraph (b)(1)(ii)(c)(3)(iii)of this section. The tested sales location is Country M because the selling activities with respect to Product X are carried on by the remainder of FS. The tested manufacturing location is the location of Branch A because the effective rate of tax imposed on the remainder of FS’s sales income by Country M (10%) is less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such income in Country A (20%), and Branch A is the only branch that would, after applying paragraph (b)(1)(ii)(b) of this section, be treated as a separate corporation. Although the activities of traveling em- ployees are considered in determining whether FS, as a whole, makes a substantial contribution to the manufacture of Product X under paragraph (a)(4)(iv) of this section, the activities of the employees of FS that are performed in Country C are not taken into consideration in determining whether Country M, the jurisdiction under the laws of which FS is organized, is the location of manufacture under para- graph (b)(1)(ii)(c)(3)(iii) of this section. Activities of employees performed outside the jurisdiction in which the controlled foreigncorporation is organized and outside a location in which the controlled foreign corporation maintains a branch or similar establish- ment, are not considered in determining the location of manufacture. Under the facts and circumstances of the business, the activities of employees of FS performed in Country M do not provide a greater contribution to the manufacture of Product X than the activities of employees of FS performed in Country A. Therefore, the location of manufacture is Country A, the location of Branch A. (4)Use of more than one branch to manufacture, produce, construct, grow, or extract separate items of personal property. For purposes of paragraphs (b)(1)(ii)(c)(2) and (b)(1)(ii)(c)(3)ofthis section, anitemof personal property refers to an individual unit of personal property rather than a type or class of personal property. (2) * * * (i) * * * (b)Activities treated as performed on behalf of the remainder of corporation.(1) With respect to purchasing or selling activ- ities performed by or through the branch or similar establishment, such purchas- ing or selling activities will, with respect to personal property manufactured, pro- duced, constructed, grown, or extracted by the remainder of the controlled foreign corporation, be treated as performed on behalf of the remainder of the controlled foreign corporation. (2) With respect to purchasing or sell- ing activities performed by or through the branch or similar establishment, such purchasing or selling activities will, with respect to personal property (other than property described in paragraph (b)(2)(i)(b)(1) of this section) purchased or sold, or purchased and sold, by the remainder of the controlled foreign cor- poration (or any branch treated as the remainder of the controlled foreign corpo- ration), be treated as performed on behalf of the remainder of the controlled foreign corporation. February 6, 20123602012–6 I.R.B. ***** (ii) * * * (a)Treatment as separate corporations. The branch or similar establishment will be treated as a wholly owned subsidiary corporation of the controlled foreign cor- poration,andsuchbranchorsimilarestab- lishment will be deemed to be incorporated in the country in which it is located. For purposes of applying the rules of this para- graph (b)(2)(ii), a branch or similar estab- lishment of a controlled foreign corpora- tion treated as a separate corporation pur- chasing or selling on behalf of the remain- der of the controlled foreign corporation under paragraph (b)(2)(ii)(b)ofthissec- tion, or the remainder of the controlled for- eign corporation treated as a separate cor- poration purchasing or selling on behalf of a branch or similar establishment of the controlled foreign corporation under para- graph (b)(2)(ii)(c) of this section, will in- clude the activities of any other branch or similar establishment or remainder of the controlled foreign corporation that would not be treated as a separate corporation (apart from the branch or similar establish- ment of a controlled foreign corporation that is treated as performing purchasing or selling activities on behalf of the remain- der of the controlled foreign corporation under paragraph (b)(2)(ii)(b)ofthissec- tion or the remainder of the controlled for- eign corporation that is treated as perform- ing purchasing or selling activities on be- half of the branch or similar establishment under paragraph (b)(2)(ii)(c)ofthissec- tion) if the effective rate of tax imposed on the income of the purchasing or sell- ing branch or similar establishment, or pur- chasing or selling remainder of the con- trolled foreign corporation, were tested un- der the principles of paragraph (b)(1)(i)(b) or (b)(1)(ii)(b) of this section against the effective rate of tax that would apply to such income if it wereconsidered derived by such other branch or similar establish- ment or the remainder of the controlled for- eign corporation. (b)Activities treated as performed on behalf of the remainder of corporation.(1) With respect to purchasing or selling activ- ities performed by or through the branch or similar establishment, such purchas- ing or selling activities will, with respect to personal propertymanufactured, pro- duced, constructed, grown, or extracted by the remainder of the controlled foreign corporation, be treated as performed on behalf of the remainder of the controlled foreign corporation. (2) With respect to purchasing or sell- ing activities performed by or through the branch or similar establishment, such purchasing or selling activities will, with respect to personal property (other than property described in paragraph (b)(2)(ii)(b)(1)ofthissection)purchased or sold, or purchased and sold, by the remainder of the controlled foreign cor- poration (or any branch treated as the remainder of the controlled foreign corpo- ration), be treated as performed on behalf of the remainder of the controlled foreign corporation. ***** (d) [Reserved]. (e)Comparison with ordinary treat- ment. Income derived by a branch or similar establishment, or by the remainder of the controlled foreign corporation, will not be foreign base company sales income under paragraph (b) of this section if the income would not be foreign base com- pany sales income if it were derived by a separate controlled foreign corporation under like circumstances. ***** (4)Illustrations. The application of this paragraph (b) may be illustrated by the fol- lowing examples: ***** Example 3.(i)Facts. Corporation E, a controlled foreign corporation incorporated under the laws of foreign Country X, is a wholly owned subsidiary of Corporation D, also a controlled foreign corporation incorporated under the laws of Country X. Corpo- ration E maintains Branch B in foreign Country Y. Both corporations use the calendar year as the taxable year. In 1964, Corporation E’s sole activity, carried on through Branch B, consists of the purchase of ar- ticles manufactured in Country X by Corporation D, a related person, and the sale of the articles through Branch B to unrelated persons. One hundred percent of the articles sold through Branch B are sold for use outside Country X and 90% are also sold for use out- side of Country Y. The income of Corporation E de- rived by Branch B from such transactions is taxed to Corporation E by Country X only at the time Cor- poration E distributes such income to Corporation D and is taxed on the basis of what the tax (a 40% ef- fective rate) would have been if the income had been derived in 1964 by Corporation E from sources within Country X from doing business through a permanent establishment therein. Country Y levies an income tax at an effective rate of 50% on income derived from sources within such country, but the income of Branch B for 1964 is effectively taxed by Country Y at a 5% rate since under the laws of such country, only 10% of Branch B’s income is derived from sources within such country. Corporation E makes no distri- butions to Corporation D in 1964. (ii)Result. In determining foreign base company sales income of Corporation E for 1964, Branch B is treated as a separate wholly owned subsidiary cor- poration of Corporation E, the 5% rate of tax being less than 90% of, and at least 5 percentage points less than the 40% rate. Income derived by Branch B, treated as a separate corporation, from the purchase from a related person (Corporation D), of personal property manufactured outside of Country Y and sold for use, disposition, or consumption outside of Coun- try Y constitutes foreign base company sales income. If, instead, Corporation D were unrelated to Corpo- ration E, none of the income would be foreign base company sales income because Corporation E would be purchasing from and selling to unrelated persons andifBranchBweretreatedasaseparatecorpora- tion it would likewise be purchasing from and selling to unrelated persons. Alternatively, if Corporation D were related to Corporation E, but Branch B manufac- tured the articles prior to sale under the principles of paragraph (a)(4)(iv) of this section, the income would not be foreign base company sales income because Branch B, treated as a separate corporation, would qualify for the manufacturing exception under para- graph (a)(4) of this section. ***** Example 8.Uniformly applicable incentive tax rate in one country.(i)Facts. FS is a controlled foreign corporation organized in Country M. FS op- erates one branch, Branch A, located in Country A. Branch A manufactures Product X within the mean- ing of paragraph (a)(4)(ii) or (a)(4)(iii) of this sec- tion. Raw materials used in the manufacture of Prod- uct X are purchased by FS from an unrelated person. FS engages in activities in Country M to sell Product X to a related person for use outside of Country M. Employees of FS located in Country M carry on only sales functions. The effective rate imposed in Coun- try M on the income from the sale of Product X is 10%. Country A generally imposes an effective rate of tax on income of 20%, but imposes a uniformly applicable incentive rate of tax of 10% on manufac- turing income and related sales income. (ii)Result. The use of Branch A to manufacture Product X does not have substantially the same tax ef- fect as if Branch A were a wholly owned subsidiary corporation of FS because the effective rate of tax on FS’s sales income from the sale of Product X in Coun- try M (10%) is not less than 90% of, and at least 5 per- centage points less than, the effective rate of tax that would apply to such income in the country in which Branch A is located (10%). Consequently, pursuant to paragraph (b)(1)(ii)(b)ofthissection,BranchAis not treated as a separate corporation apart from the remainder of FS for purposes of determining foreign base company sales income. Example 9.Manufacturing activities performed by multiple branches, no branch independently satis- fies paragraph (a)(4)(i), selling activities carried on by remainder of the controlled foreign corporation, some branch manufacturing activities included in re- mainder contribution.(i)Facts. FS, a controlled for- eign corporation organized in Country M, has three branches, Branch A, Branch B, and Branch C, located in Country A, Country B, and Country C respectively. FS purchases raw materials from a related person. 2012–6 I.R.B.361February 6, 2012 The raw materials are manufactured (under the prin- ciples of paragraph (a)(4)(ii) or (a)(4)(iii) of this sec- tion) into Product X by CM, an unrelated corporation, pursuant to a contract manufacturing arrangement. CM physically performs the substantial transforma- tion, assembly, or conversion required to manufacture Product X outside of FS’s country of organization. FS manages the manufacturing costs and capacities with respect to the manufacture of Product X through employees located in CountryM.Further,employees of FS located in Country M oversee the coordination between the branches. Branch A, through the activi- ties of employees of FS located in Country A, designs Product X, controls manufacturing related logistics, and controls the raw materials and work-in-process during the manufacturing process. Branch B, through the activities of employees of FS located in Country B, provides quality control. Branch C, through the activities of employees of FS located in Country C, provides oversight and direction during the manufac- turing process. Employees of FS located in Country M sell Product X to unrelated persons for use outside of Country M. Country M imposes an effective rate of tax on sales income of 10%. Country A imposes an effective rate of tax on sales income of 12%, Country B imposes an effective rate of tax on sales income of 24%, and Country C imposes an effective rate of tax on sales income of 25%. None of the remainder of FS,BranchA,BranchB,orBranchCindependently satisfies paragraph (a)(4)(i) of this section. However, under the facts and circumstances of the business, FS, as a whole, provides a substantial contribution to the manufacture of Product X within the meaning of paragraph (a)(4)(iv) of this section. Under the facts and circumstances of the business, the activities of the remainder of FS and Branch A,if considered together, would not provide a greater contribution to the man- ufacture of Product X than the activities of Branch B and Branch C, if considered together. Under the facts and circumstances of the business, however, the ac- tivities of the employees of the remainder of FS and Branch A, if considered together, would constitute a substantial contribution to the manufacture of Prod- uct X. (ii)Result. Based on the facts, neither the re- mainder of FS (through activities of its employees in Country M) nor any branch of FS independently satis- fies paragraph (a)(4)(i) of this section with respect to Product X, but FS, as a whole, provides a substantial contribution through the activities of its employees to the manufacture of Product X. The remainder of FS, Branch A, Branch B, and Branch C each provide a contribution through the activities of employees to the manufacture of ProductX. Therefore, FS must de- termine the location of manufacture under paragraph (b)(1)(ii)(c)(3)(iii) of this section. The tested sales lo- cation is Country M because the selling activities with respect to Product X are carried on by the remainder of FS. The location of Branch B is the tested man- ufacturing location because the effective rate of tax imposed on FS’s sales income by Country M (10%) is less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such income in Country B (24%), and Country B has the lowest effective rate of tax among the man- ufacturing branches that would, after applying para- graph (b)(1)(ii)(b) of this section, be treated as a sep- arate corporation. The manufacturing activities per- formed in Country A by Branch A will be included in the contribution of the remainder of FS for pur- poses of determining the location of manufacture of Product X because the effective rate of tax imposed on the sales income by Country M (10%) is not less than 90% of, and at least 5 percentage points less than, the effective rate of tax that would apply to such in- come in Country A (12%).The manufacturing ac- tivities performed in Country C by Branch C will be included in the contribution of Branch B for purposes of determining the location of manufacture of Prod- uct X because the effective rate of tax imposed on the sales income by Country M (10%) is less than 90% of, and at least 5 percentage points less than, the ef- fective rate of tax that would apply to such income in Country C (25%). Under the facts and circum- stances of the business, the manufacturing activities of the remainder of FS and Branch A, considered to- gether, would not provide a greater contribution to the manufacture of Product X than the activities of Branch B and Branch C, considered together. There- fore, the location of manufacture is Country B, the locationofBranchB.IndeterminingthatCountryB is the location of manufacture, it was determined that after applying paragraph (b)(1)(ii)(b)ofthissection Branch B would be treated asa separate corporation under paragraph (b)(1)(ii)(a)ofthissectionforpur- poses of determining foreign base company sales in- come. To determine whether income from the sale of Product X is foreign base company sales income, the remainder of FS takes into account the activities of Branch A because, under paragraph (b)(2)(ii)(a) of this section, Branch A would not be treated as a separate corporation apart from FS. The remainder of FS is considered to have manufactured Product X under paragraph (a)(4)(i)of this section because the manufacturing activities of the remainder of FS and Branch A, considered together, would make a sub- stantial contribution to the manufacture of Product X within the meaning of paragraph (a)(4)(iv) of this section. Therefore, income derived from the sale of Product X by the remainder of FS does not constitute foreign base company sales income. (c)Effective/applicability date. Para- graphs (a)(1)(i), (a)(1)(iii)Example 1, (a)(1)(iii)Example 2, (a)(2), (a)(4)(i), (a)(4)(ii), (a)(4)(iii), (a)(4)(iv), (a)(6)(i), (b)(1)(i)(c), (b)(1)(ii)(a), (b)(1)(ii)(c), (b)(2)(i)(b), (b)(2)(ii)(a), (b)(2)(ii)(b), (b)(2)(ii)(e), and (b)(4)Example 3,(b)(4) Example 8, and (b)(4)Example 9of this section shall apply to taxable years of controlled foreign corporations beginning after June 30, 2009, and for taxable years of United States shareholders in which or with which such taxable years of the controlled foreign corporations end. (d)Application of regulations to earlier taxable years. A taxpayer may choose to apply these regulations retroactively with respect to its open taxable years that began prior to July 1, 2009. The taxpayer may so choose if and only if the taxpayer and all members of the taxpayer’s affiliated group (within the meaning of section 1504(a)) apply these regulations, in their entirety, to the earliest taxable year of each con- trolled foreign corporation that ends with or within an open taxable year of the tax- payer and to all subsequent taxable years. §1.954–3T [Removed] Par. 3. Section 1.954–3T is removed. Steven T. Miller, Deputy Commissioner for Services and Enforcement. Approved December 6, 2011. Emily S. McMahon, Acting Assistant Secretary oftheTreasury(TaxPolicy). (Filed by the Office of the Federal Register on December 15, 2011, 11:15 a.m., and published in the issue of the Federal Register for December 19,2011, 76 F.R. 78545) Section 1274.—Determi- nation of Issue Price in the Case of Certain Debt Instru- ments Issued for Property (Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.) Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate.For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for February 2012. Rev. Rul. 2012–7 This revenue ruling provides various prescribed rates for federal income tax purposes for February 2012 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable fed- eral rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (ad- justed AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate de- scribed in section 382(f). Table 4 contains the appropriate percentages for deter- mining the low-income housing credit described in section 42(b)(1) for build- ings placed in service during the current month. However, under section 42(b)(2), February 6, 20123622012–6 I.R.B. the applicable percentage for non-feder- ally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. REV. RUL. 2012–7 TABLE 1 Applicable Federal Rates (AFR) for February 2012 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-term AFR.19%.19%.19%.19% 110% AFR.21%.21%.21%.21% 120% AFR.23%.23%.23%.23% 130% AFR .25%.25%.25%.25% Mid-term AFR1.12%1.12%1.12%1.12% 110% AFR1.23%1.23%1.23%1.23% 120% AFR1.34%1.34%1.34%1.34% 130% AFR1.47%1.46%1.46%1.46% 150% AFR 1.69%1.68%1.68%1.67% 175% AFR 1.97%1.96%1.96% 1.95% Long-term AFR 2.58%2.56%2.55%2.55% 110% AFR2.84%2.82%2.81%2.80% 120% AFR3.09%3.07%3.06% 3.05% 130% AFR3.36%3.33%3.32%3.31% REV. RUL. 2 012–7 TABLE 2 Adjusted AFR for February 2012 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-term adjusted AFR .35%.35%.35%.35% Mid-term adjusted AFR1.24%1.24%1.24%1.24% Long-te rm adjusted AFR 3.26%3.23%3.22%3.21% REV. RUL. 2012–7 TABLE 3 Rates Under Section 382 for February 2012 Adjuste d federal long-term rate for the current month 3.26% Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.)3.55% 2012–6 I.R.B.363February 6, 2012 REV. RUL. 2012–7 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for February 2012 Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%. Appropriate percentage for the 70% present value low-income housing credit7.42% Appropriate percentage for the 30% present value low-income housing credit3.18% REV. RUL. 2012–7 TABLE 5 Rate Under Sec tion 7520 for February 2012 Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest1.4% Section 1288. —Treatment of Original Is sue Discount on Tax-Exempt Obligations The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 7520.—Valuation Tables The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. Section 7872.—Treatment of Loans With Below-Market Interest Rates The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of February 2012. See Rev. Rul. 2012-7, page 362. February 6, 20123642012–6 I.R.B. Part III. Administrative, Procedural, and Miscellaneous Restitution Payments Under the Trafficking Victims Protection Act of 2000 Notice 2012–12 PURPOSE This notice provides guidance on the federal income tax treatment of manda- tory restitution payments awarded under 18 U.S.C. § 1593, as added by § 112(a) of the Trafficking Victims Protection Act of 2000 (the Act), Division A of Pub. L. 106–386, 114 Stat. 1488–89 (2000). BACKGROUND Congress enacted the Act “to combat trafficking of persons, a contemporary manifestation of slavery whose victims are predominantly women and children, to ensure just and effective punishment of traffickers, and to protect their victims.” Section 102(a) of the Act. Congress found that “[v]ictims are often forced through physical violence to engage in sex acts or perform slavery-like labor” and that “[s]uch force includes rape and other forms of sexual abuse, torture, starva- tion, imprisonment, threats, psychological abuse, and coercion.” Section 102(b)(6) of the Act. Under 18 U.S.C. §§ 1581 through 1594, as amended, Congress has defined crimi- nal acts relating to peonage, slavery, and trafficking in persons and established the fines and terms of imprisonment for per- sons convicted of the criminal acts. The criminal acts include (i) holding a person to a condition of peonage; (ii) kidnapping or carrying away a person to sell the person into involuntary servitude or to be held as a slave, (iii) providing or obtaining a per- son’s services or labor by actual or threat- ened use of certain means including force, physical restraint, serious harm, and abuse of legal process, and (iv) sex trafficking of children or by force, fraud, or coercion. See18 U.S.C. §§ 1581, 1583, 1589, and 1591. Under 18 U.S.C. § 1593, a court must order restitution to a victim for any of- fense committed under 18 U.S.C. §§ 1581 through 1594, directing a defendant to pay the victim the full amount of the victim’s losses. 18 U.S.C. § 1593(b)(1). The full amount of a victim’s losses in- cludes costs for medical services relating to physical, psychiatric, or psychological care; costs for physical and occupational therapy or rehabilitation; necessary trans- portation, temporary housing, and child care expenses; lost income; attorneys’ fees and other costs; and other losses the vic- tim suffers as a proximate result of the of- fense.See18 U.S.C. §§ 1593(b)(3) and 2259(b)(3). Under 18 U.S.C. § 1593(b)(3), a victim’s losses also include the greater of the gross income or value to the defen- dant of the victim’s services or labor or the value of the victim’s labor as guaran- teed under the minimum wage and over- time guarantees of the Fair Labor Stan- dards Act (29 U.S.C. § 201et seq.). FEDERAL TAX TREATMENT OF BENEFITS Mandatory restitution payments awarded under 18 U.S.C. § 1593 are ex- cluded from gross income for federal income tax purposes. DRAFTING INFORMATION The principal author of this notice is Sheldon Iskow of the Office of Associate Chief Counsel (Income Tax & Account- ing). For further information regarding this notice, contact Mr. Iskow at (202) 622–4920 (not a toll-free call). 2012–6 I.R.B.365February 6, 2012 Part IV. Items o fGeneralInterest Revisions to P ublications 1187, 1220, an d 1239 Announcement 2012–6 Changes to: •Publication 1220,Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, and W–2G Electronically (Rev. 9–2011) •Publication 1187,Specification for Filing Form 1042-S, Foreign Per- son’s U.S. Source Income Subject to Withholding, Electronically(Rev. 10–2011) •Publication 1239,Specifications for Filing Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, Electronically(Rev. 10–2011) The following PartD., Extensions of Time and Waivers, Sec. 1, General-Exten- sion and Sec. 2, Specifications for Filing Extensions of Time Electronically, super- sedes the previously printed Part D., Ex- tensions of Time and Waivers, Sec. 1, General-Extension and Sec. 2, Specifica- tions for Filing Extensions of Time Elec- tronically in the above listed publications. Part D. Extensions of Time and Waivers Sec. 1. General — Extensions .01An extension of time to file may be requested for Forms 1042-S, 1097, 1098, 1099, 3921, 3922, 5498, 8027 and W-2G. Note: IRS encourages the payer/trans- mitte r community to utilize the online fill- in form in lieu of the paper Form 8809. Requests for more than one payer must b e filed through the Filing Infor- matio n Returns Electronically (FIRE) syst em using the Fill-in option. No TCC requ ired. .02T he Fill-in Form 8809 may be comp leted online via the FIRE System. (See Part B, Sec. 7, for instructions on conn ecting to the FIRE System.) At the Main Menu, click “Extension of Time Requ est”andthenclick“Fill-inExtension For m”. This option is only used to request an a utomatic 30-day extension. Extension requests comp leted online via the FIRE System receiv e an instant response if com- pleted proper ly and timely. If you are requesting an additional extension, you must submit a p aper Form 8809.Requests for an additi onal extension of time to file information returns are not automatically granted. Req uests for additional time are granted only in cases of extreme hardship or catastro phic event. The IRS will only send a lette r of explanation approving or denying you r additional extension request. (Refer to .1 1 of this Section.) .03A paper F orm 8809,Application for Extensi on of Time to File Information Returns,m ay be submitted to IRS/IRB at the addres s listed below. This form may be used to r equest an extension of time to file inf ormation returns submitted on paper. A si gnature is not required when requesti ng an automatic 30-day extension. Form 8809 may be obtained by calling 1–800–TA X–Form (1–800–829–3676). The form i s also available atIRS.gov. These re quests must be sent using the fol- lowing a ddress: Interna l Revenue Service Informa tion Returns Branch Attn: Ex tension of Time Coordinator 240 Mura ll Drive, Mail Stop 4360 Kearne ysville, WV 25430 Note: D ue to the large volume of mail receiv ed by IRS/IRB and the time fac- tor inv olvedinprocessingExtensionof Time (E OT) requests, it is imperative that t heattentionlinebepresentonall envel opes or packages containing Form 8809. .04Re quests for extensions of time to fil e postmarked by the United States Posta l Service on or before the due date of the returns, and delivered by United State s mail to IRS/IRB after the due date, are t reated as timely under the “timely mail ing as timely filing” rule. A similar rule applies to designated private delivery serv ices (PDSs). Notice 97–26, 1997–17 I.R. B. 6, provides rules for determining the date that is treated as the postmark dat e. For items delivered by a non-desig- nat ed Private Delivery Service (PDS), the act ual date of receipt by IRS/IRB will be used as the fil ing date. For items delivered by a designate d PDS, but through a type of service not de signated in Notice 2004–83, 2004–52 I.R.B . 1030, the actual date of re- ceipt by IRS/I RB will be used as the filing date. The tim ely mailing rule also applies to furnishin g statements to recipients and participant s. .05To be cons idered, an extension re- questmustbe postmarked, transmitted or completed on line by the due date of the returns; ot herwise, the request will be de- nied. (See P art A, Sec. 7, for due dates.) If requesting an extension of time to file sev- eral types o f forms, use one Form 8809; however, F orm 8809 or an extension file must be sub mitted no later than the ear- liest due d ate. For example, if request- inganexte nsionoftimetofilebothForms 1099–INT a nd 5498, submit Form 8809 on or before February 28. .06 As soo nasitisapparentthat a 30-day ex tension of time to file is needed, an extens ion request should be submitted. IRS/IRB d oes not begin processing exten- sion requ ests until January. It may take up to 30 day s for IRS/IRB to respond to a pa- per exte nsion request.Extensions com- pleted o nlineviatheFIRESystemre- ceive in stant results. .07Unde r certain circumstances, a re- quest fo r an extension of time may be de- nied. W hen a denial letter is received, any additi onal or necessary information must be resu bmitted within 20 calendar days. .08Req uesting an extension of time for multip le payers should be done by com- pletin g the online fill-in form via the FIRE System . A separate Form 8809 must be compl eted online for each payer. .09Tra nsmitters requesting an exten- sion o f time via an electronic file (see Sec. 3fort he record layout) will receive the file statu s results online. .10If an extension request is approved, the ap proval notification should be kept on file. DO NOTsend the approval notifica- tion o r copy of the approval notification to IRS/ IRB or to the service center where the pape r returns are filed. .11I f an additional extension of time is ne eded, a Form 8809 and/or extension file must be sent by the initial extended due d ate. Check line 3 on the form to in- dica te that an additional extension is be- February 6, 20123662012–6 I.R.B. ing requested. Failure to properly com- plete andsignForm 8809 may cause de- lays in processing the request or result in a denial. Carefully read and follow the in- structions on the back of Form 8809. A second 30-day extension will be approved only in cases of extreme hardship or cata- strophic event. Be sure to include the rea- son an additional extension is needed.If requesting a second 30-day extension of time, submit the information return files as soon as prepared. Do not wait for IRS/IRB’s response to your second ex- tension request. Sec. 2. Specifications for Filing Extensions of Time Electronically .01The specificationsin Sec. 3 include the required 200-byte record layout for ex- tensions of time to file requests submitted electronically. Also included are the in- structions for the information that is to be entered in the record.Filers are advised to read this section in its entirety to en- sure proper filing. .02If a filer does not have an IRS/IRB assigned Transmitter Control Code (TCC), Form 4419,Application for Filing In- formation Returns Electronically (FIRE) mustbe submitted to obtain a TCC. This numbermustbe used to submit an exten- sion request electronically. (See Part A, Sec. 6.) .03If you are requesting an additional extension, you must fax a signed Form 8809 the same day as the transmission. Be sure to include the reason an additional ex- tension is needed. .04Do not submit tax year 2011 ex- tension requests filed electronically before January 4, 2012. Changes to : Publication 1220,Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, and W–2G Electronically (Rev. 9–2011) Part C, Section 7 for Form 3921 & Form 3922: •Payee “B” Record for Form 3921,Ex- ercise of an Incentive Stock Option Un- der Section 422(b), •Field Positions 547–554, Date Op- tion Granted, is a Required Field •Field Positions 555–562, Date Op- tion Exercised, is a Required Field •Field Positions 563–570, Number of Shares Transferred, is a Re- quired Field •Payee “B” Record for Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c), •Field Position 547–554. Date Op- tion Granted to Transferor, is a Re- quired Field •Field Position 555–562, Date Op- tion Exercised by Transferor, is a Required Field •Field Position 563–570, Number of Shares Transferred, is a Re- quired Field •Field Position 571–578, Date Le- gal Title Transferred by Transferor, is a Required Field Correction to Revenue Procedure 2012–8 Announcement 2012–7 Revenue Procedure 2012–8 as pub- lished on January 3, 2012 (2012–1 I.R.B. 235) contains a typographical error in section 6.07(5). The error is that section 6.07(5) refers to Notice 2011–34. The correct Notice is Notice 2011–43. Sec- tion 6.07(5) is amended to delete “Notice 2011–34” and replace it with “Notice 2011–43.” 2012–6 I.R.B.367February 6, 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. February 6, 2012i2012–6 I.R.B. Numerical Finding List 1 Bulletins 2012–1 through 2012–6 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 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 Proposed Regulations: REG-149625-10, 2012-2 I.R.B.279 REG-102988-11, 2012-4 I.R.B.326 REG-130777-11, 2012-5 I.R.B.347 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 2012-12, 2012-2 I.R.B.275 2012-13, 2012-3 I.R.B.295 2012-14, 2012-3 I.R.B.296 Revenue Rulings: 2012-1, 2012-2 I.R.B.255 2012-2, 2012-3 I.R.B.286 2012-5, 2012-5 I.R.B.337 2012-6, 2012-6 I.R.B.349 2012-7, 2012-6 I.R.B.362 Treasury Decisions: 9559, 2012-2 I.R.B.252 9560, 2012-4 I.R.B.299 Treasury Decisions— Continued: 9561, 2012-5 I.R.B.341 9562, 2012-5 I.R.B.339 9563, 2012-6 I.R.B.354 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. 2012–6 I.R.B.iiFebruary 6, 2012 Finding List of Current Actions on Previously Published Items 1 Bulletins 2012–1 through 2012–6 Notices: 2010-88 As modified by Ann. 2011-40, is superseded by Notice 2012-1, 2012-2 I.R.B.260 2011-28 Superseded by Notice 2012-9, 2012-4 I.R.B.315 Revenue Procedures: 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 Revenue Procedures— Continued: 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 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. February 6, 2012iii2012–6 I.R.B. 2012–6 I.R.B.February 6, 2012 February 6, 20122012–6 I.R.B. INTERNAL REVENUE BULLETIN The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin- tendent of Documents when their subscriptions must be renewed. CUMULATIVE BULLETINS The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the Superintendent of Documents. ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Select Businesses. Under Businesses Topics, select More Topics. Then select Internal Revenue Bulletins. INTERNAL REVENUE BULLETINS ON CD-ROM Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders) or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January. HOW TO ORDER Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance, detach entire page, and mail to the Superintendent of Documents, P.O. Box 979050, St. Louis, MO 63197–9000. Please allow two to six weeks, plus mailing time, for delivery. WE WELCOME COMMENTS ABOUT THE INTERNAL REVENUE BULLETIN If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page (www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. 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