us-irs-notices-irb-2008-14-pdf•Internal Revenue Bulletin 2008-14 (PDF rendition): IRS Notices
Internal Revenue Bulletin 2008-14 (PDF rendition): IRS Notices
us-irs-notices-irb-2008-14-pdfInternal Revenue Bulletin 2008-14 (PDF rendition): IRS NoticesGuidance
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Bulletin No. 200 8-14 April 7, 2008 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX Rev. Rul. 2008–20, page 716. 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 April 2008. T.D. 9378, page 720. Final regulations under section 6325 of the Code outline spe- cific procedures for obtaining a release of a federal tax lien or a discharge of a federal tax lien from property to which it has at- tached. The regulations incorporate changes to the Code that were made by the IRS Restructuring and Reform Act of 1998, which afford a means for a person whose property is encum- bered by a federal tax lien, but who does not owe the tax giving rise to the lien, to have his property discharged from the lien. T.D. 9379, page 715. REG–153589–06, page 730. Temporary and proposed regulations under section 1221 of theCodeprovidethetimeandmannerformakinganelection to treat the sale or exchange of musical compositions or copy- rights in musical works created by the taxpayer as the sale or exchange of a capital asset. T.D. 9381, page 694. Final regulations under section 199 of the Code concern the amendments made by the Tax Increase Prevention and Recon- ciliation Act of 2005 (TIPRA) to section 199, which provides a deduction for income attributable to domestic production ac- tivities. Notice 2008–40, page 725. Amplification of Notice 2006–52; Deduction for Energy Efficient Commercial Buildings.This notice sets forth ad- ditional guidance relating to the deduction for energy efficient commercial buildings under section 179D of the Code and is intended to be used with Notice 2006–52. Several aspects of the deduction for energy efficient commercial buildings were not addressed in Notice 2006–52. This notice addresses some of these items including the allocation of the section 179D deduction to designers of government owned buildings, certification requirements for the interim lighting rule, and the application of the interim lighting rule to unconditioned garage space. Notice 2006–52 clarified and amplified. Announcement 2008–25, page 732. This document withdraws a portion of proposed regulations (REG–107592–00, 2007–44 I.R.B. 908) under the consoli- dated return regulations. The withdrawn portion relates to the treatment of transactions involving the provision of insurance between members of a consolidated group. EMPLOYEE PLANS Announcement 2008–23, page 731. Pre-approved defined contribution master and prototype and volume submitter plans; issuance of EGTRRA opin- ion and advisory letters.This announcement states that the Service will soon issue opinion and advisory letters for pre-ap- proved,i.e., master and prototype and volume submitter de- fined contribution plans that were timely filed with the Service to comply with the Economic Growth and Tax Relief Reconcili- ation Act of 2001 (EGTRRA), and other changes in plan quali- fication requirements listed in Notice 2004–84, 2004–2 C.B. 1030. (Continued on the next page) Finding Lists begin on page ii. EXEMPT ORGANIZATIONS Announcement 2008–28, page 733. A list is provided of organizations now classified as private foun- dations. ADMINISTRATIVE T.D. 9380, page 718. Final regulations under section 6020 of the Code relate to re- turns prepared or signed by the Commissioner or other In- ternal Revenue Officers or employees. The regulations pro- vide guidance for preparing a substitute for return under sec- tion 6020(b). Absent the existence of a return under section 6020(b), the addition to tax under section 6651(a)(2) does not apply to a nonfiler. The regulations affect any person who fails to file a required return. Announcement 2008–25, page 732. This document withdraws a portion of proposed regulations (REG–107592–00, 2007–44 I.R.B. 908) under the consoli- dated return regulations. The withdrawn portion relates to the treatment of transactions involving the provision of insurance between members of a consolidated group. April 7, 20082008–14 I.R.B. The IRS Mission Provide Americ a’s taxpayers top quality service by helping them understand an d meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conven- tions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents are compiled semiannually into Cumulative Bulletins, which are sold on a single-copy basis. It is the policy of the Service to publish in the Bulletin all sub- stantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, mod- ify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indi- cated. Procedures relating solely to matters of internal man- agement are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—19 86 Code. This part i ncludes rulings and decisions based on provisions of the Intern al Revenue Code of 1986. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Leg- islation and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rul- ings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secre- tary (Enforcement). Part IV .—Items of General Interest. This par t includes notices of proposed rulemakings, disbar- ment an d suspension lists, and announcements. The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period. The c ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate. For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402. 2008–14 I.R.B.April 7, 2008 April 7, 20082008–14 I.R.B. Place missing child here. 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 April 2008. See Rev. Rul. 2008-20, page 716. Section 199.—Income Attributable to Domestic Production Activities 26 CFR 1.199–3: Domestic production gross re- ceipts. T.D. 9381 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 TIPRA Amendments to Section 199 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations concerning the amendments made by the Tax Increase Prevention and Reconciliation Act of 2005 to section 199 of the Internal Revenue Code. The final regulations also contain a rule concerning the use of losses incurred by members of an expanded affiliated group. Section 199 provides a deduction for income attribut- able to domestic production activities. The final regulations affect taxpayers engaged in certain domestic production activities. DATES:Effective Date:These regulations are effective on February 15, 2008. Applicability Date:For dates of appli- cability, see §1.199–8(i)(5) and (6). FOR FURTHER INFORMATION CON TACT: Concerning §§1.199–2(e)(2) and 1.199–8(i)(5), Paul Handleman or Dav id McDonnell, (202) 622–3040; co ncerning§§1.199–3(i)(7)and (8 ), and 1.199–5, William Kostak, (202) 622–306 0; and concerning §§1.199–7(b) (4) and 1.199–8(i)(6), Ken Cohen, (20 2) 622–7790 (not toll-free numbers). SUPPLEMENTA RY INFORMATION: Background This document provides rules relating to the deduct ion for income attributable to domestic p roduction activities under section 199 o f the Internal Revenue Code (Code). Sec tion 199 was added to the Code by sect ion 102 of the American Jobs Creati on Act of 2004 (Public Law 108–357, 11 8 Stat. 1418), and amended by section 4 03(a) of the Gulf Opportunity Zone Act of 2005 (Public Law 109–135, 119 Stat. 2 5), section 514 of the Tax Increase P revention and Reconciliation Act of 2005 (Public Law 109–222, 120 Stat. 345) (TIPRA), and section 401 of the Tax Re lief and Health Care Act of 2006 (Pub lic Law 109–432, 120 Stat. 2922). On June 1, 2006, the IRS and Treasury Department published final reg- ulation s under section 199 (T.D. 9263, 2006–1 C .B. 1063 [71 FR 31268]). On October 19, 2006, the IRS and Treasury Departm ent published final and temporary regulat ions on the TIPRA amendments to sect ion 199 (T.D. 9293, 2006–2 C.B. 957 [71 FR 61662]) and cross-referencing propos ed regulations (REG–127819–06, 2006–2 C.B. 1013 [71 FR 61692]). No public hearing was requested or held on the pro posed regulations. One comment respo nding to the proposed regulations was re ceived. After consideration of the comme nt, the proposed regulations are adopt ed as amended by this Treasury de- cisio n and the corresponding temporary regu lations are removed. Gene ral Overview Sect ion 199(a)(1) allows a deduction equa l to 9 percent (3 percent in the case of taxa ble years beginning in 2005 or 2006, and 6 percent in the case of taxable years begi nning in 2007, 2008, or 2009) of the less er of (A) the qualified production ac- tiv ities income (QPAI) of the taxpayer for the taxable ye ar, or (B) taxable income (de- termined with out regard to section 199) for the taxable ye ar (or, in the case of an indi- vidual, adju sted gross income (AGI)). Section 199(b )(1) limits the deduction for a taxable year to 50 percent of the W–2 wages paid by the taxpayer during the cal- endar year th at ends in such taxable year. For this purp ose, section 199(b)(2)(A) de- fines the te rmW–2 wagesto mean, with respect to a ny person for any taxable year of such pers on, the sum of the amounts de- scribed in s ection 6051(a)(3) and (8) paid by such per son with respect to employ- ment of emp loyees by such person during the calend ar year ending during such tax- able year. Section514(a)ofTIPRAadded new sectio n 199(b)(2)(B), which provides that the t ermW–2 wagesdoes not in- clude any amount which is not properly allocabl e to domestic production gross receipts (DPGR) for purposes of section 199(c)(1 ). Section 199(b)(2)(C) provides that the termW–2 wagesdoes not include any amou nt that is not properly included in a retu rn filed with the Social Security Adminis tration on or before the 60th day after t he due date (including extensions) for the return. Pass-t hru Entities Sectio n 199(d)(1)(A) provides that, in the cas e of a partnership or S corpora- tion, ( i) section 199 shall be applied at the partne r or shareholder level, (ii) each part- ner or s hareholder shall take into account such p erson’s allocable share of each item descr ibed in section 199(c)(1)(A) or (B) (dete rmined without regard to whether the items described in section 199(c)(1)(A) excee d the items described in section 199( c)(1)(B)), and (iii) each partner or shar eholder shall be treated for purposes of se ction 199(b) as having W–2 wages for t he taxable year in an amount equal to such person’s allocable share of the W–2 wag es of the partnership or S corporation for the taxable year (as determined under reg ulations prescribedby the Secretary). Sec tion 199(d)(1)(B) provides that, in the case of a trust or estate, (i) the items ref erred to in section 199(d)(1)(A)(ii) (as det ermined therein) and the W–2 wages 2008–14 I.R.B.694April 7, 2008 of the trust or estate for the taxable year shall be apportioned between the benefi- ciaries and the fiduciary (and among the beneficiaries) under regulations prescribed by the Secretary, and (ii) for purposes of section 199(d)(2), AGI of the trust or es- tate shall be determined as provided in sec- tion 67(e) with the adjustments described in such section. Section 199(d)(1)(C) provides that the Secretary may prescribe rules requiring or restricting the allocation of items and wages under section 199(d)(1) and may prescribe such reporting requirements as the Secretary determines appropriate. Expanded Affiliated Groups Section 199(d)(4)(A) provides that all members of an expanded affiliated group (EAG) are treated as a single corpora- tion for purposes of section 199. Section 199(d)(4)(B) provides that an EAG is an affiliated group as defined in section 1504(a), determined by substituting “more than 50 percent” for “at least 80 percent” each place it appears and without regard to section 1504(b)(2) and (4). Authority to Prescribe Regulations Section 199(d)(9) authorizes the Secre- tary to prescribe such regulations as are necessary to carry out the purposes of sec- tion 199, including regulations that pre- vent more than one taxpayer from being al- lowed a deduction under section 199 with respect to any activity described in section 199(c)(4)(A)(i). Summary of Comments For taxable years beginning after May 17, 2006, §1.199–2T(e)(2)(i) provides that the termW–2 wagesincludes only amounts described in §1.199–2(e)(1) (paragraph (e)(1) wages) that are properly allocable to DPGR (as defined in §1.199–3) for purposes of section 199(c)(1). A taxpayer may determine the amount of paragraph (e)(1) wages that is properly allocable to DPGR using any reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances. Section 1.199–2T(e)(2)(ii) and (iii) provide safe harbors for determining the amount of paragraph (e)(1) wages that is properly allocable to DPGR. Un- der the wage expense safe harbor in §1.199–2T(e)(2)(ii)(A) for taxpayers us- ing either the section 861 method of cost allocation under §1.199–4(d) or the simpli- fied deduction method under §1.199–4(e), a taxpayer may determine the amount of paragraph (e)(1) wages that is properly allocable to DPGR by multiplying the amount of paragraph (e)(1) wages by the ratio of the taxpayer’s wage expense in- cluded in calculating QPAI for the taxable year to the taxpayer’s total wage expense used in calculating the taxpayer’s taxable income (or AGI, if applicable) for the taxable year. For purposes of determining the amount of wage expense included in cost of goods sold (CGS) for this safe harbor, §1.199–2T(e)(2)(ii)(B) provides that a taxpayer may determine its wage expense included in CGS using any rea- sonable method that is satisfactory to the Secretary based on all of the facts and circumstances. Under the wage expense safe harbor in §1.199–2T(e)(2)(ii)(A), a taxpayer uses its wage expense, not W–2 wages, to de- termine the amount of W–2 wages that are properly allocable to DPGR. Section 1.199–2T(e)(2)(ii)(A) defines the term wage expenseas wages (that is, com- pensation paid by the employer in the active conduct of a trade or business to its employees) that are properly taken into account under the taxpayer’s method of accounting. The commentator suggested that, in certain circumstances, it should not be necessary for W–2 wages to be paid by a taxpayer in order for those wages to be properly allocable to DPGR. Specif- ically, the commentator suggested that W–2 wages should be treated as properly allocable to DPGR ifthe wages are paid to employees that are performing services in connection with an activity attributable to DPGR. Thus, in the case of partner- ship-shared services, if the employees of one partnership perform services that give rise to DPGR for another partnership and both partnerships have common owner- ship, then some or all of the W–2 wages should be treated as properly allocable to DPGR. The commentator further sug- gested that W–2 wages should be properly allocable to DPGR as long as the owner of the pass-thru entity includes in its tax- able income DPGR (as a distributive share of another pass-thru entity’s DPGR) and deducts from its taxable income wages paid to employees (those employed by the pass-thru entity) whose services created that DPGR. As an alternative, the commentator suggested that owners of certain pass-thru entities be permitted to treat non-DPGR as DPGR for purposes of determining whether W–2 wages are properly allocable to DPGR. The commentator suggested that the activity attribution rules for qualifying in-kind partnerships in §1.199–3T(i)(7)(i), EAG partnerships in §1.199–3T(i)(8)(ii), and EAGs in §1.199–7(a)(3) be extended to pass-thru entities with respect to gross receipts attributable to services performed by employees of a pass-thru entity if such gross receipts are taken into account as an item of income on a tax return in which the DPGR attributable to those services also is reported. The commentator be- lieves the result of such a rule would be to recharacterize non-DPGR as DPGR if the activities giving rise to the employee wages contribute to generating DPGR that is reported on the same tax return as the wage deduction. Therefore, the pass-thru entity with the employees would be treated as engaged in a qualifying production activity to the extent of the W–2 wages and the W–2 wages would be treated as properly allocable to DPGR. The interplay between the TIPRA amendment to section 199(b)(2) and the rules for qualifying in-kind partnerships under §1.199–3T(i)(7), EAG partnerships under §1.199–3T(i)(8), and EAGs under §1.199–7 may reduce or eliminate the sec- tion 199 deduction for EAGs and partners in qualifying in-kind partnerships if one entity uses employees of another entity to perform activities giving rise to DPGR. In addition, even though §1.199–3(f) pro- vides rules for contract manufacturing and certain government contracts, the TIPRA amendment to section 199(b)(2) may reduce or eliminate the section 199 deduction for taxpayers entering into such contracts because the contract manufac- turer’s W–2 wages are not attributed to the taxpayer. The commentator’s suggestions would treat pass-thru entities more favorably than non-consolidated EAGs. In general, §1.199–7(a) and (b)provides that each member of an EAG calculates its own taxable income or loss, QPAI, and W–2 wages, which are then aggregated in deter- mining the EAG’s section 199 deduction. April 7, 20086952008–14 I.R.B. After the TIPRA amendment to section 199(b)(2), to qualify as W–2 wages within the meaning of §1.199–2T(e)(2), para- graph (e)(1) wages must be properly allo- cable to DPGR. Because each member of an EAG separately calculates its own items before they are aggregated by the EAG, the member having the paragraph (e)(1) wages must itself have DPGR to which the wages are properly allocable in order to qualify those wages as W–2 wages. Para- graph (e)(1) wages that are not properly allocable to DPGR of the member having the paragraph (e)(1) wages do not qual- ify as W–2 wages, even if the paragraph (e)(1) wages were paid in connection with another member’s DPGR activities.Ex- ample 5in §1.199–2T(e)(2)(iv) illustrates this point. Section 514(b) of TIPRA amended sec- tion 199(d)(1)(A)(iii) regarding a partner’s or shareholder’s share of W–2 wages from a partnership or S corporation for taxable years beginning after May 17, 2006. Af- ter TIPRA, the section 199(d)(1)(A)(iii) rule for determining a partner’s or share- holder’s share of W–2 wages from a pass-thru entity no longer includes the second prong of the former two-prong standard, by which a partner’s or share- holder’s share of W–2 wages from the partnership or S corporation was limited to the lesser of that person’s allocable share of W–2 wages from the entity or a specified percentage of the person’s QPAI, computed by taking into account only the items of the entity allocated to that person for the taxable year of the entity. Before TIPRA, if the employees of a partner- ship performed services that gave rise to DPGR for another entity, but the partner- ship had no DPGR, then under the section 199(d)(1)(A)(iii) wage limitation, a part- ner could not take into account any W–2 wages from the partnership. After TIPRA, if the partner uses the section 861 method of cost allocation under §1.199–4(d), the partner cannot take into account any W–2 wages from the partnership because the W–2 wages do not generate DPGR in the partnership. Thus, in the case of part- nership-shared services where the partner uses the section 861 method, the TIPRA amendment to section199(b)(2) retains the result that the partner cannot take into account any W–2 wages from the partner- ship in applying the wage limitation under section 199(b)(1). Moreover, the TIPRA amendment modified the W–2 wage limitation to nar- row the availability of the section 199 deduction. The commentator’s sugges- tions would allow more taxpayers to claim the section 199 deduction and increase the amount of the deduction for some tax- payers, which conflicts with the changes made by TIPRA. Accordingly, the final regulations do not adopt the commenta- tor’s suggestions. In finalizing §1.199–5, certain clari- fying changes have been made and con- forming clarifications have been made to §1.199–9. As described in the preamble to the final and temporary regulations on the TIPRA amendments to section 199, pub- lished on October 19, 2006 (T.D. 9293, 71 FR 61662), the combination of the aggre- gation rules for determining the taxable income of an EAG in §1.199–7(b)(1) of the June 1, 2006 final regulations (T.D. 9263, 71 FR 31268) and the rules of sec- tion 172 for net operating loss deductions could cause the unintended result of the same loss being used twice in determin- ing the taxable income limitation under section 199(a)(1)(B). To eliminate this unintended result, §1.199–7T(b)(4) was promulgated to prevent a loss that was used in the year it was sustained in de- termining any EAG’s taxable income for purposes of the taxable income limitation under section 199(a)(1)(B) from being used again as either a carryover or carry- back to any taxable year in determining the taxable income limitation under section 199(a)(1)(B). No comments were received on the provisions of §1.199–7T(b)(4) and those provisions are finalized without change. Effective/Applicability Dates Section 199 applies to taxable years beginning after December 31, 2004. Sec- tions 1.199–2(e)(2), 1.199–3(i)(7) and (8), and 1.199–5 are applicable for tax- able years beginning on or after October 19, 2006 (the effective date of the tem- porary regulations). A taxpayer may apply §§1.199–2(e)(2), 1.199–3(i)(7) and (8), and 1.199–5 to taxable years be- ginning after May 17, 2006, and before October 19, 2006, regardless of whether the taxpayer otherwise relied upon No- tice 2005–14, 2005–1 C.B. 498 (see §601.601(d)(2)(ii)(b)), the provisions of REG–105847–05, 2005–2 C.B. 987, or §§1.199–1 through 1.199–8. Section 1.199–7(b)(4) is applicable for taxable years beginning on orafter February 15, 2008. Special Analyses It has been determined that this Trea- sury decision is not asignificant regula- tory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to this regulation, and because the regulation does not impose a collection of information on small entities, the Regu- latory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rule- making preceding this regulation has been submitted to the Chief Counsel for Advo- cacy of the Small Business Administration for comment on its impact on small busi- ness. Drafting Information The principal authors of these reg- ulations are Paul Handleman and Lauren Ross Taylor, Office of the Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and 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 part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.199–0 is amended by adding new entries for §§1.199–2(e)(2), 1.199–3(i)(7), 1.199–3(i)(8), 1.199–5, and 1.199–7(b)(4) to read as follows: §1.199–0 Table of contents. ***** 2008–14 I.R.B.696April 7, 2008 §1.199–2 Wage limitation. ***** (e) * * * (2) Limitation on W–2 wages for tax- able years beginningafter May 17, 2006, the enactment date of the Tax Increase Pre- vention and Reconciliation Act of 2005. (i) In general. (ii) Wage expense safe harbor. (A) In general. (B) Wage expense included in cost of goods sold. (iii) Small business simplified overall method safe harbor. (iv) Examples. ***** §1.199–3 Domestic production gross receipts. ***** (i) * * * (7) Qualifying in-kind partnership for taxable years beginning after May 17, 2006, the enactment date of the Tax In- crease Prevention and Reconciliation Act of 2005. (i) In general. (ii) Definition of qualifying in-kind partnership. (iii) Other rules. (iv) Example. (8) Partnerships owned by members of a single expanded affiliated group for tax- able years beginningafter May 17, 2006, the enactment date of the Tax Increase Pre- vention and Reconciliation Act of 2005. (i) In general. (ii) Attribution of activities. (A) In general. (B) Attribution between EAG partner- ships. (C) Exceptions to attribution. (iii) Other rules. (iv) Examples. ***** §1.199–5 Application of section 199 to pass-thru entities for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005. (a) In general. (b) Partnerships. (1) In general. (i) Determination at partner level. (ii) Determination at entity level. (2) Disallowed losses or deductions. (3) Partner’s share of paragraph (e)(1) wages. (4) Transition rule for definition of W–2 wages and for W–2 wage limitation. (5) Partnerships electing out of sub- chapter K. (6) Examples. (c) S corporations. (1) In general. (i) Determination at shareholder level. (ii) Determination at entity level. (2) Disallowed losses and deductions. (3) Shareholder’s share of paragraph (e)(1) wages. (4) Transition rule for definition of W–2 wages and for W–2 wage limitation. (d) Grantor trusts. (e) Non-grantor trusts and estates. (1) Allocation of costs. (2) Allocation among trust or estate and beneficiaries. (i) In general. (ii) Treatment of items from a trust or estate reporting qualified production activ- ities income. (3) Transition rule for definition of W–2 wages and for W–2 wage limitation. (4) Example. (f) Gain or loss from the disposition of an interest in a pass-thru entity. (g) No attribution of qualified activities. ***** §1.199–7 Expanded affiliated groups. ***** (b) * * * (4) Losses used to reduce taxable in- come of expanded affiliated group. (i) In general. (ii) Examples. ***** §1.199–8 Other rules. ***** (i) * * * (5) Tax Increase Prevention and Recon- ciliation Act of 2005. (6) Losses used to reduce taxable in- come of expanded affiliated group. ***** §1.199–1 [Amended] Par. 3. Section 1.199–1 is amended by removing the language “§1.199–9(d)” in paragraphs (d)(3)(i) and (ii) and adding the language “§1.199–5(d) or §1.199–9(d)” in its place. Par. 4. Section 1.199–2 is amended by revising paragraph (e)(2) to read as fol- lows: §1.199–2 Wage limitation. ***** (e) * * * (2)Limitation on W–2 wages for tax- able years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005—(i)In general.ThetermW–2 wagesincludes only amounts described in paragraph (e)(1) of this section (paragraph (e)(1) wages) that are properly alloca- ble to domestic production gross receipts (DPGR) (as defined in §1.199–3) for pur- poses of section 199(c)(1). A taxpayer may determine the amount of paragraph (e)(1) wages that is properly allocable to DPGR using any reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances. (ii)Wage expense safe harbor—(A)In general. A taxpayer using either the sec- tion 861 method of cost allocation under §1.199–4(d) or the simplified deduction method under §1.199–4(e) may determine the amount of paragraph (e)(1) wages that is properly allocable to DPGR for a taxable year by multiplying the amount of para- graph (e)(1) wages for the taxable year by the ratio of the taxpayer’s wage expense included in calculating qualified produc- tion activities income (QPAI) (as defined in §1.199–1(c)) for the taxable year to the taxpayer’s total wage expense used in cal- culating the taxpayer’s taxable income (or adjusted gross income, if applicable) for the taxable year, without regard to any wage expense disallowed by section 465, 469, 704(d), or 1366(d). A taxpayer that uses the section 861 method of cost al- location under §1.199–4(d) or the simpli- fied deduction method under §1.199–4(e) to determine QPAI must use the same ex- pense allocation and apportionment meth- ods that it uses to determine QPAI to allo- cate and apportion wage expense for pur- poses of this safe harbor. For purposes of April 7, 20086972008–14 I.R.B. this paragraph (e)(2)(ii), the termwage ex- pensemeans wages (that is, compensation paid by the employer in the active conduct of a trade or business to its employees) that are properly takeninto account under the taxpayer’s method of accounting. (B)Wage expense included in cost of goods sold. For purposes of paragraph (e)(2)(ii)(A) of this section, a taxpayer may determine its wage expense included in cost of goods sold (CGS) using any rea- sonable method that is satisfactory to the Secretary based on all of the facts and circumstances, such as using the amount of direct labor included in CGS or using section 263A labor costs (as defined in §1.263A–1(h)(4)(ii)) included in CGS. (iii)Small business simplified over- all method safe harbor. A taxpayer that uses the small business simplified overall method under §1.199–4(f) may use the small business simplified overall method safe harbor for determining the amount of paragraph (e)(1) wages that is properly allocable to DPGR. Under this safe harbor, the amount of paragraph (e)(1) wages that is properly allocable to DPGR is equal to the same proportion of paragraph (e)(1) wages that the amount of DPGR bears to the taxpayer’s total gross receipts. (iv)Examples. The following examples illustrate the application of this paragraph (e)(2). See §1.199–5(e)(4) for an example of the application of paragraph (e)(2)(ii) of this section to a trust or estate. The examples read as follows: Example 1.Section 861 method and no EAG.(i) Facts. X, a United States corporation that is not a member of an expanded affiliated group (EAG) (as defined in §1.199–7) or an affiliated group as de- fined in the regulations under section 861, engages in activities that generate both DPGR and non-DPGR. X’s taxable year ends on April 30, 2011. For X’s taxable year ending April 30, 2011, X has $3,000 of paragraph (e)(1) wages reported on 2010 Forms W–2. All of X’s production activities that gener- ate DPGR are within Standard Industrial Classifica- tion (SIC) Industry Group AAA (SIC AAA). All of X’s production activities that generate non-DPGR are within SIC Industry Group BBB (SIC BBB). X is able to specifically identify CGS allocable to DPGR and to non-DPGR. X incurs $900 of research and experi- mentation expenses (R&E) that are deductible under section 174, $300 of which are performed with re- spect to SIC AAA and $600 of which are performed with respect to SIC BBB. None of the R&E is legally mandated R&E as described in §1.861–17(a)(4) and none of the R&E is included in CGS. X incurs sec- tion 162 selling expenses that are not includible in CGS and are definitely related to all of X’s gross in- come. For X’s taxable year ending April 30, 2011, the adjusted basis of X’s assets is $50,000, $40,000 of which generate gross income attributable to DPGR and $10,000 of which generate gross income attribut- able to non-DPGR. For X’s taxable year ending April 30, 2011, the total square footage of X’s headquarters is 8,000 square feet, of which 2,000 square feet is set aside for domestic production activities. For its tax- able year ending April 30, 2011, X’s taxable income is $1,380 based on the following Federal income tax items: DPGR (all from sales of products within SIC AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000 Non-DPGR(allfromsalesofproductswithinSICBBB).............................................3,000 CGSallocabletoDPGR(includes$200ofwageexpense)............................................ (600) CGSallocabletonon-DPGR(includes$600ofwageexpense)........................................ (1,800) Section162sellingexpenses(includes$600ofwageexpense)........................................ (840) Section174R&E-SICAAA(includes$100ofwageexpense) ........................................ (300) Section174R&E-SICBBB(includes$200ofwageexpense)......................................... (600) Interestexpense(notincludedinCGS)...........................................................(300) Headquartersoverheadexpense(includes$100ofwageexpense)...................................... ( 180) X’staxableincome...........................................................................1,380 (ii)X’s QPAI. X allocates and apportions its de- ductions to gross income attributable to DPGR un- der the section 861 method in §1.199–4(d). In this case, the section 162 selling expenses and overhead expense are definitely related to all of X’s gross in- come. Based on the facts and circumstances of this specific case, apportionment of the section 162 sell- ing expenses between DPGR and non-DPGR on the basis of X’s gross receipts is appropriate. In addition, based on the facts and circumstances of this specific case, apportionment of the headquarters overhead ex- pense between DPGR and non-DPGR on the basis of thesquarefootageofX’sheadquarters is appropriate. For purposes of apportioning R&E, X elects to use the sales method as described in §1.861–17(c). X elects to apportion interest expense under the tax book value method of §1.861–9T(g). X has $2,400 of gross in- come attributable to DPGR (DPGR of $3,000 - CGS of $600 allocated based on X’s books and records). X’s QPAI for its taxable year ending April 30, 2011, is $1,395, as shown in the following table: DPGR (all from sales of products within SIC AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000 CGSallocabletoDPGR ......................................................................(600) Section162sellingexpenses($840x($3,000DPGR/$6,000totalgrossreceipts))......................... (420) Section174R&E-SICAAA...................................................................(300) Interest expense (not included in CGS) ($300x($40,000(X’sDPGRassets)/$50,000(X’stotalassets))) ................................... (240) Headquarters overhead expense ($180 x (2,000 square feet attributable to DPGRactivity/total8,000squarefeet)) ....................................................... ( 45) X’sQPAI.................................................................................. 1,395 (iii)W–2 wages. X chooses to use the wage ex- pense safe harbor under paragraph (e)(2)(ii) of this sectiontodetermineitsW–2wages,asshowninthe following steps: (A)Step one. X determines that $625 of wage expense were taken into account in determining its QPAI in paragraph (ii) of thisExample 1,asshownin the following table: 2008–14 I.R.B.698April 7, 2008 CGSwageexpense .......................................................................... $200 Section 162 selling expenses wage expense ($600 x ($3,000 DPGR/$6,000 total gross receipts)) . . . . . . . . . . . . . 300 Section174R&E-SICAAAwageexpense........................................................100 Headquarters overhead wage expense ($100 x (2,000 square feet attributable to DPGR activity/8,000totalsquarefeet)) ............................................................. 2 5 Totalwageexpensetakenintoaccount........................................................... 625 (B)Step two. X determines that $1,042 of the $3,000 in paragraph (e)(1) wages are properly alloca- ble to DPGR, and are therefore W–2 wages, as shown in the following calculation: S teponewageexpense x X’s paragraph (e)(1) wages X’s total wage expense for taxable year ending April 30, 2011 $ 625 x $3,000 = $1,042 $1,800 (iv)Section 199 deduction determination.X’s tentative deduction under §1.199–1(a) (section 199 deduction) is $124 (.09 x (lesser of QPAI of $1,395 or taxable income of $1,380)) subject to the wage limi- tation under section 199(b)(1) (W–2 wage limitation) of $521 (50% x $1,042). Accordingly, X’s section 199 deduction for its taxable year ending April 30, 2011, is $124. Example 2.Section 861 method and EAG.(i) Facts. The facts are the same as inExample 1ex- cept that X owns stock in Y, a United States corpo- ration, equal to 75% of the total voting power of the stock of Y and 80% of the total value of the stock of Y. X and Y are not members of an affiliated group as defined in section 1504(a). Accordingly, the rules of §1.861–14T do not apply to X’s and Y’s selling expenses, R&E, and charitable contributions. X and Y are, however, members of an affiliated group for purposes of allocating and apportioning interest ex- pense (see §1.861–11T(d)(6)) and are also members of an EAG. Y’s taxable year ends April 30, 2011. For Y’s taxable year ending April 30, 2011, Y has $2,000 of paragraph (e)(1) wages reported on 2010 Forms W–2. For Y’s taxable year ending April 30, 2011, the adjusted basis of Y’s assets is $50,000, $20,000 of which generate gross income attributable to DPGR and $30,000 of which generate gross in- come attributable to non-DPGR. All of Y’s activities that generate DPGR are within SIC Industry Group AAA (SIC AAA). All of Y’s activities that gener- ate non-DPGR are within SIC Industry Group BBB (SIC BBB). None of X’s and Y’s sales are to each other. Y is not able to specifically identify CGS allo- cable to DPGR and non-DPGR. In this case, because CGS is definitely related under the facts and circum- stances to all of Y’s gross receipts, apportionment of CGS between DPGR and non-DPGR based on gross receipts is appropriate. For Y’s taxable year ending April 30, 2011, the total square footage of Y’s head- quarters is 8,000 square feet, of which 2,000 square feet is set aside for domestic production activities. Y incurs section 162 selling expenses that are not in- cludible in CGS and are definitely related to all of Y’s gross income. For Y’s taxable year ending April 30, 2011, Y’s taxable income is $1,710 based on the following Federal income tax items: DPGR (all from sales of products within SIC AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000 Non-DPGR(allfromsalesofproductswithinSICBBB).............................................3,000 CGSallocatedtoDPGR(includes$300ofwageexpense)............................................ (1,200) CGSallocatedtonon-DPGR(includes$300ofwageexpense)........................................ (1,200) Section162sellingexpenses(includes$300ofwageexpense)........................................ (840) Section174R&E-SICAAA(includes$20ofwageexpense) ......................................... (100) Section174R&E-SICBBB(includes$60ofwageexpense).......................................... (200) Interestexpense(notincludedinCGSandnotsubjectto§1.861–10T).................................. (500) Charitablecontributions....................................................................... (50) Headquartersoverheadexpense(includes$40ofwageexpense)....................................... ( 200) Y’staxableincome...........................................................................1,710 (ii)QPAI.(A)X’s QPAI. Determination of X’s QPAI is the same as inExample 1except that interest is apportioned to gross income attributable to DPGR based on the combined adjusted bases of X’s and Y’s assets. See §1.861–11T(c). Accordingly, X’s QPAI for its taxable year ending April 30, 2011, is $1,455, as shown in the following table: DPGR (all from sales of products within SIC AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000 CGSallocatedtoDPGR ......................................................................(600) Section162sellingexpenses($840x($3,000DPGR/$6,000totalgrossreceipts))......................... (420) Section174R&E-SICAAA...................................................................(300) Interest expense (not included in CGS and not subject to §1.861–10T) ($300 x ($60,000 (tax book valueofX’sandY’sDPGRassets)/$100,000(taxbookvalueofX’sandY’stotalassets)))............... (180) Headquarters overhead expense ($180 x (2,000 square feet attributable to DPGR activity/total 8,000squarefeet))........................................................................ ( 45) X’sQPAI.................................................................................. 1,455 (B)Y’s QPAI. Y makes the same elections under the section 861 method as does X. Y has $1,800 of gross income attributable to DPGR (DPGR of $3,000 - CGS of $1,200 allocated based on Y’s gross re- ceipts). Y’s QPAI for its taxable year ending April 30, 2011, is $905, as shown in the following table: April 7, 20086992008–14 I.R.B. DPGR (all from sales of products within SIC AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000 CGSallocatedtoDPGR ......................................................................(1,200) Section162sellingexpenses($840x($3,000DPGR/$6,000totalgrossreceipts))......................... (420) Section174R&E-SICAAA...................................................................(100) Interest expense (not included in CGS and not subject to §1.861–10T) ($500 x ($60,000 (tax book valueofX’sandY’sDPGRassets)/$100,000(taxbookvalueofX’sandY’stotalassets)))............... (300) Charitable contributions (not included in CGS) ($50 x ($1,800 gross income attributable to DPGR/$3,600totalgrossincome))........................................................... (25) Headquarters overhead expense ($200 x (2,000 square feet attributable to DPGR activity/total 8,000squarefeet))........................................................................ ( 50) Y’sQPAI.................................................................................. 905 (iii)W–2 wages.(A)X’s W–2 wages.X’sW–2 wages are $1,042, the same as inExample 1. (B)Y’s W–2 wages. Y chooses to use the wage expense safe harbor under paragraph (e)(2)(ii) of this section to determine its W–2 wages, as shown in the following steps: (1)Step one. Y determines that $480 of wage expense were taken into account in determining its QPAI in paragraph (ii)(B) of thisExample 2,asshown in the following table: CGSwageexpense .......................................................................... $300 Section 162 selling expenses wage expense ($300 x ($3,000 DPGR/$6,000 total gross receipts)) . . . . . . . . . . . . . 150 Section174R&E-SICAAAwageexpense........................................................20 Headquarters overhead wage expense ($40 x (2,000 square feet attributable to DPGR activity/ 8,000totalsquarefeet))....................................................................1 0 Totalwageexpensetakenintoaccount...........................................................480 (2)Step two. Y determines that $941 of the $2,000 paragraph (e)(1) wages are properly allocable to DPGR, and are therefore W–2 wages, as shown in the following calculation: S teponewageexpense x Y’s paragraph (e)(1) wages Y’s total wage expense for taxable year ending April 30, 2011 $ 480 x $2,000 = $941 $1,020 (iv)Section 199 deduction determination.The section 199 deduction of the X and Y EAG is deter- mined by aggregating the separately determined tax- ableincome,QPAI,andW–2wagesofXandY.See §1.199–7(b). Accordingly, the X and Y EAG’s tenta- tive section 199 deduction is $212 (.09 x (lesser of combined QPAI of X and Y of $2,360 (X’s QPAI of $1,455 plus Y’s QPAI of $905) or combined tax- able incomes of X and Y of $3,090 (X’s taxable in- come of $1,380 plus Y’s taxable income of $1,710)) subject to the combined W–2 wage limitation of X and Y of $992 (50% x ($1,042 (X’s W–2 wages) + $941 (Y’s W–2 wages)))). Accordingly, the X and Y EAG’s section 199 deduction is $212. The $212 is al- located to X and Y in proportion to their QPAI. See §1.199–7(c). Example 3.Simplified deduction method.(i) Facts. Z, a corporation that is not a member of an EAG, engages in activities that generate both DPGR and non-DPGR. Z is able to specifically identify CGS allocable to DPGR and to non-DPGR. Z’s taxable year ends on April 30, 2011. For Z’s taxable year ending April 30, 2011, Z has $3,000 of paragraph (e)(1) wages reported on 2010 Forms W–2, and Z’s taxable income is $1,380 based on the following Federal income tax items: DPGR..................................................................................... $3,000 Non-DPGR ................................................................................3,000 CGSallocabletoDPGR(includes$200ofwageexpense)............................................ (600) CGSallocabletonon-DPGR(includes$600ofwageexpense)........................................ (1,800) Expenses,losses,ordeductions(deductions)(includes$1,000ofwageexpense).......................... ( 2,220) Z’staxableincome...........................................................................1,380 (ii)Z’s QPAI. Z uses the simplified deduction method under §1.199–4(e) to apportion deductions between DPGR and non-DPGR. Z’s QPAI for its taxable year ending April 30, 2011, is $1,290, as shown in the following table: DPGR .................................................................................... $3,000 CGSallocabletoDPGR ......................................................................(600) Deductions apportioned to DPGR ($2,220 x ($3,000 DPGR/$6,000 total gross receipts)) . . . . . . . . . . . . . . . . . . . ( 1,110) Z’sQPAI ..................................................................................1,290 (iii)W–2 wages. Z chooses to use the wage ex- pense safe harbor under paragraph (e)(2)(ii) of this section to determine its W–2 wages, as shown in the following steps: (A)Step one. Z determines that $700 of wage expense were taken into account in determining its 2008–14 I.R.B.700April 7, 2008 QPAI in paragraph (ii) of thisExample 3,asshownin the following table: WageexpenseincludedinCGSallocabletoDPGR................................................. $200 Wage expense included in deductions ($1,000 in wage expense x ($3,000 DPGR/$6,000 total gross receipts)). . . 5 00 WageexpenseallocabletoDPGR...............................................................700 (B)Step two. Z determines that $1,167 of the $3,000 paragraph (e)(1) wages are properly allocable to DPGR, and are therefore W–2 wages, as shown in the following calculation: S teponewageexpense x Z’s paragraph (e)(1) wages Z’s total wage expense for taxable year ending April 30, 2011 $ 700 x $3,000 = $1,167 $1,800 (iv)Section 199 deduction determination.Z’s tentative section 199 deduction is $116 (.09 x (lesser of QPAI of $1,290 or taxable income of $1,380)) subject to the W–2 wage limitation of $584 (50% x $1,167). Accordingly, Z’s section 199 deduction for its taxable year ending April 30, 2011, is $116. Example 4.Small business simplified overall method.(i)Facts. Z, a corporation that is not a mem- ber of an EAG, engages in activities that generate both DPGR and non-DPGR. Z’s taxable year ends on April 30, 2011. For Z’s taxable year ending April 30, 2011, Z has $3,000 of paragraph (e)(1) wages re- ported on 2010 Forms W–2, and Z’s taxable income is $1,380 based on the following Federal income tax items: DPGR .................................................................................... $3,000 Non-DPGR ................................................................................3,000 CGSanddeductions..........................................................................( 4,620) Z’staxableincome...........................................................................1,380 (ii)Z’s QPAI. Z uses the small business simplified overall method under §1.199–4(f) to apportion CGS and deductions between DPGR and non-DPGR. Z’s QPAI for its taxable year ending April 30, 2011, is $690, as shown in the following table: DPGR .................................................................................... $3,000 CGS and deductions apportioned to DPGR ($4,620 x ($3,000 DPGR/$6,000 total gross receipts)) . . . . . . . . . . . . ( 2,310) Z’sQPAI ..................................................................................690 (iii)W–2 wages. Z’s W–2 wages under paragraph (e)(2)(iii) of this section are $1,500, as shown in the following calculation: $3,000inparagraph(e)(1)wagesx($3,000DPGR/$6,000totalgrossreceipts)...........................$1,500 (iv)Section 199 deduction determination.Z’s tentative section 199 deduction is $62 (.09 x (lesser of QPAI of $690 or taxable income of $1,380)) subject to the W–2 wage limitation of $750 (50% x $1,500). Accordingly, Z’s section 199 deduction for its taxable year ending April 30, 2011, is $62. Example 5.Corporation uses employees of non- consolidated EAG member.(i)Facts. Corporations S and B are the only members of a single EAG but are not members of a consolidated group. S and B are both calendar year taxpayers. All the activities de- scribedinthisExample 5take place during the same taxable year and they are the only activities of S and B. S and B each use the section 861 method described in §1.199–4(d) for allocating and apportioning their deductions. B is a manufacturer but has only three employees of its own. S employs the remainder of the personnel who perform the manufacturing activities for B. S’s only receipts are from supplying employees to B. In 2010, B manufactures qualifying production property (QPP) (as defined in §1.199–3(j)(1)), using its three employees and S’s employees, and sells the QPP for $10,000,000. B’s total CGS and other de- ductions are $6,000,000, including $1,000,000 paid to S for the use of S’s employees and $100,000 paid to its own employees. B reports the $100,000 paid to its employees on the 2010 Forms W–2 issued to its employees. S pays its employees $800,000 that is reported on the 2010 Forms W–2 issued to the em- ployees. (ii)B’s W–2 wages. In determining its W–2 wages, B utilizes the wage expense safe harbor de- scribed in paragraph (e)(2)(ii) of this section. The entire $100,000 paid by B to its employees is included in B’s wage expense included in calculating its QPAI and is the only wage expense used in calculating B’s taxable income. Thus, under the wage expense safe harbor described in paragraph (e)(2)(ii) of this section, B’s W–2 wages are $100,000 ($100,000 (paragraph (e)(1) wages) x ($100,000 (wage expense used in calculating B’s QPAI)/$100,000 (wage ex- pense used in calculating B’s taxable income))). (iii)S’s W–2 wages. In determining its W–2 wages, S utilizes the wage expense safe harbor described in paragraph (e)(2)(ii) of this section. Because S’s $1,000,000 in receipts from B do not qualify as DPGR and are S’s only gross receipts, none of the $800,000 paid by S to its employees is included in S’s wage expense included in calculating its QPAI. However, the entire $800,000 is included in calculating S’s taxable income. Thus, under the wage expense safe harbor described in paragraph (e)(2)(ii)(A) of this section, S’s W–2 wages are $0 ($800,000 (paragraph (e)(1) wages) x ($0 (wage ex- pense used in calculating S’s QPAI)/$800,000 (wage expense used in calculating S’s taxable income))). (iv)Determination of EAG’s section 199 deduc- tion. The section 199 deduction of the S and B EAG is determined by aggregating the separately deter- mined taxable income or loss, QPAI, and W–2 wages April 7, 20087012008–14 I.R.B. of S and B. See §1.199–7(b). B’s taxable income and QPAI are each $4,000,000 ($10,000,000 DPGR - $6,000,000 CGS and other deductions). S’s tax- able income is $200,000 ($1,000,000 gross receipts - $800,000 total deductions). S’s QPAI is $0 ($0 DPGR - $0 CGS and other deductions). B’s W–2 wages (as calculated in paragraph (ii) of thisExam- ple 5) are $100,000 and S’s W–2 wages (as calcu- lated in paragraph (iii) of thisExample 5)are$0.The EAG’s tentative section 199 deduction is $360,000 (.09 x (lesser of combined QPAI of $4,000,000 (B’s QPAI of $4,000,000 + S’s QPAI of $0) or combined taxable income of $4,200,000 (B’s taxable income of $4,000,000 + S’s taxable income of $200,000))) sub- ject to the W–2 wage limitation of $50,000 (50% x ($100,000 (B’s W–2 wages) + $0 (S’s W–2 wages))). Accordingly, the S and B EAG’s section 199 deduc- tion for 2010 is $50,000. The $50,000 is allocated to S and B in proportion to their QPAI. See §1.199–7(c). Because S has no QPAI, the entire $50,000 is allo- cated to B. Example 6.Corporation using employees of consolidated EAG member. The facts are the same as inExample 5except that B and S are members of the same consolidated group. Ordinarily, as demon- strated inExample 5, S’s $1,000,000 of receipts would not be DPGR and its $800,000 paid to its employees would not be W–2 wages (because the $800,000 would not be properly allocable to DPGR). However, because S and B are members of the same consolidated group, §1.1502–13(c)(1)(i) provides that the separate entity attributes of S’s intercompany items or B’s corresponding items, or both, may be redetermined in order to produce the same effect as if S and B were divisions of a single corporation. If S and B were divisions of a single corporation, S and B would have QPAI and taxable income of $4,200,000 ($10,000,000 DPGR received from the sale of the QPP - $5,800,000 CGS and other deductions) and, under the wage expense safe harbor described in paragraph (e)(2)(ii) of this section, would have $900,000 of W–2 wages ($900,000 (combined para- graph (e)(1) wages of S and B) x ($900,000 (wage expense used in calculating QPAI)/$900,000 (wage expense used in calculating taxable income))). The single corporation would have a tentative section 199 deduction equal to 9% of $4,200,000, or $378,000, subject to the W–2 wage limitation of 50% of $900,000, or $450,000. Thus, the single corporation would have a section 199 deduction of $378,000. To obtain this same result for the consolidated group, S’s $1,000,000 of receipts from the intercompany transaction are redetermined as DPGR. Thus, S’s $800,000 paid to its employees are costs properly allocable to DPGR and S’s W–2 wages are $800,000. Accordingly, the consolidated group has QPAI and taxable income of $4,200,000 ($11,000,000 DPGR (from the sale of the QPP and the redetermined in- tercompany transaction) - $6,800,000 CGS and other deductions) and W–2 wages of $900,000. The con- solidated group’s section 199 deduction is $378,000, the same as the single corporation. However, for purposes of allocating the section 199 deduction between S and B, the redetermination of S’s income as DPGR under §1.1502–13(c)(1)(i) is not taken into account. See §1.199–7(d)(5). Accordingly, the consolidated group’s entire section 199 deduction of $378,000 is allocated to B. ***** §1.199–2T [Removed] Par. 5. Section 1.199–2T is removed. Par. 6. Section 1.199–3 is amended by: 1. Revising the first sentence of para- graph (f)(1). 2. Adding the language “paragraph (i)(8) of this section and” before the language “§1.199–9(j)” in paragraph (g)(4)(ii)(B). 3. Adding the language “paragraph (i)(7) of this section and” before the language “§1.199–9(i)” in paragraph (g)(4)(ii)(D). 4. Revising paragraphs (i)(7) and (8). 5.Removing the language “§1.199–9(e)” in the last sentence of paragraph (m)(6)(iv)(B) and adding the language “§§1.199–5(e) and 1.199–9(e)” in its place. 6. Revising the second and third sen- tences in paragraph (p). The revisions read as follows: §1.199–3 Domestic production gross receipts. ***** (f)***(1)In general.Withthe exception of the rules applicable to an expanded affiliated group (EAG) under §1.199–7, qualifying in-kind partnerships under paragraph (i)(7) of this section and §1.199–9(i), EAG partnerships un- der paragraph (i)(8) of this section and §1.199–9(j), and government contracts under paragraph (f)(2) of this section, only one taxpayer may claim the deduc- tion under §1.199–1(a) with respect to any qualifying activity under paragraphs (e)(1), (k)(1), and (l)(1) of this section performed in connection with the same QPP, or the production of a qualified film or utilities. * * * ***** (i) * * * (7)Qualifying in-kind partnership for taxable years beginning after May 17, 2006, the enactment date of the Tax In- crease Prevention and Reconciliation Act of 2005—(i)In general. If a partnership is a qualifying in-kind partnership described in paragraph (i)(7)(ii) of this section, then each partner is treated as having MPGE or produced the property MPGE or produced by the partnership that is distributed to that partner. If a partner of a qualifying in-kind partnership derives gross receipts from the lease, rental, license, sale, exchange, or other disposition of the property that was MPGE or produced by the qualifying in-kind partnership and distributed to that partner, then, provided such partner is a partner of the qualifying in-kind partner- ship at the time the partner disposes of the property, the partner is treated as con- ducting the MPGE or production activities previously conducted by the qualifying in-kind partnership with respect to that property. With respect to a lease, rental, or license, the partner is treated as having dis- posed of the property on the date or dates on which it takes into account its gross receipts derived from the lease, rental, or license under its method of accounting. With respect to a sale, exchange, or other disposition, the partner is treated as hav- ing disposed of the property on the date it ceases to own the property for Federal income tax purposes, even if no gain or loss is taken into account. (ii)Definition of qualifying in-kind partnership. For purposes of this para- graph (i)(7), aqualifying in-kind partner- shipis a partnership engaged solely in— (A) The extraction, refining, or process- ing of oil, natural gas (as described in para- graph (l)(2) of this section), petrochemi- cals, or products derived from oil, natural gas, or petrochemicals in whole or in sig- nificant part within the United States; (B) The production or generation of electricity in the United States; or (C) An activity or industry desig- nated by the Secretary by publication in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter). (iii)Other rules. Except as provided in this paragraph (i)(7), a qualifying in-kind partnership is treated the same as other partnerships for purposes of section 199. Accordingly, a qualifying in-kind partner- ship is subject to the rules of this section regarding the application of section 199 to pass-thru entities, including application of the section 199(d)(1)(A)(iii) rule for de- termining a partner’s share of the amounts described in §1.199–2(e)(1) (paragraph (e)(1) wages) from the partnership under §1.199–5(b)(3). In determining whether a qualifying in-kind partnership or its part- ners MPGE QPP in whole or in significant part within the United States, see para- graphs (g)(2) and (3) of this section. 2008–14 I.R.B.702April 7, 2008 (iv)Example. The following example illustrates the application of this paragraph (i)(7). Assume that PRS and X are calen- dar year taxpayers. The example reads as follows: Example. X, Y, and Z are partners in PRS, a qualifying in-kind partnership described in paragraph (i)(7)(ii) of this section. X, Y, and Z are corporations. In 2007, PRS distributes oil to X that PRS derived from its oil extraction. PRS incurred $600 of CGS extracting the oil distributed to X, and X’s adjusted basis in the distributed oil is $600. X incurs $200 of CGS in refining the oil within the United States. In 2007, X, while it is a partner in PRS, sells the oil to a customer for $1,500. X is treated as having dis- posed of the property on the date it ceases to own the property for Federal income tax purposes. Under paragraph (i)(7)(i) of this section, X is treated as hav- ing extracted the oil. The extraction and refining of the oil each qualify as an MPGE activity under para- graph (e)(1) of this section.Therefore, X’s $1,500 of gross receipts qualify as DPGR. X subtracts from the $1,500 of DPGR the $600 of CGS incurred by PRS and the $200 of refining costs it incurred. Thus, X’s QPAI is $700 for 2007. (8)Partnerships owned by members of a single expanded affiliated group for taxable years beginning after May 17, 2006, the enactment date of the Tax In- crease Prevention andReconciliation Act of 2005—(i)In general. For purposes of this section, if all of the interests in the capital and profits of a partnership are owned by members of a single EAG at all times during the taxable year of the partnership (EAG partnership), then the EAG partnership and all members of that EAG are treated as a single taxpayer for purposes of section 199(c)(4) during that taxable year. (ii)Attribution of activities—(A)In general. If a member of an EAG (dispos- ing member) derives gross receipts from the lease, rental, license, sale, exchange, or other disposition of property that was MPGE or produced by an EAG partner- ship, all the partners of which are members of the same EAG to which the disposing member belongs at the time that the dis- posing member disposes of such property, then the disposing member is treated as conducting the MPGE or production ac- tivities previously conducted by the EAG partnership with respect to that property. The previous sentence applies only for those taxable years in which the disposing member is a member of the EAG of which all the partners of the EAG partnership are members for the entire taxable year of the EAG partnership. With respect to a lease, rental, or license, the disposing member is treated as having disposed of the prop- erty on the date or dates on which it takes into account its gross receipts from the lease, rental, or license under its method of accounting. With respect to a sale, ex- change, or other disposition, the disposing member is treated as having disposed of the property on the date it ceases to own the property for Federal income tax pur- poses, even if no gain or loss is taken into account. Likewise, if an EAG partner- ship derives gross receipts from the lease, rental, license, sale, exchange, or other disposition of property that was MPGE or produced by a member (or members) of the same EAG (the producing member) to which all the partners of the EAG part- nership belong at the time that the EAG partnership disposes of such property, then the EAG partnership is treated as con- ducting the MPGE or production activities previously conducted by the producing member with respect to that property. The previous sentence applies only for those taxable years in which the producing memberisamemberoftheEAGofwhich all the partners of the EAG partnership are members for the entire taxable year of the EAG partnership. With respect to a lease, rental, or license, the EAG partnership is treated as having disposed of the property on the date or dates on which it takes into account its gross receipts derived from the lease, rental, or license under its method of accounting. With respect to a sale, exchange, or other disposition, the EAG partnership is treated as having disposed of the property on the date it ceases to own the property for Federal income tax pur- poses, even if no gain or loss is taken into account. See paragraph (i)(8)(iv)Example 3of this section. (B)Attribution between EAG partner- ships. If an EAG partnership (disposing partnership) derives gross receipts from the lease, rental, license, sale, exchange, or other disposition of property that was MPGE or produced by another EAG part- nership (producing partnership), then the disposing partnership is treated as con- ducting the MPGE or production activi- ties previously conducted by the produc- ing partnership with respect to that prop- erty, provided that each of these partner- ships (the producing partnership and the disposing partnership) is owned for its en- tire taxable year in which the disposing partnership disposes of such property by members of the same EAG. With respect to a lease, rental, or license, the dispos- ing partnership is treated as having dis- posed of the property on the date or dates on which it takes into account its gross re- ceipts from the lease, rental, or license un- der its method of accounting. With respect to a sale, exchange, or other disposition, the disposing partnership is treated as hav- ing disposed of the property on the date it ceases to own the property for Federal in- come tax purposes, even if no gain or loss is taken into account. (C)Exceptions to attribution. Attribu- tion of activities does not apply for pur- poses of the construction of real property under paragraph (m)(1) of this section and the performance of engineering and archi- tectural services under paragraphs (n)(2) and (3) of this section, respectively. (iii)Other rules. Except as provided in this paragraph (i)(8), an EAG partnership is treated the same as other partnerships for purposes of section 199. Accordingly, an EAG partnership is subject to the rules of this section regarding the application of section 199 to pass-thru entities, includ- ing the section 199(d)(1)(A)(iii) rule under §1.199–5(b)(3). In determining whether a member of an EAG or an EAG partner- ship MPGE QPP in whole or in signifi- cant part within the United States or pro- duced a qualified film or produced utilities within the United States, see paragraphs (g)(2) and (3) of this section andExample 5of paragraph (i)(8)(iv) of this section. (iv)Examples. The following examples illustrate the rules of this paragraph (i)(8). Assume that PRS, X, Y, and Z all are cal- endar year taxpayers. The examples read as follows: Example 1.Contribution. X and Y are the only partners in PRS, a partnership, for PRS’s entire 2007 taxable year. X and Y are both members of a single EAG for the entire 2007 year. In 2007, X MPGE QPP within the United States and contributes the QPP to PRS. In 2007, PRS sells the QPP for $1,000. Under this paragraph (i)(8), PRS is treated as having MPGE the QPP within the United States, and PRS’s $1,000 gross receipts constitute DPGR. PRS, X, and Y must apply the rules of this section regarding the application of section 199 to pass-thru entities with respect to the activity of PRS, including the section 199(d)(1)(A)(iii) rule for determining a partner’s share of the paragraph (e)(1) wages from the partner- ship under §1.199–5(b)(3). Example 2.Sale.X,Y,andZaretheonlymem- bers of a single EAG for the entire 2007 year. X and Y each own 50% of the capital and profits interests in PRS, a partnership, for PRS’s entire 2007 taxable year. In 2007, PRS MPGE QPP within the United April 7, 20087032008–14 I.R.B. States and then sells the QPP to X for $6,000, its fair market value at the time of the sale. PRS’s gross re- ceipts of $6,000 qualify as DPGR. In 2007, X sells the QPP to customers for $10,000, incurring selling expenses of $2,000. Under paragraph (i)(8)(ii)(A) of this section, X is treated as having MPGE the QPP within the United States, and X’s $10,000 of gross receipts qualify as DPGR. PRS, X and Y must ap- ply the rules of this section regarding the application of section 199 to pass-thru entities with respect to the activity of PRS, including application of the sec- tion 199(d)(1)(A)(iii) rule for determining a partner’s share of the paragraph (e)(1) wages from the partner- ship under §1.199–5(b)(3). The results would be the same if PRS sold the QPP to Z rather than to X. How- ever, if PRS did sell the QPP to Z, and Z was not a member of the EAG for PRS’sentire taxable year, the activities previously conducted by PRS with respect to the QPP would not be attributed to Z, and none of Z’s $10,000 of gross receipts would qualify as DPGR. Example 3.Lease.X,Y,andZaretheonlymem- bers of a single EAG for the entire 2007 year. X and Y each own 50% of the capital and profits in- terests in PRS, a partnership, for PRS’s entire 2007 taxable year. In 2007, PRS MPGE QPP within the United States and then sells the QPP to X for $6,000, its fair market value at the time of the sale. PRS’s gross receipts of $6,000 qualify as DPGR. In 2007, X rents the QPP it acquired from PRS to customers un- related to X. X takes the gross receipts attributable to the rental of the QPP into account under its method of accounting in 2007 and 2008. On July 1, 2008, X ceases to be a member of the same EAG to which Y, the other partner in PRS, belongs. For 2007, X is treated as having MPGE the QPP within the United States under paragraph (i)(8)(ii)(A) of this section, and its gross receipts derived from the rental of the QPP qualify as DPGR. For 2008, however, because X and Y, partners in PRS, are no longer members of the same EAG for the entire year, the gross rental re- ceipts X takes into account in 2008 do not qualify as DPGR. Example 4.Distribution. X and Y are the only partners in PRS, a partnership, for PRS’s entire 2007 taxable year. X and Y are both members of a single EAG for the entire 2007 year. In 2007, PRS MPGE QPP within the United States, incurring $600 of CGS, and then distributes the QPP to X. X’s adjusted basis in the QPP is $600. X incurs $200 of CGS to further MPGE the QPP within the United States. In 2007, X sells the QPP for $1,500 to an unrelated customer. X is treated as having disposed of the QPP on the date it ceases to own the QPP for Federal income tax purposes. Under paragraph (i)(8)(ii)(A) of this section, X is treated as having MPGE the QPP within the United States, and X’s $1,500 of gross receipts qualify as DPGR. Example 5.Multiple sales.(i)Facts.XandYare the only partners in PRS, a partnership, for PRS’s en- tire 2007 taxable year. X and Y are both non-consol- idated members of a single EAG for the entire 2007 year. PRS produces in bulk form in the United States the active ingredient for a drug. Assume that PRS’s own MPGE activity with respect to the active ingre- dient is not substantial in nature, taking into account all of the facts and circumstances, and PRS’s direct labor and overhead to MPGE the active ingredient within the United States are $15 and account for 15% of PRS’s $100 CGS of the active ingredient. In 2007, PRS sells the active ingredient in bulk form to X. X uses the active ingredient to produce the finished dosage form drug. Assume that X’s own MPGE ac- tivity with respect to the finished dosage form drug is not substantial in nature, taking into account all of the facts and circumstances, and X’s direct labor and overhead to MPGE the finished dosage form drug within the United States are $12 and account for 10% of X’s $120 CGS of the drug. In 2007, X sells the finished dosage form drug to Y and Y sells the fin- ished dosage form drug to customers. Assume that Y’s own MPGE activity with respect to the finished dosage form drug is not substantial in nature, taking into account all of the facts and circumstances, and Y incurs $2 of direct labor and overhead and Y’s CGS in selling the finished dosage form drug to customers is $130. (ii)Analysis. PRS’s gross receipts from the sale of the active ingredient to X are non-DPGR because PRS’s MPGE activity is not substantial in nature and PRS does not satisfy the safe harbor described in paragraph (g)(3) of this section because PRS’s di- rect labor and overhead account for less than 20% of PRS’s CGS of the active ingredient. X’s gross receipts from the sale of the finished dosage form drug to Y are DPGR because X is considered to have MPGE the finished dosage form drug in significant part in the United States pursuant to the safe harbor described in paragraph (g)(3) of this section because the $27 ($15 + $12) of direct labor and overhead in- curred by PRS and X equals or exceeds 20% of X’s total CGS ($120) of the finished dosage form drug at the time X disposes of the finished dosage form drug to Y. Similarly, Y’s gross receipts from the sale of the finished dosage form drug to customers are DPGR because Y is considered to have MPGE the finished dosage form drug in significant part in the United States pursuant to the safe harbor described in paragraph (g)(3) of this section because the $29 ($15 + $12 + $2) of direct labor and overhead incurred by PRS, X, and Y equals or exceeds 20% of Y’s total CGS ($130) of the finished dosage form drug at the time Y disposes of the finished dosage form drug to Y’s customers. ***** (p) * * * Thus, partners, including partners in partnerships described in paragraphs (i)(7) and (8) of this sec- tion and §1.199–9(i) and (j), may not treat guaranteed payments as DPGR. See §§1.199–5(b)(6)Example 5and 1.199–9(b)(6)Example 5. §1.199–3T [Removed] Par. 7. Section 1.199–3T is removed. Par. 8. Section 1.199–4 is amended by: 1. Revising paragraph (d)(5). 2.Removing the language “§1.199–9(d)” in paragraph (e)(1) and adding the language “§1.199–5(d) or §1.199–9(d)” in its place. 3. Revising paragraph (f)(5). The revisions read as follows: §1.199–4 Costs allocable to domestic production gross receipts. ***** (d) * * * (5)Treatment of items from a pass-thru entity reporting qualified production activities income.If, pursuant to §1.199–5(e)(2) or §1.199–9(e)(2), or to the authority granted in §1.199–5(b)(1)(ii) or (c)(1)(ii), or §1.199–9(b)(1)(ii) or (c)(1)(ii), a taxpayer must combine QPAI and W–2 wages from a partnership, S corporation, trust (to the extent not described in §1.199–5(d) or §1.199–9(d)) or estate with the taxpayer’s total QPAI and W–2 wages from other sources, then for purposes of apportioning the taxpayer’s interest expense under this paragraph (d), the taxpayer’s interest in such partnership (and, where relevant in apportioning the taxpayer’s interest expense, the partnership’s assets), the taxpayer’s shares in such S corporation, or the taxpayer’s interest in such trust shall be disregarded. ***** (f) * * * (5)Trusts and estates.Trustsandes- tates under §§1.199–5(e) and 1.199–9(e) may not use the small business simplified overall method. ***** Par. 9. Section 1.199–5 is added to read as follows: §1.199–5 Application of section 199 to pass-thru entities for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005. (a)In general. The provisions of this section apply solely for purposes of section 199 of the Internal Revenue Code (Code). (b)Partnerships—(1)In general—(i) Determination at partner level. The de- duction with respect to the qualified pro- duction activities of the partnership allow- able under §1.199–1(a) (section 199 de- duction) is determined at the partner level. As a result, each partner must compute its deduction separately. The section 199 de- duction has no effect on the adjusted ba- sis of the partner’s interest in the part- nership. Except as provided by publi- cation pursuant to paragraph (b)(1)(ii) of 2008–14 I.R.B.704April 7, 2008 this section, for purposes of this section, each partner is allocated, in accordance with sections 702 and 704, its share of partnership items (including items of in- come, gain, loss, and deduction), cost of goods sold (CGS) allocated to such items of income, and gross receipts that are in- cluded in such items of income, even if the partner’s share of CGS and other de- ductions and losses exceeds domestic pro- duction gross receipts (DPGR) (as defined in §1.199–3(a)). A partnership may spe- cially allocate items of income, gain, loss, or deduction to its partners, subject to the rules of section 704(b) and the support- ing regulations. Guaranteed payments un- der section 707(c) are not considered al- locations of partnership income for pur- poses of this section. Guaranteed pay- ments under section 707(c) are deductions by the partnership that must be taken into account under the rules of §1.199–4. See §1.199–3(p) and paragraph (b)(6)Example 5of this section. Except as provided in paragraph (b)(1)(ii) of this section, to de- termine its section 199 deduction for the taxable year, a partner aggregates its dis- tributive share of such items, to the extent they are not otherwise disallowed by the Code, with those items it incurs outside the partnership (whether directly or indirectly) for purposes of allocating and apportion- ing deductions to DPGR and computing its qualified production activities income (QPAI) (as defined in §1.199–1(c)). (ii)Determination at entity level. The Secretary may, by publication in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), per- mit a partnership to calculate a partner’s share of QPAI and W–2 wages as defined in §1.199–2(e)(2) (W–2 wages) at the entity level, instead of allocating to the partner, in accordance with sections 702 and 704, the partner’s share of partner- ship items (including items of income, gain, loss, and deduction) and amounts described in §1.199–2(e)(1) (paragraph (e)(1) wages). If a partnership does calcu- late QPAI at the entity level— (A) Each partner is allocated its share of QPAI (subject to the limitations of paragraph (b)(2) of this section) and W–2 wages from the partnership, which are combined with the partner’s QPAI and W–2 wages from other sources, if any; (B) For purposes of computing the partner’s QPAI under §§1.199–1 through 1.199–8, a partner does not take into ac- count the items from the partnership (for example, a partner does not take into account items from the partnership in determining whether a threshold orde minimisrule applies or in allocating and apportioning deductions) in calculating its QPAI from other sources; (C) A partner generally does not recom- pute its share of QPAI from the partnership using another method; however, the part- ner might have to adjust its share of QPAI from the partnership to take into account certain disallowed losses or deductions, or the allowance of suspended losses or de- ductions; and (D) A partner’s distributive share of QPAI from a partnership may be less than zero. (2)Disallowed losses or deduc- tions. Except as provided by publication in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), losses or deductions of a partnership are taken into account in computing the part- ner’s QPAI for a taxable year only if, and to the extent that, the partner’s distributive share of those losses or deductions from all of the partnership’s activities is not disallowed by section 465, 469, or 704(d), or any other provision of the Code. If only a portion of the partner’s distributive share of the losses or deductions from a partnership is allowed for a taxable year, a proportionate share of those allowed losses or deductions that are allocated to the partnership’s qualified production activities, determined in a manner consis- tent with sections 465, 469, and 704(d), and any other applicable provision of the Code, is taken intoaccount in computing QPAI for that taxable year. To the extent that any of the disallowed losses or deduc- tions are allowed in a later taxable year under section 465, 469, or 704(d), or any other provision of the Code, the partner takes into account a proportionate share of those allowed losses or deductions that are allocated to the partnership’s qualified production activities in computing the partner’s QPAI for that later taxable year. Losses or deductions of the partnership that are disallowed for taxable years be- ginning on or before December 31, 2004, however, are not taken into account in a later taxable year for purposes of com- puting the partner’s QPAI for that later taxable year, whether or not the losses or deductions are allowed for other purposes. (3)Partner’s share of paragraph (e)(1) wages.Under section 199(d)(1)(A)(iii), a partner’s share of paragraph (e)(1) wages of a partnership for purposes of determin- ing the partner’s wage limitation under section 199(b)(1) (W–2 wage limitation) equals the partner’s allocable share of those wages. Except as provided by pub- lication in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b)ofthischapter), the partnership mustallocate the amount of paragraph (e)(1) wages among the part- ners in the same manner it allocates wage expense among those partners. The part- ner must add its share of the paragraph (e)(1) wages from the partnership to the partner’s paragraph (e)(1) wages from other sources, if any. The partner (other than a partner that itself is a partnership or S corporation) then must calculate its W–2 wages by determining the amount of the partner’s total paragraph (e)(1) wages properly allocable to DPGR. If the partner is a partnership or S corporation, the partner must allocate its paragraph (e)(1) wages (including the paragraph (e)(1) wages from a lower-tier partnership) among its partners or shareholders in the same manner it allocates wage expense among those partners or shareholders. See §1.199–2(e)(2) for the computation of W–2 wages and for the proper allocation of any such wages to DPGR. (4)Transition rule for definition of W–2 wages and for W–2 wage limitation.If a partnership and any partner in that part- nership have different taxable years, only one of which begins after May 17, 2006, the definition of W–2 wages of the partner- ship and the section 199(d)(1)(A)(iii) rule for determining a partner’s share of wages from that partnership is determined under the law applicable to partnerships based on the beginning date of the partnership’s tax- able year. Thus, for example, for the tax- able year of a partnership beginning on or before May 17, 2006, a partner’s share of W–2 wages from the partnership is deter- mined under section 199(d)(1)(A)(iii) as in effect for taxable years beginning on or be- fore May 17, 2006, even if the taxable year of that partner in which those wages are taken into account begins after May 17, 2006. (5)Partnerships electing out of sub- chapter K. For purposes of §§1.199–1 April 7, 20087052008–14 I.R.B. through 1.199–8, the rules of this para- graph (b) apply to all partnerships, in- cluding those partnerships electing under section 761(a) to be excluded, in whole or in part, from the application of subchapter K of chapter 1 of the Code. (6)Examples. The following examples illustrate the application of this paragraph (b). Assume that each partner has suffi- cient adjusted gross income or taxable in- come so that the section 199 deduction is not limited under section 199(a)(1)(B). As- sume also that the partnership and each of its partners (whether individual or corpo- rate) are calendar year taxpayers. The ex- amples read as follows: Example 1.Section 861 method with interest ex- pense.(i)Partnership Federal income tax items.X and Y, unrelated United States corporations, are each 50% partners in PRS, a partnership that engages in production activities that generate both DPGR and non-DPGR. X and Y share all items of income, gain, loss, deduction, and credit equally. Both X and Y are engaged in a trade or business. PRS is not able to identify from its books and records CGS alloca- ble to DPGR and non-DPGR. In this case, because CGS is definitely related under the facts and circum- stances to all of PRS’s gross receipts, apportionment of CGS between DPGR and non-DPGR based on gross receipts is appropriate. For 2010, the adjusted basis of PRS’s business assets is $5,000, $4,000 of which generate gross income attributable to DPGR and $1,000 of which generate gross income attribut- able to non-DPGR. For 2010, PRS has the following Federal income tax items: DPGR..................................................................................... $3,000 Non-DPGR.................................................................................3,000 CGS......................................................................................3,240 Section162sellingexpenses ..................................................................1,200 Interestexpense(notincludedinCGS)...........................................................300 (ii)Allocation of PRS’s Federal income tax items. X and Y each receive the following distributive share of PRS’s Federal income tax items, as determined un- der the principles of §1.704–1(b)(1)(vii): GrossincomeattributabletoDPGR($1,500(DPGR)-$810(allocableCGS))............................$690 Gross income attributable to non-DPGR ($1,500 (non-DPGR) - $810 (allocable CGS)) . . . . . . . . . . . . . . . . . . . . 690 Section162sellingexpenses ..................................................................600 Interestexpense(notincludedinCGS)........................................................... 150 (iii)Determination of QPAI.(A)X’s QPAI.Be- cause the section 199 deduction is determined at the partner level, X determines its QPAI by aggregat- ing its distributive share of PRS’s Federal income tax items with all other such items from all other, non-PRS-related activities. For 2010, X does not have any other such items. For 2010, the adjusted ba- sis of X’s non-PRS assets, all of which are investment assets, is $10,000. X’s only gross receipts for 2010 are those attributable to the allocation of gross income from PRS. X allocates and apportions its deductible items to gross income attributable to DPGR under the section 861 method of §1.199–4(d). In this case, the section 162 selling expenses are not included in CGS and are definitely related to all of PRS’s gross in- come. Based on the facts and circumstances of this specific case, apportionment of those expenses be- tween DPGR and non-DPGR on the basis of PRS’s gross receipts is appropriate. X elects to apportion its distributive share of interest expense under the tax book value method of §1.861–9T(g). X’s QPAI for 2010 is $366, as shown in the following table: DPGR..................................................................................... $1,500 CGSallocabletoDPGR ......................................................................(810) Section162sellingexpenses($600x($1,500DPGR/$3,000totalgrossreceipts))......................... (300) Interest expense (not included in CGS) ($150 x ($2,000 (X’s share of PRS’s DPGR assets)/ $12,500(X’snon-PRSassets($10,000)+X’sshareofPRSassets($2,500))))......................... ( 24) X’sQPAI..................................................................................366 (B)Y’s QPAI.(1) For 2010, in addition to the ac- tivities of PRS, Y engages in production activities that generate both DPGR and non-DPGR. Y is able to identify from its books and records CGS allocable to DPGR and to non-DPGR. For 2010, the adjusted basis of Y’s non-PRS assets attributable to its produc- tion activities that generate DPGR is $8,000 and to other production activities that generate non-DPGR is $2,000. Y has no other assets. Y has the following Federal income tax items relating to its non-PRS ac- tivities: GrossincomeattributabletoDPGR($1,500(DPGR)-$900(allocableCGS))............................$600 Gross income attributable to non-DPGR ($3,000 (other gross receipts) - $1,620 (allocable CGS)) . . . . . . . . . . . . 1,380 Section162sellingexpenses .................................................................. 540 Interestexpense(notincludedinCGS)...........................................................90 (2) Y determines its QPAI in the same general manner as X. However, because Y has other trade or business activities outside of PRS, Y must aggre- gate its distributive share of PRS’s Federal income tax items with its own such items. Y allocates and apportions its deductible items to gross income at- tributable to DPGR under the section 861 method of §1.199–4(d). In this case, Y’s distributive share of PRS’s section 162 selling expenses, as well as those selling expenses from Y’s non-PRS activities, are definitely related to all of its gross income. Based on the facts and circumstances of this specific case, apportionment of those expenses between DPGR and non-DPGR on the basis of Y’s gross receipts (includ- ing Y’s share of PRS’s gross receipts) is appropri- ate. Y elects to apportion its distributive share of in- terest expense under the tax book value method of §1.861–9T(g). Y has $1,290 of gross income attribut- able to DPGR ($3,000 DPGR ($1,500 from PRS and $1,500 from non-PRS activities) - $1,710 CGS ($810 from PRS and $900 from non-PRS activities)). Y’s QPAI for 2010 is $642, as shown in the following ta- ble: 2008–14 I.R.B.706April 7, 2008 DPGR ($1,500 from PRS and $1,500 from non-PRS activities). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,000 CGS allocable to DPGR ($810 from PRS and $900 from non-PRS activities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,710) Section 162 selling expenses ($1,140 ($600 from PRS and $540 from non-PRS activities) x $3,000 ($1,500 PRS DPGR + $1,500 non-PRS DPGR)/$7,500 ($3,000 PRS totalgrossreceipts+$4,500non-PRStotalgrossreceipts))........................................ (456) Interest expense (not included in CGS) ($240 ($150 from PRS and $90 from non-PRS activities) x $10,000 (Y’s non-PRS DPGR assets ($8,000) + Y’s share of PRS DPGR assets ($2,000))/$12,500 (Y’snon-PRSassets($10,000)+Y’sshareofPRSassets($2,500)))................................. ( 192) Y’sQPAI..................................................................................642 (iv)Determination of section 199 deduction.X’s tentative section 199 deduction is $33 (.09 x $366, that is, QPAI determined at the partner level) subject to the W–2 wage limitation (50% of W–2 wages). Y’s tentative section 199 deduction is $58 (.09 x $642) subject to the W–2 wage limitation. Example 2.Section 861 method with R&E ex- pense.(i)Partnership Federal income tax items.X and Y, unrelated United States corporations each of which is engaged in a trade or business, are partners in PRS, a partnership that engages in production activ- ities that generate both DPGR and non-DPGR. Nei- ther X nor Y is a member of an affiliated group. X and Y share all items of income, gain, loss, deduction, and credit equally. All of PRS’s domestic production activities that generate DPGR are within Standard Industrial Classification (SIC) Industry Group AAA (SIC AAA). All of PRS’s production activities that generate non-DPGR are within SIC Industry Group BBB (SIC BBB). PRS is not able to identify from its books and records CGS allocable to DPGR and to non-DPGR. In this case, because CGS is definitely related under the facts and circumstances to all of PRS’s gross receipts, apportionment of CGS between DPGR and non-DPGR based on gross receipts is ap- propriate. PRS incurs $900 of research and experi- mentation expenses (R&E) that are deductible under section 174, $300 of which are performed with re- spect to SIC AAA and $600 of which are performed with respect to SIC BBB. None of the R&E is legally mandated R&E as described in §1.861–17(a)(4) and none is included in CGS. For 2010, PRS has the fol- lowing Federal income tax items: DPGR (all from sales of products within SIC AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000 Non-DPGR(allfromsalesofproductswithinSICBBB).............................................3,000 CGS......................................................................................2,400 Section162sellingexpenses...................................................................840 Section174R&E-SICAAA...................................................................300 Section174R&E-SICBBB....................................................................600 (ii)Allocation of PRS’s Federal income tax items. X and Y each receive the following distributive share of PRS’s Federal income tax items, as determined un- der the principles of §1.704–1(b)(1)(vii): GrossincomeattributabletoDPGR($1,500(DPGR)-$600(CGS))....................................$900 Grossincomeattributabletonon-DPGR($1,500(othergrossreceipts)-$600(CGS)) ..................... 900 Section162sellingexpenses...................................................................420 Section174R&E-SICAAA................................................................... 150 Section174R&E-SICBBB....................................................................300 (iii)Determination of QPAI.(A)X’s QPAI.Be- cause the section 199 deduction is determined at the partner level, X determines its QPAI by aggregat- ing its distributive share of PRS’s Federal income tax items with all other such items from all other, non- PRS-related activities. For 2010, X does not have any other such tax items. X’s only gross receipts for 2010 are those attributable to the allocation of gross income from PRS. As stated, all of PRS’s domestic production activities that generate DPGR are within SIC AAA. X allocates and apportions its deductible items to gross income attributable to DPGR under the section 861 method of §1.199–4(d). In this case, the section 162 selling expenses are definitely related to all of PRS’s gross income. Based on the facts and circumstances of this specific case, apportionment of those expenses between DPGR and non-DPGR on the basis of PRS’s gross receipts is appropriate. For purposes of apportioning R&E, X elects to use the sales method as described in §1.861–17(c). Because X has no direct sales of products, and because all of PRS’s SIC AAA sales attributable to X’s share of PRS’s gross income generate DPGR, all of X’s share of PRS’s section 174 R&E attributable to SIC AAA is taken into account for purposes of determin- ing X’s QPAI. Thus, X’s total QPAI for 2010 is $540, as shown in the following table: DPGR (all from sales of products within SIC AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,500 CGS......................................................................................(600) Section162sellingexpenses($420x($1,500DPGR/$3,000totalgrossreceipts))......................... (210) Section174R&E-SICAAA................................................................... (150) X’sQPAI.................................................................................. 540 (B)Y’s QPAI.(1) For 2010, in addition to the ac- tivities of PRS, Y engages in domestic production activities that generate both DPGR and non-DPGR. With respect to those non-PRS activities, Y is not able to identify from its books and records CGS alloca- ble to DPGR and to non-DPGR. In this case, because non-PRS CGS is definitely related under the facts and circumstances to all of Y’s non-PRS gross receipts, apportionment of non-PRS CGS between DPGR and non-DPGR based on Y’s non-PRS gross receipts is appropriate. For 2010, Y has the following non-PRS Federal income tax items: April 7, 20087072008–14 I.R.B. DPGR(fromsalesofproductswithinSICAAA)................................................... $1,500 DPGR (from sales of products within SIC BBB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Non-DPGR (from sales of products within SIC BBB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,000 CGS(allocatedtoDPGRwithinSICAAA)....................................................... 750 CGS (allocated to DPGR within SIC BBB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 CGS (allocated to non-DPGR within SIC BBB). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Section162sellingexpenses................................................................... 540 Section174R&E-SICAAA...................................................................300 Section174R&E-SICBBB.................................................................... 450 (2) Because Y has DPGR as a result of activities outside PRS, Y must aggregate its distributive share of PRS’s Federal income tax items with such items from all its other, non-PRS-related activities. Y al- locates and apportions its deductible items to gross income attributable to DPGR under the section 861 method of §1.199–4(d). In this case, the section 162 selling expenses are definitely related to all of Y’s gross income. Based on the facts and circumstances of the specific case, apportionment of such expenses between DPGR and non-DPGR on the basis of Y’s gross receipts (including Y’s share of PRS’s gross re- ceipts) is appropriate. For purposes of apportioning R&E, Y elects to use the sales method as described in §1.861–17(c). (3) With respect to sales that generate DPGR, Y has gross income of $2,400 ($4,500 DPGR ($1,500 from PRS and $3,000 from non-PRS activities) - $2,100 CGS ($600 from sales of products by PRS and $1,500 from non-PRS activities)). Because all of the sales in SIC AAA generate DPGR, all of Y’s share of PRS’s section 174 R&E attributable to SIC AAA and the section 174 R&E attributable to SIC AAA that Y incurs in its non-PRS activities are taken into account for purposes of determining Y’s QPAI. Because only a portion of the sales within SIC BBB generate DPGR, only a portion of the section 174 R&E attributable to SIC BBB is taken into account in determining Y’s QPAI. Thus, Y’s QPAI for 2010 is $1,282, as shown in the following table: DPGR ($4,500 DPGR ($1,500 from PRS and $3,000 from non-PRS activities)) . . . . . . . . . . . . . . . . . . . . . . . . . .$4,500 CGS($600fromsalesofproductsbyPRSand$1,500fromnon-PRSactivities).......................... (2,100) Section 162 selling expenses ($960 ($420 from PRS + $540 from non-PRS activities) x ($4,500DPGR/$9,000totalgrossreceipts)).................................................... (480) Section 174 R&E-SIC AAA ($150 from PRS and $300 from non-PRS activities) . . . . . . . . . . . . . . . . . . . . . . . . . (450) Section 174 R&E-SIC BBB ($750 ($300 from PRS + $450 from non-PRS activities) x ($1,500 DPGR/$6,000 total gross receipts allocated to SIC BBB ($1,500 from PRS + $4,500 from non-PRS activities)) . . . . . . . . . . ( 188) Y’sQPAI..................................................................................1,282 (i v)Determination of section 199 deduction.X’s tentative section 199 deduction is $49 (.09 x $540, that is, QPAI determined at the partner level) subject to the W–2 wage limitation (50% of W–2 wages). Y’s tentative section 199 deduction is $115 (.09 x $1,282) subject to the W–2 wage limitation. Ex ample 3.Partnership with special allocations. (i)In general. X and Y are unrelated corporate part- ners in PRS and each is engaged in a trade or busi- n ess. PRS is a partnership that engages in a domes- tic production activity and other activities. In gen- eral, X and Y share all partnership items of income, g ain, loss, deduction, and credit equally, except that 80% of the wage expense of PRS and 20% of PRS’s other expenses are specially allocated to X. Under all the facts and circumstances, these special alloca- tions have substantial economic effect under section 704(b). In the 2010 taxable year, PRS’s only wage ex- pense is $2,000 for marketing, which is not included in CGS. PRS has $8,000 of gross receipts ($6,000 of which is DPGR), $4,000 of CGS ($3,500 of which is allocable to DPGR), and $3,000 of deductions (com- prised of $2,000 of wage expense for marketing and $1,000 of other expenses). X qualifies for and uses the simplified deduction method under §1.199–4(e). Y does not qualify to use that method and, therefore, must use the section 861 method under §1.199–4(d). In the 2010 taxable year, X has gross receipts attrib- utable to non-partnership trade or business activities of $1,000 and wage expense of $200. None of X’s non-PRS gross receipts is DPGR. For purposes of this Example 3, with regard to both X and PRS, paragraph (e)(1) wages equal wage expense for the 2010 taxable year. (i i)Allocation and apportionment of costs. Under the partnership agreement, X’s distributive share of the Federal income tax items of PRS is $1,250 of gr oss income attributable to DPGR ($3,000 DPGR - $1,750 allocable CGS), $750 of gross income at- tributable to non-DPGR ($1,000 non-DPGR - $250 a llocable CGS), and $1,800 of deductions (com- prised of X’s special allocations of $1,600 of wage expense ($2,000 x 80%) for marketing and $200 of o ther expenses ($1,000 x 20%)). Under the simpli- fied deduction method, X apportions $1,200 of other deductions to DPGR ($2,000 ($1,800 from the part- nership and $200 from non-partnership activities) x ($3,000 DPGR/$5,000 total gross receipts)). Ac- cordingly, X’s QPAI is $50 ($3,000 DPGR - $1,750 CGS - $1,200 of deductions). X has $1,800 of para- graph (e)(1) wages ($1,600 (X’s 80% share) from PRS + $200 (X’s own non-PRS paragraph (e)(1) wages)). To calculate its W–2 wages, X must deter- mine how much of this $1,800 is properly allocable under §1.199–2(e)(2) to X’s total DPGR (including X’s share of DPGR from PRS). Thus, X’s tentative section 199 deduction for the 2010 taxable year is $5 (.09 x $50), subject to the W–2 wage limitation (50% of X’s W–2 wages). Example 4.Partnership with no paragraph (e)(1) wages.(i)Facts. AandB,bothindividuals,are partners in PRS. PRS is a partnership that engages in manufacturing activities that generate both DPGR and non-DPGR. A and B share all items of income, gain, loss, deduction, and credit equally. For the 2010 taxable year, PRS has total gross receipts of $2,000 ($1,000 of which is DPGR), CGS of $400 and deductions of $800. PRS has no paragraph (e)(1) wages. Each partner’s distributive share of PR S’s Federal income tax items is $500 DPGR, $500 non-DPGR, $200 CGS, and $400 of deductions. A has trade or business activities outside of PRS (n on-PRS activities). With respect to those activities, A has total gross receipts of $1,000 ($500 of which is DPGR), CGS of $400 (including $50 of paragraph ( e)(1) wages), and deductions of $200 for the 2010 taxable year. B has no trade or business activities outside of PRS. A and B each use the small business s implified overall method under §1.199–4(f). (ii)A’s QPAI. A’s total CGS and deductions apportioned to DPGR equal $600 (($1,200 ($200 P RS CGS + $400 non-PRS CGS + $400 PRS deduc- tions + $200 non-PRS trade or business deductions)) x ($1,000 total DPGR ($500 from PRS + $500 from non-PRS activities)/$2,000 total gross receipts ($1,000 from PRS + $1,000 from non-PRS activ- ities))). Accordingly, A’s QPAI is $400 ($1,000 DPGR ($500 from PRS + $500 from non-PRS activ- ities) - $600 CGS and deductions). (iii)A’s W–2 wages and section 199 deduction. A has $50 of paragraph (e)(1) wages ($0 from PRS + $50 from A’s non-PRS activities). To calculate A’s W–2 wages, A determines, under a reasonable method satisfactory to the Secretary, that $40 of this $50 is properly allocable under §1.199–2(e)(2) to A’s DPGR from PRS and non-PRS activities. A’s tenta- tive section 199 deduction is $36 (.09 x $400), sub- ject to the W–2 wage limitation of $20 (50% of W–2 wages of $40). Thus, A’s section 199 deduction is $20. (iv)B’s QPAI and section 199 deduction.B’s CGS and deductions apportioned to DPGR equal $300 (($200 PRS CGS + $400 PRS deductions) x ($500 DPGR from PRS /$1,000 total gross receipts 2008–14 I.R.B.708April 7, 2008 from PRS)). Accordingly, B’s QPAI is $200 ($500 DPGR - $300 CGS and deductions). B’s tentative section 199 deduction is $18 (.09 x $200), subject to the W–2 wage limitation. In this case, however, the limitation is $0, because B has no paragraph (e)(1) wages. Thus, B’s section 199 deduction is $0. Example 5.Guaranteed payment.(i)Facts.The facts are the same as inExample 4, except that in 2010 PRS also makes a guaranteed payment of $200 to A for services rendered by A (see section 707(c)), and PRS incurs $200 of wage expense for employ- ees’ salary, which is included within the $400 of CGS (in this case the wage expense of $200 equals PRS’s paragraph (e)(1) wages). The guaranteed payment is taxable to A as ordinary income and is properly deducted by PRS under section 162. Pursuant to §1.199–3(p), A may not treat any part of this pay- ment as DPGR. Accordingly, PRS has total gross re- ceipts of $2,000 ($1,000 of which is DPGR), CGS of $400 (including $200 of wage expense) and deduc- tions of $1,000 (including the $200 guaranteed pay- ment) for the 2010 taxable year. Each partner’s dis- tributive share of the items of the partnership is $500 DPGR, $500 non-DPGR, $200 CGS (including $100 of wage expense), and $500 of deductions. (ii)A’s QPAI and W–2 wages.A’stotalCGSand deductions apportioned to DPGR equal $591 ($1,300 ($200 PRS CGS + $400 non-PRS CGS + $500 PRS deductions + $200 non-PRS trade or business de- ductions) x ($1,000 total DPGR ($500 from PRS + $500 from non-PRS activities)/$2,200 total gross re- ceipts ($1,000 from PRS + $200 guaranteed payment + $1,000 from non-PRS activities))). Accordingly, A’s QPAI is $409 ($1,000 DPGR - $591 CGS and other deductions). A’s total paragraph (e)(1) wages are $150 ($100 from PRS + $50 from non-PRS ac- tivities). To calculate its W–2 wages, A must deter- mine how much of this $150 is properly allocable un- der §1.199–2(e)(2) to A’s total DPGR from PRS and non-PRS activities. A’s tentative section 199 deduc- tion is $37 (.09 x $409), subject to the W–2 wage lim- itation (50% of W–2 wages). (iii)B’s QPAI and W–2 wages. B’s QPAI is $150 ($500 DPGR - $350 CGS and other deductions). B has $100 of paragraph (e)(1) wages (all from PRS). To calculate its W–2 wages, B must determine how much of this $100 is properly allocable under §1.199–2(e)(2) to B’s total DPGR. B’s tentative section 199 deduction is $14 (.09 x $150), subject to the W–2 wage limitation (50% of B’s W–2 wages). (c)S corporations—(1)In general—(i) Determination at shareholder level.The section 199 deduction with respect to the qualified production activities of an S cor- poration is determined at the shareholder level. As a result, each shareholder must compute its deduction separately. The sec- tion 199 deduction has no effect on the ad- justed basis of a shareholder’s stock in an S corporation. Except as provided by pub- lication pursuant to paragraph (c)(1)(ii) of this section, for purposes of this section, each shareholder is allocated, in accor- dance with section 1366, itspro ratashare of S corporation items (including items of income, gain, loss, and deduction), CGS allocated to such items of income, and gross receipts included in such items of in- come, even if the shareholder’s share of CGS and other deductions and losses ex- ceeds DPGR. Except as provided by pub- lication under paragraph (c)(1)(ii) of this section, to determine its section 199 deduc- tion for the taxable year, the shareholder aggregates itspro ratashare of such items, to the extent they are not otherwise disal- lowed by the Code, with those items it in- curs outside the S corporation (whether di- rectly or indirectly) for purposes of allocat- ing and apportioning deductions to DPGR and computing its QPAI. (ii)Determination at entity level. The Secretary may, by publication in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b)ofthischapter),per- mit an S corporation to calculate a share- holder’s share of QPAI and W–2 wages at the entity level, instead of allocating to the shareholder, in accordance with section 1366, the shareholder’spro ratashare of S corporation items (including items of income, gain, loss, and deduction) and paragraph (e)(1) wages. If an S corpo- ration does calculate QPAI at the entity level— (A) Each shareholder is allocated its share of QPAI (subject to the limitations of paragraph (c)(2) of this section) and W–2 wages from the S corporation, which are combined with the shareholder’s QPAI and W–2 wages from other sources, if any; (B) For purposes of computing the shareholder’s QPAI under §§1.199–1 through 1.199–8, a shareholder does not take into account the items from the S corporation (for example, a shareholder does not take into account items from the S corporation in determining whether a threshold orde minimisrule applies or in allocating and apportioning deductions) in calculating its QPAI from other sources; (C) A shareholder generally does not recompute its share of QPAI from the S corporation using another method; however, the shareholder might have to adjust its share of QPAI from the S corporation to take into account certain disallowed losses or deductions, or the allowance of suspended losses or deductions; and (D) A shareholder’s share of QPAI from an S corporation may be less than zero. (2)Disallowed losses or deduc- tions.Except as provided by publication in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b)ofthischapter), losses or deductions of the S corporation are taken into account in computing the shareholder’s QPAI for a taxable year only if, and to the extent that, the share- holder’spro ratashare of the losses or deductions from all of the S corporation’s activities is not disallowed by section 465, 469, or 1366(d), or any other provision of the Code. If only a portion of the shareholder’s share of the losses or de- ductions from an S corporation is allowed for a taxable year, a proportionate share of those allowed losses or deductions that are allocated to the S corporation’s quali- fied production activities, determined in a manner consistent with sections 465, 469, and 1366(d), and any other applicable pro- vision of the Code, is taken into account in computing QPAI for that taxable year. To the extent that any of the disallowed losses or deductions are allowed in a later taxable year under section 465, 469, or 1366(d), or any other provision of the Code, the shareholder takes into account a proportionate share of those allowed losses or deductions that are allocated to the S corporation’s qualified production activities in computing the shareholder’s QPAI for that later taxable year. Losses or deductions of the S corporation that are disallowed for taxable years beginning on or before December 31, 2004, however, are not taken into account in a later taxable year for purposes of computing the share- holder’s QPAI for that later taxable year, whether or not the losses or deductions are allowed for other purposes. (3)Shareholder’s share of para- graph (e)(1) wages. Under section 199(d)(1)(A)(iii), an S corporation share- holder’s share of the paragraph (e)(1) wages of the S corporation for purposes of determining the shareholder’s W–2 wage limitation equals the shareholder’s alloca- ble share of those wages. Except as pro- vided by publication in the Internal Rev- enue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), the S corporation must allocate the paragraph (e)(1) wages among the shareholders in the same manner it al- locates wage expense among those share- holders. The shareholder then must add its share of the paragraph (e)(1) wages from the S corporation to theshareholder’s para- graph (e)(1) wages from other sources, if any, and then must determine the por- April 7, 20087092008–14 I.R.B. tion of those total paragraph (e)(1) wages allocable to DPGR to compute the share- holder’s W–2 wages. See §1.199–2(e)(2) for the computation of W–2 wages and for the proper allocation of such wages to DPGR. (4)Transition rule for definition of W–2 wages and for W–2 wage limitation.If an S corporation and any of its sharehold- ers have different taxable years, only one of which begins after May 17, 2006, the definition of W–2 wages of the S corpo- ration and the section 199(d)(1)(A)(iii) rule for determining a shareholder’s share of wages from that S corporation is de- termined under the law applicable to S corporations based on the beginning date of the S corporation’s taxable year. Thus, for example, for the short taxable year of an S corporation beginning after May 17, 2006, and ending in 2006, a shareholder’s share of W–2 wages from the S corporation is determined under section 199(d)(1)(A)(iii) for taxable years beginning after May 17, 2006, even if that shareholder’s taxable year began on or before May 17, 2006. (d)Grantor trusts. To the extent that the grantor or another person is treated as owning all or part (the owned portion) of a trust under sections 671 through 679, such person (owner) computes its QPAI with re- spect to the owned portion of the trust as if that QPAI had been generated by activi- ties performed directly by the owner. Sim- ilarly, for purposes of the W–2 wage limi- tation, the owner of the trust takes into ac- count the owner’s share of the paragraph (e)(1) wages of the trust that are attribut- able to the owned portion of the trust. The provisions of paragraph (e) of this section do not apply to the owned portion of a trust. (e)Non-grantor trusts and estates—(1) Allocation of costs. The trust or estate cal- culates each beneficiary’s share (as well as the trust’s or estate’s own share, if any) of QPAI and W–2 wages from the trust or estate at the trust or estate level. The beneficiary of a trust or estate may not re- compute its share of QPAI or W–2 wages from the trust or estate by using another method to reallocate the trust’s or estate’s qualified production costs or paragraph (e)(1) wages, or otherwise. Except as provided in paragraph (d) of this section, theQPAIofatrustorestatemustbecom- puted by allocating expenses described in section 199(d)(5) in one of two ways, depending on the classification of those expenses under §1.652(b)–3. Specifically, directly attributable expenses within the meaning of §1.652(b)–3 are allocated pur- suant to §1.652(b)–3, and expenses not directly attributable within the meaning of §1.652(b)–3 (other expenses) are allocated under the simplified deduction method of §1.199–4(e) (unless the trust or estate does not qualify to use the simplified de- duction method, in which case it must use the section 861 method of §1.199–4(d) with respect to such other expenses). For this purpose, depletion and depreciation deductions described in section 642(e) and amortization deductions described in sec- tion 642(f) are treated as other expenses described in section 199(d)(5). Also for this purpose, the trust’s or estate’s share of other expenses from a lower-tier pass-thru entity is not directlyattributable to any class of income (whether or not those other expenses are directly attributable to the aggregate pass-thru gross income as a class for purposes other than section 199). A trust or estate may not use the small business simplified overall method for computing its QPAI. See §1.199–4(f)(5). (2)Allocation among trust or estate and beneficiaries—(i)In general. The QPAI of a trust or estate (which will be less than zero if the CGS and deductions allo- cated and apportioned to DPGR exceed the trust’s or estate’s DPGR) and W–2 wages of a trust or estate are allocated to each beneficiary and to the trust or estate based on the relative proportion of the trust’s or estate’s distributable net income (DNI), as defined by section 643(a), for the taxable year that is distributed or required to be distributed to the beneficiary or is retained by the trust or estate. For this purpose, the trust or estate’s DNI is determined with re- gard to the separate share rule of section 663(c), but without regard to section 199. To the extent that the trust or estate has no DNI for the taxable year, any QPAI and W–2 wages are allocated entirely to the trust or estate. A trust or estate is allowed the section 199 deduction in computing its taxable income to the extent that QPAI and W–2 wages are allocated to the trust or es- tate. A beneficiary of a trust or estate is allowed the section 199 deduction in com- puting its taxable income based on its share of QPAI and W–2 wages from the trust or estate, which are aggregated with the bene- ficiary’s QPAI and W–2 wages from other sources, if any. (ii)Treatment of items from a trust or estate reporting qualified production ac- tivities income. When, pursuant to this paragraph (e), a taxpayer must combine QPAI and W–2 wages from a trust or es- tate with the taxpayer’s total QPAI and W–2 wages from other sources, the tax- payer, when applying §§1.199–1 through 1.199–8 to determine the taxpayer’s to- tal QPAI and W–2 wages from such other sources, does not take into account the items from such trust or estate. Thus, for example, a beneficiary of an estate that re- ceives QPAI from the estate does not take into account the beneficiary’s distributive share of the estate’s gross receipts, gross income, or deductions when the benefi- ciary determines whether a threshold orde minimisrule applies or when the benefi- ciary allocates and apportions deductions in calculating its QPAI from other sources. Similarly, in determining the portion of the beneficiary’s paragraph (e)(1) wages from other sources that is attributable to DPGR (thus, the W–2 wages from other sources), the beneficiary does not take into account DPGR and non-DPGR from the trust or es- tate. (3)Transition rule for definition of W–2 wages and for W–2 wage limitation.The definition of W–2 wages of a trust or estate and the section 199(d)(1)(A)(iii) rule for determining the respective shares of wages from that trust or estate, and thus the ben- eficiary’s share of W–2 wages from that trust or estate, is determined under the law applicable to pass-thru entities based on the beginning date of the taxable year of the trust or estate, regardless of the begin- ning date of the taxable year of the benefi- ciary. (4)Example. The following example illustrates the application of this paragraph (e). Assume that the partnership, trust, and trust beneficiary all are calendar year taxpayers. The example reads as follows: Example.(i)Computation of DNI and inclusion and deduction amounts.(A)Trust’s distributive share of partnership items.Trust,acomplextrust,isapart- ner in PRS, a partnership that engages in activities that generate DPGR and non-DPGR. In 2010, PRS distributes $10,000 cash to Trust. PRS properly al- locates (in the same manner as wage expense) para- graph (e)(1) wages of $3,000 to Trust. Trust’s dis- tributive share of PRS items, which are properly in- cluded in Trust’s DNI, is as follows: 2008–14 I.R.B.710April 7, 2008 Gross income attributable to DPGR ($15,000 DPGR - $5,000 CGS (including wage expense of $1,000)). . . . . . .$10,000 Grossincomeattributabletonon-DPGR($5,000othergrossreceipts-$0CGS) .......................... 5,000 Selling expenses attributable to DPGR (includes wage expense of $2,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 Otherexpenses(includeswageexpenseof$1,000) ................................................. 2,000 (B)Trust’s direct activities. In addition to its cash distribution in 2010 from PRS, Trust directly has the following items which are properly included in Trust’s DNI: Dividends.................................................................................. $10,000 Tax-exemptinterest..........................................................................10,000 RentsfromcommercialrealpropertyoperatedbyTrustasabusiness...................................10,000 Realestatetaxes.............................................................................1,000 Trusteecommissions.........................................................................3,000 Stateincomeandpersonalpropertytaxes......................................................... 5,000 Wageexpenseforrentalbusiness(directparagraph(e)(1)wages)......................................2,000 Otherbusinessexpenses ......................................................................1,000 (C)Allocation of deductions under §1.652(b)–3. (1)Directly attributable expenses. In computing Trust’s DNI for the taxable year, the distributive share of expenses of PRS are directly attributable under §1.652(b)–3(a) to the distributive share of income of PRS. Accordingly, the $5,000 of CGS, $3,000 of selling expenses, and $2,000 of other ex- penses are subtracted from the gross receipts from PRS ($20,000), resulting in net income from PRS of $10,000. With respect to the Trust’s direct expenses, $1,000 of the trustee commissions, the $1,000 of real estate taxes, and the $2,000 of wage expense are directly attributable under §1.652(b)–3(a) to the rental income. (2)Non-directly attributable expenses. Under §1.652(b)–3(b), the trustee must allocate a portion of the sum of the balance of the trustee commissions ($2,000), state income and personal property taxes ($5,000), and the other business expenses ($1,000) to the $10,000 of tax-exempt interest. The portion to be attributed to tax-exempt interest is $2,222 ($8,000 x ($10,000 tax exempt interest/$36,000 gross receipts net of direct expenses)), resulting in $7,778 ($10,000 - $2,222) of net tax-exempt interest. Pursuant to its authority recognized under §1.652(b)–3(b), the trustee allocates the entire amount of the remaining $5,778 of trustee commissions, state income and personal property taxes, and other business expenses to the $6,000 of net rental income, resulting in $222 ($6,000 - $5,778) of net rental income. (D)Amounts included in taxable income.For 2010, Trust has DNI of $28,000 (net dividend in- come of $10,000 + net PRS income of $10,000 + net rental income of $222 + net tax-exempt income of $7,778). Pursuant to Trust’s governing instrument, Trustee distributes 50%, or $14,000, of that DNI to B, an individual who is a discretionary beneficiary of Trust. Assume that there are no separate shares under Trust, and no distributions are made to any other ben- eficiary that year. Consequently, with respect to the $14,000 distribution B receives from Trust, B prop- erly includes in B’s gross income $5,000 of income from PRS, $111 of rents, and $5,000 of dividends, and properly excludes from B’s gross income $3,889 of tax-exempt interest. Trust includes $20,222 in its adjusted total income and deducts $10,111 under sec- tion 661(a) in computing its taxable income. (ii)Section 199 deduction.(A)Simplified deduc- tion method. For purposes of computing the section 199 deduction for the taxable year, assume Trust qualifies for the simplified deduction method under §1.199–4(e). The determination of Trust’s QPAI un- der the simplified deduction method requires multiple steps to allocate costs. First, the Trust’s expenses directly attributable to DPGR under §1.652(b)–3(a) are subtracted from the Trust’s DPGR. In this step, the directly attributable $5,000 of CGS and sell- ing expenses of $3,000 are subtracted from the $15,000 of DPGR from PRS. Second, the Trust’s expenses directly attributable under §1.652(b)–3(a) to non-DPGR from a trade or business are subtracted from the Trust’s trade or business non-DPGR. In this step, $4,000 of Trust expenses directly allocable to the real property rental activity ($1,000 of real estate taxes, $1,000 of Trustee commissions, and $2,000 of wages) are subtracted from the $10,000 of rental income. Third, Trust must identify the portion of its other expenses that is attributable to Trust’s trade or business activities, if any, because expenses not attributable to trade or business activities are not taken into account in computing QPAI. In this step, in this example, the portion of the trustee commis- sions not directly attributable to the rental operation ($2,000) is directly attributable to non-trade or busi- ness activities. In addition, the state income and personal property taxes are not directly attributable under §1.652(b)–3(a) to either trade or business or non-trade or business activities, so the portion of those taxes not attributable to either the PRS interests or the rental operation is not a trade or business expense and, thus, is not taken into account in com- puting QPAI. The portion of the state income and personal property taxes that is treated as an other trade or business expense is $3,000 ($5,000 x $30,000 total trade or business gross receipts/$50,000 total gross receipts). Fourth, Trust then allocates its other trade or business expenses (not directly attributable under §1.652(b)–3(a)) between DPGR and non-DPGR on the basis of its total gross receipts from the conduct of a trade or business ($20,000 from PRS + $10,000 rental income). Thus, Trust combines its non-directly attributable (other) business expenses ($2,000 from PRS + $4,000 ($1,000 of other business expenses + $3,000 of income and property taxes allocated to a trade or business) from its own activities) and then apportions this total ($6,000) between DPGR and other receipts on the basis of Trust’s total trade or business gross receipts ($6,000 of such expenses x $15,000 DPGR/$30,000 total trade or business gross receipts = $3,000). Thus, for purposes of computing Trust’s and B’s section 199 deduction, Trust’s QPAI is $4,000 ($7,000 ($15,000 DPGR - $5,000 CGS - $3,000 selling expenses) - $3,000). Because the distribution of Trust’s DNI to B equals one-half of Trust’s DNI, Trust and B each has QPAI from PRS for purposes of the section 199 deduction of $2,000. B has $1,000 of QPAI from non-Trust activities that is added to the $2,000 QPAI from Trust for a total of $3,000 of QPAI. (B)W–2 wages. For the 2010 taxable year, Trust chooses to use the wage expense safe harbor under §1.199–2(e)(2)(ii) to determine its W–2 wages. For its taxable year ending December 31, 2010, Trust has $5,000 ($3,000 from PRS + $2,000 of Trust) of para- graph (e)(1) wages reported on 2010 Forms W–2. Trust’s W–2 wages are $2,917, as shown in the fol- lowing table: April 7, 20087112008–14 I.R.B. WageexpenseincludedinCGSdirectlyattributabletoDPGR......................................... $1,000 Wage expense included in selling expense directly attributable to DPGR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,000 Wage expense included in non-directly attributable deductions ($1,000 in wage expense x ($15,000DPGR/$30,000totaltradeorbusinessgrossreceipts)).................................... 5 00 WageexpenseallocabletoDPGR............................................................... 3,500 W–2 wages (($3,500 of wage expense allocable to DPGR/$6,000 of total wage expense) x $5,000 inparagraph(e)(1)wages).................................................................. $2,917 (C)Section 199 deduction computation.(1)B’s computation. B is eligible to use the small business simp lified overall method. Assume that B has suf- ficient adjusted gross income so that the section 199 deduction is not limited under section 199(a)(1)(B). Beca use the $14,000 Trust distribution to B equals one-half of Trust’s DNI, B has W–2 wages from Trust of $1,459 (50% x $2,917). B has W–2 wages of $100 fro m trade or business activities outside of Trust and attributable to DPGR (computed without regard to B’s interest in Trust pursuant to §1.199–2(e)) for a tot al of $1,559 of W–2 wages. B has $1,000 of QPAI from non-Trust activities that is added to the $2,000 QPAI from Trust for a total of $3,000 of QPAI. B’s te ntative deduction is $270 (.09 x $3,000), limited un- der the W–2 wage limitation to $780 (50% x $1,559 W–2 wages). Accordingly, B’s section 199 deduction fo r 2010 is $270. (2)Trust’s computation. Trust has sufficient ad- justed gross income so that the section 199 deduction is not limited under section 199(a)(1)(B). Because the $14,000 Trust distribution to B equals one-half of Trust’s DNI, Trust has W–2 wages of $1,459 (50% x $2,917). Trust’s tentative deduction is $180 (.09 x $2,000 QPAI), limited under the W–2 wage limitation to $730 (50% x $1,459 W–2 wages). Accordingly, T rust’s section 199 deduction for 2010 is $180. ( f)Gain or loss from the disposition of a n interest in a pass-thru entity.DPGR g enerally does not include gain or loss rec- o gnized on the sale, exchange, or other dis- position of an interest in a pass-thru entity. However, with respect to a partnership, if section 751(a) or (b) applies, then gain or loss attributable to assets of the partnership giving rise to ordinary income under sec- tion 751(a) or (b), the sale, exchange, or other disposition of which would give rise to DPGR, is taken into account in com- puting the partner’s section 199 deduc- tion. Accordingly, to the extent that cash or property received by a partner in a sale or exchange of all or part of its partner- ship interest is attributable to unrealized receivables or inventory items within the meaning of section 751(c) or (d), respec- tively, and the sale or exchange of the unre- alized receivable or inventory items would give rise to DPGR if sold, exchanged, or otherwise disposed of by the partnership, the cash or property received by the part- ner is taken into account by the partner in determining its DPGR for the taxable year. Likewise, to the extent that a dis- tribution of property to a partner is treated under section 751(b) as a sale or exchange of property between the partnership and the distributee partner, and any property deemed sold or exchanged would give rise to DPGR if sold, exchanged, or otherwise disposed of by the partnership, the deemed sale or exchange of the property must be taken into account in determining the part- nership’s and distributee partner’s DPGR to the extent not taken into account under the qualifying in-kind partnership rules. See §§1.751–1(b) and 1.199–3(i)(7). (g)No attribution of qualified activi- ties. Except as provided in §1.199–3(i)(7) regarding qualifying in-kind partnerships and §1.199–3(i)(8) regarding EAG part- nerships, an owner of a pass-thru entity is not treated as conducting the qualified production activities of the pass-thru en- tity, and vice versa. This rule applies to all partnerships, including partnerships that have elected out of subchapter K under section 761(a). Accordingly, if a partner- ship manufactures QPP within the United States, or produces a qualified film or produces utilities in the United States, and distributes or leases, rents, licenses, sells, exchanges, or otherwise disposes of such property to a partner who then, without performing its own qualifying activity, leases, rents, licenses, sells, exchanges, or otherwise disposes of such property, then the partner’s gross receipts from this latter lease, rental, license, sale, ex- change, or other disposition are treated as non-DPGR. In addition, if a partner man- ufactures QPP within the United States, or produces a qualified film or produces util- ities in the United States, and contributes or leases, rents, licenses, sells, exchanges, or otherwise disposes of such property to a partnership which then, without per- forming its own qualifying activity, leases, rents, licenses, sells, exchanges, or other- wise disposes of such property, then the partnership’s gross receipts from this latter disposition are treated as non-DPGR. §1.199–5T [Removed] Par. 10. Section 1.199–5T is removed. Par. 11. Section 1.199–7 is amended by revising paragraph (b)(4) to read as fol- lows: §1.199–7 Expanded affiliated groups. ***** (b) * * * (4)Losses used to reduce taxable in- come of expanded affiliated group—(i) In general. The amount of an NOL sus- tained by any member of an EAG that is used in the year sustained in determin- ing an EAG’s taxable income limitation under section 199(a)(1)(B) is not treated as an NOL carryover or NOL carryback to any taxable year in determining the taxable income limitation under section 199(a)(1)(B). For purposes of this para- graph (b)(4), an NOL is considered to be used if it reduces an EAG’s aggregate tax- able income, regardless of whether the use of the NOL actually reduces the amount of the section 199 deduction that the EAG would otherwise derive. An NOL is not considered to be used to the extent that it reduces an EAG’s aggregate taxable in- come to an amount less than zero. If more than one member of an EAG has an NOL used in the same taxable year to reduce the EAG’s taxable income, the members’ respective NOLs are deemed used in pro- portion to the amount of their NOLs. (ii)Examples. The following exam- ples illustrate the application of this para- graph (b)(4). For purposes of these exam- ples, assume that all relevant parties have sufficient W–2 wages so that the section 199 deduction is not limited under section 199(b)(1). The examples read as follows: Example 1.(i)Facts. Corporations A and B are the only two members of an EAG. A and B are both calendar year taxpayers, and they do not join in the fil- ing of a consolidated Federal income tax return. Nei- ther A nor B had taxable income or loss prior to 2010. In 2010, A has QPAI and taxable income of $1,000, and B has QPAI of $1,000 and an NOL of $1,500. In 2011, A has QPAI of $2,000 and taxable income of $1,000 and B has QPAI of $2,000 and taxable income 2008–14 I.R.B.712April 7, 2008 prior to the NOL deduction allowed under section 172 of $2,000. (ii)Section 199 deduction for 2010. In determin- ing the EAG’s section 199 deduction for 2010, A’s $1,000 of QPAI and B’s $1,000 of QPAI are aggre- gated, as are A’s $1,000 of taxable income and B’s $1,500 NOL. Thus, for 2010, the EAG has QPAI of $2,000 and taxable income of ($500). The EAG’s section 199 deduction for 2010 is 9% of the lesser of its QPAI or its taxable income. Because the EAG has a taxable loss in 2010, the EAG’s section 199 deduc- tion is $0. (iii)Section 199 deduction for 2011. In determin- ing the EAG’s section 199 deduction for 2011, A’s $2,000 of QPAI and B’s $2,000 of QPAI are aggre- gated, giving the EAG QPAI of $4,000. Also, $1,000 of B’s NOL from 2010 was used in 2010 to reduce the EAG’s taxable income to $0. The remaining $500 of B’s 2010 NOL is not considered to have been used in 2010 because it reduced the EAG’s taxable income below $0. Accordingly, for purposes of determin- ing the EAG’s taxable income limitation under sec- tion 199(a)(1)(B) in 2011, B is deemed to have only a $500 NOL carryover from 2010 to offset a portion of its 2011 taxable income. Thus, B’s taxable income in 2011 is $1,500 which is aggregated with A’s $1,000 of taxable income. The EAG’s taxable income limi- tation in 2011 is $2,500. The EAG’s section 199 de- duction is 9% of the lesser of its QPAI of $4,000 or its taxable income of $2,500. Thus, the EAG’s sec- tion 199 deduction in 2011 is 9% of $2,500, or $225. The results would be the same if neither A nor B had QPAI in 2010. Example 2. The facts are the same as inExample 1except that in 2010 B was not a member of the same EAG as A, but instead was a member of an EAG with Corporation X, which had QPAI and taxable income of $1,000 in 2010, and had neither taxable income nor loss in any other year. There were no other members of the EAG in 2010 besides B and X, and B and X did not file a consolidated Federal income tax return. As $1,000 of B’s NOL was used in 2010 to reduce the B and X EAG’s taxable incometo $0, B is considered to have only a $500 NOL carryover from 2010 to offset a portion of its 2011 taxable income for purposes of the taxable income limitation under section 199(a)(1)(B), just as inExample 1. Accordingly, the results for the A and B EAG in 2011 are the same as inExample 1. Example 3. The facts are the same as inExample 1except that B is not a member of any EAG in 2011. Because $1,000 of B’s NOL was used in 2010 to re- duce the EAG’s taxable income to $0, B is consid- ered to have only a $500 NOL carryover from 2010 to offset a portion of its 2011 taxable income for pur- poses of the taxable income limitation under section 199(a)(1)(B), just as inExample 1. Thus, for pur- poses of determining B’s taxable income limitation in 2011, B is considered to have taxable income of $1,500, and B has a section 199 deduction of 9% of $1,500, or $135. Example 4. Corporations A, B, and C are the only members of an EAG. A, B, and C are all calen- dar year taxpayers, and they do not join in the filing of a consolidated Federal income tax return. None of the EAG members (A, B, or C) had taxable in- come or loss prior to 2010. In 2010, A has QPAI of $2,000 and taxable income of $1,000, B has QPAI of $1,000 and an NOL of $1,000, and C has QPAI of $1,000 and an NOL of $3,000. In 2011, prior to the NOL deduction allowed under section 172, A and B each has taxable income of $200 and C has taxable income of $5,000. In determining the EAG’s sec- tion 199 deduction for 2010, A’s QPAI of $2,000, B’s QPAI of $1,000, and C’s QPAI of $1,000 are aggre- gated, as are A’s taxable income of $1,000, B’s NOL of $1,000, and C’s NOL of $3,000. Thus, for 2010, the EAG has QPAI of $4,000 and taxable income of ($3,000). In determining the EAG’s taxable income limitation under section 199(a)(1)(B) in 2011, $1,000 of B’s and C’s aggregate NOLs in 2010 of $4,000 are considered to have been used in 2010 to reduce the EAG’s taxable income to $0, in proportion to their NOLs. Thus, $250 of B’s NOL from 2010 ($1,000 x $1,000/$4,000) and $750 of C’s NOL from 2010 ($1,000 x $3,000/$4,000) are deemed to have been used in 2010. The remaining $750 of B’s NOL and the remaining $2,250 of C’s NOL are not deemed to have been used because so doing would have reduced the EAG’s taxable income in 2010 below $0. Accord- ingly, for purposes of determining the EAG’s taxable income limitation in 2011, B is deemed to have a $750 NOL carryover from 2010 and C is deemed to have a $2,250 NOL carryover from 2010. Thus, for pur- poses of determining the EAG’s taxable income lim- itation, B’s taxable income in 2011 is $0 and C’s tax- able income in 2011 is $2,750, which are aggregated with A’s $200 taxable income. B’s unused NOL car- ryover from 2010 cannot be used to reduce either A’s or C’s 2011 taxable income. Thus, the EAG’s taxable income limitation in 2011 is $2,950, A’s taxable in- come of $200 plus B’s taxable income of $0 plus C’s taxable income of $2,750. ***** §1.199–7T [Removed] Par. 12. Section 1.199–7T is removed. Par. 13. Section 1.199–8 is amended by: 1.Removing the language “§1.199–9(j)” in paragraph (e)(1)(i) and adding the language “§§1.199–3(i)(8) and 1.199–9(j)” in its place. 2.Removing the language “§1.199–9(i)” in paragraph (e)(1)(i) and adding the language “§§1.199–3(i)(7) and 1.199–9(i)” in its place. 3.Removing the language “§1.199–9(i)” in paragraph (e)(1)(ii)(B) and adding the language “§1.199–3(i)(7) or §1.199–9(i)” in its place. 4. Revising the last two sentences in paragraph (h). 5. Revising paragraphs (i)(5) and (i)(6). The revisions read as follows: §1.199–8 Other rules. ***** (h)Disallowed losses or deductions. * * * For taxpayers that are partners in partnerships, see §§1.199–5(b)(2) and 1.199–9(b)(2). For taxpayers that are shareholders in S corporations, see §§1.199–5(c)(2) and 1.199(c)(2). (i) * * * (5)Tax Increase Prevention and Reconciliation Act of 2005. Sections 1.199–2(e)(2), 1.199–3(i)(7) and (8), and 1.199–5 are applicablefor taxable years beginning on or after October 19, 2006. A taxpayer may apply §§1.199–2(e)(2), 1.199–3(i)(7) and (8), and 1.199–5 to tax- able years beginning after May 17, 2006, and before October 19, 2006, regardless of whether the taxpayer otherwise relied upon Notice 2005–14, 2005–1 C.B. 498 (see §601.601(d)(2)(ii)(b) of this chap- ter), the provisions of REG–105847–05, 2005–2 C.B. 987, or §§1.199–1 through 1.199–8. (6)Losses used to reduce taxable in- come of expanded affiliated group. Sec- tion 1.199–7(b)(4) is applicable for taxable years beginning on orafter February 15, 2008. For taxable years beginning on or after October 19, 2006, and before Febru- ary 15, 2008, see §1.199–7T(b)(4) (see 26 CFR part 1 revised as of April 1, 2007). ***** §1.199–8T [Removed] Par. 14. Section 1.199–8T is removed. Par. 15. Section 1.199–9 is amended by: 1. Revising paragraph (b)(1)(ii)(B). 2. Removing the language “paragraph (b) of this section shall” from paragraph (b)(5) and adding the language “this para- graph (b)” in its place. 3. Revising paragraph (c)(1)(ii)(B). 4. Revising paragraph (e)(2)(i). 5. Removing the language “directly al- locable costs” in the sixth sentence ofEx- ample 4in paragraph (j)(5) and adding the language “CGS” in its place. 6. Adding the language “finished dosage form” before the word “drug” each time it appears in the seventh, eighth, and ninth sentences in paragraph (j)(5)Ex- ample 5(i) and in the second and third sentences in paragraph (j)(5)Example 5 (ii). The revisions read as follows: §1.199–9 Application of section 199 to pass-thru entities for taxable years beginning on or before May 17, 2006, the enactment date of the Tax Increase April 7, 20087132008–14 I.R.B. Prevention and Reconciliation Act of 2006. ***** (b) * * * (1) * * * (ii) * * * (B) For purposes of computing the partner’s QPAI under §§1.199–1 through 1.199–9, a partner does not take into ac- count the items from the partnership (for example, a partner does not take into account items from the partnership in determining whether a threshold orde minimisrule applies or in allocating and apportioning deductions) in calculating its QPAI from other sources; ***** (c) * * * (1) * * * (ii) * * * (B) For purposes of computing the shareholder’s QPAI under §§1.199–1 through 1.199–9, a shareholder does not take into account the items from the S corporation (for example, a shareholder does not take into account items from the S corporation in determining whether a threshold orde minimisrule applies or in allocating and apportioning deductions) in calculating its QPAI from other sources; ***** (e) * * * (2)***(i)In general.TheQPAIofa trust or estate (which will be less than zero if the CGS and deductions allocated and apportioned to DPGR exceed the trust’s or estate’s DPGR) and W–2 wages of a trust or estate are allocated to each beneficiary and to the trust or estate based on the rela- tive proportion of the trust’s or estate’s dis- tributable net income (DNI), as defined by section 643(a), for the taxable year that is distributed or required to be distributed to the beneficiary or is retained by the trust or estate. For this purpose, the trust or es- tate’s DNI is determined with regard to the separate share rule of section 663(c), but without regard to section 199. To the ex- tent that the trust or estate has no DNI for the taxable year, any QPAI and W–2 wages are allocated entirely to the trust or estate. A trust or estate is allowed the section 199 deduction in computing its taxable income to the extent that QPAI and W–2 wages are allocated to the trust or estate. A ben- eficiary of a trust or estate is allowed the section 199 deduction in computing its tax- able income based on its share of QPAI and W–2 wages from the trust or estate, which (subject to the wage limitation as described in paragraph (e)(3) of this section) are ag- gregated with the beneficiary’s QPAI and W–2 wages from other sources, if any. ***** Linda E. Stiff, Deputy Commissioner for Services and Enforcement. Approved February 1, 2008. Eric Solomon, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on February 14, 2008, 8:45 a.m., and published in the issue of the Federal Register for February 15, 2008, 73 F.R. 8798) Section 280G.—Golden Parachute Payments Federal short-term, mid-term, and long-term rates are set forth for the month of April 2008. See Rev. Rul. 2008-20, page 716. 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 April 2008. See Rev. Rul. 2008-20, page 716. Section 412.—Minimum Funding Standards The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of April 2008. See Rev. Rul. 2008-20, page 716. Section 467.—Certain Payments for the Use of Property or Se rvices The adjusted a pplicable federal short-term, mid- term, and long -term rates are set forth for the month of April 2008. See Rev. Rul. 2008-20, page 716. 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 April 2008. See Rev. Rul. 2008-20, page 716. Section 482.—Allocation of Income and Deductions Among Taxpayers Federal short-term, mid-term, an d long-term rates are set forth for the month of Apri l 2008. See Rev. Rul. 2008-20, page 716. 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 April 2008. See Rev. Rul. 2008-20, page 716. Section 642.—Special Rules for Credits and Deductions Federal short-term, mid-term, and long-term rates are set forth for the month of April 2008. See Rev. Rul. 2008-20, page 716. 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 April 2008. See Rev. Rul. 2008-20, page 716. 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 April 2008. See Rev. Rul. 2008-20, page 716. 2008–14 I.R.B.714April 7, 2008 Section 1221.—Capital Asset Defined 26 CFR 1.1221–3T: Time and manner for electing capital asset treatment for certain self-created musi- cal works (temporary). T.D. 9379 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Time and Manner for Electing Capital Asset Treatment for Certain Self-Created Musical Works AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Temporary regulation. SUMMARY: This document contains a temporary regulation that provides the time and manner for making an election to treat the sale or exchange of musical com- positions or copyrights in musical works created by the taxpayer (or received by the taxpayer from the works’ creator in a transferred basis transaction) as the sale or exchange of a capital asset. The reg- ulation reflects changes to the law made by the Tax Increase Prevention and Rec- onciliation Act of 2005 and the Tax Relief and Health Care Act of 2006. The regula- tion affects taxpayers making the election under section 1221(b)(3) of the Internal Revenue Code (Code) to treat gain or loss from such a sale or exchange as capital gain or loss. The text of this temporary regulation also serves as the text of the proposed regulation (REG–153589–06) set forth in this issue of the Bulletin. DATES:Effective Date:This regulation is effective on February 8, 2008. Applicability Dates:For dates of appli- cability, see §1.1221–3T(d). FOR FURTHER INFORMATION CONTACT: Jamie Kim, (202) 622–4950 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background Section 1221(a) of the Internal Revenue Code (Code) generally provides that cap- ital assets include all property held by a taxpayer with certain specified exclusions. Section 1221(a)(1) excludes from the defi- nition of a capital asset inventory property or property held by a taxpayer primarily for sale to customers in the ordinary course of the taxpayer’s trade or business. Section 1221(a)(3) excludes from the definition of a capital asset copyrights, literary, musical, or artistic compositions, letters or memo- randa, or similar property held by a tax- payer whose personal efforts created the property (or held by a taxpayer whose ba- sis in the property is determined by refer- ence to the basis of such property in the hands of the taxpayer whose personal ef- forts created the property). Section 1221(b)(3) of the Code, added by section 204 of the Tax Increase Pre- vention and Reconciliation Act of 2005 (Public Law 109–222, 120 Stat. 345) and amended by section 412 of the Tax Re- lief and Health Care Act of 2006 (Public Law 109–432, 120 Stat. 2922), provides that, at the election of a taxpayer, the sec- tion 1221(a)(1) and (a)(3) exclusions from capitalassetstatusdonotapplytomu- sical compositions or copyrights in musi- cal works sold or exchanged by a taxpayer described in section 1221(a)(3). Thus, if a taxpayer who owns a musical composi- tion or copyright in a musical work cre- ated by the taxpayer (or transferred to the taxpayer by the work’s creator in a sec- tion 1221(a)(3)(C) transferred basis trans- action) elects the application of this provi- sion, gain or loss from the sale or exchange of the musical composition or copyright is treated as capital gain or loss. Explanation of Provisions This temporary regulation provides rules regarding the time and manner for making an election under section 1221(b)(3) to treat gain or loss from the sale or exchange of certain musical com- positions or copyrights in musical works as gain or loss from the sale or exchange of a capital asset. Special Analyses It has been determined that this Trea- sury decision is not asignificant regula- tory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administra- tive Procedure Act (5 U.S.C. chapter 5) does not apply to this regulation. For application of the Regulatory Flexibility Act (5 U.S.C. Chapter 6) please refer to thecrossreferencenoticeofproposed rulemaking published elsewhere in this issue of the Bulletin. Pursuant to section 7805(f) of the Internal Revenue Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal author of these regula- tions is Jamie Kim of the Office of As- sociate Chief Counsel (Income Tax & Ac- counting). However, other personnel from the IRS and Treasury Department partici- pated in their development. ***** Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1221–3T is added to read as follows: §1.1221–3T Time and manner for electing capital asset treatment for certain self-created musical works (temporary). (a)Description. Section 1221(b)(3) al- lows an electing taxpayer to treat the sale or exchange of a musical composition or copyright in a musical work created by the taxpayer’s personal efforts (or having a ba- sis determined by reference to the basis of such property in the hands of a taxpayer whose personal efforts created such prop- erty) as the sale or exchange of a capital asset. As a consequence, gain or loss from the sale or exchange is treated as capital gain or loss. An election may be made for April 7, 20087152008–14 I.R.B. sales and exchanges in taxable years be- ginning after May 17, 2006. (b)Time and manner for making the election. An election described in this section is made separately for each mu- sical composition (or copyright in a mu- sical work) sold or exchanged during the taxable year. An election must be made on or before the due date (including ex- tensions) of the income tax return for the taxable year of the sale or exchange. An election is to be made on Schedule D, “Capital Gains and Losses,” of the ap- propriate income tax form (for example, Form 1040, “U.S. Individual Income Tax Return;” Form 1065, “U.S. Return of Part- nership Income;” Form 1120, “U.S. Cor- poration Income Tax Return”) by treating the sale or exchange as the sale or ex- change of a capital asset, in accordance with the form and its instructions. (c)Revocability of election. An election described in this section is revocable with the consent of the Commissioner. To seek consent to revoke an election, a taxpayer must submit a request for a letter ruling under the appropriate revenue procedure. See, for example, Rev. Proc. 2007–1, 2007–1 C.B. 1 (updated annually). Al- ternatively, an automatic extension of 6 months from the due date of the taxpayer’s income tax return (excluding extensions) is granted to revoke an election, provided the taxpayer timely filed the taxpayer’s income tax return and, within this 6-month extension period, the taxpayer files an amended income tax return that treats the sale or exchange as the sale or exchange of property that is not a capital asset. See §601.601(d)(2)(ii)(b) of this Chapter. (d)Effective/applicability date.(1)The rules of this section apply to sales and ex- changes in taxable years beginning after May 17, 2006. (2)Expiration date. This section ex- pires on February 8, 2011. Linda E. Stiff, Deputy Commissioner for Services and Enforcement. Approved January 28, 2008. Eric Solomon, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on February 7, 2008, 8:45 a.m., and published in the issue of the Federal RegisterforFebruary8,2008,73F.R.7464) 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 April 2008. Rev. Rul. 2008–20 This revenue ruling provides vari- ous prescribed rates for federal income tax purposes for April 2008 (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 (adjusted 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 described in section 382(f). Table 4 contains the ap- propriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for deter- mining 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. 2008–14 I.R.B.716April 7, 2008 REV. RUL. 2008–20 TABLE 1 Applicable Federal Rates (AFR) for April 2008 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-term AFR 1.85% 1.84%1.84%1.83% 110% AFR2.03%2.02%2.01%2.01% 120% AFR2.22%2.21%2.20%2.20% 130% AFR2.40%2.39%2.38%2.38% Mid-term AFR2.87% 2.85% 2.84%2.83% 110% AFR3.16%3.14%3.13%3.12% 120% AFR 3.45% 3.42%3.41%3.40% 130% AFR3.74%3.71%3.69%3.68% 150% AFR 4.33%4.28%4.26%4.24% 175% AFR5.05% 4.99%4.96%4.94% Long-term AFR4.40% 4.35% 4.33%4.31% 110% AFR 4.85% 4.79%4.76%4.74% 120% AFR 5.29%5.22%5.19%5.16% 130% AFR 5.74%5.66%5.62%5.59% REV. RUL. 2008–20 TABLE 2 Adjusted AFR for April 2008 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-ter madjusted AFR 1.99%1.98%1.98%1.97% Mid-term adjusted AFR3.28% 3.25% 3.24%3.23% Long-term adjusted AFR 4.55%4.50% 4.47%4.46% REV. RUL. 2008–20 TABLE 3 Rates Under Section 382 for April 2008 Adjusted federal long-term rate for the current month 4.55% 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.)4.55% REV. RUL. 2008–20 TABLE 4 Appropriate Percentages Under Section 42(b)(2) for April 2008 Appropriate percentage for the 70% present value low-income housing credit7.84% Appropriate percentage for the 30% present value low-income housing credit3.36% April 7, 20087172008–14 I.R.B. REV. RUL. 2008–20 TABLE 5 Rate Under Section 7520 for April 2008 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 interest3.4% Section 1288.—Treatment of Original Issue Discount on Tax-Exempt Obligations The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of April 2008. See Rev. Rul. 2008-20, page 716. Section 6020.—Returns Prepared for or Executed by Secretary 26 CFR 301.6020–1: Returns prepared or executed by the Commissioner or other Internal Revenue Offi- cers. T.D. 9380 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301 Substitute for Return AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. SUMMARY: This document contains final regulations relating to returns prepared or signed by the Commissioner or other Inter- nal Revenue Officers or employees under section 6020 of the Internal Revenue Code. These final regulations provide guidance for preparing a substitute for return under section 6020(b). Absent the existence of a return under section 6020(b), the addi- tion to tax under section 6651(a)(2) does not apply to a nonfiler. These final regu- lations affect any person who fails to file a required return. DATES:Effective Date:These regulations are effective on February 20, 2008. Applicability Date:For dates of appli- cability, see §301.6020–1(d). FOR FURTHER INFORMATION CONTACT: Alicia E. Goldstein at (202) 622–3630 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains final regula- tionsrelatingtosubstitutes for returns. These final regulations reflect amend- ments to 26 CFR part 301 under section 6020 of the Internal Revenue Code. Sec- tion 301.6020–1 of the Procedure and Administration Regulations provides for the preparation or execution of returns by authorized Internal Revenue Officers or employees. Section 1301(a) of the Tax- payer Bill of Rights Act of 1996, Public Law 104–168 (110 Stat. 1452), amended section 6651 to add subsection (g)(2), which provides that, for returns due after July 30, 1996 (determined without regard to extensions), a return made under sec- tion 6020(b) shall be treated as a return filed by the taxpayer for purposes of deter- mining the amount of the additions to tax under section 6651(a)(2) and (a)(3). Ab- sent the existence of a return under section 6020(b), the addition to tax under section 6651(a)(2) does not apply to a nonfiler. InCabirac v. Commissioner,120T.C. 163 (2003),aff’d in an unpublished opin- ion, No. 03–3157 (3 rd Cir. Feb. 10, 2004), andSpurlock v. Commissioner,T.C. Memo. 2003–124, the Tax Court found that the Service did not establish that it had prepared and signed a return in accordance with section 6020(b). InSpurlock,theTax Court held that a return for section 6020(b) purposes must be subscribed, contain suf- ficient information from which to compute the taxpayer’s tax liability, and the return and any attachments must “purport to be a return.”Spurlock, T.C.Memo. 2003–124 at 27. These decisions prompted the Ser- vice and the Treasury Department to revise its rules for the preparation or execution of returns by authorized Internal Revenue Officer or employees. Temporary regula- tions and a notice of proposed rulemaking (REG–131739–03, 2005–2 C.B. 494) were published in theFederal Register on July 18, 2005 [70 FR 41165]. The Service and the Treasury Depart- ment received written public comments responding to the proposed regulations. After consideration of the comments received, the proposed regulations are adopted as revised by this Treasury de- cision. These final regulations generally retain the provisions of the proposed regu- lations with one minor change as explained in more detail in the preamble. Explanation of Provisions and Summary of Comments The regulations provide that a docu- ment (or set of documents) signed by an authorized Internal Revenue Officer or employee is a return under section 6020(b) if the document (or set of documents) iden- tifies the taxpayer by name and taxpayer identification number, contains sufficient information from which to compute the taxpayer’s tax liability, and the document (or set of documents) purports to be a return under section 6020(b). A Form 13496, “IRC Section 6020(b) Certifica- tion,” or any other form that an authorized Internal Revenue Officer or employee signs and uses to identify a document (or set of documents) containing the informa- tion set forth in this preamble as a section 6020(b) return, and the documents iden- tified, constitute a valid section 6020(b) return. Further, because the Service prepares and signs section 6020(b) returns both by hand and through automated means, these regulations provide that a name or title of an Internal Revenue Officer or employee appearing upon a return made in accor- dance with section 6020(b) is sufficient as a subscription by that officer or em- ployee to adopt the document as a return for the taxpayer without regard to whether the name or title is handwritten, stamped, typed, printed or otherwise mechanically affixed to the document. The document or 2008–14 I.R.B.718April 7, 2008 set of documents and subscription may be in written or electronic form. These final regulations do not alter the method for the preparation of returns un- dersection6020(a)asprovidedinT.D. 6498. Under section 6020(a), if the tax- payer consents to disclose necessary infor- mation, the Service may prepare a return on behalf of a taxpayer, and if the taxpayer signs the return, the Service will receive it as the taxpayer’s return. The proposed regulations generated nu- merous comments. For the most part, the comments were variations of ten different form letters. The commentators took is- sue with the regulation because the signa- ture on the certification was not signed un- der oath, and therefore not signed under a penalty of perjury; because a “set of docu- ments” could substitute for a return instead of the form that would have been used by the taxpayer, and because the Service was making the decision of who should file a tax return. After considering these comments, the Service and the Treasury Department have concluded that they provide no basis for adopting changes in the final regulations. In particular, the argument that the Service should not be able to decide who should file a tax return is without merit. The re- quirement to file a tax return is not vol- untary and is clearly set forth in sections 6011(a) and 6012(a). There has been one minor change to the text of the temporary regulations. The temporary regulation provided that any return made in accordance with paragraph (b)(1) of this section and signed by the Commissioner or other authorized Inter- nal Revenue Officer or employee shall be prima faciegood and sufficient for all le- gal purposes. In 2005, new language was added to the Bankruptcy Code at 11 U.S.C. §523(a) that specifically provided that a section 6020(b) return is not a return for dischargeability purposes. Therefore, the portion of the temporary regulation that stated that the return was sufficient for all legal purposes isno longer correct. The language in the regulation has been changed to state that a section 6020(b) return is sufficient for all legal purposes “except insofar as any Federal statute expressly provides otherwise.” Special Analyses It has been determined that this Trea- sury decision is not a significant regul a- tory action as defined in Executive Orde r 12866. Therefore, a regulatory assess ment is not required. It also has been deter- mined that section 553(b) of the Admin- istrative Procedure Act (5 U.S.C. chap ter 5) does not apply to these regulations ,and because the regulations do not impose a collection of information, the Regu latory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805( f) of the Internal Revenue Code, the notic eof proposed rulemaking preceding the se reg- ulations was submitted to the Chief Coun- sel for Advocacy of the Small Busin ess Administration for comment on its impact on small business. Drafting Information The principal author of these regula- tions is Alicia Goldstein, Office of the As- sociate Chief Counsel (Procedure and Ad- ministration). ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR part 301 is amended as follows: PART 301—PROCEDURE AND ADMINISTRATION Paragraph 1. The authority citation for part 301 continues to read in part as fol- lows: Authority: 26 U.S.C. 7805* * * §301.6020–1T[Removed] Par. 2. Section 301.6020–1T is re- moved. Par. 3. Section 301.6020–1 is added to read as follows: §301.6020–1 Returns prepared or executed by the Commissioner or other Internal Revenue Officers. (a)Preparation of returns—(1)In gen- eral. If any person required by the Inter- nal Revenue Code or by the regulations to make a return fails to make such return, it may be prepared by the Commissioner or other authorized Internal Revenue Offi- cer or employee provided such person con- sents to disclose all information necessary for the preparation of such return. The re- turn upon being signed by the person re- quired to make it shall be received by the Commissioner as the return of such person. (2)Responsibility of person for whom return is prepared. A person for whom a return is prepared in accordance with para- graph (a)(1) of this section shall for all legal purposes remain responsible for the correctness of the return to the same extent as if the return had been prepared by him. (b)Execution of returns—(1)In gen- eral. If any person required by the Inter- nal Revenue Code or by the regulations to make a return (other than a declaration of estimated tax required under section 6654 or 6655) fails to make such return at the time prescribed therefore, or makes, willfully or otherwise, a false, fraudulent or frivolous return, the Commissioner or other authorized Internal Revenue Offi- cer or employee shall make such return from his own knowledge and from such information as he canobtain through tes- timony or otherwise. The Commissioner or other authorized Internal Revenue Offi- cer or employee may make the return by gathering information and making compu- tations through electronic, automated or other means to make a determination of the taxpayer’s tax liability. (2)Form of the return.Adocument(or set of documents) signed by the Commis- sioner or other authorized Internal Rev- enue Officer or employee shall be a re- turn for a person described in paragraph (b)(1) of this section if the document (or set of documents) identifies the taxpayer by name and taxpayer identification num- ber, contains sufficient information from which to compute the taxpayer’s tax li- ability, and purports to be a return. A Form 13496, “IRC Section 6020(b) Cer- tification,” or any other form that an au- thorized Internal Revenue Officer or em- ployee signs and uses to identify a set of documents containing the information set forth in this paragraph as a section 6020(b) return, and the documents identified, con- stitute a return under section 6020(b). A return may be signed by the name or ti- tle of an Internal Revenue Officer or em- ployee being handwritten, stamped, typed, printed or otherwise mechanically affixed April 7, 20087192008–14 I.R.B. to the return, so long as that name or ti- tle was placed on the document to signify that the Internal Revenue Officer or em- ployee adopted the document as a return for the taxpayer. The document and signa- ture may be in written or electronic form. (3)Status of returns. Any return made in accordance with paragraph (b)(1) of this section and signed by the Commissioner or other authorized Internal Revenue Of- ficer or employee shall be good and suf- ficient for all legal purposes except inso- far as any Federal statute expressly pro- vides otherwise. Furthermore, the return shall be treated as the return filed by the taxpayer for purposes of determining the amount of the addition to tax under sec- tions 6651(a)(2) and (3). (4)Deficiency procedures. For defi- ciency procedures in the case of income, estate, and gift taxes, see §§6211 through 6216, inclusive, and §§301.6211–1 through 301.6215–1, inclusive. (5)Employment status procedures.For pre-assessment procedures in employment taxes cases involving worker classifica- tion, see section 7436 (proceedings for de- termination of employment status). (6)Examples. The application of this paragraph (b) is illustrated by the follow- ing examples: Example 1. Individual A, a calendar-year tax- payer, fails to file his 2003 return. Employee X, an In- ternal Revenue Service employee, opens an examina- tion related to A’s 2003 taxable year. At the end of the examination, X completes a Form 13496, “IRC Sec- tion 6020(b) Certification,” and attached to it the doc- uments listed on the form. Those documents explain examination changes and provide sufficient informa- tion to compute A’s tax liability. The Form 13496 provides that the Service employee identified on the form certifies that the attached pages constitute a re- turn under section 6020(b). When X signs the certi- fication package, the package constitutes a return un- der paragraph (b) of this section because the package identifies A by name, contains A’s taxpayer identify- ing number (TIN), has sufficient information to com- pute A’s tax liability, and contains a statement stat- ing that it constitutes a return under section 6020(b). In addition, the Service will determine the amount of the additions to tax under section 6651(a)(2) by treating the section 6020(b) return as the return filed by the taxpayer. Likewise, the Service will deter- mine the amount of any addition to tax under section 6651(a)(3), which arises only after notice and demand for payment, by treating the section 6020(b) return as thereturnfiledbythetaxpayer. Example 2. Same facts as inExample 1, except that, after performing the examination, X does not compile any examination documents together as a re- lated set of documents. X also does not sign and complete the Form 13496 nor associate the forms ex- plaining examination changes with any other docu- ment. Because X did not sign any document stating that it constitutes a return under section 6020(b) and the documents otherwise do not purport to be a sec- tion 6020(b) return, the documents do not constitute a return under section 6020(b). Therefore, the Service cannot determine the section 6651(a)(2) addition to tax against nonfiler A for A’s 2003 taxable year on the basis of those documents. Example 3. Individual C, a calendar-year tax- payer, fails to file his 2003 return. The Service deter- mines through its automated internal matching pro- grams that C received reportable income and failed to file a return. The Service, again through its automated systems, generates a Letter 2566, “30 Day Proposed Assessment (SFR–01) 910 SC/CG.” This letter con- tains C’s name, TIN, and has sufficient information to compute C’s tax liability. Contemporaneous with the creation of the Letter 2566, the Service, through its automated system, electronically creates and stores a certification stating that the electronic data contained as part of C’s account constitutes a valid return under section 6020(b) as of that date. Further, the electronic data includes the signature of the Service employee authorized to sign the section 6020(b) return upon its creation. Although the signature is stored electroni- cally, it can appear as a printed name when the Service requests a paper copy of the certification. The elec- tronically created information, signature, and certifi- cation is a return under section 6020(b). The Service will treat that return as the return filed by the taxpayer in determining the amount of the section 6651(a)(2) addition to tax with respect to C’s 2003 taxable year. Likewise, the Service will determine the amount of any addition to tax under section 6651(a)(3), which arises only after notice and demand for payment, by treating the section 6020(b) return as the return filed by the taxpayer. Example 4. Corporation M, a quarterly taxpayer, fails to file a Form 941, “Employer’s QUARTERLY Federal Tax Return,” for the second quarter of 2004. Q, a Service employee authorized to sign returns under section 6020(b), prepares a Form 941 by hand, stating Corporation M’s name, address, and TIN. Q completes the Form 941 by entering line item amounts, including the tax due, and then signs the document. The Form 941 that Q prepared and signed constitutes a section 6020(b) return because the Form 941 purports to be a return under section 6020(b), the form contains M’s name and TIN, and it includes sufficient information to compute M’s tax liability for the second quarter of 2004. (c)Cross references—(1) For provi- sions that a return executed by the Com- missioner or other authorized Internal Revenue Officer or employee will not start the running of the period of limitations on assessment and collection, see section 6501(b)(3) and §301.6501(b)–1(e). (2) For determining the period of lim- itations on collection after assessment of a liability on a return executed by the Commissioner or other authorized Internal Revenue Officer or employee, see section 6502 and §301.6502–1. (3) For additions to the tax and addi- tional amounts for failure to file returns, see section 6651 and §301.6651–1, and section 6652 and §301.6652–1, respec- tively. (4) For additions to the tax for fail- ure to pay tax, see section 6651 and §301.6651–1. (5) For criminal penalties for willful failure to make returns, see sections 7201, 7202 and 7203. (6) For criminal penalties for willfully making false or fraudulent returns, see sec- tions 7206 and 7207. (7) For civil penalties for filing frivolous income tax returns, see section 6702. (8) For authority to examine books and witnesses, see section 7602 and §301.7602–1. (d)Effective/Applicability date.This section is applicable on February 20, 2008. LindaE.Stiff, Deputy Commissioner for Services and Enforcement. Approved February 5, 2008. Eric Solomon, Assistant Secretary of theTreasury(TaxPolicy). (Filed by the Office of the Federal Register on February 19, 2008, 8:45 a.m., and published in the issue of the Federal Register f or February 20, 2008, 73 F.R. 9188) Section 6325.—Release of Lien or Discharge of Property 26 CFR 301.6325–1: Release of lien or discharge of property. T.D. 93 78 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 301 and 401 Release of Lien or Discharge of Property AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. 2008–14 I.R.B.720April 7, 2008 SUMMARY: This document contains fi- nal regulations related to release of lien and discharge of property under sections 6325, 6503, and 7426 of the Internal Rev- enue Code (Code). These regulations update existing regulations and contain procedures for processing a request made by a property owner for discharge of a Federal tax lien from his property under section 6325(b)(4). The regulations also clarify the impact of these procedures on sections 6503(f)(2) and 7426(a)(4) and (b)(5). These regulations reflect the enact- ment of sections 6325(b)(4), 6503(f)(2), and 7426(a)(4) by the IRS Restructuring and Reform Act of 1998. DATES:Effective Date:These regulations are effective January 31, 2008. Applicability Date:These regulations apply to any release of lien or discharge of property that is requested after January 31, 2008. FOR FURTHER INFORMATION CONTACT: Debra A. Kohn, (202) 622–7985 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains final regu- lations that amend the Procedure and Administration Regulations (26 CFR part 301) under sections 6325, 6503, and 7426 of the Code. The IRS Restructuring and Reform Act of 1998, Public Law 105–206 (112 Stat. 685) (RRA 1998), enacted sec- tions 6325(b)(4), 6503(f)(2), 7426(a)(4), and 7426(a)(5) to provide a statutory mechanism for a person other than the person against whom the underlying tax was assessed, upon furnishing a deposit or bond, to obtain a discharge of the Federal tax lien from property owned by him, and for the IRS or the courts to determine the disposition of the deposit or bond amount. RRA 1998 thereby necessitated changes to the rules under sections 6325, 6503, and 7426. On January 11, 2007, a notice of pro- posed rulemaking (REG–159444–04, 2007–9 I.R.B. 618) relating to release of lien or discharge of property was published in theFederal Register(72 FR 1301–03). No comments were received and no public hearing was requested or held. Accord- ingly, the proposed regulations are adopted as amended by this Treasury decision. These final regulations generally retain the provisions of the proposed regulations but include one modification as explained in more detail below. Explanation of Modification The final regulations differ substan- tively in one respect from the version of the regulations set forth in the notice of proposed rulemaking. The proposed reg- ulations interpret section 6325(b)(4)(D), which states that section 6325(b)(4)(A) is inapplicable “if the owner of the property is the person whose unsatisfied liability gave rise to the lien,” as indicating that the procedures for obtaining a discharge of a Federal tax lien under section 6325(b)(4) are not available to a person who owns the subject property withthe person whose tax liability gave rise to the lien (the taxpayer). Upon further consideration of this issue, it was decided that section 6235(b)(4)(D) should not be so interpreted, as that in- terpretation would unfairly leave some third-party property owners without a means to discharge Federal tax liens from their properties. Accordingly, the final regulations reflect an interpretation of section 6325(b)(4)(D) that makes the sec- tion 6325(b)(4) procedures available to a person who co-owns property with the taxpayer. 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, and because these regulations do not impose a collec- tion of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chap- ter 6) does not apply. Pursuant to sec- tion 7805(f) of the Code, the notice of pro- posed rulemaking preceding these regula- tions was submitted to the Chief Counsel for Advocacy of the Small Business Ad- ministration for comment on its impact on small business. Drafting Information The principal author of these regula- tions is Debra A. Kohn of the Office of the Associate Chief Counsel (Procedure and Administration). ***** Adoption of Amendments to the Regulations Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR parts 301 and 401 are amended as follows: PART 301—PROCEDURE AND ADMINISTRATION Paragraph 1. The authority citation for part 301 continues to read, in part, as fol- lows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.6325–1 is amended as follows: 1.Paragraphs (a) and (b)(1)(i), (b)(2)(i), (b)(2)(ii), and (b)(3) are revised. 2. Paragraph (b)(2)(iii) is redesignated as paragraph (b)(6) and revised. 3. Paragraph (b)(4) is redesignated as paragraph (b)(5) and revised. 4. A new paragraph (b)(4) is added. 5. Paragraphs (c)(1) and (c)(2) are amended by removing the language “dis- trict director” and adding the language “appropriate official” in its place, wher- ever it appears. 6. The first sentence of paragraph (d)(1) is amended by removing the language “A district director” and adding the language “The appropriate official” in its place, by removing the word “Code” and adding the language “Internal Revenue Code” in its place, and by removing the language “the district director” and adding the language “the appropriate official” in its place. The third sentence is amended by removing the language “a districtdirector” and adding the language “the appropriate official” in its place, and removing the language “the district director” and adding “the appropri- ate official” in its place. 7. Paragraph (d)(2)(i) is amended by re- moving the language “A district director” and adding the language “The appropriate official” in its place, by removing the word “Code” and adding the language “Internal Revenue Code” in its place, and by remov- ing the language “the district director” and April 7, 20087212008–14 I.R.B. adding the language “the appropriate offi- cial” in its place. 8. Paragraph (d)(2)(ii),Examples 1 through4, are amended by removing the language “district director” and adding the language “appropriate official” in its place, wherever it appears. 9. Paragraphs (d)(3) and (d)(4) are amended by removing the language “dis- trict director” and adding the language “appropriate official” in its place, wher- ever it appears. 10. The first sentence of paragraph (e) is amended by removing the language “a district director” andadding the language “the appropriate official” in its place, and by removing the language “the district director” and adding the language “the appropriate official” in its place. The third and fourth sentences are amended by re- moving the language “district director” and adding the language “appropriate of- ficial” in its place. 11. Paragraphs (f)(1) and (f)(2)(i) are amended by removing the language “a dis- trict director” and adding the language “the appropriate official” in its place, paragraph (f)(2)(i)(b) is amended by removing the language “the district director” and adding the language “the appropriate official” in its place, and paragraph (f)(3) is amended by removing the word “Code” and adding the language “Internal Revenue Code” in its place. 12. Paragraphs (h) and (i) are added. The revisions and additions read as fol- lows: §301.6325–1 Release of lien or discharge of property. (a)Release of lien—(1)Liability sat- isfied or unenforceable. The appropriate official shall issue acertificate of release for a filed notice of Federal tax lien, no later than 30 days after the date on which he finds that the entire tax liability listed in such notice of Federal tax lien either has been fully satisfied (as defined in para- graph (a)(4) of this section) or has become legally unenforceable. In all cases, the lia- bility for the payment of the tax continues until satisfaction of the tax in full or un- til the expiration of the statutory period for collection, including such extension of the period for collection as is agreed to. (2)Bond accepted. The appropriate of- ficial shall issue a certificate of release of any tax lien if he is furnished and accepts a bond that is conditioned upon the payment of the amount assessed (together with all interest in respect thereof), within the time agreed upon in the bond, but not later than 6 months before the expiration of the statu- tory period for collection, including any agreed upon extensions. For provisions re- lating to bonds, see sections 7101 and 7102 and §§301.7101–1 and 301.7102–1. (3)Certificate of release for a lien which has become legally unenforceable. The appropriate official shall have the au- thority to file a notice of Federal tax lien which also contains acertificate of release pertaining to those liens which become legally unenforceable. Such release will become effective as a release as of a date prescribed in the document containing the notice of Federal tax lien and certificate of release. (4)Satisfaction of tax liability.For purposes of paragraph (a)(1) of this sec- tion, satisfaction of the tax liability occurs when— (i) The appropriate official determines that the entire tax liability listed in a notice of Federal tax lien has been fully satisfied. Such determination will be made as soon as practicable after tender of payment; or (ii) The taxpayer provides the appropri- ate official with proof of full payment (as defined in paragraph (a)(5) of this section) with respect to the entire tax liability listed in a notice of Federal tax lien together with the information and documents set forth in paragraph (a)(7) of this section. See para- graph (a)(6) of this section if more than one tax liability is listed in a notice of Federal tax lien. (5)Proofoffullpayment.Asused in paragraph (a)(4)(ii)ofthissection,the termproof of full paymentmeans— (i) An internal revenue cashier’s receipt reflecting full payment of the tax liability in question; (ii) A canceled check in an amount suf- ficient to satisfy the tax liability for which the release is being sought; (iii) A record, made in accordance with procedures prescribed by the Com- missioner, of proper payment of the tax liability by credit or debit card or by elec- tronic funds transfer; or (iv) Any other manner of proof accept- able to the appropriate official. (6)Notice of a Federal tax lien which lists multiple liabilities. When a notice of Federal tax lien lists multiple tax liabilities, the appropriate official shall issue a certifi- cate of release when all of the tax liabilities listed in the notice of Federal tax lien have been fully satisfied or have become legally unenforceable. In addition, if the taxpayer requests that a certificate of release be is- sued with respect to one or more tax lia- bilities listed in the notice of Federal tax lien and such liability has been fully satis- fied or has become legally unenforceable, the appropriate official shall issue a certifi- cate of release. For example, if a notice of Federal tax lien lists two separate liabili- ties and one of the liabilities is satisfied, the taxpayer may request the issuance of a certificate of release with respect to the sat- isfied tax liability and the appropriate offi- cial shall issue a release. (7)Taxpayer requests. A request for a certificate of release with respect to a no- tice of Federal tax lien shall be submitted in writing to the appropriate official. The request shall contain the information re- quired in the appropriate IRS Publication. (b)Dischargeofspecificpropertyfrom the lien—(1)Property double the amount of the liability. (i) The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property sub- ject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code if he determines that the fair market value of that part of the property remaining sub- ject to the Federal tax lien is at least double the sum of the amount of the unsatisfied li- abilitysecuredbytheFederaltaxlienand of the amount of all other liens upon the property which have priority over the Fed- eral tax lien. In general, fair market value is that amount which one ready and willing but not compelled to buy would pay to an- other ready and willing but not compelled to sell the property. ***** (2)Part payment; interest of United States valueless—(i)Part payment.The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to a Federal tax lien imposed under chapter 64 of the In- ternal Revenue Code if there is paid over to him in partial satisfaction of the liability secured by the Federal tax lien an amount determined by him to be not less than the value of the interest of the United States in thepropertytobesodischarged.Indeter- 2008–14 I.R.B.722April 7, 2008 mining the amount to be paid, the appropri- ate official will take into consideration all the facts and circumstances of the case, in- cluding the expenses to which the govern- ment has been put in the matter. In no case shall the amount to be paid be less than the value of the interest of the United States in the property with respect to which the cer- tificate of discharge is to be issued. (ii)Interest of the United States value- less. The appropriate official may, in his discretion, issue a certificate of discharge of any part of the property subject to the Federal tax lien if he determines that the interest of the United States in the property to be so discharged has no value. (3)Discharge of property by substitu- tion of proceeds of sale. The appropri- ate official may, in his discretion, issue a certificate of discharge of any part of the property subject to a Federal tax lien imposed under chapter 64 of the Internal Revenue Code if such part of the property is sold and, pursuant to a written agree- ment with the appropriate official, the pro- ceeds of the sale are held, as a fund sub- ject to the Federal tax liens and claims of the United States, in the same manner and with the same priority as the Federal tax liens or claims had with respect to the dis- charged property. This paragraph does not apply unless the sale divests the taxpayer of all right, title, and interest in the prop- erty sought to be discharged. Any rea- sonable and necessary expenses incurred in connection with the sale of the prop- erty and the administration of the sale pro- ceeds shall be paid by the applicant or from the proceeds of the sale before satisfaction of any Federal tax liens or claims of the United States. (4)Right of substitution of value—(i) Issuance of certificate of discharge to property owner who is not the taxpayer. If an owner of property subject to a Fed- eral tax lien imposed under chapter 64 of the Internal Revenue Code submits an application for a certificate of discharge pursuant to paragraph (b)(5) of this sec- tion, the appropriate official shall issue a certificate of discharge of such property after the owner either deposits with the appropriate official an amount equal to the value of the interest of the United States in the property, as determined by the appro- priate official pursuant to paragraph (b)(6) of this section, or furnishes an acceptable bond in a like amount. This paragraph does not apply if the person seeking the discharge is the person whose unsatisfied liability gave rise to the Federal tax lien. Thus, if the property is owned by both the taxpayer and another person, the other per- son may obtain a certificate of discharge of the property under this paragraph, but the taxpayer may not. (ii)Refund of deposit and release of bond. The appropriate official may, in his discretion, determinethat either the entire unsatisfied tax liability listed on the notice of Federal tax lien can be satisfied from a source other than the property sought to be discharged, or the value of the interest of the United States is less than the prior de- termination of such value. The appropriate official shall refund the amount deposited with interest at the overpayment rate de- termined under section 6621 or release the bond furnished to the extent that he makes this determination. (iii)Refund request. If a property owner desires an administrative refund of his de- posit or release of the bond, the owner shall file a request in writing with the appropri- ate official. The request shall contain such information as the appropriate IRS Publi- cation may require. The request must be filed within 120 days after the date the cer- tificate of discharge is issued. A refund re- quest made under this paragraph neither is required nor is effective to extend the pe- riod for filing an action in court under sec- tion 7426(a)(4). (iv)Internal Revenue Service’s use of deposit if court action not filed.Ifno action is filed under section 7426(a)(4) for refund of the deposit or release of the bond within the 120-day period speci- fied therein, the appropriate official shall, within 60 days after the expiration of the 120-day period, apply the amount de- posited or collect on such bond to the extent necessary to satisfy the liability listed on the notice of Federal tax lien, and shall refund, with interest at the overpay- ment rate determined under section 6621, any portion of the amount deposited that is not used to satisfy the liability. If the appropriate official has not completed the application of the deposit to the unsatis- fied liability before the end of the 60-day period, the deposit will be deemed to have been applied to the unsatisfied liability as of the 60 th day. (5)Application for certificate of dis- charge. Any person desiring a certificate of discharge under this paragraph (b) shall submit an application in writing to the ap- propriate official. The application shall contain the information required by the ap- propriate IRS Publication. For purposes of this paragraph (b), any application for certificate of discharge made by a prop- erty owner who is not the taxpayer, and any amount submitted pursuant to the ap- plication, will be treated as an application for discharge and a deposit under section 6325(b)(4) unless the owner of the prop- erty submits a statement, in writing, that the application is being submitted under another paragraph of section 6325 and not under section 6325(b)(4), and the owner in writing waives the rights afforded un- der paragraph (b)(4), including the right to seek judicial review. (6)Valuation of interest of United States. For purposes of paragraphs (b)(2) and (b)(4) of this section, in determining the value of the interest of the United States in the property, or any part thereof, with respect to which the certificate of discharge is to be issued, the appropriate official shall give consideration to the value of the property and the amount of all liens and encumbrances thereon hav- ing priority over the Federal tax lien. In determining the value of the property, the appropriate official may, in his discretion, give consideration to the forced sale value of the property in appropriate cases. ***** (h) As used in this section, the termap- propriate officialmeans either the official or office identified in the relevant IRS Pub- lication or, if such official or office is not so identified, the Secretary or his delegate. (i)Effective/applicability date.This section applies to any release of lien or discharge of property that is requested after January 31, 2008. Par. 3. Section 301.6503(f)–1 is amended as follows: 1. The section heading is revised. 2. The undesignated paragraph is des- ignated as paragraph (a), a paragraph head- ing is added, and a new sentence is added immediately prior to theExample. 3. In newly designated paragraph (a), the language “a district director” is re- moved and the language “the appropri- ate official” is added in its place, the lan- guage “the district director” is removed and the language “the appropriate official” April 7, 20087232008–14 I.R.B. is added in its place, and in theExample the language “district director” is removed and the language “appropriate official” is added in its place, wherever it appears. 4. Paragraphs (b), (c), and (d) are added. The revisions and additions read as fol- lows: §301.6503(f)–1 Suspension of running of period of limitation; wrongful seizure of property of third-party owner and discharge of lien for substitution of value. (a)Wrongful seizure. ***Thefol- lowing example illustrates the principles of this section: ***** (b)Discharge of wrongful lien for sub- stitution of value. If a person other than the taxpayer submits a request in writing for a certificate of discharge for a filed Federal tax lien under section 6325(b)(4), the running of the period of limitations on collection after assessment under section 6502 for any liability listed in such notice of Federal tax lien shall be suspended for a period equal to the period beginning on the date the appropriate official receives a deposit or bond in the amount specified in §301.6325–1(b)(4)(i) and ending on the date that is 30 days after the earlier of— (1) The date the appropriate official no longer holds, or isdeemed to no longer hold, within the meaning of paragraph (b)(4)(iv) of this section, any amount as a deposit or bond by reason of taking such actions as prescribed in sections 6325(b)(4)(B) and (C); or (2) The date the judgment secured un- der section 7426(b)(5) becomes final. (c) As used in this section, the termap- propriate officialmeans either the official or office identified in the relevant IRS Pub- lication or, if such official or office is not so identified, the Secretary or his delegate. (d)Effective/applicability date.This section applies to any request for a certifi- cate of discharge made after January 31, 2008. Par. 4. In §301.7426–1, paragraphs (a)(4), (b)(5), and (d) are added. §301.7426–1 Civil actions by persons other than taxpayers. (a) * * * (4)Substitution of value. A person who obtains a certificate of discharge under sec- tion 6325(b)(4) with respect to any prop- erty may, within 120 days after the day on which the certificate is issued, bring a civil action against the United States in a district court of the United States for a determi- nation of whether the value of the interest of the United States (if any) in such prop- erty is less than the value determined by the appropriate official. A civil action un- der this provision shall be the exclusive ju- dicial remedy for a person other than the taxpayer who obtains a certificate of dis- charge for a filed notice of Federal tax lien. (b) * * * (5)Substitution of value. If the court de- termines that the determination by the ap- propriate official of the value of the inter- est of the United States in the property ex- ceeds the actual value of such interest, the court may grant a judgment ordering a re- fund of the amount deposited, or a release of the bond, to the extent that the aggregate of those amounts exceeds the value as de- termined by the court. ***** (d) Paragraphs (a)(4) and (b)(5) of this section apply to any request for a certifi- cate of discharge made after January 31, 2008. PART 401—[REMOVED] Par. 5. Part 401 is removed. LindaE.Stiff, Deputy Commissioner for Services and Enforcement. Approved January 9, 2008. Eric Solomon, Assistant Secretary of theTreasury(TaxPolicy). (Filed by the Office of the Federal Register on January 30, 2008, 8:45 a.m., and published in the issue of the Federal Register for January 31, 2008, 73 F.R. 5741) Section 7520.—Valuation Tables The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of April 2008. See Rev. Rul. 2008-20, page 716. 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 April 2008. See Rev. Rul. 2008-20, page 716. 2008–14 I.R.B.724April 7, 2008 Part III. Administrative, Procedural, and Miscellaneous Amplification of Notice 2006–52; Deduction for Energy Efficient Commercial Buildings Notice 2008–40 SECTION 1. PURPOSE This notice clarifies and amplifies No- tice 2006–52, 2006–1 C.B. 1175. No- tice 2006–52 provides a process that al- lows a taxpayer who owns a commercial building and installs property as part of the commercial building’s interior light- ing systems, heating, cooling, ventilation, and hot water systems, or building enve- lope to obtain a certification that the prop- erty satisfies the energy efficiency require- ments of § 179D(c)(1) and (d) of the Inter- nal Revenue Code. Notice 2006–52 also provides for a public list of software pro- grams that may be used in calculating en- ergy and power consumption for purposes of § 179D. This notice sets forth additional guid- ance relating to the deduction for energy efficient commercial buildings under § 179D and is intended to be used with No- tice 2006–52. Any reference in this notice to Standard 90.1–2001 should be treated as a reference to ANSI/ASHRAE/IESNA Standard 90.1–2001, Energy Standard for Buildings Except Low-Rise Residential Buildings, developed for the American National Standards Institute by the Amer- ican Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America (as in effect on April 2, 2003, in- cluding addenda 90.1a–2003, 90.1b–2002, 90.1c–2002, 90.1d–2002, and 90.1k–2002 as in effect on that date). SECTION 2. BACKGROUND Section 1331 of the Energy Policy Act of 2005, Pub. L. No. 109–58, 119 Stat. 594 (2005), enacted § 179D of the Code, which provides a deduction with respect to energy efficient commercial buildings. Section 204 of the Tax Relief and Health Care Act of 2006, Pub. L. No. 109–432, 120 Stat. 2922 (2006), extends the § 179D deduction through December 31, 2008. Section 179D(a) allows a deduction to a taxpayer for part or all of the cost of en- ergy efficient commercial building prop- erty that the taxpayer places in service af- ter December 31, 2005, and before January 1, 2009. Sections 179D(d)(1) and 179D(f) allow a deduction to a taxpayer for part or all of the cost of certain partially qual- ifying commercial building property that the taxpayer places in service after Decem- ber 31, 2005, and before January 1, 2009. Partially qualifying commercial building property is property that would be energy efficient commercial building property but for the failure to achieve the 50-percent re- duction in energy and power costs required under § 179D(c)(1)(D). SECTION 3. SPECIAL RULE FOR GOVERNMENT-OWNED BUILDINGS .01In General. In the case of energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under § 179D) that is installed on or in property owned by a Federal, State, or lo- cal government or a political subdivision thereof, the owner of the property may al- locate the § 179D deduction to the per- son primarily responsible for designing the property (the designer). If the allocation of a § 179D deduction to a designer satisfies the requirements of this section, the deduc- tionwillbeallowedonlytothatdesigner. The deduction will be allowed to the de- signer for the taxable year that includes the date on which the property is placed in ser- vice. .02Designer of Government-Owned Buildings. A designer is a person that creates the technical specifications for in- stallation of energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under § 179D). A designer may include, for example, an ar- chitect, engineer, contractor, environmen- tal consultant or energy services provider who creates the technical specifications foranewbuildingoranadditiontoan existing building that incorporates energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under § 179D). A person that merely in- stalls, repairs, or maintains the property is not a designer. .03Allocation of the Deduction.If more than one designer is responsible for creating the technical specifications for installation of energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under § 179D) on or in a government-owned building, the owner of the building shall— (1) determine which designer is primar- ily responsible and allocate the full deduc- tion to that designer, or (2) at the owner’s discretion, allocate the deduction among several designers. .04Form of Allocation. An allocation of the § 179D deduction to the designer of a government-owned building must be in writing and will be treated as satisfying the requirements of this section with re- spect to energy efficient commercial build- ing property (or partially qualifying com- mercial building property for which a de- duction is allowed under § 179D) if the al- location contains all of the following: (1) The name, address, and telephone number of an authorized representative of the owner of the government-owned build- ing; (2) The name, address, and telephone number of an authorized representative of the designer receivingthe allocation of the § 179D deduction; (3) The address of the govern- ment-owned building on or in which the property is installed; (4) The cost of the property; (5) The date the property is placed in service; (6) The amount of the § 179D deduction allocated to the designer; (7) The signatures of the authorized representatives of both the owner of the government-owned building and the de- signer or the designer’s authorized repre- sentative; and (8) A declaration, applicable to the allo- cation and any accompanying documents, signed by the authorized representative of the owner of the government-owned build- ing, in the following form: “Under penalties of perjury, I declare that I have examined this allocation, in- April 7, 20087252008–14 I.R.B. cluding accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this allocation are true, correct, and com- plete.” .05Obligations of Designer.Before a designer may claim the § 179D deduc- tion with respect to property installed on or in a government-owned building, the designer must obtain the written alloca- tion described in section 3.04. A designer is not required to attach the allocation to the return on which the deduction is taken. However, § 1.6001–1(a) of the Income Tax Regulations requires that taxpayers main- tain such books and records as are suffi- cient to establish the entitlement to, and amount of, any deduction claimed by the taxpayer. Accordingly, a designer claim- ing a deduction under § 179D should re- tain the allocation as part of the taxpayer’s records for purposes of § 1.6001–1(a) of the Income Tax Regulations. .06Tax Consequences to Designer of Government-Owned Buildings. The maxi- mum amount of the § 179D deduction to be allocated to the designer is the amount of the costs incurred by the owner of the gov- ernment-owned building to place the en- ergy efficient commercial building prop- erty in service. A partial deduction may be allocated and computed in accordance with the procedures set forth in sections 2 and 3 of Notice 2006–52. The designer does not include any amount in income on account of the § 179D deduction allocated to the designer. In addition, the designer is not required to reduce future deductions by an amount equal to the § 179D deduction allocated to the designer. Although reduc- ing future deductions in this manner would provide equivalent treatment for designers that are allocated a § 179D deduction and building owners that are required to reduce the basis of their energy efficient commer- cial building property by the amount of the § 179D deduction they claim, § 179D does not provide for any reductions other than reductions to the basis of the energy effi- cient commercial building property. .07Tax Consequences to Owner of Public Building. The owner of the pub- lic building is not required to include any amount in income on account of the § 179D deduction allocated to the de- signer. The owner of the public building is, however, required to reduce the basis of the energy efficient commercial building property (or partially qualifying commer- cial building property) by the amount of the § 179D deduction allocated. SECTION 4. LIST OF APPROVED SOFTWARE PROGRAMS .01In General. The Department of En- ergy creates and maintains a public list of software that may be used to calculate en- ergy and power consumption and costs for purposes of providing a certification under section 4 of Notice 2006–52. This public list appears athttp://www.eere.energy.gov/ buildings/info/tax_incentives.html.Soft- ware will be included on the list if the software developer submits the following information to the Department of Energy: (1) The name, address, and (if applica- ble) web site of the software developer; (2) The name, email address, and tele- phone number of the person to contact for further information regarding the soft- ware; (3) The name, version, or other identi- fier of the software as it will appear on the list; (4) All test results, input files, output files, weather data, modeler reports, and theexecutableversionofthesoftwarewith which the tests were conducted; and (5) A declaration by the developer of the software made under penalties of per- jury and containing all of the following in- formation: (a) A statement that the software has been tested according to the American Na- tional Standards Institute/American Soci- ety of Heating, Refrigerating and Air-Con- ditioning Engineers (ANSI/ASHRAE) Standard 140–2007 Standard Method of Test for the Evaluation of Building Energy Analysis Computer Programs. (b) A statement that the software can model explicitly— (i) 8,760 hours per year; (ii) Calculation methodologies for the building components being modeled; (iii) Hourly variations in occupancy, lighting power, miscellaneous equipment power, thermostat setpoints, and HVAC system operation, defined separately for each day of the week and holidays; (iv) Thermal mass effects; (v) Ten or more thermal zones; (vi) Part-load performance curves for mechanical equipment; (vii) Capacity and efficiency correction curves for mechanicalheating and cooling equipment; and (viii) Air-side and water-side econo- mizers with integrated control. (c) A statement that the software can ex- plicitly model each of the following HVAC systems listed in Appendix G of Standard 90.1–2004: (i) Packaged Terminal Air Conditioner (PTAC) (air source), single-zone package (through the wall), multi-zone hydronic loop, air-to-air DX coil cooling, central boiler, hot water coil. (ii) Packaged Terminal Heat Pump (PTHP) (air source), single-zone pack- age (through the wall), air-to-air DX coil heat/cool. (iii) Packaged Single Zone Air Condi- tioner (PSZ-AC), single-zone air, air-to-air DX coil cool, gas coil, constant-speed fan. (iv) Packaged Single Zone Heat Pump (PSZ-HP), single-zone air, air-to-air DX coil cool/heat, constant-speed fan. (v) Packaged Variable-Air-Volume (PVAV) with reheat, multi-zone air; multi-zone hydronic loop, air-to-air DX coil, VAV fan, boiler, hot water VAV ter- minal boxes. (vi) Packaged Variable-Air-Volume with parallel fan powered boxes (PVAV with PFP boxes), multi-zone air, DX coil, VAV fan, fan-powered induction boxes, electric reheat. (vii) Variable-Air-Volume (VAV) with reheat, multi-zone air, multi-zone hy- dronic loop, air-handling unit, chilled water coil, hot water coil, VAV fan, chiller, boiler, hot water VAV boxes. (viii) Variable-Air-Volume with par- allel fan powered boxes (VAV with PFP boxes), multi-zone air, air-handling unit, chilled water coil, hot water coil, VAV fan, chiller, fan-powered induction boxes, electric reheat. (d) A statement that the software can— (i) Either directly determine energy and power costs or produce hourly reports of energy use by energy source suitable for determining energy and power costs sepa- rately; and (ii) Design load calculations to deter- mine required HVAC equipment capacities and air and water flow rates. (e) A statement describing which, if any, of the following the software can ex- plicitly model: (i) Natural ventilation. 2008–14 I.R.B.726April 7, 2008 (ii) Mixed mode (natural and mechani- cal) ventilation. (iii) Earth tempering of outdoor air. (iv) Displacement ventilation. (v) Evaporative cooling. (vi) Water use by occupants for cook- ing, cleaning or other domestic uses. (vii) Water use by heating, cooling, or other equipment, or for on-site landscap- ing. (viii) Automatic interior or exterior lighting controls (such as occupancy, pho- tocells, or time clocks). (viii) Daylighting (sidelighting, sky- lights, or tubular daylight devices). (ix) Improved fan system efficiency through static pressure reset. (x) Radiant heating or cooling (low or high temperature). (xi) Multiple or variable speed control for fans, cooling equipment, or cooling towers. (xii) On-site energy systems (such as combined heat and power systems, fuel cells, solar photovoltaic, solar thermal, or wind). .02Addresses. Submissions under this section must be addressed as follows: Commercial Software List Department of Energy Office of Building Technologies, EE–2J 1000 Independence Ave., SW Washington, DC 20585–0121 .03Updated Lists. The software list athttp://www.eere.energy.gov/ buildings/info/tax_incentives.htmlwill be updated as necessary to reflect submissions received under this section. .04Removal from Published List.The Department of Energy may, upon exami- nation, determine that software is not suf- ficiently accurate to justify its use in calcu- lating energy and power consumption and costs for purposes of providing a certifica- tion under section 4 of Notice 2006–52 and remove the software from the published list. The Department of Energy may un- dertakesuchanexaminationonitsown initiative or in response to a public request supported by appropriate analysis of the software’s deficiencies. .05Effect of Removal from Published List. Software may not be used to calcu- late energy and power consumption and costs for purposes of providing a certifi- cation with respect to property placed in service after the date on which the soft- ware is removed from the published list. The removal will not affect the validity of any certification with respect to property placed in service on or before the date on which the software is removed from the published list. .06Public Availability of Information. The Department of Energy may make all information provided under paragraph .01 of this section available for public review. .07Applicability. The procedures in this section supersede the procedures set forth in section 6 of Notice 2006–52 for periods after March 31, 2008. Any soft- ware that is included on the public list on March 31, 2008, will remain on the pub- lic list unless and until removed under the procedures set forth in this section. SECTION 5. CERTIFICATION REQUIREMENTS FOR INTERIM LIGHTING RULE .01In General. Section 2.03(1)(b) of Notice 2006–52 provides an interim rule under which partially qualifying prop- erty is treated as energy efficient lighting property (the Interim Lighting Rule). Be- fore a taxpayer may claim the § 179D deduction under the Interim Lighting Rule with respect to energy efficient lighting property installed on or in a commercial building, the taxpayer must obtain a cer- tification with respect to the property. Thecertificationmustbeprovidedbya qualified individual. Section 4 of Notice 2006–52 provides that the certification must include a statement that qualified computer software was used to calculate energy and power consumption and costs. That section also provides that the cer- tification must include a statement that the building owner has received an expla- nation of projected annual energy costs. These requirements are appropriate only in the case of certifications that involve calculations of energy and power con- sumption and cost. The Interim Lighting Rule is satisfied by a reduction in lighting power density and such a reduction may be computed using a spreadsheet or other similar software. This computation does not require qualified computer software to model the entire building system or a determination of projected annual energy costs. Accordingly, the requirements of section 4 of Notice 2006–52 do not apply to certifications under the Interim Lighting Rule. .02Applicable Requirements.Atax- payer is not required to attach the certifi- cation to the return on which the deduction is taken. However, § 1.6001–1(a) of the Income Tax Regulations requires that tax- payers maintain such books and records as are sufficient to establish the entitle- ment to, and amount of, any deduction claimed by the taxpayer. Accordingly, a taxpayer claiming a deduction under § 179D should retain the certification as part of the taxpayer’s records for pur- poses of § 1.6001–1(a) of the Income Tax Regulations. The qualified individual pro- viding a certification under the interim rule must document a reduction in lighting power density in a thorough and consistent manner. A certification under the Interim Lighting Rule will be treated as satisfying the requirements of § 179D(c)(1) if the certification contains all of the following: (1) The name, address, and telephone number of the qualified individual; (2) The address of the building to which the certification applies; (3) A statement by the qualified individ- ual that the interior lighting systems that have been, or are planned to be, incorpo- rated into the building— (a) Achieve a reduction in lighting power density of at least 25 percent (50 percent in the case of a warehouse) of the minimum requirements in Table 9.3.1.1 or Table 9.3.1.2 (not including additional interior lighting power allowances) of Standard 90.1–2001; (b) Have controls and circuiting that comply fully with the mandatory and prescriptive requirements of Standard 90.1–2001; (c) Include provision for bi-level switching in all occupancies except hotel and motel guest rooms, store rooms, re- strooms, public lobbies, and garages; and (d) Meet the minimum requirements for calculated lighting levels as set forth in the IESNA Lighting Handbook, Performance and Application, Ninth Edition, 2000; (4) A statement by the qualified individ- ual that— (a) Field inspections of the building were performed by a qualified individual after the energy efficient lighting property has been placed in service; April 7, 20087272008–14 I.R.B. (b) The field inspections confirmed that the building has met, or will meet, the re- duction in lighting power density required by the design plans and specifications; and (c) The field inspections were per- formed in accordance with inspection and testing procedures that— (i) Have been prescribed by the Na- tional Renewable Energy Laboratory (NREL) as Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deduction; and (ii) Are in effect at the time the certifi- cation is given; (5) A list identifying the components of the energy efficient lighting property in- stalled on or in the building, the energy efficiency features of the building, and its projected lighting power density; (6) A statement that the building owner has received an explanation of the energy efficiency featuresof the building and its projected lighting power density; (7) A declaration, applicable to the certification and any accompanying docu- ments, signed by the qualified individual, in the following form: “Under penalties of perjury, I declare that I have examined this certification, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete.” SECTION 6. APPLICATION OF THE INTERIM LIGHTING RULE TO UNCONDITIONED GARAGE SPACE For purposes of the Interim Lighting Rule, the definition of a Building within the Scope of Standard 90.1–2001 (found in Section 5.01 of Notice 2006–52) is ex- panded to include a structure that— (1) Encloses space affording shelter to persons, animals, or property within ex- terior walls (or within exterior and party walls) and a roof; (2) Is not a single-family house, a multi- family structure of three stories or fewer above grade, a manufactured house (mo- bile home), or a manufactured house (mod- ular); and (3) Is unconditioned attached or de- tached garage space as referenced by Tables 9.3.1.1 and 9.3.1.2 of Standard 90.1–2001. SECTION 7. CHANGES RELATING TO PARTIALLY QUALIFYING PROPERTY .01Energy Savings Percentages.A taxpayer may apply section 2.05 of Notice 2006–52 by substituting “10” for “16 2 /3” in section 2.05(1) of such notice. If a taxpayer makes this substitution, the tax- payer must apply sections 2.03 and 2.04 of Notice 2006–52 by substituting “20” for “16 2 /3” in sections 2.03(1)(a) and 2.04(1) of such notice. If § 179D is extended beyond December 31, 2008, the Internal Revenue Service and the Treasury De- partment expect, in the absence of other changes to § 179D, that the substitute per- centages set forth in this section will be the only percentages used in determining whether property placed in service after December 31, 2008, is partially qualifying property. .02Limitation on Deduction for Par- tially Qualifying Property. (1)In General. If property installed on or in a building is treated as partially qual- ifying property under sections 2.03, 2.04, and 2.05 of Notice 2006–52, the deduction for the cost of such property shall not ex- ceed the greatest of the following amounts: (a) The sum of the deductions allowable under sections 2.03 and 2.04 of such no- tice; (b) The sum of the deductions allowable under sections 2.04 and 2.05 of such no- tice; or (c) The sum of the deductions allowable under sections 2.03 and 2.05 of such no- tice. (2)Application to Multiple Taxpayers. If two or more taxpayers install property on or in the same building and the deduc- tion for the cost of the property is subject to the limitation in section 7.02(1) of this no- tice, the aggregate amount of the § 179D deductions allowed to all such taxpayers with respect to the building shall not ex- ceed the amount determined under section 7.02(1) of this notice. SECTION 8. PAPERWORK REDUCTION ACT The collections of information con- tained in this notice have been reviewed and approved by the Office of Manage- ment and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–2004. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number. The collections of information are in sections 4 and 6 of Notice 2006–52 and sections 4 and 5 of this notice. This in- formation is required to be collected and retained in order to ensure that energy efficient commercial building property meets the requirements for the deduction under § 179D. This information will be used to determine whether commercial building property for which certifications are provided is property that qualifies for the deduction. The collection of information is re- quired to obtain a benefit. The likely respondents are two groups: qualified individuals providing a certifica- tion under § 179D (section 4 of Notice 2006–52 and section 5 of this notice) and software developers seeking to have soft- ware included on the public list created by the Department of Energy (section 6 of No- tice 2006–52 and section 4 of this notice). For qualified individuals providing a certification under § 179D, the likely re- spondents are individuals. The likely num- ber of certifications is 20,000. The esti- mated burden per certification ranges from 15 to 30 minutes with an estimated average burden of 22.5 minutes. The estimated to- tal annual reporting burden is 7,500 hours. For software developers seeking to have software included on the public list created by the Department of Energy, the likely respondents are individuals, corpo- rations and partnerships. The estimated total annual reporting burden is 75 hours. The estimated annual burden per respon- dent varies from 1 to 2 hours, depending on individual circumstances, with an es- timated average burden of 1 1 /2hours to completethesubmissionrequiredtohave thesoftwareaddedtothepubliclist. The estimated number of respondents is 50. The estimated frequency of responses is once. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and tax return 2008–14 I.R.B.728April 7, 2008 information are confidential, as required by 26 U.S.C. 6103. SECTION 9. DRAFTING INFORMATION The principal author of this notice is Jennifer C. Bernardini of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further in- formation regarding this notice, contact Jennifer C. Bernardini at (202) 622–3110 (not a toll-free call). April 7, 20087292008–14 I.R.B. Part IV. Items o fGeneralInterest Notice of Prop osed Rulemaking by Cross-Refere nce to Temporary Re gulation Time and Mann er for Electing Capital Asse tTreatmentfor Certain Sel f-Created Musical Works REG–153589 –06 AGENCY: In ternal Revenue Service (IRS), Tre asury. ACTION: No tice of proposed rulemaking by cross-r eference to temporary regula- tion. SUMMARY: I n this issue of the Bulletin, the IRS is i ssuing a temporary regulation (T.D. 937 9) that provides the time and manner fo rmakinganelectiontotreatthe sale or ex change of musical compositions or copyri ghts in musical works created by the taxpa yer (or received by the taxpayer from the works’ creator in a transferred basis tr ansaction) as the sale or exchange of a capi tal asset. The temporary regula- tion ref lects changes to the law made by the Tax I ncrease Prevention and Recon- ciliat ion Act of 2005 and the Tax Relief and Hea lth Care Act of 2006. The tem- porary regulation affects taxpayers making the ele ction under section 1221(b)(3) of the Intern al Revenue Code (Code) to treat gain or los s from such a sale or exchange as capit al gain or loss. The text of the tem- porar y regulation also serves as the text of this p roposed regulation. DATES : Written or electronic comments and re quests for a public hearing must be rece ived by May 8, 2008. ADDR ESSES: Send submissions to: CC:P A:LPD:PR(REG–153589–06), room 5203, Internal Revenue Service, PO Box 7 604, Ben Franklin Station, Wash- ingt on, D.C. 20044. Submissions may be hand delivered Monday through Friday bet ween the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–153589–06), Cou rier’s Desk, Internal Revenue Ser vice, 1111 Constitution Avenue, N.W., Washington, D .C., or sent electronically viatheFedera leRulemaking Portal atwww. regulations.gov(IRS REG–153589–0 6). FOR FURTHER IN FORMATION CONTACT: Conc erning the pro- posed regula tion, Jamie Kim, (202) 622–4950; co ncerning submission of comments or r equesting a hearing, Richard.A.H urst@irscounsel.treas.gov, (202) 622–7 180 (not toll-free numbers). SUPPLEMENT ARY INFORMATION: Background and Explanation of Provisions Temporary r egulation in this issue of the Bulleti n amends the Income Tax Reg- ulations (2 6 CFR Part 1) relating to sec- tion 1221( b)(3) of the Internal Revenue Code (Code ). The temporary regulation provides r ules regarding the time and man- ner for mak ing an election under section 1221(b)(3 ) to treat the sale or exchange of certai n musical compositions or copy- rights in musical works as the sale or ex- change of a capital asset. The text of the temporar y regulation also serves as the text of this p roposed regulation. The preamble to the te mporary regulation explains the amendme nts. Special Analyses It has be en determined that this notice of propo sed rulemaking is not a significant regulat ory action as defined in Executive Order 12 866. Therefore,a regulatory as- sessme nt is not required. It also has been determ ined that section 553(b) of the Ad- minist rative Procedure Act (5 U.S.C. chap- ter 5) d oes not apply to this regulation, and becaus e the regulation does not impose a colle ction of information on small entities, the Re gulatory Flexibility Act (5 U.S.C. chapt er 6) does not apply. Pursuant to sec- tion 7 805(f) of the Internal Revenue Code, this r egulation has been submitted to the Chie f Counsel for Advocacy of the Small Busi ness Administration for comment on its i mpact on small business. Comments and R equests for a Public Hearing Before this proposed regulation is adopted as a final regulation, considera- tion will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clar- ity of the proposed rules and how they can be made easier to understand. All comments will be available for public in- spection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is sched- uled, notice of the date, time, and place for the public hearing will be published in the Federal Register. Drafting Information The principal author of these regula- tions is Jamie Kim of the Office of As- sociate Chief Counsel (Income Tax & Ac- counting). However, other personnel from the IRS and Treasury Department partici- pated in their development. ***** Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1221–3 is added to read as follows: §1.1221–3 Time and manner for electing capital asset treatment for certain self-created musical works. [The text of proposed §1.1221–3 is the same as the text of §1.1221–3T(a) through (d)(1) published elsewhere in this issue of the Bulletin.] Linda E. Stiff, Deput y Commissioner for Serv ices and Enforcement. 2008–14 I.R.B.730April 7, 2008 (Filed by the Office of the Federal Register on February 7, 2008, 8:45 a.m., and published in the issue of the Federal Register for February 8, 2008, 73 F.R. 7503) Issuance of Opinion and Advisory Letters and Opening of the EGTRRA Determination Letter Program for Pre-Approved Defined Contribution Plans Announcement 2008–23 The Service will soon issue opinion and advisory letters for pre-approved (i.e., master and prototype (M&P) and volume submitter (VS)) definedcontribution plans that were timely filed with the Service to comply with the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107–16, (“EGTRRA”) and other changes in plan qualification requirements listed in Notice 2004–84, 2004–2 C.B. 1030 (“the 2004 Cumulative List”). The Service expects to issue the letters on March 31, 2008, or, in some cases, as soon as possible thereafter. Employers using these pre-approved plan documents to restate a plan for EGTRRA will be re- quired to adopt the EGTRRA-approved plan document by April 30, 2010. The Service will accept applications for indi- vidual determination letters submitted by adopters of these pre-approved plans start- ing on May 1, 2008. This announcement describes certain changes to the determi- nation letter application procedures for pre-approved plans that will simplify the application process for many applicants, and it informs plan sponsors that revised application forms for these plans will be available in the near future. Background Rev. Proc. 2007–44, 2007–28, I.R.B. 54, and Rev. Proc. 2005–16, 2005–1 C.B. 674, describe a staggered remedial amend- ment system for plans that are qualified under § 401(a) of the Internal Revenue Code, with five-year amendment/approval cycles for individually designed plans and six-year cycles for pre-approved plans. The submission period for the initial cy- cle for pre-approved defined contribution plans was February 17, 2005, through Jan- uary 31, 2006. Sponsors and practitioners were required to restate their pre-approved defined contribution plans for EGTRRA and the 2004 Cumulative List and apply for new opinion or advisory letters during this submission period. Section 16.03 of Rev. Proc. 2007–44 provides that when the review of a cycle for pre-approved plans has neared comple- tion, the Service will publish an announce- ment providing the date by which adopting employers must adopt the newly approved plans. This date is intended to give adopt- ing employers a window of approximately two years in which to adopt the plans. Procedures for filing determination let- ter applications are contained in Rev. Proc. 2008–6, 2008–1 I.R.B. 192. Section 6.05 of Rev. Proc. 2008–6 requires a determi- nation letter application to include a copy of the plan’s signed and dated timely good faith EGTRRA amendments, interim and other plan amendments. These documents are in addition to the restated plan or, in the case of M&P and certain VS plans, the completed adoption agreement. In general, an application for an indi- vidual determination letter on a pre-ap- proved plan is to be filed on Form 5307, Application forDetermination for Adopters of Master or Prototype or Volume Submitter Plans. These applications will be reviewed on the basis of the Cumula- tive List of Changes in Plan Qualification Requirements that was used to review the underlying pre-approved plan, that is, the 2004 Cumulative List in the case of an application filed for the cycle that includes the pre-approved plan submission period that ended on January 31, 2006. In certain circumstances, however, an application for an individual determination letter on a pre-approved plan is to be filed on Form 5300,Application for Determina- tion for Employee Benefit Plan,ratherthan Form 5307. These circumstances include the following: (1) where the adopter of an M&P plan amends the basic plan docu- ment or adoption agreement, other than by choosing among options permitted under the plan or amending the plan in the man- ner described in sections 5.02 and 19.03 of Rev. Proc. 2005–16; (2) where the adopter of a VS plan makes changes to the pre-ap- proved plan that are too extensive or com- plex or otherwise determined by the Ser- vice to be incompatible with the purposes of the volume submitter program; and (3) where the adopter of a pre-approved plan is requesting a determination regarding par- tial termination, affiliated service group status or leased employees, or where the pre-approved plan is a multiple employer VS plan. Except as otherwise provided in this an- nouncement, an application for an individ- ual determination letter on a pre-approved plan that is filed on Form 5300 will be re- viewed on the basis of the Cumulative List in effect when the application is filed. For example, a determination letter application filed on Form 5300 on May 1, 2008, will be reviewed on the basis of the 2007 Cumula- tive List (Notice 2007–94, 2007–51 I.R.B. 1179). Deadline for Employer Adoption of EGTRRA-approved Defined Contribution M&P and VS Plans An adopting employer whose plan is eligible for the six-year remedial amend- ment cycle under section 17 of Rev. Proc. 2007–44 and that adopts an EGTRRA-ap- proved M&P or VS defined contribution plan by April 30, 2010, will have adopted the plan within the employer’s six-year re- medial amendment cycle. 1 The end of the plan’s remedial amendment cycle with re- spect to EGTRRA and the changes in plan qualification requirements on the 2004 Cu- mulative List is April 30, 2010. Individual Determination Letter Filing Procedures for Pre-approved Plans The Service will accept applications for individual determination letters for EGTRRA-approved M&P and VS defined contribution plans starting May 1, 2008. The procedures for filing such applications are clarified and revised as follows: •An application for a determination letter that is filed on Form 5307 gen- erally need not include the plan’s EGTRRA good faith amendments that were adopted prior to the adoption of the EGTRRA-restated plan or any in- terim plan amendments, regardless of when adopted, unless the plan is a VS 1 Section 20 of Rev. Proc. 2007–44 provides that an opinion or advisory letter for a new pre-approved plan submitted for approval after the end of the submission period may not be relied on for the period prior to the date of submission. April 7, 20087312008–14 I.R.B. plan that does not authorize the prac- titioner to amend the plan on behalf of the adopting employer. The Ser- vice may, however, request evidence of adoption of good faith and interim amendments during the course of its review of a particular plan. Applica- tions filed on Form 5307 for VS plans that do not authorize the practitioner to amend the plan on behalf of the adopt- ing employer must include the plan’s EGTRRA good faith amendments and any interim amendments that were adopted for qualification changes on the 2004 Cumulative List. •An application for a determination letter on a pre-approved plan that is required to file Form 5300 only be- cause the plan is a multiple employer VS plan or because the employer is requesting a determination regarding partial termination, affiliated service group status or leased employees will be reviewed on the basis of the Cu- mulative List that was used to review the underlying pre-approved plan, that is, the 2004 Cumulative List, as if the application had been filed on Form 5307. The Service’s review of the application will not consider changes in the qualification requirements sub- sequent to the 2004 Cumulative List. Except in the case of VS plans that do not authorize the practitioner to amend the plan on behalf of the adopting em- ployer, an application described in this paragraph need not include the plan’s EGTRRA good faith amendments that were adopted prior to the adoption of the EGTRRA-restated plan or any interim plan amendments, regardless of when adopted. The Service may, however, request evidence of adoption of good faith and interim amendments during the course of its review of a particular plan. An application for a VS plan that is described in this para- graph but which does not authorize the practitioner to amend on behalf of the adopting employer must include the plan’s EGTRRA good faith amend- ments and any interim amendments that were adopted for qualification changes on the 2004 Cumulative List. •An application for a determination let- ter on any other pre-approved plan that is required to file Form 5300 will be re- viewed on the basis of the Cumulative List in effect on the date the appli- cation is filed. The application must include a copy of the plan’s signed and dated timely good faith EGTRRA amendments, and interim and other plan amendments for all the changes in qualification requirements on the Cumulative List that is in effect when the application is filed. Applications described in this paragraph include (1) applications for determination let- ters on M&P plans that have been amended by the adopting employer in a manner other than to choose among options permitted under the plan or as described in sections 5.02 and 19.03 of Rev. Proc. 2005–16, and (2) appli- cations for determination letters on VS plans that have been modified by the adopting employer in a manner that is too extensive or complex or other- wise determined by the Service to be incompatible with the purposes of the volume submitter program. These changes will be published as modi- fications to Rev. Proc. 2008–6 when that revenue procedure is next revised. Un- til the modifications to the revenue pro- cedures are published, plan sponsors may rely on this announcement regarding the changes. Plan sponsors and their advisors are encouraged to review the frequently asked questions on the following web site:http://www.irs.gov/retirement/ article/0,,id=179990,00.htmlfor additional information regarding the issuance of opinion, advisory and determination letters for pre-approved plans and the documents that must be submitted with a determination letter application. Revision of Form 5307 Form 5307 is being revised to allow the form to be optically scanned and thereby improve the Service’s processing of deter- mination letter applications filed with the form. It is expected that the revised form will be available soon. However, applica- tions filed with the current form (revised 2001) will continueto be accepted through September 30, 2008. Consolidated Returns; Intercompany Obligations Announcement 2008–25 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Partial withdrawal of notice of proposed rulemaking. SUMMARY: This document withdraws a portion of a notice of proposed rulemak- ing (REG–107592–00, 2007–44 I.R.B. 908) published in theFederal Registeron September 28, 2007 (72 FR 55139). The withdrawn portion relates to the treatment of transactions involving the provision of insurance between members of a consol- idated group. FOR FURTHER INFORMATION CONTACT: Frances L. Kelly, (202) 622–7770 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background On September 28, 2007, the IRS and the Treasury Department published a notice of proposed rulemaking (REG–107592–00) in theFederal Register(72 FR 55139) which proposed to amend §1.1502–13(g) (regarding the treatment of transactions involving obligations between mem- bers of a consolidated group) and to add §1.1502–13(e)(2)(ii)(C) (regarding the treatment of certain transactions involving the provision of insurance between mem- bers of a consolidated group). Under proposed §1.1502–13(e)(2) (ii)(C), certain intercompany insurance transactions would be taken into account on a single entity basis.Written comments were received with respect to proposed §1.1502–13(e)(2)(ii)(C). After consideration of these comments, the IRS and the Treasury Department have decided to withdraw proposed §1.1502–13(e)(2)(ii)(C). However, the IRS and the Treasury Department continue to study whether revisions to the rules for intercompany transactions are necessary to clearly reflect the taxable income of consolidated groups. ***** 2008–14 I.R.B.732April 7, 2008 Partial Withdrawal of a Notice of Proposed Rulemaking Accordingly, under the authority of 26 U.S.C. 7805 and 26 U.S.C. 1502, §1.1502–13(e)(2)(ii)(C) of the notice of proposed rulemaking (REG–107592–00) that was published in theFederal Regis- teron September 28, 2007 (72 FR 55139) is withdrawn. Linda E. Stiff, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on February 20, 2008, 8:48 a.m., and published in the issue of the Federal Register for February 25, 2008, 73 F.R. 9972) Foundations Status of Certain Organizations Announcement 2008–28 The following organizations have failed to establish or have been unable to main- tain their status as public charities or as op- erating foundations. Accordingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under sec- tion 508(b) of the Code. This listing does notindicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive de- ductible contributions. Former Public Charities.The follow- ing organizations (which have been treated as organizations thatare not private foun- dations described in section 509(a) of the Code) are now classified as private foun- dations: Absolute Positive Influences, Fort Worth, TX Academy Community Development Corporation, Greensboro, NC Adams Clubhouse, Prescott Valley, AZ Alternative Decisions Incorporation, Wynocote, PA Bridges Ministry, Renton, WA Carolina Assistance Programs, Inc., Greer, SC Christopher House, Inc., Fancy Farm, KY Coalition for Safe Community Needle Disposal, Inc., Houston, TX Colonial Chapel Foundation at the American Village, Montevallo, AL Dominion College, Cape Girardeau, MO Door of Hope Recovery House for Women, Inc., Indianapolis, IN Dorothy Below Lesher Scholarship Trust, Lansing, MI Eco Mentors Alliance, Mahtomedi, MN Eisner Research Associates, Inc., Encino, CA Florence Indian Education Parent Committee, Florence, OR Friends of Western Missouri Medical Foundation, Warrensburg, MS Global Community Development, Inc., Birmingham, AL Gratiot Residents East Area Together, Detroit, MI Greater Zion Community Outreach Center, Inc., Baltimore, MD Habitat for Education, Danville, CA Here Too Help, Los Angeles, CA Hosannas Horse Granger, Duluth, GA Housing Counselors of Texas, Inc., Dallas, TX Impact Housing Corporation, Mequon, WI Ivory & Billie Crittendon Foundation, Tacoma, WA James 2 Association, Arlington, VA Knowledge Management Associates, Columbia, MO Lambs Vision Christian Fellowship, Garden Grove, CA Lindsay Educational Foundation, Lindsay, OK Maandeeq Womans Organization, Inc., Oxford, GA Manna Ministry, Inc., Centreville, MD Metro Community Assistance, Inc., Dallas, GA Mississippi Housing Opportunity Coalition, Inc., Collins, MS Morning Glory Temple Shelter of Hope, Chicago, IL Museum of Black-African American History and Learning Center, Lincoln, NE Museum of Life or Death Incorporation, Irvington, NJ Myers Community Tutoring Service, Inc., Cordova, TN National Cave Museum, Park City, KY New Horizons Educational Center, Inc., Philadelphia, PA North Carolina Community Solutions Network, Durham, NC Paws From the Ghetto, Inc., New York, NY Phoenix Project, Inc., Nashville, TN Prostate Cancer Project, North Miami, FL Providence Childrens Home, Victorville, CA Quest Depot, Inc., Goshen, AR Rhodius Booster Club, Plainfield, IN Scent-cerely Yours, Desert Hot Springs, CA Seledorwon USA, Inc., Dorchester, MA Share Care Prayer Mission, Gonzales, LA Sherman Chamber Foundation, Inc., Sherman, TX Silver Threads & Golden Needles, Inc., Lawrenceville, GA Snell Development Group, San Leandro, CA Society for the Prevention of Domestic Violence, Inc., New York, NY Sonoma Mountain Institute, Petaluma, CA Sonshine Financial Ministries, Inc., Odenton, MD Spirit of a Child Foundation, Hayward, WI State Committee on the Life and History of Black Georgians, Atlanta, GA Turnage Transitional Home for Clean Living, Los Angeles, CA Tyler Court Interfaith Housing Corporation, Lemon Grove, CA Victoria House Corporation, San Diego, CA VIP Care Services, Pomona, CA Wheel Productions, Phoenix, AZ Your New Beginnings, Inc., Aberdeen, MS If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Inter- nalRevenueServicewillissuearulingor determinationletterwiththerevisedclas- sification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as pro- videdinsection1.509(a)–7oftheIncome Tax Regulations. It is not the practice of the Service to announce such revised clas- sification of foundation status in the Inter- nal Revenue Bulletin. April 7, 20087332008–14 I.R.B. Definition of Terms Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the ef- fect: Amplifieddescribes a situation where no change is being made in a prior pub- lished position, but the prior position is be- ingextendedtoapplytoavariationofthe fact situation set forth therein. Thus, if an earlier ruling held that a principle ap- plied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare withmodi- fied,below). Clarifiedis used in those instances where the language in a prior ruling is be- ing made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed. Distinguisheddescribes a situation where a ruling mentions a previously pub- lished ruling and points out an essential difference between them. Modifiedis used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare withamplifiedandclarified, above). Obsoleteddescribes a previously pub- lished ruling that is not considered deter- minative with respect to future transac- tions. This term is most commonly used in a ruling that lists previously published rul- ings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted. Revokeddescribes situations where the position in the previously published ruling is not correct and the correct position is beingstatedinanewruling. Supersededdescribes a situation where the new ruling does nothing more than re- state the substance and situation of a previ- ously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same po- sition published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single rul- ing a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new rul- ing does more than restate the substance of a prior ruling, a combination of terms is used. For example,modifiedandsu- persededdescribes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously pub- lished ruling is first modified and then, as modified, is superseded. Supplementedis used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original rul- ing has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the ad- ditions, and supersedes all prior rulings in the series. Suspendedis used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Abbreviations The fol lowing abbreviations in current use and for merly used will appear in material publis hedintheBulletin. A—Individual. Acq.—A cquiescence. B—Individual. BE—Beneficiary. BK—Bank . B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cu mulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Coo perative. Ct.D.—Court Decision. CY—County. D—Decede nt. DC—Dummy Corporation. DE—Donee. Del. Order —Delegation Order. DISC—Domestic International Sales Corporation. DR—Donor. E—Estate. EE—Employee. E.O.—Executive Order. ER—Emp loyer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduc iary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Fo reign International Sales Company. FPH—Foreign Personal Holding Company. F.R.—Federal Register. FUTA—Fed eral Unemployment Tax Act. FX—Foreign corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grante e. GP—General Partner. GR—Grantor. IC—Insura nce Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—No nacquiescence. O—Organization. P—Parent Corporation. PHC—Persona l Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Pa rtnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Re al Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsi diary. S.P.R.—Statement of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Trans feree. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpay er. TR—Trust. TT—Trustee. U.S.C.—Uni ted States Code. X—Corporation. Y—Corporation. Z—Corporat ion. 2008–14 I.R.B.iApril 7, 2008 Numerical Finding List 1 Bulletins 2008–1 through 2008–14 Announcements: 2008-1, 2008-1 I.R.B.246 2008-2, 2008-3 I.R.B.307 2008-3, 2008-2 I.R.B.269 2008-4, 2008-2 I.R.B.269 2008-5, 2008-4 I.R.B.333 2008-6, 2008-5 I.R.B.378 2008-7, 2008-5 I.R.B.379 2008-8, 2008-6 I.R.B.403 2008-9, 2008-7 I.R.B.444 2008-10, 2008-7 I.R.B.445 2008-11, 2008-7 I.R.B.445 2008-12, 2008-7 I.R.B.446 2008-13, 2008-8 I.R.B.480 2008-14, 2008-8 I.R.B.481 2008-15, 2008-9 I.R.B.511 2008-16, 2008-9 I.R.B.511 2008-17, 2008-9 I.R.B.512 2008-18, 2008-12 I.R.B.667 2008-19, 2008-11 I.R.B.624 2008-20, 2008-11 I.R.B.625 2008-21, 2008-13 I.R.B.691 2008-22, 2008-13 I.R.B.692 2008-23, 2008-14 I.R.B.731 2008-24, 2008-13 I.R.B.692 2008-25, 2008-14 I.R.B.732 2008-26, 2008-13 I.R.B.693 2008-28, 2008-14 I.R.B.733 Notices: 2008-1, 2008-2 I.R.B.251 2008-2, 2008-2 I.R.B.252 2008-3, 2008-2 I.R.B.253 2008-4, 2008-2 I.R.B.253 2008-5, 2008-2 I.R.B.256 2008-6, 2008-3 I.R.B.275 2008-7, 2008-3 I.R.B.276 2008-8, 2008-3 I.R.B.276 2008-9, 2008-3 I.R.B.277 2008-10, 2008-3 I.R.B.277 2008-11, 2008-3 I.R.B.279 2008-12, 2008-3 I.R.B.280 2008-13, 2008-3 I.R.B.282 2008-14, 2008-4 I.R.B.310 2008-15, 2008-4 I.R.B.313 2008-16, 2008-4 I.R.B.315 2008-17, 2008-4 I.R.B.316 2008-18, 2008-5 I.R.B.363 2008-19, 2008-5 I.R.B.366 2008-20, 2008-6 I.R.B.406 2008-21, 2008-7 I.R.B.431 2008-22, 2008-8 I.R.B.465 Notices— Continued: 2008-23, 2008-7 I.R.B.433 2008-24, 2008-8 I.R.B.466 2008-25, 2008-9 I.R.B.484 2008-26, 2008-9 I.R.B.487 2008-27, 2008-10 I.R.B.543 2008-28, 2008-10 I.R.B.546 2008-29, 2008-12 I.R.B.637 2008-30, 2008-12 I.R.B.638 2008-31, 2008-11 I.R.B.592 2008-32, 2008-11 I.R.B.593 2008-33, 2008-12 I.R.B.642 2008-34, 2008-12 I.R.B.645 2008-35, 2008-12 I.R.B.647 2008-36, 2008-12 I.R.B.650 2008-37, 2008-12 I.R.B.654 2008-38, 2008-13 I.R.B.683 2008-39, 2008-13 I.R.B.684 2008-40, 2008-14 I.R.B.725 Proposed Regulations: REG-147290-05, 2008-10 I.R.B.576 REG-153589-06, 2008-14 I.R.B.730 REG-104713-07, 2008-6 I.R.B.409 REG-104946-07, 2008-11 I.R.B.596 REG-111583-07, 2008-4 I.R.B.319 REG-114126-07, 2008-6 I.R.B.410 REG-127391-07, 2008-13 I.R.B.689 REG-136701-07, 2008-11 I.R.B.616 REG-139236-07, 2008-9 I.R.B.491 REG-141399-07, 2008-8 I.R.B.470 REG-147832-07, 2008-8 I.R.B.472 REG-149475-07, 2008-9 I.R.B.510 Revenue Procedures: 2008-1, 2008-1 I.R.B.1 2008-2, 2008-1 I.R.B.90 2008-3, 2008-1 I.R.B.110 2008-4, 2008-1 I.R.B.121 2008-5, 2008-1 I.R.B.164 2008-6, 2008-1 I.R.B.192 2008-7, 2008-1 I.R.B.229 2008-8, 2008-1 I.R.B.233 2008-9, 2008-2 I.R.B.258 2008-10, 2008-3 I.R.B.290 2008-11, 2008-3 I.R.B.301 2008-12, 2008-5 I.R.B.368 2008-13, 2008-6 I.R.B.407 2008-14, 2008-7 I.R.B.435 2008-15, 2008-9 I.R.B.489 2008-16, 2008-10 I.R.B.547 2008-17, 2008-10 I.R.B.549 2008-18, 2008-10 I.R.B.573 2008-19, 2008-11 I.R.B.594 2008-21, 2008-12 I.R.B.657 2008-22, 2008-12 I.R.B.658 Revenue Procedures— Continued: 2008-23, 2008-12 I.R.B.664 2008-24, 2008-13 I.R.B.684 2008-25, 2008-13 I.R.B.686 Revenue Rulings: 2008-1, 2008-2 I.R.B.248 2008-2, 2008-2 I.R.B.247 2008-3, 2008-2 I.R.B.249 2008-4, 2008-3 I.R.B.272 2008-5, 2008-3 I.R.B.271 2008-6, 2008-3 I.R.B.271 2008-7, 2008-7 I.R.B.419 2008-8, 2008-5 I.R.B.340 2008-9, 2008-5 I.R.B.342 2008-10, 2008-13 I.R.B.676 2008-11, 2008-10 I.R.B.541 2008-12, 2008-10 I.R.B.520 2008-13, 2008-10 I.R.B.518 2008-14, 2008-11 I.R.B.578 2008-15, 2008-12 I.R.B.633 2008-16, 2008-11 I.R.B.585 2008-17, 2008-12 I.R.B.626 2008-18, 2008-13 I.R.B.674 2008-19, 2008-13 I.R.B.669 2008-20, 2008-14 I.R.B.716 Tax Conventions: 2008-8, 2008-6 I.R.B.403 Treasury Decisions: 9368, 2008-6 I.R.B.382 9369, 2008-6 I.R.B.394 9370, 2008-7 I.R.B.428 9371, 2008-8 I.R.B.447 9372, 2008-8 I.R.B.462 9373, 2008-8 I.R.B.463 9374, 2008-10 I.R.B.521 9375, 2008-5 I.R.B.344 9376, 2008-11 I.R.B.587 9377, 2008-11 I.R.B.578 9378, 2008-14 I.R.B.720 9379, 2008-14 I.R.B.715 9380, 2008-14 I.R.B.718 9381, 2008-14 I.R.B.694 9382, 2008-9 I.R.B.482 1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin 2007–52, dated December 26, 2007. April 7, 2008ii2008–14 I.R.B. Finding List of Current Actions on Previously Published Items 1 Bulletins 2008–1 through 2008–14 Announcements: 2006-88 Clarified and superseded by Notice 2008-35, 2008-12 I.R.B.647 Notice 2008-36, 2008-12 I.R.B.650 2008-6 Superseded by Ann. 2008-19, 2008-11 I.R.B.624 Notices: 2001-16 Modified by Notice 2008-20, 2008-6 I.R.B.406 2001-60 Modified and superseded by Notice 2008-31, 2008-11 I.R.B.592 2002-44 Superseded by Notice 2008-39, 2008-13 I.R.B.684 2003-51 Superseded by Rev. Proc. 2008-24, 2008-13 I.R.B.684 2006-27 Clarified and superseded by Notice 2008-35, 2008-12 I.R.B.647 2006-28 Clarified and superseded by Notice 2008-36, 2008-12 I.R.B.650 2006-52 Clarified and amplified by Notice 2008-40, 2008-14 I.R.B.725 2006-77 Clarified and amplified by Notice 2008-25, 2008-9 I.R.B.484 2006-107 Modified by Notice 2008-7, 2008-3 I.R.B.276 2007-30 Modified and superseded by Notice 2008-14, 2008-4 I.R.B.310 2007-54 Clarified by Notice 2008-11, 2008-3 I.R.B.279 Proposed Regulations: REG-209020-86 Corrected by Ann. 2008-11, 2008-7 I.R.B.445 Proposed Regulations— Continued: REG-107592-00 Partial withdrawal by Ann. 2008-25, 2008-14 I.R.B.732 REG-149856-03 Hearing scheduled by Ann. 2008-26, 2008-13 I.R.B.693 REG-113891-07 Hearing scheduled by Ann. 2008-4, 2008-2 I.R.B.269 REG-127770-07 Hearing scheduled by Ann. 2008-24, 2008-13 I.R.B.692 Revenue Procedures: 97-36 Modified by Rev. Proc. 2008-23, 2008-12 I.R.B.664 2001-23 Modified by Rev. Proc. 2008-23, 2008-12 I.R.B.664 2002-9 Modified by Rev. Proc. 2008-18, 2008-10 I.R.B.573 Modified and amplified by Rev. Proc. 2008-25, 2008-13 I.R.B.686 2007-1 Superseded by Rev. Proc. 2008-1, 2008-1 I.R.B.1 2007-2 Superseded by Rev. Proc. 2008-2, 2008-1 I.R.B.90 2007-3 Superseded by Rev. Proc. 2008-3, 2008-1 I.R.B.110 2007-4 Superseded by Rev. Proc. 2008-4, 2008-1 I.R.B.121 2007-5 Superseded by Rev. Proc. 2008-5, 2008-1 I.R.B.164 2007-6 Superseded by Rev. Proc. 2008-6, 2008-1 I.R.B.192 2007-7 Superseded by Rev. Proc. 2008-7, 2008-1 I.R.B.229 2007-8 Superseded by Rev. Proc. 2008-8, 2008-1 I.R.B.233 Revenue Procedures— Continued: 2007-26 Obsoleted in part by Rev. Proc. 2008-17, 2008-10 I.R.B.549 2007-31 Obsoleted in part by Rev. Proc. 2008-19, 2008-11 I.R.B.594 2007-39 Superseded by Rev. Proc. 2008-3, 2008-1 I.R.B.110 2007-52 Superseded by Rev. Proc. 2008-9, 2008-2 I.R.B.258 2008-13 Corrected by Ann. 2008-15, 2008-9 I.R.B.511 Revenue Rulings: 58-612 Clarified and amplified by Rev. Rul. 2008-15, 2008-12 I.R.B.633 64-250 Amplified by Rev. Rul. 2008-18, 2008-13 I.R.B.674 89-42 Modified and superseded by Rev. Rul. 2008-17, 2008-12 I.R.B.626 92-19 Supplemented in part by Rev. Rul. 2008-19, 2008-13 I.R.B.669 97-31 Modified and superseded by Rev. Rul. 2008-17, 2008-12 I.R.B.626 2001-48 Modified and superseded by Rev. Rul. 2008-17, 2008-12 I.R.B.626 2007-4 Supplemented and superseded by Rev. Rul. 2008-3, 2008-2 I.R.B.249 Treasury Decisions: 9362 Corrected by Ann. 2008-9, 2008-7 I.R.B.444 Ann. 2008-12, 2008-7 I.R.B.446 9363 Corrected by Ann. 2008-10, 2008-7 I.R.B.445 9375 Corrected by Ann. 2008-16, 2008-9 I.R.B.511 1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2007–27 through 2007–52 is in Internal Revenue Bulletin 2007–52, dated December 26, 2007. 2008–14 I.R.B.iiiApril 7, 2008 April 7, 20082008–14 I.R.B. 2008–14 I.R.B.April 7, 2008 April 7, 20082008–14 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. Under information for: select Businesses. Under related 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 371954, Pittsburgh PA, 15250–7954. 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 e-mail 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 Internal Revenue Service W ashington,DC20224 Official Business Penalty for Private Use, $300
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