Internal Revenue Bulletin 2008-16 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
8-16
April 21, 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
T.D. 9384, page 792.
Final regulations under section 199 of the Code revise certain
rules and examples relating to the definitions of a qualified film
produced by the taxpayer under section 199(c)(4)(A)(i)(II) and
(c)(6) and an expanded affiliated group under section 199(d)(4).
T.D. 9386, page 788.
Final regulations under section 165 of the Code provide guid-
ance on the availability and character of a deduction for a loss
sustained from abandoned stock or other securities.
T.D. 9387, page 789.
Final regulations under section 168 of the Code provide
guidance regarding the application of normalization account-
ing rules to balances of excess deferred income taxes and
accumulated deferred investment tax credits of public utilities
whose assets cease to be public utility property.
REG–124590–07, page 801.
Proposed regulations under section 954(d) of the Code provide
guidance in cases in which personal property sold by a con-
trolled foreign corporation is manufactured, produced, or con-
structed pursuant to a contract manufacturing arrangement or
by one or more branches of the controlled foreign corporation.
Notice 2008–44, page 799.
2007 section 45K inflation adjustment factor.This notice
announces the applicable inflation adjustment factor and phase-
out amount for the nonconventional source fuel credit for the
2007 calendar year.
EMPLOYEE PLANS
REG–151135–07, page 815.
Proposed regulations under section 432 of the Code provide
additional rules for certain multiemployer defined benefit plans
that are in effect on July 16, 2006. The regulations affect spon-
sors and administrators of, and participants in, multiemployer
plans that are in either endangered or critical status. The reg-
ulations are necessary to implement the new rules set forth in
section 432 that are effective for plan years beginning after
2007.
EXEMPT ORGANIZATIONS
Announcement 2008–32, page 826.
The IRS has revoked its determination that Educate the Chil-
dren Foundation of Long Beach, CA; CFIDS Walk-A-Thon Com-
mittee of Hicksville, NY; Open Doors, Inc., of Duluth, GA; Amal-
gamated Credit Counselors of Lauderhill, FL; Carter Lake Chari-
table of Urbandale, IA; Christian Credit Counselors, Inc., of Las
Vegas, NV; In Time Youth Group of Ontario, OR; Young Lions
Foundation of Sausalito, CA; Charity Connections, Ltd., of Pitts-
ford, NY; and North-Tartan Area Girls Basketball Booster Club
of Oakdale, MN, qualify as organizations described in sections
501(c)(3) and 170(c)(2) of the Code.
(Continued on the next page)
Finding Lists begin on page ii.

ESTATE TAX
Rev. Rul. 2008–22, page 796.
Substitution power.This ruling provides guidance regarding
whether the corpus of aninter vivostrust is includible in the
grantor’s gross estate under section 2036 or 2038 of the Code
if the grantor retained the power, exercisable in a nonfiduciary
capacity, to acquire property held in the trust by substituting
other property of equivalent value. The ruling provides that,
for estate tax purposes, the substitution power will not, by it-
self, cause the value of the trust corpus to be includible in the
grantor’s gross estate, provided the trustee has a fiduciary obli-
gation (under local law) to ensure the grantor’s compliance with
the terms of this power by satisfying itself that the properties
acquired and substituted by the grantor are in fact of equivalent
value and further provided that the substitution power cannot
be exercised in a manner that can shift benefits among the
trust beneficiaries.
ADMINISTRATIVE
Announcement 2008–30, page 825.
This document contains corrections to final and temporary reg-
ulations (T.D. 9368, 2008–6 I.R.B. 382) regarding the reduc-
tion of the number of separate foreign tax credit limitation cat-
egories under section 904(d) of the Code. The regulations af-
fect taxpayers claiming foreign tax credits and provide guid-
ance needed to comply with the statutory changes made by
the American Jobs Creation Act of 2004 (AJCA).
Announcement 2008–33, page 826.
This document contains a correction to final regulations (T.D.
9273, 2006–2 C.B. 394) addressing the carryover of certain
tax attributes, such as earnings and profits and foreign income
tax accounts, when two corporations combine in a corporate
reorganization or liquidation that is described in both sections
367(b) and 381 of the Code.
Announcement 2008–36, page 827.
This document cancels a public hearing on proposed regula-
tions (REG–114126–07, 2008–6 I.R.B. 410) that provide guid-
ance relating to the reduction of the number of separate for-
eign tax credit limitation categories under section 904(d) of
the Code.
April 21, 20082008–16 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.
2008–16 I.R.B.April 21, 2008

April 21, 20082008–16 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 165.—
Losses
26 CFR 1.165–5: Worthless securities.
T.D. 9386
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Abandonment of Stock or
Other Securities
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Fin
al regulations.
SUMMARY: This document contains final
regulations concerning the availability and
character of a loss deduction under section
165 of the Internal Revenue Code (Code)
for losses sustained from abandoned stock
or other securities. The final regulations
clarify the tax treatment of losses from
abandoned securities, and affect any tax-
payer claiming a deduction for a loss from
abandoned securities after the date these
regulations are published in theFederal
Register.
DATES:Effective Date:These final regu-
lations are effective on March 12, 2008.
Applicability Date:For dates of appli-
cability, see §1.165–5(i)(2).
FOR FURTHER INFORMATION
CONTACT: Sean M. Dwyer at (202)
622–5020 or Peter C. Meisel at (202)
622–7750 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This doc
ument contains amendments to
26 CFR pa
rt 1. On July 30, 2007, the IRS
publish
ed a notice of proposed rulemaking
(REG–10
1001–05, 2007–36 I.R.B. 548)
in theFe
deral Register(72 FR 41468).
The not
ice of proposed rulemaking clari-
fied th
e treatment of abandoned stock or
other s
ecurities under section 165 of the
Code, s
pecifically providing that a loss
from an abando
ned security is governed by
section 165(g
), and that the loss is only al-
lowed if all ri
ghts in the security are per-
manently sur
rendered and relinquished for
no considera
tion. The IRS received no
comments in r
esponse to the notice of pro-
posed rulema
king. No public hearing was
requested o
rheld.
The proposed
regulations are adopted
as final reg
ulations by this Treasury deci-
sion.
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. Because the
regulations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice of
proposed rulemaking that preceded this fi-
nal regulation was submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Drafti
ng Information
The principal authors of these final reg-
ulations are Sean M. Dwyer, Office of the
Associate Chief Counsel (Income Tax &
Accounting), and Peter C. Meisel, Office
of the Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Adopti
on of Amendments to the
Regul
ations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Parag
raph 1. The authority citation for
part 1
continues to read, in part, as follows:
Authority: 26
U.S.C. 7805 * * *
Par. 2. Sectio
n 1.165–5 is amended by:
1. Redesignat
ing paragraph (i) as para-
graph (j).
2. Adding a new
paragraph (i).
The addition r
eadsasfollows:
§1.165–5 Wort
hless securities.
*****
(i)Abandonmen
t of securities—(1)
In general.
Fo
r purposes of section 165
and this secti
on, a security that becomes
wholly worthl
ess includes a security de-
scribedinpar
agraph (a) of this section that
is abandoned
and otherwise satisfies the
requirement
s for a deductible loss under
section 165.
If the abandoned security
is a capital a
sset and is not described in
section 165
(g)(3) and paragraph (d) of this
section (co
ncerning worthless securities
of certain a
ffiliated corporations), the re-
sulting los
s is treated as a loss from the
sale or exch
ange, on the last day of the
taxable yea
r, of a capital asset. See section
165(g)(1)
and paragraph (c) of this section.
To abandon
a security, a taxpayer must
permanent
ly surrender and relinquish all
rights in t
he security and receive no con-
siderati
on in exchange for the security.
For purpo
ses of this section, all the facts
and circu
mstances determine whether the
transact
ion is properly characterized as an
abandonm
ent or other type of transaction,
such as a
n actual sale or exchange, contri-
bution t
o capital, dividend, or gift.
(2)Effe
ctive/applicability date.This
paragra
ph (i) applies to any abandonment
ofstock
or other securities after March 12,
2008.
*****
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved March 3, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed
by the Office of the Federal Register on March 11,
2008, 8:45 a.m., and published in the issue of the Federal
Register for March 12, 2008, 73 F.R. 13124)
2008–16 I.R.B.788April 21, 2008

Section 168.—Accelerated
Cost Recovery System
26 CFR 1.168(i)–3: Treatment of excess deferred
income tax reserve upon disposition of deregulated
public utility property.
T.D. 9387
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Application of Normalization
Accounting Rules to Balances
of Excess Deferred Income
Taxes and Accumulated
Deferred Investment Tax
Credits of Public Utilities
Whose Assets Cease to be
Public Utility Property
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION
: Final Regulations.
SUMMARY: This document contains fi-
nal regulations that provide guidance on
the normalization requirements applica-
ble to public utilities that benefit (or have
benefited) from accelerated depreciation
methods or from the investment tax credit
permitted under pre–1991 law. These
regulations permit a utility whose assets
cease, whether by disposition, deregu-
lation, or otherwise,to be public utility
property with respect to the utility (dereg-
ulated public utility property) to return to
its ratepayers the normalization reserve
for excess deferred income taxes (EDFIT)
with respect to those assets and, in certain
circumstances, also permit the return of
part or all of the reserve for accumulated
deferred investment tax credits (ADITC)
with respect to those assets.
DATES:Effective Date:These regulations
are effective March 20, 2008.
Applicability Date:For dates of
applicability, see §1.46–6(k)(4) and
§1.168(i)–3(d) of these regulations.
FOR FURTHER INFORMATION
CONTACT: Patrick Kirwan, at (202)
622–3040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
This document amends the Income Tax
Regulations (26 CFR Part 1) relating to
the normalization requirements of sections
168(f)(2) and 168(i)(9) of the Internal
Revenue Code (Code), section 203(e)
of the Tax Reform Act of 1986, Public
Law 99–514 (100 Stat. 2146), and for-
mer section 46(f) of the Code. Proposed
regulations relating to the normalization
requirements applicable to electric utili-
ties that benefit (or have benefited) from
accelerated depreciation methods or from
the investment tax credit permitted under
pre–1991 law (REG–104385–01, 2003–1
C.B. 634) were published in theFederal
Registeron March 4, 2003 (the 2003 pro-
posed regulations) and again on December
21, 2005 (2006–1 C.B. 389, the 2005
proposed regulations). The preambles of
both the 2003 proposed regulations and
the 2005 proposed regulations describe
the normalization method of accounting
and the reserves underthe normalization
method for excess deferred federal income
tax (EDFIT) and accumulated deferred
investment tax credits (ADITC).
The 2003 proposed regulations pro-
vided that electric utilities whose gener-
ation assets become deregulated public
utility property could continue to flow
through EDFIT reserves associated with
those assets without violating the nor-
malization requirements. The rate of
flowthrough was limited to the rate that
would have been permitted under a nor-
malization method of accounting if the
assets had remained public utility prop-
erty.
The 2003 proposed regulations pro-
vided similar rules under which electric
utilities could continue to flow through
ADITC reserves associated with gen-
eration assets that become deregulated
public utility property without violating
the normalization requirements. The 2003
proposed regulations addressed the treat-
ment of these assets under former section
46(f)(2) (relating to the use of the invest-
ment credit to reduce the taxpayer’s cost of
service) but did not address their treatment
under former section 46(f)(1) (relating to
the use of the investment credit to reduce
the taxpayer’s rate base). The 2003 pro-
posed regulations would have applied to
public utility generation property deregu-
lated after March 4, 2003. Utilities would
have been permitted an election to apply
the proposed rules to generation property
that was deregulated on or before that date.
In response to the public comments and
after further analysis, the 2003 proposed
regulations were withdrawn and were re-
placed by the 2005 proposed regulations.
The 2005 proposed regulations generally
retain the rule of the 2003 proposed regu-
lations regarding the return of EDFIT re-
serves and extend theapplication of the
rule to all public utility property.
The 2005 proposed regulations permit
flowthrough of the ADITC reserve with
respect to deregulated public utility prop-
erty to continue after its deregulation only
to the extent the reduction in cost of ser-
vice does not exceed, as a percentage of
the ADITC with respect to the property
at the time of deregulation, the percentage
of the total stranded cost that the taxpayer
is permitted to recover with respect to the
property. In addition, the 2005 proposed
regulations provide that the credit may not
be flowed through more rapidly than the
rate at which the taxpayer is permitted to
recover the stranded cost with respect to
the property. The 2005 proposed regula-
tions provide similar rules for property to
which former section 46(f)(1) (relating to
rate base restoration) applies and extend
the application of the ADITC flowthrough
rules to all public utility property.
The 2005 proposed regulations gener-
ally apply to any public utility property
that becomes deregulated public util-
ity property after December 21, 2005.
They do not include an election to ap-
ply the regulations retroactively. For
public utility property that became dereg-
ulated public utility property on or be-
fore December 21, 2005, the preamble
of the 2005 proposed regulations states
that the IRS will follow the holdings set
forth in the private letter rulings pro-
hibiting flowthrough of the EDFIT and
ADITC reserves associated with an asset
after the asset’s disposition. The 2005
proposed regulations provide, however,
that flowthrough will be permitted if
it is consistent with the 2003 proposed
regulations and occurs during the period
beginning on March 5, 2003, and ending
on the earlier of (1) the last date on which
the utility’s rates are determined under the
April 21, 20087892008–16 I.R.B.

rate order in effect on December 21, 2005,
or (2) December 21, 2007.
Written comments were received in re-
sponse to the 2005 proposed regulations,
and a public hearing was held on April 5,
2006. Three commentators spoke at the
public hearing. After consideration of all
the comments, the 2005 proposed regula-
tions are adopted as amended by this Trea-
sury decision. In general, the final regula-
tions follow the approach of the 2005 pro-
posed regulations.
A number of commentators suggested
that the proposed rules should apply on an
elective basis to public utility property that
was deregulated prior to March 5, 2003, if
regulatory proceedings for the deregulated
public utility property are pending. The
preamble to the 2005 proposed regulations
explains that the Secretary’s authority
under section 7805(b)(7) to provide for
retroactive elections should not be exer-
cised in a manner that impairs existing
agreements between utilities and their reg-
ulators. Many commentators agreed with
the objective of not disturbing previously
settled and finalized agreements and be-
lieved that a retroactive election would
likely result in taxpayers being compelled
to reopen such agreements. The commen-
tators suggested, however, that applying
the regulations to regulatory proceedings
that have yet to be finally decided would
not impair any existing agreement, and
that the final regulations should permit
continued flowthrough of the EDFIT and
ADITC reserves if no final order or settle-
ment agreement prescribing the treatment
of those reserves after deregulation was
in effect on December 21, 2005. Other
commentators suggested that the section
7805 limitations on retroactivity do not
apply to these regulations because the
normalization provisions were enacted be-
fore the effective date of those limitations.
The IRS and Treasury Department agree
that there is no statutory impediment that
would prohibit the application of the regu-
lations to previously deregulated property.
Nevertheless, the IRS and Treasury De-
partment have concluded that there is no
compelling argument in this instance for
frustrating the expectations of taxpayers
who embarked upon deregulation of their
public utility property before the publi-
cation of the new rules. Accordingly, the
final regulations do not depart from the
general practice of applying amendments
to the regulations without retroactive ef-
fect and retain the prospective effective
date of the 2005 proposed regulations
without a retroactive election. The final
regulations retain the proposed transition
rule under which flowthrough is permitted
if it is consistent with the 2003 proposed
regulations and occurs during the period
beginning on March 5, 2003, and ending
on the earlier of (1) the last date on which
the utility’s rates are determined under the
rate order in effect on December 21, 2005,
or (2) December 21, 2007.
One commetator suggested that the reg-
ulations should provide guidance concern-
ing when deregulation occurs. Under the
regulations, property becomes deregulated
public utility property when it ceases to be
public utility property with respect to the
taxpayer. This depends on the particular
facts and circumstances and is more appro-
priately addressed on a case-by-case basis.
Some commentators suggested that
the final regulations should permit
flowthrough of ADITC reserves even in
cases in which ratepayers do not bear the
cost of the asset giving rise to the credit.
The comments generally argued that this
would be consistent with Congressional
intent to share the benefit of the credit
between ratepayers and shareholders. The
IRS and Treasury Department agree that
the Code provides for such sharing in
the typical situation in which ratepayers
ultimately bear the full cost of an asset
through ratemaking depreciation. On the
other hand, neither the statutory provi-
sion nor the legislative history provides
any indication that Congress intended for
ratepayers to share in benefits attributable
to costs that they do not bear. Accordingly,
for the reasons set forth in the preamble
of the 2005 proposed regulations, the final
regulations retain the proposed rules relat-
ing to flowthrough of the ADITC reserve
and rate base restoration, including the
rule allowing flowthrough consistent with
the 2003 proposed regulations during the
transition period.
Commentators suggested that the use of
terms other than deregulated public utility
property in the preamble of the 2005 pro-
posed regulations implies that a distinction
exists between property that ceases to be
public utility property because of deregu-
lation and property that ceases to be pub-
lic utility property because of a disposition
or other event. To clarify that this is not
the case, the term deregulated public utility
property is the sole term used in the final
regulations to describe property that ceases
to be public utility property.
One commentator questioned whether
the term deregulated public utility prop-
erty includes normal retirements. The final
regulations clarify that they do not apply to
ordinary retirements within the meaning of
section 1.167(a)–11(d)(3)(ii).
One commentator suggested that dereg-
ulated public utility property should in-
clude property that is public utility prop-
erty in the hands of a transferee. The
commentator further suggested that if the
transferee of public utility property will
continue the flowthrough of the trans-
feror’s EDFIT and ADITC reserves, fur-
ther flowthrough by the transferor should
not be required. The IRS and Treasury
Department agree with these suggestions.
Accordingly, the final regulations provide,
on a prospective basis, that they apply to
a taxpayer with respect to public utility
property that ceasesto be public utility
property with respect to the taxpayer.
Thus, the regulations will apply even if the
property remains regulated public utility
property in the hands of a transferee. The
regulations further provide an exception
from the generally applicable rule per-
mitting transferor flowthrough when the
transferee will continue flowthrough of
the EDFIT reserves. A similar exception
was not provided for the ADITC reserve
because transferorflowthrough of that
reserve does not occur if the transferee,
rather than the transferor, is recovering the
cost of the property through ratemaking
depreciation.
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 these regulations and, because
the regulations do not impose a collection
of information on small entities, the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6) does not apply. Therefore, a Regula-
tory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preced-
2008–16 I.R.B.790April 21, 2008

ing these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small businesses.
Drafting Information
The principal author of the regulations
is Patrick S. Kirwan, Office of Associate
Chief Counsel (Passthroughs & Special In-
dustries). However, other personnel from
the IRS and the Treasury Department par-
ticipated in the development of the regula-
tions.
*****
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 1.46–6 is amended by
adding paragraph (k) to read as follows:
§1.46–6 Limitation in case of certain
regulated companies.
*****
(k)Treatment of accumulated deferred
investment tax credits upon the dereg-
ulation of public utility property—(1)
Scope—(i)In general. This paragraph
(k) provides rules for the application of
former sections 46(f)(1) and 46(f)(2) of
the Internal Revenue Code to a taxpayer
with respect to public utility property that
ceases, whether by disposition, deregu-
lation, or otherwise,to be public utility
property with respect to the taxpayer and
that is not described inparagraph (k)(1)(ii)
of this section (deregulated public utility
property).
(ii)Exception. This paragraph (k)
does not apply to property that ceases
to be public utility property with respect
to the taxpayer on account of an ordi-
nary retirement within the meaning of
§1.167(a)–11(d)(3)(ii).
(2)Ratable amount—(i)Restoration
of rate base reduction.Areductionin
the taxpayer’s rate base on account of
the credit with respect to public utility
property that becomes deregulated public
utility property is restored ratably dur-
ing the period after the property becomes
deregulated public utility property if the
amount of the reduction remaining to be
restored does not, at any time during the
period, exceed the restoration percentage
of the recoverable stranded cost of the
property at such time.
For this purpose—
(A) The stranded cost of the property
is the cost of the property reduced by the
amount of such cost that the taxpayer has
recovered through regulated depreciation
expense during the period before the prop-
erty becomes deregulated public utility
property;
(B) The recoverable stranded cost of the
property at any time is the stranded cost of
the property that the taxpayer will be per-
mitted to recover through rates after such
time; and
(C) The restoration percentage for the
property is determined by dividing the re-
duction in rate base remaining to be re-
stored with respect to the property immedi-
ately before the property becomes deregu-
lated public utility property by the stranded
cost of the property.
(ii)Cost of service reduction.Reduc-
tions in the taxpayer’s cost of service on
account of the credit with respect to pub-
lic utility property that becomes deregu-
lated public utility property are ratable dur-
ing the period after the property becomes
deregulated public utility property if the
cumulative amount of the reduction during
such period does not, at any time during the
period, exceed the flowthrough percentage
of the cumulative stranded cost recovery
for the property at such time.
For this purpose—
(A) The stranded cost of the property
is the cost of the property reduced by the
amount of such cost that the taxpayer has
recovered through regulated depreciation
expense during the period before the prop-
erty becomes deregulated public utility
property;
(B) The cumulative stranded cost re-
covery for the property at any time is
the stranded cost of the property that the
taxpayer has been permitted to recover
through rates on or before such time; and
(C) The flowthrough percentage for
thepropertyisdeterminedbydividingthe
amount of credit with respect to the prop-
ertyremainingtobeusedtoreducecostof
service immediately before the property
becomes deregulated public utility prop-
erty by the stranded cost of the property.
(3)Cross reference. See §1.168(i)–(3)
for rules relating to the treatment of bal-
ances of excess deferred income taxes
when public utility property becomes
deregulated public utility property.
(4)Effective/applicability dates—(i)In
general. Except as provided in paragraph
(k)(4)(ii) of this section, this paragraph (k)
applies to public utility property that be-
comes deregulated public utility property
with respect to a taxpayer after December
21, 2005.
(ii)Property that becomes public utility
property of the transferee. This paragraph
(k) does not apply to property that becomes
deregulated public utility property with re-
spect to a taxpayer on account of a transfer
on or before March 20, 2008, if after the
transfer the property is public utility prop-
erty of the transferee.
(iii)Application of regulation project
(REG–104385–01).A reduction in
the taxpayer’s cost of service will be
treated as ratable if it is consistent with
the proposed rules in regulation project
(REG–104385–01) (68 FR 10190) March
4, 2003, and occurs during the period be-
ginning on March 5, 2003, and ending on
the earlier of—
(A) The last date on which the utility’s
rates are determined under the rate order in
effect on December 21, 2005; or
(B) December 21, 2007.
Par. 3. Section 1.168(i)–3 is added to
read as follows:
§1.168(i)–3 Treatment of excess deferred
income tax reserve upon disposition of
deregulated public utility property.
(a)Scope
—(1)In general. This sec-
tion provides rules for the application of
section 203(e) of the Tax Reform Act of
1986, Public Law 99–514 (100 Stat. 2146)
to a taxpayer with respect to public util-
ity property (within the meaning of section
168(i)(10)) that ceases, whether by dispo-
sition, deregulation, or otherwise, to be
public utility property with respect to the
taxpayer and that is not described in para-
graph (a)(2) of this section (deregulated
public utility property).
(2)Exceptions. Thissectiondoesnot
apply to the following property:
(i) Property that ceases to be public util-
ity property with respect to the taxpayer on
April 21, 20087912008–16 I.R.B.

account of an ordinary retirement within
the meaning of §1.167(a)–11(d)(3)(ii).
(ii) Property transferredbythetaxpayer
if after the transfer the property is public
utility property of the transferee and the
taxpayer’s excess tax reserve with respect
to the property (within the meaning of sec-
tion 203(e) of the Tax Reform Act of 1986)
is treated as an excess tax reserve of the
transferee with respect to the property.
(b)Amount of reduction. If public util-
ity property of a taxpayer becomes dereg-
ulated public utility property to which this
section applies, the reduction in the tax-
payer’s excess tax reserve permitted under
section 203(e) of the Tax Reform Act of
1986 is equal to the amount by which the
reserve could be reduced under that provi-
sion if all such property had remained pub-
lic utility property of the taxpayer and the
taxpayer had continued use of its normal-
ization method of accounting with respect
to such property.
(c)Cross reference. See §1.46–6(k) for
rules relating to the treatment of accumu-
lated deferred investment tax credits when
utilities dispose of regulated public utility
property.
(d)Effective/applicability dates—(1)In
general. Except as provided in paragraph
(d)(2) of this section, this section applies to
public utility propertythat becomes dereg-
ulated public utility property after Decem-
ber 21, 2005.
(2)Property that becomes public util-
ity property of the transferee. This section
does not apply to property that becomes
deregulated public utility property with re-
spect to a taxpayer on account of a transfer
on or before March 20, 2008, if after the
transfer the property is public utility prop-
erty of the transferee.
(3)Application of regulation project
(REG–104385–01). A reduction in the
taxpayer’s excess deferred income tax
reserve will be treated as ratable if it is
consistent with the proposed rules in reg-
ulation project (REG–104385–01) (68 FR
10190) March 4, 2003, and occurs during
the period beginning on March 5, 2003,
and ending on the earlier of—
(i) The last date on which the utility’s
rates are determined under the rate order
in effect on December 21, 2005; or
(ii) December 21, 2007.
Linda E. Stiff,
Acting Deputy Commissioner for
Services and Enforcement.
Approved March 6, 2008.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on March 19,
2008, 8:45 a.m., and published in the issue of the Federal
Register for March 20, 2008, 73 F.R. 14934)
Section 199.—Income
Attributable to Domestic
Production Activities
26 CFR 1.199–3: Domestic production gross re-
ceipts.
T.D. 9384
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Qualified Films Under Section
199
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations involving the deduction for
income attributableto domestic produc-
tion activities under section 199. The final
regulations revise certain rules and exam-
ples relating to the definitions of a quali-
fied film produced by the taxpayer under
section 199(c)(4)(A)(i)(II) and (c)(6) and
an expanded affiliated group under section
199(d)(4). The final regulations affect tax-
payers who produce qualified films and
taxpayers who are members of expanded
affiliated groups.
DATES:Effective Date:These regulations
are effective March 7, 2008.
Applicability Date:For dates of appli-
cability, see §1.199–8(i)(8) and (9).
FOR FURTHER INFORMATION
CONTACT: Concerning §1.199–3(k),
David McDonnell, at (202) 622–3040;
concerning §1.199–7, Ken Cohen (202)
622–7790 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document amends §§1.199–3(k)
and 1.199–7 of the Income Tax Regula-
tions (26 CFR Part 1). Section 1.199–3(k)
relates to the definition of qualified film
produced by the taxpayer under section
199(c)(4)(A)(i)(II) and (c)(6) of the Inter-
nal Revenue Code (Code) and §1.199–7
involves expanded affiliated groups under
section 199(d)(4). Section 199 was added
to the Code by section 102 of the Ameri-
can Jobs Creation Act of 2004 (Public Law
108–357, 118 Stat. 1418), and amended
by section 403(a) of the Gulf Opportunity
Zone Act of 2005 (Public Law 109–135,
119 Stat. 25), section 514 of the Tax In-
crease Prevention andReconciliation Act
of 2005 (Public Law 109–222, 120 Stat.
345), and section 401 of the Tax Relief
and Health Care Act of 2006 (Public Law
109–432, 120 Stat. 2922).
On June 7, 2007, the IRS and Treasury
Department published proposed regula-
tions under section 199 (REG–103842–07,
2007–28 I.R.B. 79 [72 FR 31478]). The
proposed regulationsrevise certain rules
and examples in T.D. 9263, 2006–25
I.R.B. 1063 [71 FR 31268] relating to
qualified films produced by the taxpayer
under section 199(c)(4)(A)(i)(II) and
(c)(6) and expanded affiliated groups un-
der section 199(d)(4). No comments were
received responding to the notice of pro-
posed rulemaking and no public hearing
was requested or held. Therefore, the
proposed regulations are adopted without
change by this Treasury decision.
Explanation of Provisions
General Overview
Section 199(a)(1) allows a deduction
equal to 9 percent (3 percent in the case of
taxable years beginning in 2005 or 2006,
and 6 percent in the case of taxable years
beginning in 2007, 2008, or 2009) of the
lesser of (A) the qualified production ac-
tivities income (QPAI) of the taxpayer for
the taxable year, or (B) taxable income (de-
termined without regard to section 199) for
the taxable year (or, in the case of an indi-
vidual, adjusted gross income).
2008–16 I.R.B.792April 21, 2008

Section 199(c)(1) defines QPAI for any
taxable year as an amount equal to the ex-
cess (if any) of (A) the taxpayer’s domes-
tic production gross receipts (DPGR) for
such taxable year, over (B) the sum of (i)
the cost of goods sold (CGS) that are al-
locable to such receipts; and (ii) other ex-
penses, losses, or deductions (other than
the deduction under section 199) that are
properly allocable to such receipts.
Section 199(c)(4)(A)(i) provides that
the term DPGR means the taxpayer’s gross
receipts that are derived from any lease,
rental, license, sale, exchange, or other
disposition of (I) qualifying production
property (QPP) that was manufactured,
produced, grown, or extracted by the tax-
payer in whole or in significant part within
the United States; (II) any qualified film
produced by the taxpayer; or (III) electric-
ity, natural gas, or potable water produced
by the taxpayer in the United States.
Section 199(c)(6) defines a qualified
film to mean any property described in sec-
tion 168(f)(3) if not less than 50 percent
of the total compensation relating to pro-
duction of the property is compensation
for services performed in the United States
by actors, production personnel, directors,
and producers. The term does not include
property with respect to which records are
required to be maintained under 18 U.S.C.
2257 (generally, films,videotapes, or other
matter that depict actual sexually explicit
conduct and are produced in whole or in
part with materials that have been mailed
or shipped in interstate or foreign com-
merce, or are shipped or transported or are
intended for shipment or transportation in
interstate or foreign commerce).
Section 199(d)(4)(A) provides that all
members of an expanded affiliated group
(EAG) are treated as a single corporation
for purposes of section 199. Under sec-
tion 199(d)(4)(B), an EAG is an affiliated
group as defined in section 1504(a), deter-
mined by substituting “more than 50 per-
cent” for “at least 80 percent” each place
it appears and without regard to section
1504(b)(2) and (4).
Qualified Film Produced by the Taxpayer
Under section 199(c)(4)(A)(i)(II), a
taxpayer’s gross receipts qualify as DPGR
if the receipts are derived from any lease,
rental, license, sale, exchange, or other
disposition of any qualified film (as de-
fined in section 199(c)(6)) produced by
the taxpayer. A film must be both a “qual-
ified film” under section 199(c)(6) and
“produced by the taxpayer” under section
199(c)(4)(A)(i)(II) in order for the gross
receipts to qualify as DPGR. However, as
discussed in the preamble to the proposed
regulations published on June 7, 2007 (72
FR 31478), the “by the taxpayer” compen-
sation fraction in §1.199–3(k)(5) in T.D.
9263 (71 FR 31268) may have resulted in
a film that was produced entirely within
the United States as not qualifying under
section 199(c)(6) if less than 50 percent of
the total compensation relating to produc-
tion was paid “by the taxpayer.”
This Treasury decision revises the
“by the taxpayer” compensation
fraction in §1.199–3(k)(5) in T.D. 9263
(71 FR 31268) for determining the
not-less-than-50-percent-of-the-total-com-
pensationrequirementunder
§1.199–3(k)(1).Under the revised
fraction in §1.199–3(k)(5), the numerator
of the revised fraction is the compensation
for services performed in the United
States and the denominator is the total
compensation for services regardless
of where the production activities are
performed.The revised fraction
essentially compares (in the numerator)
the sum of the compensation for services
paid by the taxpayer for services
performed in the United States and the
compensation for services paid by others
for services performed in the United
States to (in the denominator) the sum of
the total compensation for services paid
by the taxpayer for services and the total
compensation for services paid by others
for services regardless of location.
Under §1.199–3(k)(6), a film that is a
qualified film under §1.199–3(k)(1) will
be treated as “produced by the taxpayer”
for purposes of section 199(c)(4)(A)(i)(II)
if the production activity performed by the
taxpayer is substantial in nature within the
meaning of §1.199–3(g)(2). Thus, a qual-
ified film will be treated as produced by
the taxpayer if the production of the qual-
ified film by the taxpayer is substantial in
nature taking into account all of the facts
and circumstances, including the relative
value added by, and relative cost of, the
taxpayer’s production activity, the nature
of the qualified film, and the nature of the
production activity that the taxpayer per-
forms.
The revised fraction in §1.199–3(k)(5)
follows the statutory language in section
199(c)(6) by referencing all compensation
for services related to the production as
opposed to the more limited “by the tax-
payer” compensation fraction in T.D. 9263
(71 FR 31268). Because taxpayers may
have difficulty obtaining information re-
lated to the compensation paid by others,
this Treasury decision provides a safe har-
bor in §1.199–3(k)(7) that treats a film as
a qualified film if not less than 50 percent
of the total compensation for services paid
by the taxpayer is compensation for ser-
vices performed in the United States. The
safe harbor further provides that a quali-
fied film will be treated as produced by the
taxpayer if the taxpayer satisfies the safe
harbor in §1.199–3(g)(3) with respect to
the qualified film, which requires that the
direct labor and overhead costs incurred
by the taxpayer to produce the qualified
film within the United States account for
20 percent or more of the total costs of the
film. Thus, a taxpayer will be treated as
having produced a qualified film if, in con-
nection with the qualified film, the direct
labor and overhead of the taxpayer to pro-
duce the qualified film within the United
States account for 20 percent or more of
the taxpayer’s CGS of the qualified film,
or in a transaction without CGS (for exam-
ple, a lease, rental, or license) account for
20 percent or more of the taxpayer’s “un-
adjusted depreciable basis” (as defined in
§1.199–3(g)(3)(ii)) in the qualified film.
Expanded Affiliated Groups
As discussed in the preamble to the
proposed regulations published on June
7, 2007 (72 FR 31478), §1.199–7(e),Ex-
ample 10, in T.D. 9263 (71 FR 31268)
misapplies §1.1502–13 of the consoli-
dated return regulations. Accordingly,
§1.199–7(e),Example 10, has been re-
vised to correctly apply the consolidated
return regulations. In addition, as also
discussed in the preamble to the proposed
regulations published on June 7, 2007 (72
FR 31478), the section 199 closing of the
books method under §1.199–7(f)(1)(ii) in
T.D. 9263 (71 FR 31268) could have cre-
ated a larger section 199 deduction than
is warranted. Accordingly, this Treasury
decision removes the section 199 closing
of the books method and revises theEx-
April 21, 20087932008–16 I.R.B.

amplein §1.199–7(g)(3) to apply thepro
rataallocation method.
Effective/Applicability Dates
Sections 1.199–3(k) and 1.199–7(e),
Example 10, (f)(1), and (g)(3) are applica-
ble to taxable years beginning on or after
March 7, 2008. A taxpayer may apply
§§1.199–3(k) and 1.199–7(e),Example
10, to taxable years beginning after De-
cember 31, 2004, and before March 7,
2008. However, for taxable years begin-
ning before June 1, 2006, a taxpayer may
rely on §1.199–3(k) only if the taxpayer
does not apply Notice 2005–14, 2005–1
C.B. 498 (see §601.601(d)(2)(ii)(b)), or
REG–105847–05, 2005–2 C.B. 987 (see
§601.601(d)(2)(ii)(b)), to the taxable year.
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 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 Internal Revenue Code, the notice of
proposed rulemaking preceding this regu-
lation was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is David H. McDonnell, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries), IRS. However,
other personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
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:
1.Revising the entries for
§1.199–3(k)(6) and (7).
2.Adding new entries for
§§1.199–3(k)(7)(i) and (ii); (8), (9), and
(10); and 1.199–8(i)(8) and (9).
3.Removing the entries for
§1.199–7(f)(1)(i), (ii), and (iii).
The additions and revisions read as fol-
lows:
§1.199–0 Table of contents.
*****
§1.199–3 Domestic production gross
receipts.
*****
(k) * * *
(6) Produced by the taxpayer.
(7) Qualified film produced by the tax-
payer — safe harbor.
(i) Safe harbor.
(ii) Determination of 50 percent.
(8) Production pursuant to a contract.
(9) Exception.
(10) Examples.
*****
§1.199–8 Other rules.
*****
(i) * * *
(8) Qualified film produced by the tax-
payer.
(9) Expanded affiliated groups.
*****
Par. 3. Section 1.199–3 is amended by:
1. Revising paragraphs (k)(1), (k)(4),
and (k)(5).
2. Redesignating paragraph (k)(6) as
(k)(9).
3. Redesignating paragraph (k)(7) as
(k)(10).
4. Adding new paragaphs (k)(6), (k)(7),
and (k)(8).
5. RevisingExample 6of newly redes-
ignated paragraph (k)(10).
The revisions and additions read as fol-
lows:
§1.199–3 Domestic production gross
receipts.
*****
(k)Definition of qualified film—(1)In
general.Thetermqualified filmmeans
any motion picture film or video tape un-
der section 168(f)(3), or live or delayed
television programming (film), if not less
than 50 percent of the total compensation
relating to the production of such film is
compensation for services performed in
the United States by actors, production
personnel, directors, and producers. For
purposes of this paragraph (k), the term
actorsincludes players, newscasters, or
any other persons who are compensated
for their performance or appearance in a
film. For purposes of this paragraph (k),
the termproduction personnelincludes
writers, choreographers and composers
whoarecompensatedforprovidingser-
vices during the production of a film,
as well as casting agents, camera opera-
tors, set designers, lighting technicians,
make-up artists, and other persons who are
compensated for providing services that
are directly related to the production of
the film. Except as provided in paragraph
(k)(2) of this section, the definition of a
qualified film does not include tangible
personal property embodying the qualified
film, such as DVDs or videocassettes.
*****
(4)Compensation for services.For
purposes of this paragraph (k), the term
compensation for servicesmeans all pay-
ments for services performed by actors,
production personnel, directors, and pro-
ducers relating to the production of the
film, including participations and resid-
uals. Payments for services include all
elements of compensation as provided for
in §1.263A–1(e)(2)(i)(B) and (3)(ii)(D).
Compensation for services is not limited
to W–2 wages and includes compensation
paid to independent contractors. In the
case of a taxpayer that uses the income
forecast method of section 167(g) and cap-
italizes participations and residuals into
the adjusted basis of the qualified film,
thetaxpayermustusethesameestimate
of participations and residuals in deter-
mining compensation for services. In the
case of a taxpayer that excludes partici-
pations and residuals from the adjusted
basis of the qualified film under section
167(g)(7)(D)(i), the taxpayer must use
2008–16 I.R.B.794April 21, 2008

the amount expected to be paid as partic-
ipations and residuals based on the total
forecasted income used in determining in-
come forecast depreciation in determining
compensation for services.
(5)Determination of 50 percent.
The not-less-than-50-percent-of-the-to-
tal-compensation requirement under para-
graph (k)(1) of this section is calculated
using a fraction. The numerator of the
fraction is the compensation for services
performed in the United States and the
denominator is the total compensation for
services regardless of where the produc-
tion activities are performed. A taxpayer
may use any reasonable method that is
satisfactory to the Secretary based on all
of the facts and circumstances, includ-
ing all historic information available, to
determine the compensation for services
performed in the United States and the
total compensation for services regardless
of where the production activities are per-
formed. Among the factors to be consid-
ered in determining whether a taxpayer’s
method of allocating compensation is rea-
sonable is whether the taxpayer uses that
method consistently from one taxable year
to another.
(6)Produced by the taxpayer. A qual-
ified film will be treated as produced
by the taxpayer for purposes of section
199(c)(4)(A)(i)(II) if the production activ-
ity performed by the taxpayer is substantial
in nature within the meaning of paragraph
(g)(2) of this section. The special rules of
paragraph (g)(4) of this section regarding
a contract with an unrelated person and
aggregation apply in determining whether
the taxpayer’s production activity is sub-
stantial in nature. Paragraphs (g)(2) and
(4) of this section are applied by substi-
tuting the termqualified filmfor QPP and
disregarding the requirement that the pro-
duction activity must be within the United
States. The production activity of the tax-
payer must consist of more than the minor
or immaterial combination or assembly of
two or more components of a film. For
purposes of paragraph (g)(2) of this sec-
tion, the relative value added by affixing
trademarks or trade names as defined in
§1.197–2(b)(10)(i) will be treated as zero.
(7)Qualified film produced by the
taxpayer — safe harbor. A film will be
treated as a qualified film under paragraph
(k)(1) of this section and produced by the
taxpayer under paragraph (k)(6) of this
section (qualified film produced by the
taxpayer) if the taxpayer meets the re-
quirements of paragraphs (k)(7)(i) and (ii)
of this section. A taxpayer that chooses
to use this safe harbor must apply all the
provisions of this paragraph (k)(7).
(i)Safe harbor. A film will be treated as
a qualified film produced by the taxpayer
if not less than 50 percent of the total com-
pensation for services paid by the taxpayer
is compensation for services performed in
the United States and the taxpayer satis-
fies the safe harbor in paragraph (g)(3) of
this section. The special rules of paragraph
(g)(4) of this section regarding a contract
with an unrelated person and aggregation
apply in determining whether the taxpayer
satisfies paragraph (g)(3) of this section.
Paragraphs (g)(3) and (4) of this section
are applied by substituting the termqual-
ified filmfor QPP but not disregarding the
requirement that the direct labor and over-
head of the taxpayer to produce the quali-
fied film must be within the United States.
Paragraph (g)(3)(ii)(A) of this section in-
cludes any election under section 181.
(ii)Determination of 50 percent.
The not-less-than-50-percent-of-the-to-
tal-compensation requirement under para-
graph (k)(7)(i) of this section is calcu-
lated using a fraction. The numerator of
the fraction is the compensation for ser-
vices paid by the taxpayer for services
performed in the United States and the
denominator is the total compensation for
services paid by the taxpayer regardless
of where the production activities are per-
formed. For purposes of this paragraph
(k)(7)(ii), the termpaid by the taxpayer
includes amounts that are treated as paid
by the taxpayer under paragraph (g)(4)
of this section. A taxpayer may use any
reasonable method that is satisfactory to
the Secretary based onall of the facts and
circumstances, including all historic infor-
mation available, to determine the com-
pensation for services paid by the taxpayer
for services performed in the United States
and the total compensation for services
paid by the taxpayer regardless of where
the production activities are performed.
Among the factors to be considered in
determining whether a taxpayer’s method
of allocating compensation is reasonable
is whether the taxpayer uses that method
consistently from one taxable year to an-
other.
(8)Production pursuant to a contract.
With the exception of the rules applicable
to an expanded affiliated group (EAG) un-
der §1.199–7 and EAG partnerships under
§1.199–3(i)(8), only one taxpayer may
claim the deduction under §1.199–1(a)
with respect to any activity related to the
production of a qualified film performed
in connection with the same qualified film.
If one taxpayer performs a production ac-
tivity pursuant to a contract with another
party, then only the taxpayer that has the
benefits and burdens of ownership of the
qualified film under Federal income tax
principles during the period in which the
production activityoccurs is treated as
engaging in the production activity.
*****
(10) * * *
Example 6. X creates a television program in
the United States that includes scenes from films li-
censed by X from unrelated persons Y and Z. Assume
that Y and Z produced the films licensed by X. The
not-less-than-50-percent-of-the-total-compensation
requirement under paragraph (k)(1) of this section
is determined by reference to all compensation for
services paid in the production of the television pro-
gram, including the films licensed by X from Y and
Z, and is calculated using a fraction as described in
paragraph (k)(5) of this section. The numerator of the
fraction is the compensation for services performed
in the United States and the denominator is the total
compensation for services regardless of where the
production activities are performed. However, for
purposes of calculating the denominator, in deter-
mining the total compensation paid by Y and Z, X
need only include the total compensation paid by Y
and Z to actors, production personnel, directors, and
producers for the production of the scenes used by X
in creating its television program.
*****
Par. 4. Section 1.199–7 is amended by:
1. RevisingExample 10of paragraph
(e).
2. Revising paragraphs (f)(1) and
(g)(3).
The revisions read as follows:
§1.199–7 Expanded affiliated groups.
*****
(e) * * *
Example 10.(i)Facts. Corporation P owns all
of the stock of Corporations S and B. P, S, and B file
a consolidated Federal income tax return on a calen-
daryearbasis.P,S,andBeachusesthesection861
method for allocating and apportioning their deduc-
tions. In 2010, S MPGE QPP in the United States at
a cost of $1,000. On November 30, 2010, S sells the
QPP to B for $2,500. On February 28, 2011, P sells
60% of the stock of B to X, an unrelated person. On
June 30, 2011, B sells the QPP to U, another unre-
lated person, for $3,000.
April 21, 20087952008–16 I.R.B.

(ii)Consolidated group’s 2010 QPAI. Because S
and B are members of a consolidated group in 2010,
pursuant to §1.199–7(d)(1) and §1.1502–13, neither
S’s $1,500 of gain on the sale of QPP to B nor S’s
$2,500 gross receipts from the sale are taken into ac-
count in 2010. Accordingly, neither S nor B has QPAI
in 2010.
(iii)Consolidated group’s 2011 QPAI. B becomes
a nonmember of the consolidated group at the end of
the day on February 28, 2011, the date on which P
sells 60% of the B stock to X. Under §1.199–7(d)(1)
and §1.1502–13(d), S takes the intercompany trans-
action into account immediately before B becomes
a nonmember of the consolidated group. Pursuant
to §1.1502–13(d)(1)(ii)(A)(1), because the QPP is
owned by B, a nonmember of the consolidated group
immediately after S’s gain is taken into account, B is
treated as selling the QPP to a nonmember for $2,500,
B’s adjusted basis in the property, immediately be-
fore B becomes a nonmember of the consolidated
group. Accordingly, immediately before B becomes
a nonmember of the consolidated group, S takes into
account $1,500 of QPAI (S’s $2,500 DPGR received
from B - S’s $1,000 cost of MPGE the QPP).
(iv)B’s 2011 QPAI.Pursuantto
§1.1502–13(d)(2)(i)(B), the attributes of B’s
corresponding item, that is, its sale of the QPP to
U, are determined as if the S division (but not the
B division) were transferred by the P, S, and B
consolidated group (treated as a single corporation)
to an unrelated person. Thus, S’s activities in MPGE
the QPP before the intercompany sale of the QPP to
B continue to affect the attributes of B’s sale of the
QPP. As such, B is treated as having MPGE the QPP.
Accordingly, upon its sale of the QPP, B has $500 of
QPAI (B’s $3,000 DPGR received from U minus B’s
$2,500 cost of MPGE the QPP).
*****
(f)Allocation of income and loss by a
corporation that is a member of the ex-
panded affiliated group for only a portion
of the year—(1)In general. A corporation
that becomes or ceases to be a member of
an EAG during its taxable year must allo-
cate its taxable income or loss, QPAI, and
W–2 wages between the portion of the tax-
able year that it is a member of the EAG
and the portion of the taxable year that it
is not a member of the EAG. This alloca-
tion of items is made by using thepro rata
allocation method described in this para-
graph (f)(1). Under thepro rataallocation
method, an equal portion of a corporation’s
taxable income or loss, QPAI, and W–2
wages for the taxable year is assigned to
each day of the corporation’s taxable year.
Those items assigned to those days that the
corporation was a member of the EAG are
then aggregated.
*****
(g) * * *
(3)Example. The following example
illustrates the application of paragraphs (f)
and (g) of this section:
Example.(i)Facts. Corporations X and Y, calen-
dar year corporations, are members of the same EAG
for the entire 2010 taxable year. Corporation Z, also a
calendar year corporation, is a member of the EAG of
which X and Y are members for the first half of 2010
and not a member of any EAG for the second half of
2010. During the 2010 taxable year, neither X, Y, nor
Z joins in the filing of a consolidated Federal income
tax return. Assume that X, Y, and Z each has W–2
wages in excess of the section 199(b) wage limita-
tion for all relevant periods. In 2010, X has taxable
income of $2,000 and QPAI of $600, Y has a taxable
loss of $400 and QPAI of ($200), and Z has taxable
income of $1,400 and QPAI of $2,400.
(ii)Analysis.Pursuanttothepro rataallocation
method, $700 of Z’s 2010 taxable income and $1,200
ofZ’s2010QPAIareallocatedtothefirsthalfofthe
2010 taxable year (the period in which Z is a member
of the EAG) and $700 of Z’s 2010 taxable income and
$1,200 of Z’s 2010 QPAI are allocated to the second
half of the 2010 taxable year (the period in which Z
is not a member of any EAG). Accordingly, in 2010,
the EAG has taxable income of $2,300 (X’s $2,000 +
Y’s ($400) + Z’s $700) and QPAI of $1,600 (X’s $600
+ Y’s ($200) + Z’s $1,200). The EAG’s section 199
deduction for 2010 is therefore $144 (9% of the lesser
of the EAG’s $2,300 of taxable income or $1,600 of
QPAI). Pursuant to §1.199–7(c)(1), this $144 deduc-
tion is allocated to X, Y, and Z in proportion to their
respective QPAI. Accordingly, X is allocated $48 of
the EAG’s section 199 deduction, Y is allocated $0 of
the EAG’s section 199 deduction, and Z is allocated
$96 of the EAG’s section 199 deduction. For the sec-
ond half of 2010, Z has taxable income of $700 and
QPAI of $1,200. Therefore, for the second half of
2010, Z has a section 199 deduction of $63 (9% of
the lesser of its $700 taxable income or $1,200 QPAI
for the second half of 2010). Accordingly, X’s 2010
section 199 deduction is $48, Y’s 2010 section 199
deduction is $0, and Z’s 2010 section 199 deduction
is $159, the sum of the $96 section 199 deduction of
the EAG allocated to Z for the first half of 2010 and
Z’s $63 section 199 deduction for the second half of
2010.
*****
Par. 5. Section 1.199–8 is amended by:
1. Adding two sentences at the end of
paragraph (a).
2. Adding new paragraphs (i)(8) and
(i)(9).
The revisions and additions read as fol-
lows:
§1.199–8 Other rules.
(a)In general. ***Forpurposesof
§§1.199–1 through 1.199–9, use of terms
such aspayment,paid,incurred,orpaid
or incurredis not intended to provide any
specific rule based upon the use of one
term versus another. In general, the use
of the termpayment,paid,incurred,or
paid or incurredis intended to convey the
appropriate standard under the taxpayer’s
method of accounting.
*****
(i) * * *
(8)Qualified film produced by the tax-
payer. Section 1.199–3(k) is applicable
to taxable years beginning on or after
March 7, 2008. A taxpayer may apply
§1.199–3(k) to taxable years beginning af-
ter December 31, 2004, and before March
7, 2008. However, for taxable years begin-
ning before June 1, 2006, a taxpayer may
rely on §1.199–3(k) only if the taxpayer
does not apply Notice 2005–14, 2005–1
C.B. 498 (see §601.601(d)(2)(ii)(b)ofthis
chapter), or REG–105847–05, 2005–2
C.B. 987 (see §601.601(d)(2)(ii)(b)ofthis
chapter), to the taxable year.
(9)Expanded affiliated groups. Section
1.199–7(e),Example 10, (f)(1), and (g)(3)
are applicable to taxable years beginning
on or after March 7, 2008. A taxpayer may
apply §1.199–7(e),Example 10, to taxable
years beginning after December 31, 2004,
and before March 7, 2008.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
Approved March 3, 2008.
Eric Solomon,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on March 6, 2008,
8:45 a.m., and published in the issue of the Federal Register
for March 7, 2008, 73 F.R. 12268)
Section 2036.—Transfers
With Retained Life Estate
26 CFR 20.2036–1: Transfers with retained life es-
tate.
(Also § 2038; 20.2038–1.)
Substitution power.This ruling pro-
vides guidance regarding whether the cor-
pus of aninter vivostrust is includible
in the grantor’s gross estate under section
2036 or 2038 of the Code if the grantor
retained the power, exercisable in a non-
fiduciary capacity, to acquire property held
in the trust by substituting other property
of equivalent value. The ruling provides
that, for estate tax purposes, the substitu-
tion power will not, by itself, cause the
value of the trust corpus to be includible
2008–16 I.R.B.796April 21, 2008

in the grantor’s gross estate, provided the
trustee has a fiduciary obligation (under lo-
cal law) to ensure the grantor’s compliance
with the terms of this power by satisfying
itself that the properties acquired and sub-
stituted by the grantor are in fact of equiv-
alent value and further provided that the
substitution power cannot be exercised in
a manner that can shift benefits among the
trust beneficiaries.
Rev. Rul. 2008–22
ISSUE
Is the corpus of aninter vivostrust in-
cludible in the grantor’s gross estate un-
der § 2036 or 2038 of the Internal Revenue
Code if the grantor retained the power, ex-
ercisable in a nonfiduciary capacity, to ac-
quire property held in the trust by substi-
tuting other property of equivalent value?
FACTS
In Year 1,D, a United States citizen,
established and funded Trust. Trust is an
irrevocableinter vivostrust for the ben-
efit ofD’s descendants.Tis the trustee
of Trust, andDis prohibited from serving
as trustee under the terms of Trust. The
governing instrument provides thatDhas
the power, exercisable at any time, to ac-
quire any property held in Trust by substi-
tuting other property of equivalent value.
The power is exercisable byDin a non-
fiduciary capacity, without the approval or
consent of any person acting in a fiduciary
capacity. To exercise the power of substi-
tution,Dmust certify in writing that the
substituted property and the trust property
for which it is substituted are of equiva-
lent value. In addition, under local law,T
has a fiduciary obligation to ensure that the
properties being exchanged are of equiva-
lent value. Under local law, if a trust has
two or more beneficiaries, the trustee has
a duty to act impartially in investing and
managing the trust assets, taking into ac-
count any differing interests of the benefi-
ciaries. Further, under local law and with-
out restriction in the trust instrument,T
has the discretionary power to acquire, in-
vest, reinvest, exchange, sell, convey, con-
trol, divide, partition, and manage the trust
property in accordance with the standards
provided by law.
Ddies in Year 2.
LAW AND ANALYSIS
Section 2036(a) provides that the value
of the gross estate shall include the value
of all property to the extent of any interest
therein of which the decedent has at any
time made a transfer (except in the case
of abona fidesale for an adequate and
full consideration in money or money’s
worth), by trust or otherwise, under which
the decedent has retained for life or for any
period not ascertainable without reference
to the decedent’s death or for any period
that does not in fact end before the dece-
dent’s death, (1) the possession or enjoy-
ment of, or the right to the income from,
the property, or (2) the right, either alone
or in conjunction with any person, to desig-
nate the persons who shall possess or enjoy
the property or the income from the prop-
erty.
Section 2038(a)(1) provides that the
value of the gross estate includes the value
of all property to the extent of any interest
therein of which the decedent has at any
time made a transfer (except in the case
of abona fidesale for an adequate and
full consideration in money or money’s
worth), by trust or otherwise, where the
enjoyment thereof was subject at the date
of the decedent’s death to any change
through the exercise of a power (in what-
ever capacity exercisable) by the decedent
alone or by the decedent in conjunction
with any other person to alter, amend,
revoke, or terminate, or where any such
power is relinquished during the 3-year
period ending on the date of the decedent’s
death.
InEstate of Jordahl v. Commissioner,
65 T.C. 92 (1975),acq. in result, 1977–2
C.B. 1, the decedent created aninter vivos
trust. Under the terms of the trust, the
decedent reserved the power to substitute
other securities or property for those held
in trust, provided the substituted property
was equal in value to the property replaced.
After the decedent’s death, the Service ar-
gued that the trust assets were includible
in the decedent’s gross estate under § 2038
because the decedent’s power to substitute
assets of equal value could be exercised
to alter the beneficial interests in the trust.
The court determined, however, that be-
cause the decedent was bound by fiduciary
standards and was therefore accountable
in equity to the succeeding income ben-
eficiary and remaindermen, the decedent
could not exercise the power to deplete the
trust or to shift trust benefits among the
beneficiaries. Accordingly, the court held
that the substitution power was not a power
to alter, amend, or revoke the trust within
the meaning of § 2038.
In general, a trustee has a fiduciary duty
to the trust and its beneficiaries. As a re-
sult, the trustee is held to a high standard of
conduct with respect to the administration
of the trust. A trustee is under a duty to
the beneficiaries of the trust to administer
the trust solely in the interest of the benefi-
ciaries. The trustee must act fairly, justly,
honestly, in the utmost good faith, and with
sound judgment and prudence. 90A C.J.S.
Trusts § 323 (2007). The trustee is also
subject to a duty of impartiality that re-
quires the trustee to take into account the
interests of all the beneficiaries for whom
the trustee is acting. Restatement (Third)
of Trusts §§ 183 and 232 (2007); 76 Am.
Jur. 2d Trusts § 434 (2008). A trustee
must administer the trust solely in the inter-
ests of the beneficiaries. Generally, a sale,
encumbrance, or other transaction involv-
ing the investment or management of trust
property entered into by the trustee for the
trustee’s own personal account or which is
otherwise affected by a conflict between
the trustee’s fiduciary and personal inter-
ests may be voidable by a beneficiary af-
fected by the transaction. Uniform Trust
Code § 802 (2005). If a trust has two or
more beneficiaries, the trustee must act im-
partially in investing, managing, and dis-
tributing the trust property, giving due re-
gard to the beneficiaries’ respective inter-
ests. Uniform Trust Code § 803 (2005).
See also,Sallee v. Fort Knox National
Bank, et. al., 286 F.3d 878, 891 (6
th
Cir.
2002) (distinguishing between a duty of
good faith and fair dealing, requiring par-
ties to “deal fairly” with one another, and
the more onerous fiduciary duty that re-
quires a party to place the interest of the
other party before one’s own interests).
In situations where the grantor of a trust
holds a nonfiduciary power to replace trust
assets with assets of equivalent value, the
trustee has a duty to ensure that the value
of the assets being replaced is equivalent
to the value of the assets being substi-
tuted. If the trustee knows or has reason
to believe that the exercise of the substi-
tution power does not satisfy the terms of
the trust instrument because the assets be-
ing substituted have a lesser value than the
April 21, 20087972008–16 I.R.B.

trust assets being replaced, the trustee has
a fiduciary duty to prevent the exercise
of the power. See Restatement (Third) of
Trusts § 75 (2007) and Uniform Trust Code
§§ 801 and 802 (2005).
In the instant case, unlike the situation
presented inEstate of Jordahl, the trust in-
strument expressly prohibitsDfrom serv-
ing as trustee and states thatD’s power
to substitute assets of equivalent value is
held in a nonfiduciary capacity. Thus,D
is not subject to the rigorous standards at-
tendant to a power held in a fiduciary ca-
pacity. However, under the terms of the
trust, the assetsDtransfers into the trust
must be equivalent in value to the assetsD
receives in exchange. In addition,Thas
a fiduciary obligation to ensure that the
assets exchanged are of equivalent value.
Thus,Dcannot exercise the power to sub-
stitute assets in a manner that will reduce
the value of the trust corpus or increaseD’s
net worth. Further, in view ofT’s abil-
ity to reinvest the assets andT’s duty of
impartiality regarding the trust beneficia-
ries,Tmust prevent any shifting of ben-
efits between or among the beneficiaries
that could otherwise result from a substitu-
tion of property byD. Under these circum-
stances,D’s retained power will not cause
the value of the trust corpus to be included
inD’s gross estate under § 2036 or 2038.
HOLDING
A grantor’s retained power, exercis-
able in a nonfiduciary capacity, to acquire
property held in trust by substituting prop-
erty of equivalent value will not, by itself,
cause the value of the trust corpus to be in-
cludible in the grantor’s gross estate under
§ 2036 or 2038, provided the trustee has a
fiduciary obligation (under local law or the
trust instrument) to ensure the grantor’s
compliance with the terms of this power
by satisfying itself that the properties ac-
quired and substituted by the grantor are
in fact of equivalent value, and further
provided that the substitution power can-
not be exercised in a manner that can shift
benefits among the trust beneficiaries. A
substitution power cannot be exercised in
a manner that can shift benefits if: (a) the
trustee has both the power (under local
law or the trust instrument) to reinvest the
trust corpus and a duty of impartiality with
respect to the trust beneficiaries; or (b)
the nature of the trust’s investments or the
level of income produced by any or all of
the trust’s investments does not impact the
respective interests of the beneficiaries,
such as when the trust is administered as a
unitrust (under local law or the trust instru-
ment) or when distributions from the trust
are limited to discretionary distributions
of principal and income.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Mayer Samuels of the Office of the
Associate Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this revenue ruling,
contact Mr. Samuels at (202) 622–3090
(not a toll-free call).
Section 2038.—Revocable
Transfers
26 CFR 20.2038–1: Revocable transfers.
Is the corpus of aninter vivostrust includible in
the grantor’s gross estate under section 2036 or 2038
of the Internal Revenue Code if the grantor retained
the power, exercisable in a nonfiduciary capacity, to
acquire property held in the trust by substituting other
property of equivalent value. See Rev. Rul. 2008-22,
page 796.
2008–16 I.R.B.798April 21, 2008

Part III. Administrative, Procedural, and Miscellaneous
Nonconventional Source Fuel
Credit, Section 45K Inflation
Adjustment Factor, and
Section 45K Reference Price
Notice 2008–44
SECTION 1. PURPOSE
This notice publishes the nonconven-
tional source fuel credit, inflation adjust-
ment factor, and reference price under
§ 45K of the Internal Revenue Code for
calendar year 2007. These are used to de-
termine the credit allowable under § 45K
for fuel produced from a nonconventional
source. The calendar year 2007 infla-
tion-adjusted credit applies to the sales of
barrel-of-oil equivalent of qualified fuels
sold by a taxpayer to an unrelated person
during the 2007 calendar year, the domes-
tic production of which is attributable to
the taxpayer.
SECTION 2. BACKGROUND
Section 45K(a) provides for a credit
for producing fuel from a nonconventional
source, measured in barrel-of-oil equiva-
lent of qualified fuels, the production of
which is attributable to the taxpayer and is
sold by the taxpayer to an unrelated per-
son during the tax year. The credit is equal
to the product of $3.00 and the appropriate
inflation adjustment factor.
Section 45K(b)(1) and (2) provides for
a phase-out of the credit. The credit al-
lowable under § 45K(a) must be reduced
by an amount which bears the same ratio
to the amount of the credit (determined
without regard to § 45K(b)(1)) as the
amount by which the reference price for
the calendar year in which the sale occurs
exceeds $23.50 bears to $6.00. The $3.00
in § 45K(a) and the $23.50 and $6.00 each
must be adjusted by multiplying these
amounts by the appropriate inflation ad-
justment factor.
Section 45K(c)(1), in part, defines the
term “qualified fuels” to include gas pro-
duced from biomass and liquid, gaseous,
or solid synthetic fuels produced from coal
(including lignite), including such fuels
when used as feedstocks.
Section 45K(d)(1) provides that the
credit applies only to sales of qualified
fuels the production of which is within
the United States (within the meaning of
§ 638(1)) or a possession of the United
States (within the meaning of § 638(2)).
Section 45K(d)(2)(A) requires that the
Secretary, not later than April 1 of each cal-
endar year, determine and publish in the
Federal Register the inflation adjustment
factor and the reference price for the pre-
ceding calendar year.
Section 45K(d)(2)(B) defines “inflation
adjustment factor” for a calendar year as
a fraction the numerator of which is the
GNP implicit price deflator for the calen-
dar year and the denominator of which is
the GNP implicit price deflator for calen-
dar year 1979. The term “GNP implicit
price deflator” means the first revision of
the implicit price deflator for the gross na-
tional product as computed and published
by the Department of Commerce.
Section 45K(d)(2)(C) defines “refer-
ence price” to mean with respect to a
calendar year the Secretary’s estimate of
the annual average wellhead price per bar-
rel for all domestic crude oil the price of
which is not subject to regulation by the
United States.
Section 45K(d)(5) provides that the
term “barrel-of-oil equivalent” with re-
spect to any fuel generally means that
amount of the fuel that has a Btu content
of 5.8 million.
Section 45K(g)(1) provides that in the
case of a facility for producing coke or
coke gas, which was placed in service
before January 1, 1993, or after June
30, 1998, and before January 1, 2010,
§ 45K(g) shall apply with respect to coke
and coke gas produced in such facility
and sold during the period beginning on
the later of January 1, 2006, or the date
that such facility is placed in service, and
ending on the date which is 4 years after
the date such period began.
Section 45K(g)(2)(B) provides that
in determining the amount of credit al-
lowable under § 45K solely by reason
of § 45K(g), § 45K(d)(2)(B) shall be ap-
plied by substituting “2004” for “1979.”
Accordingly, for purposes of § 45K(g),
the inflation adjustment factor for a cal-
endar year is a fraction the numerator of
which is the GNP implicit price deflator
for the calendar year and the denominator
of which is the GNP implicit price deflator
for calendar year 2004.
Section 45K(g)(2)(D) provides that the
phase-out of the credit under § 45K(b)(1)
does not apply in the case of facilities pro-
ducing coke or coke gas.
SECTION 3. REFERENCE PRICE
The reference price for calendar year
2007 is $66.52.
SECTION 4. INFLATION
ADJUSTMENT AND CREDIT
AMOUNT
.01Gas Produced from Biomass and
Liquid, Gaseous, or Solid Synthetic Fuel
Produced from Coal.
In the case of gas produced from
biomass and liquid, gaseous, or solid
synthetic fuel produced from coal, the
inflation adjustment factor for calendar
year 2007 is 2.4160. Because the calendar
year 2007 reference price exceeds $23.50
multiplied by the inflation adjustment
factor, the credit per barrel equivalent of
qualified fuel sold in calendar year 2007
is reduced by $4.87, which is the amount
that bears the same ratio to the amount of
the credit (determined without regard to
§ 45K(b)(1)) as the amount by which the
reference price for the calendar year 2007
exceeds $23.50 (adjusted for inflation)
bears to $6.00 (adjusted for inflation).
The phase-out amount is computed as
follows:
($3.00 x 2.4160) x [($66.52 - ($23.50 x
2.4160)) / ($6.00 x 2.4160)] = $4.87.
The nonconventional source fuel credit
under § 45K(a) is $2.38 per barrel-of-oil
equivalent of qualified fuels [($3.00 x
2.4160) - $4.87].
.02Facilities for Producing Coke or
Coke Gas.In case of facilities producing
coke or coke gas, the inflation adjustment
factor for calendar year 2007 is 1.0936.
The nonconventional source fuel credit is
$3.28 per barrel-of-oil equivalent ($3.00 x
1.0936).
SECTION 5. DRAFTING
INFORMATION CONTACT
The principal author of this notice
is Jennifer Bernardini of the Office of
Associate Chief Counsel (Passthroughs
April 21, 20087992008–16 I.R.B.

and Special Industries). For further in-
formation regarding this notice, contact
Ms. Bernardini at (202) 622–3110 (not a
toll-free call).
2008–16 I.R.B.800April 21, 2008

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Guidance Rega
rding Foreign
Base Company S
ales Income
REG–124590–
07
AGENCY: Inte
rnal Revenue Service
(IRS), Treas
ury Department.
ACTION: Noti
ce of proposed rulemaking.
SUMMARY: Thi
s document contains pro-
posed regula
tions that provide guidance
relating to f
oreign base company sales
income, as d
efined in section 954(d), in
cases in whi
ch personal property sold by
a controlle
d foreign corporation (CFC) is
manufactur
ed, produced, or constructed
pursuant t
o a contract manufacturing ar-
rangement
or by one or more branches of
the CFC. Th
ese regulations, in general,
will affec
t CFCs and their United States
sharehold
ers. Certain portions of these
proposed r
egulations restate changes to
§1.954–3
(a)(4) that were contained in for-
mer propo
sed regulations.
DATES: Wr
itten or electronic comments
and reque
sts for a public hearing must be
received
by May 28, 2008.
ADDRESSE
S: Send submissions to:
CC:PA:L
PD:PR(REG–124590–07),
Interna
l Revenue Service, PO Box
7604, Be
nFranklinStation, Wash-
ington,
DC 20044 or send electron-
ically,
via the Federal eRulemaking
Portal
atwww.regulations.gov(IRS
REG–12
4590–07).
FOR FUR
THER INFORMATION
CONTAC
T: Concerning the proposed reg-
ulatio
ns, Ethan Atticks, (202) 622–3840;
concer
ning submissions of comments,
Kelly
Banks, (202) 622–0392 (not toll-free
numbe
rs).
SUPPL
EMENTARY INFORMATION:
Backg
round
A.For
eign Base Company Sales Income
Under
section 951(a)(1)(A)(i), a United
State
s shareholder of a CFC includes in
gross income i
tspro ratashare of the
CFC’s subpart
F income for the CFC’s
taxable year w
hich ends with or within
the taxable ye
ar of the shareholder. Sec-
tion 952(a)(2
) defines the term “subpart
F income” to m
ean, in part, “foreign base
company inco
me.” Section 954(a)(2) de-
fines “forei
gn base company income”
to include fo
reign base company sales
income (FBC
SI) for the taxable year. Sec-
tion 954(d)
(1) defines FBCSI to mean
income deri
ved by a CFC in connection
with (1) the
purchase of personal property
from a rela
ted person and its sale to any
person, (2
) the sale of personal property to
any person
on behalf of a related person,
(3) the pur
chase of personal property from
any person
and its sale to a related person,
or (4) the
purchase of personal property
from any p
erson on behalf of a related
person, p
rovided (in all of these cases)
that the p
roperty both is manufactured,
produce
d, grown or extracted outside of
the CFC’
s country of organization and is
sold for
use, consumption or disposition
outside
of such country.
The Trea
sury regulations further define
FBCSI an
d the applicable exceptions from
FBCSI. T
hese exceptions from FBCSI are
contai
ned in §1.954–3(a)(2), which ad-
dresse
s personal property manufactured,
produc
ed, constructed, grown, or extracted
within
the CFC’s country of organization
(the sa
me country manufacture exception),
§1.95
4–3(a)(3), which addresses personal
prope
rty sold for use, consumption or
dispo
sition within the CFC’s country of
organ
ization, and §1.954–3(a)(4) which
addre
sses personal property manufac-
ture
d, produced or constructed by the CFC
(the
manufacturing exception).
Sect
ion 1.954–3(a)(4)(i) provides that
FBCS
I does not include income of a CFC
deri
ved in connection with the sale of per-
sona
l property manufactured, produced,
or co
nstructed by such corporation in
who
le or in part from personal property
whi
ch it has purchased. It then states
gen
erally that a foreign corporation is
con
sidered to have manufactured, pro-
duc
ed, or constructed personal property
whi
ch it sells if the property sold is in
ef
fect not the propertywhich it purchased.
Sp
ecifically, §1.954–3(a)(4)(i) states that
pe
rsonal property sold will be considered
as not being th
e property purchased if the
provisions of
§1.954–3(a)(4)(ii) or (iii) are
satisfied.
Section 1.954
–3(a)(4)(ii) and (iii) set
forth two sepa
rate tests to determine
whether a CFC i
s considered to manufac-
ture, produce
, or construct personal prop-
erty that it s
ells. First, §1.954–3(a)(4)(ii)
sets forth a “
substantial transformation”
test, pursua
nt to which if personal prop-
erty is subst
antially transformed prior to
sale, the pr
operty sold will be treated as
having been
manufactured, produced, or
constructe
d by the selling corporation.
Examples of
substantial transformation
provided i
n the regulations include the
conversio
n of wood pulp to paper, steel
rods to scr
ews and bolts, and tuna fish to
canned tun
a. Second, §1.954–3(a)(4)(iii)
sets forth
a general “substantive test” and
asafehar
bor that apply when purchased
property
is used by the CFC as a compo-
nent part
of personal property that is sold
by the CFC
. Under the substantive test, the
sale of p
ersonal property will be treated
as the sa
le of a product manufactured by
the CFC r
ather than the sale of compo-
nent par
ts if the operations conducted by
the CFC i
n connection with the property
are sub
stantial in nature and generally
consid
ered to constitute the manufacture,
produc
tion, or construction of the prop-
erty. T
he assembly of automobiles from
compon
ent parts is provided as an example
of an a
ctivity considered to be substan-
tial i
n nature and generally considered to
const
itute the manufacture of a product.
Under
the safe harbor, without limiting
the ap
plication of the substantive test, the
oper
ations of a selling corporation in con-
nect
ion with the use of purchased property
as a c
omponent part of the personal prop-
erty
that is sold will be considered to
cons
titute the manufacture of a product if
in co
nnection with such property conver-
sio
n costs (direct labor and factory burden)
of s
uch corporation account for 20 percent
or m
ore of the total cost of goods sold.
Sec
tion 1.954–3(a)(4)(iii) makes clear
tha
t, in no event, however, will packaging,
pr
epackaging, labeling, or minor assem-
bl
y operations constitute the manufacture,
pr
oduction, or construction of property
fo
r purposes of section 954(d)(1). For
pu
rposes of this preamble, satisfaction of
April 21, 20088012008–16 I.R.B.

the requirements of §1.954–3(a)(4)(ii) or
(iii) will be referred to as satisfaction of
the “physical manufacturing test.”
B.The Branch Rule
In addition to the general FBCSI rules
of section 954(d)(1), section 954(d)(2)
provides a special rule for purposes of
determining FBCSI if a CFC carries on
activities through a branch or similar
establishment outside its country of or-
ganization and the carrying on of such
activities has substantially the same effect
as if such branch or similar establish-
ment were a wholly owned subsidiary
corporation (the branch rule). Under the
branch rule, to the extent prescribed by
regulations, the income attributable to the
carrying on of such activities is treated as
income derived by a wholly owned sub-
sidiary of the CFC and constitutes FBCSI
of the CFC. See section 954(d)(2). Sec-
tion 1.954–3(b)(1)(i) (addressing sales or
purchase branches) and (ii) (addressing
manufacturing branches) provide rules on
the application of the branch rule. The
purpose of the branch rule is to prevent a
CFC from using a foreign branch to avoid
the application of the FBCSI rules. Ab-
sent the branch rule, a CFC could engage
in purchasing or manufacturing activi-
ties with respect to personal property in a
high-tax jurisdiction and selling activities
with respect to the property in a low-tax
jurisdiction without incurring FBCSI. In
such a case, the sales income would not
be FBCSI to the CFC because the same
person would be purchasing or manufac-
turing the personal property and selling
the personal property. The branch rule
therefore treats a sales, purchase, or man-
ufacturing branch located outside of the
country of organization of the CFC as a
separate corporation so as to create a re-
lated party transaction between the branch
and the remainder of the CFC for purposes
of determining FBCSI.
With respect to manufacturing
branches, §1.954–3(b)(1)(ii)(a)provides
that if a CFC carries on manufacturing,
producing, constructing, growing, or ex-
tracting activities by or through a branch
or similar establishment located outside
of its country of organization and the use
of that branch or similar establishment
for such activities with respect to per-
sonal property purchased or sold by or
through the remainder of the CFC has
substantially the same tax effect as if that
branch or similar establishment were a
wholly owned subsidiary corporation of
such CFC, that branch or similar estab-
lishment and the remainder of the CFC
will be treated as separate corporations
for purposes of determining FBCSI of
such CFC. Section 1.954–3(b)(1)(ii)(b)
provides that the use of a manufacturing
branch or similar establishment will be
considered to have substantially the same
tax effect as if it were a wholly owned
subsidiary corporation of the CFC if the
tax imposed on the income derived by the
remainder of the CFC satisfies the test set
forth in §1.954–3(b)(1)(ii)(b)(themanu-
facturing branch tax rate disparity test).
There is also a separate tax rate disparity
test which applies to sales or purchase
branches under §1.954–3(b)(1)(i)(b)(the
sales branch tax rate disparity test).
For purposes of the manufacturing
branch tax rate disparity test, the income
considered to be derived by the remainder
of the CFC is determined first by applying
the rules of §1.954–3(b)(2)(i) which treat
the CFC and the manufacturing branch
as separate corporations, and then by de-
termining the income of the CFC that
would be FBCSI under section 954(d)(1)
and §1.954–3(a)(1) if the CFC and the
branch were separate corporations (but
without applying the exceptions contained
in §1.954–3(a)(2), (3), and (4)).
Specifically, §1.954–3(b)(2)(i)(a) treats
the remainder of the CFC and the manu-
facturing branch as separate corporations.
In addition, §1.954–3(b)(2)(i)(b)and(c)
deem purchases or sales to be made “on
behalf of” a related person to take into
account that the remainder of the CFC
and the branch are treated as separate
corporations. Section 1.954–3(b)(2)(i)(b)
addresses sales and purchase branches by
treating selling or purchasing activities
conducted through a branch or similar
establishment with respect to personal
property as performed on behalf of the
CFC if the CFC manufactures, produces,
constructs, grows, extracts, purchases,
or sells that same property. Section
1.954–3(b)(2)(i)(c) provides a corollary
rule addressing manufacturing branches,
pursuant to which the purchase or sale
of personal property by the remainder of
the CFC is treated as performed on behalf
of a branch that manufactures, produces,
constructs, grows, or extracts that prop-
erty. The general rule of §1.954–3(a)(1)
is then applied to determine the income
that would be FBCSI if the branch and
the remainder of the CFC were separate
corporations subject to the “on behalf of”
related party transactions described above.
Section 1.954–3(b)(1)(ii)(b) provides
that the manufacturing branch tax rate
disparity test is satisfied if the income that
would be FBCSI after applying these spe-
cial rules is taxed in the year when earned
at an effective rate of tax that is less than
90 percent of, and at least 5 percentage
points less than, the hypothetical effective
rate of tax. The hypothetical effective rate
of tax is the effective rate of tax which
would apply to such income under the
laws of the country in which the manu-
facturing branch is located, if, under the
laws of such country, the entire income of
the CFC were considered derived by such
CFC from sources within such country
from doing business through a permanent
establishment therein, received in such
country, and allocable to such permanent
establishment, and the CFC were created
or organized under the laws of, and man-
aged and controlled in, such country.
If the manufacturing branch
tax rate disparity test is satisfied,
§1.954–3(b)(1)(ii)(a) then treats the
branch and the remainder of the CFC
as separate corporations and the special
rules of §1.954–3(b)(2)(ii) are applied for
purposes of determining FBCSI. Section
1.954–3(b)(2)(ii)(a) through (c) provide
separate CFC and related party rules that
mirror §1.954–3(b)(2)(i)(a) through (c).
Section 1.954–3(b)(2)(ii)(d) through (f)
provide special rules to prevent double
counting of FBCSI and to align treatment
of branches with the treatment of separate
CFCs. In particular, §1.954–3(b)(2)(ii)(e)
provides that incomederived by a branch
or similar establishment, or by the remain-
der of the CFC, will not be FBCSI if the
income would not be so considered if it
were derived by a separate CFC under
like circumstances.
C.Legal Developments
In Rev. Rul. 75–7, 1975–1 C.B. 244,
revoked by Rev. Rul. 97–48, 1997–2
C.B. 89, the IRS considered a case in
which a CFC purchased raw material from
related persons outside of its country of
2008–16 I.R.B.802April 21, 2008

organization, contracted with an unre-
lated manufacturer located outside of its
country of organization to process the raw
material into a finished product, and then
sold the finished product to unrelated per-
sons outside of its country of organization.
Under the terms of the arrangement, the
contract manufacturer was paid a con-
version fee. The raw material, work in
process, and finished product remained
the property of the CFC at all times. The
CFC alone had complete control over the
timeandquantityofproductionaswell
as complete quality control over the con-
version process. The IRS ruled, under
these facts, that the performance of the
operations by the contract manufacturer
whereby the raw material was processed
into a finished good was considered to
be a performance by the CFC, and the
CFC would therefore be treated as having
substantially transformed personal prop-
erty. The ruling further concluded that,
because the CFC conducted the manufac-
turing activity outside of its country of
organization, it was considered to do so
through a branch or similar establishment.
Because the manufacturing branch tax rate
disparity test was not satisfied, however,
the activities of the “branch” were not
treated as the activities of a separate CFC
and the CFC was therefore entitled to the
manufacturing exception from FBCSI.
See §601.601(d)(2)(ii)(b).
InAshland Oil, Inc. v. Commissioner,
95 TC 348 (1990), the Tax Court held that
an unrelated manufacturing corporation
in a contract manufacturing arrangement
with a CFC cannot be treated as a branch
or similar establishment of the CFC. In
Vetco, Inc. v. Commissioner,95TC579
(1990), the Tax Court held that a wholly
owned subsidiary of a CFC in a contract
manufacturing arrangement with the CFC
also cannot be treated as a branch or simi-
lar establishment of the CFC.
In Rev. Rul. 97–48 the IRS revoked
Rev. Rul. 75–7. Rev. Rul. 97–48
states that the IRS will followAshland
Oil, Inc. v. CommissionerandVetco,
Inc. v. Commissioner, and therefore con-
firms that the IRS will not treat a separate
contract manufacturer as a branch for pur-
poses of section 954(d)(2). In addition,
Rev. Rul. 97–48 rules that the activities
of a contract manufacturer cannot be at-
tributed to a CFC for purposes of either
section 954(d)(1) or section 954(d)(2) to
determine whether the income of a CFC is
FBCSI. However, the ruling does not ad-
dress the circumstances under which the
activities of the CFC itself may qualify as
manufacturing when acontract manufac-
turing or similar arrangement is in place.
See §601.601(d)(2)(ii)(b).
D.Business Developments
Final regulationsaddressing FBCSI
were first published in 1964 (T.D. 6734,
1964–1 C.B. 237 [29 FR 6392]). Since
then, global economic expansion and glob-
alization have led to significant changes
in manufacturing. Many multinational
groups have extensive manufacturing net-
works that straddle geographic borders.
These cross-border manufacturing net-
works are created primarily to leverage
expertise and cost efficiencies. In addi-
tion, the use of contract manufacturing
arrangements has become a common way
of manufacturing products because of the
flexibility and efficiencies it affords. Ac-
cordingly, updated rules in this area are
important to the continued competitive-
ness of U.S. businesses operating abroad.
Explanation of Provisions
In response to the growing impor-
tance of contract manufacturing and other
manufacturing arrangements, the Trea-
sury Department and the IRS propose
to modernize the FBCSI regulations in
light of current business structures and
practices that are inadequately addressed
by the current regulations. Specifically,
the proposed regulations address: (1) the
application of the manufacturing excep-
tion where the physical manufacturing
test is not satisfied by the CFC but where
theCFC,and/orabranchoftheCFC,is
otherwise involved in the manufacturing
process; (2) the application of the branch
rule to business structures involving the
use of one or more branches engaged in
manufacturing, producing, constructing,
growing, or extracting activities; and (3)
other miscellaneous branch rule issues.
Certain portions of these proposed regula-
tions restate changes that were previously
proposed in REG–104537–97, 1998–1
C.B. 892 [63 FR 14669] and withdrawn
in REG–113909–98, 1999–2 C.B. 125 [64
FR 37727].
A.Application of the manufacturing
exception where the physical
manufacturing test is not satisfied
by the CFC but the CFC is involved in
the manufacturing process — Substantial
contribution to manufacturing
Section 954(d)(1) includes, as FBCSI,
income derived in connection with the pur-
chase of personal property from a related
person and “its” sale to any person, and in-
comederivedinconnectionwiththepur-
chase of personal property from any per-
sonand“its”saletoarelatedperson.Some
taxpayers argue that use of the word “its”
implies that the property sold must be the
same property that is purchased for the
sales income to be FBCSI. Accordingly,
these taxpayers assert that where the per-
sonal property purchased by the CFC is
manufactured such that the property pur-
chased is not the same as the property
sold by the CFC, the property sold by the
CFC is not the property purchased and
therefore the sale of such property does
not generate FBCSI, even if the CFC it-
self performs little or no part of the man-
ufacture of that property. They further ar-
gue that the manufacturing exception un-
der §1.954–3(a)(4)(i) provides a safe har-
bor but does not define the universe of
cases in which personal property sold by
a CFC is considered to be different from
the property purchased by the CFC for
purposes of determining FBCSI. In addi-
tion, they argue that §1.954–3(a)(4)(i) sup-
ports their view because it states, in part,
that “[a] foreign corporation will be con-
sidered, for purposes of this subparagraph,
to have manufactured, produced, or con-
structed personal property which it sells if
the property sold is in effect not the prop-
erty which it purchased.”
The Treasury Department and the IRS
believe that the position taken by these tax-
payers is contrary to existing law, and re-
sults from an incorrect reading of section
954(d)(1) and §1.954–3(a)(4)(i). Section
954(d)(1) requires only a purchase of per-
sonal property and the sale of that personal
property by the CFC with no indication as
to form. Moreover, section 954(d)(1)(A)
limits FBCSI to income derived in connec-
tion with the purchase (or sale) of personal
property that is manufactured, produced,
grown, or extracted outside of the CFC’s
country of organization, thereby indicating
that section 954(d)(1) is concerned with
April 21, 20088032008–16 I.R.B.

the segregation of purchasing or selling
and manufacturing into different jurisdic-
tions, not merely with whether the prop-
erty was manufactured.
Section 1.954–3(a)(4) provides the
only set of rules under which a change
in form of personal property is consid-
ered relevant for purposes of determining
FBCSI. The first sentence of Treas. Reg.
§1.954–3(a)(4) sets forth the general rule
that “foreign base company sales income
does not include income of a CFC derived
in connection with the sale of personal
property manufactured, produced, or con-
structed by such corporation in whole or
in part from personal property which it
has purchased.” The third sentence of that
paragraph explains that “the property sold
will be considered, for purposes of this
subparagraph, as not being the property
which is purchased if the provisions of
subdivision (ii) or (iii) of this subparagraph
are satisfied.” The plain language of the
regulation, as well as the examples, clarify
that in order to satisfy §1.954–3(a)(4)(ii)
or (iii) the relevant manufacturing ac-
tivities must be performed by the CFC
itself. See, for example,Electronic Arts,
Inc. v. Commissioner, 118 TC 226, 265
(2002) (stating that “petitioner’s focus on
certain language in section 1.954–3(a)(4),
Income Tax Regs., overlooks the regu-
lation’s requirement that various actions
have been done ‘by’ the corporation being
evaluated”). See also,Medchem v. Com-
missioner, 116 TC 308 (2001).
Further, this regulation was issued
shortly after the statute became effective,
and is consistent with the legislative his-
tory, which contemplates that property
sold will be considered different from the
property purchased only when the CFC
itself manufactures that property. See
S. Rep. No. 1881, 87
th
Cong., 2d Sess.
(1962), 1962–3 C.B. 841, 949 (stating that
“[i]n a case in which a controlled foreign
corporation purchases parts or materials
which it then transforms or incorporates
into a final product, income from the
sale of the final product would not be
foreign base company sales income if
the corporation substantially transforms
the parts or materials, so that, in effect,
the final product is not the property
purchased.”)
The proposed regulations clarify that
for purposes of determining FBCSI per-
sonalpropertysoldbyaCFCwillbe
considered to be the property purchased
by the CFC regardless of whether it is
sold in the same form in which it was pur-
chased, in a different form than the form in
which it was purchased, or as a component
part of a manufactured product, except as
specifically provided by the same coun-
try manufacture exception contained in
§1.954–3(a)(2) and the manufacturing
exception contained in §1.954–3(a)(4).
Therefore, the only time that the manu-
facture of a product will affect whether
income is FBCSI is when the manufac-
ture of the product is performed by the
CFC or performed in the country of or-
ganization of the CFC. With respect to
the manufacturing exception contained in
§1.954–3(a)(4), the proposed regulations
clarify that a CFC qualifies for the manu-
facturing exception only if the CFC, acting
through its employees, manufactured the
relevant product within the meaning of
§1.954–3(a)(4)(i). The proposed regula-
tions also further provide rules to deter-
mine whether the activities of a branch or
similar establishment outside the country
in which the CFC is incorporated have
substantially the same tax effect as if the
branch or similar establishment were a
wholly owned subsidiary corporation, and
thus whether under section 954(d)(2) the
income attributable to the branch or simi-
lar establishment constitutes FBCSI of the
CFC.
The Treasury Department and the IRS
recognize, however, that due to business
considerations in the global marketplace,
personal property may be manufactured
pursuant to a contract manufacturing ar-
rangement under which the CFC engages
in activities related to the manufacture of
the property (for example, oversight, di-
rection and control over the contract man-
ufacturer) but does not satisfy the physical
manufacturing test. In certain of these
cases, the Treasury Department and the
IRS believe that the CFC should qualify
for the manufacturing exception to FBCSI.
Accordingly, the proposed regulations
modify §1.954–3(a)(4) to provide that a
CFC that provides a “substantial contribu-
tion” with respect tothe manufacture, pro-
duction, or construction of personal prop-
erty, but that could not satisfy the physical
manufacturing test, may have manufac-
tured such property for purposes of the
manufacturing exception. Specifically,
proposed §1.954–3(a)(4)(i) provides that,
in addition to proposed §1.954–3(a)(4)(ii)
and (iii), a taxpayer may qualify for the
manufacturing exception by satisfying the
“substantial contribution test” in proposed
§1.954–3(a)(4)(iv). Pursuant to proposed
§1.954–3(a)(4)(iv)(a), a CFC will sat-
isfy the substantial contribution test with
respect to personal property only if the
facts and circumstances evidence that the
controlled foreign corporation makes a
substantial contribution through the activ-
ities of its employees to the manufacture
of that property.
Factors to be considered in determining
whether a CFC makes a substantial con-
tribution to the manufacture of personal
property include but are not limited to: (1)
oversight and direction of the activities or
process (including management of the risk
of loss) pursuant to which the property
is manufactured under the principles of
§1.954–3(a)(4)(ii) or (iii); (2) performance
of activities that are considered in, but in-
sufficient to satisfy the tests provided in
§1.954–3(a)(4)(ii) and (iii); (3) control of
the raw materials, work-in-process and fin-
ished goods; (4) management of the manu-
facturing profits; (5) material selection; (6)
vendor selection; (7) control of logistics;
(8) quality control; and (9) direction of the
development, protection, and use of trade
secrets, technology, product design and de-
sign specifications, andother intellectual
property used in manufacturing the prod-
uct.
In light of the addition of the new test
contained in proposed §1.954–3(a)(4)(iv),
the interaction between several existing
regulation sections and the new test is
clarified. First, the existing manufacturing
exceptions under §1.954–3(a)(4)(ii) and
(iii) are modified to clarify that the applica-
bility of the tests under §1.954–3(a)(4)(ii)
and (iii) are restricted to cases in which
physical transformation or physical as-
sembly or conversion of component parts
is conducted by the selling corporation.
Second, the definition of manufacturing
for purposes of the same country manufac-
ture exception contained in §1.954–3(a)(2)
is modified to exclude manufacturing as
defined under the substantial contribution
test, and to ensure that the modifications
to the existing manufacturing exceptions
under §1.954–3(a)(4)(ii) and (iii) do not
narrow the same country manufacture
exception. The Treasury Department
and the IRS did not intend these regu-
2008–16 I.R.B.804April 21, 2008

lations to change the scope of the same
country manufacture exception. Section
1.954–3(a)(2) excludes manufacturing as
defined under the substantial contribu-
tion test because a rule that expanded the
definition of manufacturing to include
§1.954–3(a)(4)(iv) activities for purposes
of the same country manufacture excep-
tion could prove difficult to administer.
Sucharulecouldrequireanassessment
of activities other than physical manufac-
turing conducted by an unrelated person.
Modifying §1.954–3(a)(2) ensures that the
modifications to the existing manufactur-
ing exceptions under §1.954–3(a)(4)(ii)
and (iii) do not narrow the same country
manufacture exception by clarifying that
property manufactured in the country of
organization of the selling corporation will
qualify for the same country manufacture
exception regardless of whose employees
engage in manufacturing activities that
satisfy the principles of §1.954–3(a)(4)(ii)
or (iii).
Third, the proposed regulations modify
§1.954–3(a)(6), which addresses the appli-
cation of the manufacturingexceptiontoa
CFC’s distributive share of partnership in-
come where the partnership manufactures
and sells personal property. The reference
to “the separate activities or property of
the controlled foreign corporation or any
other person,” in §1.954–3(a)(6) was in-
tended to clarify that the activities of an-
other person could not be attributed to the
partnership for purposes of applying the
manufacturing exception. Because these
proposed regulations clarify that no attri-
bution is allowed for purposes of applying
the manufacturing exception that language
is now unnecessary and is therefore re-
moved. Section 1.954–3(a)(6) is also mod-
ified consistent with the modifications to
§1.954–3(a)(4) providing that a CFC may
only qualify for the manufacturing excep-
tion through the activities of its employees.
B.Application of the branch rule to
business structures involving the use
of more than one branch engaged in
manufacturing
Proposed §1.954–3(b)(2)(ii)(c)(2)cre-
ates a rebuttable presumption with respect
to the application of the substantial contri-
bution test where a CFC claims to satisfy
the substantial contribution test with re-
spect to the activities of a branch of that
CFC that satisfies §1.954–3(a)(4)(ii) or
(iii). Under this rebuttable presumption,
if a branch of a CFC satisfies the physical
manufacturing test with respect to per-
sonalpropertysoldbytheremainderof
theCFC,theremainderoftheCFCwill
be presumed not to make a substantial
contribution to the manufacture of that
personal property unless the CFC can re-
but that presumption to the satisfaction of
the Commissioner.
The Treasury Department and the IRS
believe that these rules are necessary as
a backstop to the branch rule. In the ab-
sence of the rebuttable presumption, a rule
permitting a CFC to qualify for the manu-
facturing exception based upon its contri-
bution to the manufacturing activities of a
branch would prove difficult to administer.
Such a rule could encourage a CFC to elect
classification of its subsidiaries that en-
gage in manufacturing activities as disre-
garded entities, obfuscating the division of
manufacturing labor and income between
the CFC and its branches. Of course, the
presumption may be rebutted and any ad-
verse consequences alleviated by incorpo-
rating the branch that satisfies the physical
manufacturing test.
Although §1.954–3(b)(1)(i)(c)pro-
vides a rule addressing the use of
multiple sales or purchase branches,
§1.954–3(b)(1)(ii) does not provide a
corollary rule for the use of multiple manu-
facturing branches. The Treasury Depart-
ment and the IRS believe that the lack of
aspecificruleaddressingtheuseofmore
than one manufacturing branch does not
currently limit the general manufacturing
branch rule of §1.954–3(b)(1)(ii)(a)from
applying to each manufacturing branch of
aCFCinacasewhereaCFCperforms
manufacturing activities through more
than one branch or similar establishment.
Rather, such an application is consistent
with the rules regarding multiple sales
or purchase branches. Nonetheless, for
clarity, the proposed regulations set forth
rules addressing the use of multiple man-
ufacturing branches.
The proposed regulations set forth two
rules addressing the application of the
manufacturing branch tax rate disparity
test to multiple manufacturing branches.
Proposed§1.954–3(b)(1)(ii)(c)(2)
addresses situations in which multiple
branches each perform manufacturing ac-
tivities with respect to separate items of
personal property that are then sold by the
CFC. Consistent with the rule for multiple
sales branches, the proposed regulations
require the separate application of the
manufacturing branch tax rate disparity
test to each branch that is manufacturing a
separate item of personal property.
Proposed§1.954–3(b)(1)(ii)(c)(3)
addresses situations in which multiple
branches, or one or more branches and the
remainder of the CFC, perform manufac-
turing activities with respect to the same
item of personal property that is then sold
by the CFC. When multiple branches, or
one or more branches and the remainder of
the CFC, perform manufacturing activities
with respect to the same item of personal
property, the manufacturing branch tax
rate disparity test is applied by giving
satisfaction of the physical manufacturing
test precedence over other contributions
to manufacturing. Therefore, if only one
branch, or only the remainder of the CFC,
satisfies the physical manufacturing test
of §1.954–3(a)(4)(ii) or (iii), then the lo-
cation of that branch or the remainder
of the CFC will be the location of man-
ufacturing of the personal property for
purposes of applying the manufacturing
branch tax rate disparity test. If more than
one branch, or one or more branches and
the remainder of the CFC, each satisfy
the physical manufacturing test, then the
branch or the remainder of the CFC lo-
cated or organized in the jurisdiction that
would impose the lowest effective rate of
tax will be the location of manufacturing
of the personal property for purposes of
applying the manufacturing branch tax
rate disparity test.
If none of the branches nor the remain-
der of the CFC satisfies the physical man-
ufacturing test, but the CFC as a whole
satisfies the substantial contribution test
contained in proposed §1.954–3(a)(4)(iv),
then the location of manufacturing of the
personal property will be the location of
thebranchortheremainderoftheCFC
that provides the predominant amount of
the CFC’s substantial contribution to man-
ufacturing. Whether any branch or the re-
mainder of the CFC provides a predomi-
nant amount of the CFC’s contribution to
manufacturing is determined by applying
the facts and circumstances test provided
in §1.954–3(a)(4)(iv) to weigh the contri-
bution to manufacturing of each branch or
the remainder of the CFC. If a predominant
April 21, 20088052008–16 I.R.B.

amount of the CFC’s contribution to manu-
facturing is not provided by any one loca-
tion, the location of manufacturing of the
personal property for purposes of apply-
ingthemanufacturingbranchtaxratedis-
parity test will be that place (either the re-
mainder of the CFC or one of its branches)
where manufacturing activity is performed
and which would impose the highest ef-
fective rate of tax when applying either
§1.954–3(b)(1)(i)(b)or(ii)(b).
Because the proposed regulations ad-
dress cases in which two or more branches,
or one or more branches and the remainder
of the CFC, perform manufacturing activi-
ties related to the manufacture of the same
item of property, §1.954–3(b)(2)(ii)(a)
is modified to clarify the application of
the branch rule where manufacturing
activities are performed in more than
one location. In such cases, proposed
§1.954–3(b)(2)(ii)(a) provides that, for
purposes of treating the location of sales
or purchase income as a separate corpora-
tion for purposes of determining whether
FBCSI is incurred, that separate corpo-
ration will exclude any branch or the re-
mainder of the CFC that would be treated
as a separate corporation, if the hypothet-
ical rate imposed by the jurisdiction of
each such branch or the remainder of the
CFC were separately tested against the
effective rate of tax imposed on the sales
or purchase income under the relevant tax
rate disparity test.
C.Miscellaneous Branch Rule Issues
The Treasury Department and the IRS
also propose to amend certain other as-
pects of §1.954–3(b) as follows:
1.Definition of a manufacturing branch
While §1.954–3(b)(1)(ii)(a) defines
a manufacturing branch as a branch or
similar establishment through which a
CFC carries on manufacturing activi-
ties, it does not explicitly require that
§1.954–3(a)(4)(i) be satisfied by the CFC
as a whole in order for the manufactur-
ing branch rule to apply. The Treasury
Department and the IRS believe that a
manufacturingbranchonlyexistswithre-
spect to personal property sold by a CFC
if the CFC (including any branch of that
CFC) has manufactured that property. Ac-
cordingly, proposed §1.954–3(b)(1)(ii)(a)
clarifies this point by providing that the
manufacturing branch rule applies only
where a CFC (including any branch of the
CFC) satisfies the manufacturing require-
ment under proposed §1.954–3(a)(4).
2.Modification of §1.954–3(b)(2)(ii)(e)
Section 1.954–3(b)(2)(ii)(e)provides
that income derived by a branch or sim-
ilar establishment, or by the remainder
of the CFC, will not be FBCSI if the in-
come would not be so considered if it
were derived by a separate CFC under like
circumstances. For example, if a branch
of a CFC purchases personal property
from an unrelated person and sells the
property to an unrelated person without
any involvement by the remainder of the
CFC, the branch rule will not apply to
create a related party transaction between
the branch and the remainder of the CFC.
Therefore the purchase and sale of that
personal property by the branch will not
generate FBCSI.
The proposed regulations provide that
the substantial contribution test generally
applies to a CFC that sells personal prop-
erty where another person (for example, a
second CFC) satisfies the physical manu-
facturing test with respect to that property.
However, a negative presumption applies
where a CFC claims to satisfy the sub-
stantial contribution test with respect to
income from the sale of personal property
where the physical manufacturing test is
satisfied by a branch of that CFC. The
effect of these rules is that, where a CFC
seeks to rely on the substantial contribu-
tion test with respect to the income from
the sale of personal property manufactured
(within the meaning of §1.954–3(a)(4)(ii)
or (iii)) by one or more of its branches,
but cannot rebut the negative presumption
to the satisfaction of the Commissioner,
abranchortheremainderofaCFCmay
have FBCSI where a separate CFC would
not. Therefore, to integrate the rules re-
garding the substantial contribution test
and its application under the branch rule,
proposed §1.954–3(b)(2)(ii)(e) excepts
from its general rule cases in which a
branch satisfies the physical manufactur-
ing test with respect to personal property
and the remainder of the controlled foreign
corporation fails to rebut the presumption
that it does not satisfy the substantial con-
tribution test with respect to the activities
of that manufacturing branch.
In addition, consistent with §1.954–
3(b)(2)(ii)(f), §1.954–3(b)(2)(ii)(e)is
modified to clarify that it applies only for
purposes of paragraph (b) of §1.954–3
(that is, the branch rule). This clarifies
that in no event will the branch rule cause
income not to be FBCSI if that income
would otherwise be FBCSI under section
954(d)(1). For example, assume a CFC
incorporated in Country Y purchases
personal property from a related party
and has that property manufactured by
a contract manufacturer in Country Z.
If the CFC does not perform any other
activity with respect to the manufacture
of the property, and if the CFC sells the
manufactured property through a branch
located in Country Z for use, consumption,
or disposition outside of Country Y, the
income from the sale of that property
is FBCSI under section 954(d)(1). If
the branch located in Country Z were
a separate CFC the income would not
be FBCSI because it would be selling
personal property manufactured in its
country of organization, Country Z.
However, because the income would be
FBCSI to the CFC under section 954(d)(1),
proposed §1.954–3(b)(2)(ii)(e) does not
apply to create a different result.
3.Modification of §1.954–3(b)(2)(i)(b),
(b)(2)(ii)(b) and (b)(4), Example 3
Commentators have noted that
§1.954–3(b)(2)(i)(b) and (ii)(b) can be
read to cause a branch that purchases
from unrelated persons and sells to unre-
lated persons to have FBCSI even where
the remainder of the CFC has no con-
nection with the personal property that
is sold. Although §1.954–3(b)(2)(ii)(e)
should prevent such a result, commen-
tators note that a contrary reading is
possible because the sales branch rules
of §1.954–3(b)(2)(i)(b)and(ii)(b) apply,
in part, with respect to personal prop-
erty manufactured, produced, constructed,
grown, or extracted by, or personal prop-
erty purchased or sold by the “controlled
foreign corporation” (as opposed to by
the “remainder” of the controlled foreign
corporation). For example, in a case in
which a branch bothmanufactures and
sells personal property, the branch could
be considered to sell on behalf of the re-
mainder of the CFC because the branch’s
manufacturing activities would be consid-
2008–16 I.R.B.806April 21, 2008

ered to be manufacturing activities of the
CFC, thereby triggering the application of
§1.954–3(b)(2)(ii)(b). Further, commen-
tators note that §1.954–3(b)(4),Example
3appears to support this reading because
in that example a branch of a corporation
purchases from a related person and sells
to an unrelated person, and the branch is
treated as selling that property on behalf
of the remainder of the CFC, even though
the remainder of the corporation does not
manufacture, purchase, or sell the personal
property.
Section 1.954–3(b)(2)(i)(b) and (ii)(b)
are intended to apply only to purchasing or
selling by a branch with respect to personal
property manufactured, purchased, or sold
by “the remainder of” the CFC (including
any branch treated as the remainder of the
CFC). For example, the branch rule could
apply in a case where personal property is
manufactured by the CFC in the country
of organization of the CFC and then sold
by a branch of the CFC located outside of
the country of organization of the CFC.
However, the branch rule does not apply
where, for example, a branch of the CFC
purchases personal property from an unre-
lated party and sells it to an unrelated party
without any involvement by the remainder
of the CFC. Accordingly, the proposed
regulations amend §1.954–3(b)(2)(i)(b)
and (ii)(b)byaddingthewords“remain-
der of” before each place where the words
“controlled foreign corporation” appear in
those paragraphs and by adding the words
“(or by any branch treated as the remain-
der of the CFC)” after each place where
the words “controlled foreign corporation”
appear in those paragraphs. Consistent
with this change, the proposed regula-
tions revise the rationale for the result in
§1.954–3(b)(4),Example 3as described
below.
In §1.954–3(b)(4),Example 3, a branch
of a second-tier CFC purchases finished
goods from the first-tier CFC and sells 90
percent of the product for use, consump-
tion, or disposition outside of the country
in which the branch is located and the
country of organization of the second-tier
CFC. The remainder of the second-tier
CFC does not engage in any manufactur-
ing or selling activities. The sales branch
tax rate disparity test is met in comparison
to the effective tax rate of the second-tier
CFC (the first-tier CFC and second-tier
CFC are organized in the same country).
The example concludes that since the sales
branch tax disparity test is met, the branch
is treated as a separate CFC and is treated
as selling personal property on behalf of
the second-tier CFC and therefore the 90
percent of sales made for use, consump-
tion, or disposition outside of the branch’s
country result in FBCSI.
The rationale of the example is incor-
rect because the branch is not selling on
behalf of the second-tier CFC because the
remainder of the second-tier CFC (not in-
cluding the branch) does not manufacture,
purchase, or sell the personal property.
Therefore, §1.954–3(b)(2)(i)(b) and (ii)(b)
do not apply. However, the result is correct
because the branch, treated as a separate
corporation, is purchasing from a related
person, the first-tier CFC, organized out-
side of the branch’s country and selling
to persons outside the branch’s country
and the branch is located in a jurisdic-
tion that satisfies the sales branch tax rate
disparity test with respect to the income
from the sale of the personal property. Ac-
cordingly, the proposed regulations revise
§1.954–3(b)(4),Example 3to provide the
correct rationale for the result. In addition,
the result in §1.954–3(b)(4),Example 3is
further revised to add two alternative fac-
tual scenarios (purchase from an unrelated
party, and manufacture within the mean-
ing of proposed §1.954–3(a)(4)(iv) by the
selling branch) to illustrate the point that,
in general, a branch will not have FBCSI
if a separate CFC would not have FBCSI
under like circumstances.
Proposed Effective/Applicability Date
These regulations will apply to taxable
years of CFCs beginning on or after the
date they are published as final regula-
tions in theFederal Register,andfortax-
able years of United States shareholders in
which or with which such taxable years of
the CFCs end.
Reliance on Proposed Regulations
Until these regulations are finalized,
taxpayers may choose to apply these reg-
ulations in their entirety to all open tax
years as if they were final regulations.
Request for Comments
The Treasury Department and the
IRS request comments on all aspects of
these proposed regulations, including
comments regarding the substantial con-
tribution test, and the activities listed in
§1.954–3(a)(4)(iv)(b).In particular, com-
ments are requested on whether one or
more safe harbors should be added to the
substantial contribution test. In drafting
the proposed regulations, the Treasury De-
partment and the IRS considered a number
of approaches to a safe harbor but ulti-
mately chose to request comments in this
regard because of difficulties in fashion-
ing a safe harbor that would be flexible
enough to apply across various industries
and across a range of different types of
manufacturing arrangements. Among the
safe harbors considered in drafting the
proposed regulations were: (1) a list of
mandatory activities; (2) a cost based test;
(3) a compensation based test; (4) a value
basedtest;(5)ataxratedisparitybased
test; and (6) a percentage based test com-
paring the compensation paid to employ-
ees of the CFC for performing activities
related to the manufacturing process vs.
the total cost for all activities related to the
manufacturing process (that is, including
costs paid to a contract manufacturer but
excluding the cost of raw materials and
marketing intangibles). In addition, the
Treasury Department and the IRS request
comments as to whether the requirement,
under the manufacturing exception from
foreign base company sales income, that
the activities of the CFC be performed by
its employees, should permit commercial
arrangements where individuals perform-
ing services for the CFC, while not on
its payroll, are nevertheless controlled by
employees of the CFC.
Comments are also requested on
whether it would be appropriate to add
an anti-abuse rule similar to the foreign
base company services substantial assis-
tance test announced in Notice 2007–13
to prevent a CFC from qualifying for the
manufacturing exception based on the ap-
plication of the substantial contribution
test in cases in which substantially all of
the direct or indirect contributions to the
manufacture of personal property provided
collectively by the CFC and any related
United States person is provided by one or
more related United States persons. Such
a rule might provide, for example, that
where (1) the United States parent of a
CFC provides 45 percent of the manufac-
turing contribution, (2) the CFC provides 5
April 21, 20088072008–16 I.R.B.

percent of the manufacturing contribution,
and (3) an unrelated contract manufacturer
provides 50 percent of the manufacturing
contribution to the personal property, the
CFC does not make a substantial contri-
bution to the manufacture of that property
because a related United States person
provides 80 percent or more of the contri-
bution to the manufacture of the property
(90 percent in this case, 45/50) provided
collectively by the CFC and any related
United States person. Such a rule was
considered but ultimately not included in
the proposed regulations and comments
are requested on whether or not such a rule
should be added to the final regulations.
See §601.601(d)(2)(ii)(b).
In addition, comments are requested on
the multiple manufacturing branch rules.
First, comments are requested on whether
the negative presumption rule concerning
cases in which the selling branch or the
remainder of the CFC performs activities
described in proposed §1.954–3(a)(4)(iv)
is more appropriate than an alternative rule
that would deny the use of the test con-
tained in proposed §1.954–3(a)(4)(iv) in
cases in which a branch of the CFC man-
ufactures the property within the meaning
of proposed §1.954–3(a)(4)(ii) or (iii).
Second, comments are requested on the
consequences of and possible alternatives
to proposed §1.954–3(b)(1)(ii)(c)(3)(e),
which provides that if a predominant
amount of the CFC’s substantial contribu-
tion is not provided by any one location,
the location of manufacturing of the per-
sonal property will be considered to be that
location (either the remainder of the CFC
or one of its branches) which imposes the
highest effective rate of tax that would be
imposed on the sales income, among those
locations where manufacturing activity
related to the generation of that income
is performed. The Treasury Department
and the IRS considered a rule that would
allow taxpayers to alternatively use the
mean effective rate of tax among the lo-
cations where manufacturing activity is
performed, so long as that effective rate
of tax was within a set number of percent-
age points of the highest effective tax rate
that would be imposed by any jurisdiction
in which a manufacturing branch or the
remainder of the CFC was located or orga-
nized. However, the Treasury Department
and the IRS were concerned about the
complexity of such a rule. The Treasury
Department and the IRS request comments
on whether this or other alternatives to the
highest rate test would be appropriate. Fi-
nally, comments are requested on whether
any modifications to §1.954–3(b)(1)(i)(b)
and (b)(1)(ii)(b) should be adopted to
make the rules concerning the comparison
of effective rates of tax easier to apply.
Special Anal
yses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations and because the proposed regula-
tion does not impose a collection of in-
formation on small entities, the Regula-
tory Flexibility Act (5 U.S.C. Ch. 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice of
proposed rulemaking was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies) or electronic com-
ments that are submitted timely to the IRS.
The Treasury Department and the IRS re-
quest comments on the clarity of the pro-
posed rules and how they can be made eas-
ier to understand. All comments will be
available for public inspection and copy-
ing. A public hearing will be scheduled
if requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Ethan Atticks, Office of Associate
Chief Counsel (International). However,
other personnel from the Treasury Depart-
ment and the IRS participated in their de-
velopment.
*****
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
26 CFR part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.954–3 is amended by:
1. Adding a new sentence after the first
sentence of paragraph (a)(1)(i), and by re-
vising the second sentence ofExample 1in
paragraph (a)(1)(iii), and the first sentence
ofExample 2in paragraph (a)(1)(iii).
2. Revising the third sentence of para-
graph (a)(2).
3. Revising paragraph (a)(4)(i), and the
first sentences of paragraphs (a)(4)(ii) and
(iii), and by adding paragraph (a)(4)(iv).
4. Revising the text of paragraph
(a)(6)(i).
5. Adding a new sentence to the end of
paragraph (b)(1)(ii)(a).
6. Redesignating the text of paragraph
(b)(1)(ii)(c) as paragraph (b)(1)(ii)(c)(1),
andaddingaparagraphheadingtonewly
designated paragraph (b)(1)(ii)(c).
7. Adding paragraphs (b)(1)(ii)(c)(2),
and (c)(3).
8. Revising paragraph (b)(2)(i)(b).
9. Adding a new sentence to the end of
paragraph (b)(2)(ii)(a), and revising para-
graph (b)(2)(ii)(b).
10.Redesignating paragraph
(b)(2)(ii)(c) as paragraph (b)(2)(ii)(c)(1
),
revising the paragraph heading of para-
graph (b)(2)(ii)(c), adding paragraph
(b)(2)(ii)(c)(2), and revising paragraph
(b)(2)(ii)(e).
11. RevisingExample 3in paragraph
(b)(4).
12. Adding paragraph (d).
The additions and revisions read as fol-
lows:
§1.954–3 Foreign Base Company Sales
Income.
(a) * * *
(1)In general—(i)General rules.
***For purposes of the preceding
sentence, except as provided in paragraphs
(a)(2) and (a)(4) of this section, personal
property sold by a controlled foreign
corporation will be considered to be the
2008–16 I.R.B.808April 21, 2008

same property that was purchased by the
controlled foreign corporation regardless
of whether the personal property is sold in
the same form in which it was purchased,
in a different form than the form in which
it was purchased, or as a component part
of a manufactured product. * * *
*****
Example 1. * * * Corporation A purchases from
M Corporation, a related person, articles manufac-
tured in the United States and sells the articles to P,
not a related person, for delivery and use in foreign
country Y. * * *
Example 2. Corporation A inExample 1also pur-
chases from P, not a related person, articles manufac-
tured in country Y and sells the articles to foreign cor-
poration B, a related person, for use in foreign country
Z.***
*****
(2) * * * The principles set forth in para-
graphs (a)(4)(i), (a)(4)(ii), and (a)(4)(iii)
of this section apply under this paragraph
(a)(2) in determining what constitutes
manufacture, production, or construction
of personal property, excluding, in the case
of manufacture, production, or construc-
tion by a person other than the controlled
foreign corporation, the requirement set
forth in paragraph (a)(4)(i) of this section
that the provisions of paragraphs (a)(4)(ii)
and (a)(4)(iii) of this section may only
be satisfied through the activities of that
person’s employees. * * *
*****
(4)Property manufactured, produced,
or constructed by the controlled foreign
corporation—(i)—In general.Foreign
base company sales income does not
include income of a controlled foreign
corporation derivedin connection with
the sale of personal property manufac-
tured, produced, or constructed by such
corporation in whole or in part from per-
sonal property which it has purchased. A
controlled foreign corporation will have
manufactured, produced, or constructed
personal property which the corporation
sells only if such corporation satisfies
the provisions of paragraphs (a)(4)(ii),
(a)(4)(iii), or (a)(4)(iv) of this section
through the activities of its employees
with respect to such property. A con-
trolled foreign corporation will not be
treated as having manufactured, produced,
or constructed personal property which
the corporation sells merely because the
property is sold in a different form than the
form in which it was purchased. For rules
of apportionment in determining foreign
base company sales income derived from
the sale of personal property purchased
and used as a component part of property
which is not manufactured, produced, or
constructed, see paragraph (a)(5) of this
section.
(ii)***Ifpersonalpropertypurchased
by a foreign corporation is substantially
transformed by such foreign corpora-
tion prior to sale, the property sold by
the selling corporation is manufactured,
produced, or constructed by such selling
corporation. * * *
(iii) * * * If purchased property is used
as a component part of personal property
which is sold, the sale of the property will
be treated as the sale of a manufactured
product, rather than the sale of component
parts, if the assembly or conversion of the
component parts into the final product by
the selling corporation involves activities
that are substantial in nature and gener-
ally considered to constitute the manufac-
ture, production, or construction of prop-
erty. ***
(iv)Substantial contribution to manu-
facturing of personal property—(a)—In
general. This paragraph (a)(4)(iv) applies
only if a controlled foreign corporation
does not satisfy paragraph (a)(4)(ii) or
(a)(4)(iii) of this section, but the personal
property purchased by a controlled foreign
corporation would be considered to be
manufactured, produced, or constructed
prior to sale (under the principles of para-
graphs (a)(4)(ii) or (iii) of this section) by
the controlled foreign corporation if the
manufacturing, producing, and construct-
ing activities undertaken with respect to
that property prior to sale were under-
taken by the controlled foreign corporation
through the activities of its employees.
If this paragraph (a)(4)(iv) applies, the
personal property sold by the controlled
foreign corporation is manufactured, pro-
duced, or constructed by such controlled
foreign corporation only if the facts and
circumstances evidencethat the controlled
foreign corporation makes a substantial
contribution through the activities of its
employees to the manufacture, production,
or construction of the personal property
sold. The determination of whether a
controlled foreign corporation makes a
substantial contribution through the activ-
ities of its employees to the manufacture,
production, or construction of the personal
property sold will involve, but will not
necessarily be limited to, consideration
of the activities set forth in paragraph
(a)(4)(iv)(b) of this section. The weight
given to any activity (whether or not set
forth) will vary with the facts and circum-
stances of the particular business. The
presence or absence of any activity, or of
a particular number of activities, is not
determinative. Further, the fact that other
persons make contributions to the man-
ufacture, production, or construction of
personal property prior to sale does not
necessarily prevent the controlled foreign
corporation from making a substantial
contribution to the manufacture, construc-
tion, or production of that property through
the activities of its employees.
(b)Activities. Activities of a con-
trolled foreign corporation’s employees
to be considered in determining whether
a controlled foreigncorporation makes a
substantial contribution through the activ-
ities of its employees to the manufacture,
construction, or production of personal
property include but are not limited to—
(1) Oversight and direction of the activ-
ities or process (including management of
the risk of loss) pursuant to which the prop-
erty is manufactured, produced, or con-
structed under the principles of paragraphs
(a)(4)(ii) or (iii) of this section;
(2) Performance of activities that are
considered in but that are insufficient to
satisfy the tests provided in paragraphs
(a)(4)(ii) and (a)(4)(iii) of this section;
(3) Control of the raw materials, work-
in-process and finished goods;
(4) Management of the manufacturing
profits;
(5) Material selection;
(6) Vendor selection;
(7) Control of logistics;
(8) Quality control; and
(9) Direction of the development, pro-
tection, and use of trade secrets, technol-
ogy, product design and design specifica-
tions, and other intellectual property used
in manufacturing the product.
(c) The rules of this paragraph (a)(4)(iv)
are illustrated by the following examples:
Example 1.No substantial contribution to man-
ufacturing.(i)Facts. FS, a controlled foreign cor-
poration, purchases raw materials from a related per-
son. The raw materials are then manufactured (un-
der the principles of paragraph (a)(4)(iii) of this sec-
tion) into Product X by CM, an unrelated corporation
that performs the physical conversion outside of FS’s
country of organization, pursuant to a contract man-
April 21, 20088092008–16 I.R.B.

ufacturing arrangement. Product X is then sold by
FS for use outside of FS’s country of organization.
At all times, FS retains control of the raw material,
work-in-process, and finished goods, as well as the
intangibles used in the conversion process. FS retains
the right to oversee and direct the physical conversion
of Product X by CM but does not regularly exercise,
through its employees, its powers of oversight or di-
rection.
(ii)Result. FS does not satisfy paragraph
(a)(4)(ii) or (a)(4)(iii) of this section because FS
does not, through the activities of its employees,
substantially transform, convert or assemble personal
property into Product X. However, Product X was
manufactured (by CM), and therefore this paragraph
(a)(4)(iv) applies. FS does not satisfy the test under
this paragraph (a)(4)(iv) because it does not make a
substantial contribution through the activities of its
employees to the manufacture of Product X. Mere
contractual ownership of materials and intellectual
property and contractual rights to exercise powers of
direction and control (without the exercise of those
powers) are not sufficient to satisfy this paragraph
(a)(4)(iv). Therefore, FS is not considered to have
manufactured Product X under paragraph (a)(4)(i) of
this section.
Example 2.Substantial contribution to manufac-
turing, unrelated manufacturer.(i)Facts. Assume
the same facts as inExample 1, except for the follow-
ing. FS, through its employees, is engaged in product
design and quality control. Employees of FS regu-
larly exercise the right to oversee and direct the ac-
tivities of CM in the manufacture of Product X.
(ii)Result. FS does not satisfy paragraph
(a)(4)(ii) or (a)(4)(iii) of this section with respect to
Product X because FS does not, through the activities
of its employees, substantially transform, convert or
assemble personal property into Product X. However,
Product X was manufactured (by CM), and therefore
this paragraph (a)(4)(iv) applies. FS satisfies the test
under this paragraph (a)(4)(iv) because it makes a
substantial contribution through the activities of its
employees to the manufacture of Product X. There-
fore FS is considered to have manufactured Product
X. The analysis and conclusion in thisExample 2
would be the same if CM were a corporation that was
related to FS.
Example 3.Employees of another person.(i)
Facts. FS, a controlled foreign corporation organized
in Country M, purchases raw materials from a related
person. The raw materialsare then manufactured (un-
der the principles of paragraph (a)(4)(iii) of this sec-
tion) into Product X by CM, an unrelated contract
manufacturer located in Country C. CM uses employ-
ees of another corporation to operate its manufactur-
ing plant and convert the raw materials into Product
X. Apart from the physical conversion of the raw ma-
terials into Product X, employees of FS perform all of
the other activities with respect to the manufacture of
Product X (for example, oversight and direction of
the manufacturing process, control of raw materials,
control of logistics, vendor selection, quality control).
FS sells Product X for use, consumption or disposi-
tion outside Country M.
(ii)Result. If the manufacturing activities under-
taken with respect to Product X prior to sale were un-
dertaken by FS through the activities of its employ-
ees, FS would have satisfied the manufacturing ex-
ception contained in paragraph (a)(4)(iii) of this sec-
tion with respect to Product X. Therefore, this para-
graph (a)(4)(iv) applies. FS satisfies the test under
this paragraph (a)(4)(iv) because it makes a substan-
tial contribution through the activities of its employ-
ees to the manufacture of Product X. Therefore, FS is
considered to have manufactured Product X. If CM’s
manufacturing plant were located in Country M, the
test in paragraph (a)(2) of this section could be sat-
isfied even if CM did not manufacture Product X
through the activities of its employees.
Example 4.Automated manufacturing.(i)Facts.
FS, a controlled foreign corporation, purchases raw
materials from a related person. The raw materi-
als are then manufactured (under the principles of
paragraph (a)(4)(ii) of this section) into Product X
by CM, an unrelated corporation located outside of
FS’s country of organization, pursuant to a contract
manufacturing arrangement. Product X is then sold
by FS to related and unrelated persons for use outside
of FS’s country of organization. Under the contract
manufacturing arrangement, CM is responsible for
the physical transformation of the raw materials into
Product X. At all times, FS retains ownership of the
raw material, work-in-process, and finished goods.
FS retains the right to oversee and direct the physical
conversion of Product X by CM but does not regu-
larly exercise, through its employees, its powers of
oversight or direction. FS is the owner of sophisti-
cated software and network systems that remotely
and automatically (without human involvement) take
orders, route them to CM, order raw materials, and
perform quality control. FS has a small number
of computer technicians who monitor the software
and network systems to ensure that they are running
smoothly and to apply any necessary patches or fixes.
The software and network systems were developed
by employees of DP, the U.S. corporate parent of FS,
pursuant to a cost sharing agreement between DP and
FS. DP employees regularly supervise the computer
technicians, evaluate the results of the automated
manufacturing business, and make ongoing opera-
tional decisions, including with regard to acceptable
performance of the manufacturing process, stoppages
of that process, and product and process redesign
and updates to meet the needs of the business and its
customers. DP employees develop and provide to FS
all of the upgrades to the software and network sys-
tems. DP also has employees who control the other
aspects of the manufacturing process such as product
design, vendor and material selection, management
and retention of the manufacturing profits, and the
selection of CM.
(ii)Result. FS does not satisfy paragraph
(a)(4)(ii) or (a)(4)(iii) of this section with respect to
Product X because FS doesnot, through the activities
of its employees, substantially transform, convert or
assemble personal property into Product X. If the
manufacturing activities undertaken with respect to
Product X between the time the raw materials were
purchased and the time Product X was sold were
undertaken by FS through the activities of its em-
ployees, FS would have satisfied the manufacturing
exception contained in paragraph (a)(4)(iii) of this
section with respect to Product X. Therefore, this
paragraph (a)(4)(iv) applies. FS does not satisfy
the test under this paragraph (a)(4)(iv) because it
does not make a substantial contribution through
the activities of its employees to the manufacture of
Product X. Mere contractual ownership of materials
and intellectual property together with contractual
rights to exercise powers of direction and control
and a small number of technical employees are not
sufficient to satisfy this paragraph (a)(4)(iv). FS’s
primary contribution to the manufacture of Product X
is the provision of the software and network systems
to CM. Substantial operational responsibilities and
decision making are exercised by DP employees who
direct the activities of the FS employees. Therefore,
FS is not considered to have manufactured Product
X.
*****
(6)***(i)***Todeterminetheex-
tent to which a controlled foreign corpo-
ration’s distributive share of any item of
gross income of a partnership would have
been foreign base company sales income if
received by it directly, under §1.952–1(g),
the property sold will be considered to be
manufactured, produced or constructed by
the controlled foreign corporation, within
the meaning of paragraph (a)(4) of this sec-
tion, only if the manufacturing exception
of paragraph (a)(4) of this section would
have applied to exclude the income from
foreign base company sales income if the
controlled foreign corporation had earned
the income directly, determined by taking
into account the activities of the employees
of, and property owned by, the partnership.
*****
(b) * * *
(1) * * *
(ii) * * *
(a) * * *The provisions of this para-
graph (b)(1)(ii)(a) will not apply unless the
controlled foreign corporation (including
any branches or similar establishments of
such controlled foreign corporation) man-
ufactures, produces, or constructs such
personal property within the meaning of
paragraph (a)(4)(i) of this section.
*****
(c)Use of more than one branch—(1)
Use of one or more sales or purchase
branches in addition to a manufacturing
branch. ***
(2)Use of more than one branch to
manufacture, produce, construct, grow, or
extract separate items of personal prop-
erty. If a controlled foreign corporation
carries on manufacturing, producing, con-
structing, growing, or extracting activi-
ties with respect to separate items of per-
sonal property by or through more than
one branch or similar establishment lo-
cated outside the country under the laws
2008–16 I.R.B.810April 21, 2008

of which such corporation is created or or-
ganized, then paragraphs (b)(2)(ii)(b)and
(c) of this section will be applied sepa-
rately to each such branch or similar estab-
lishment (by treating such branch or sim-
ilar establishment as if it were the only
branch or similar establishment of the con-
trolled foreign corporation and as if any
other branches or similar establishments
were separate corporations) in determining
whether the use of such branch or similar
establishment has substantially the same
tax effect as if such branch or similar estab-
lishment were a wholly owned subsidiary
corporation of the controlled foreign cor-
poration. The application of this paragraph
(b)(1)(ii)(c)(2) is illustrated by the follow-
ing example:
Example.Multiple branches that satisfy para-
graph (a)(4)(ii) or (a)(4)(iii) of this section.(i)Facts.
FS is a controlled foreign corporation organized in
Country M. FS operates two branches, Branch A and
Branch B located in Country A and Country B, re-
spectively. Branch A and Branch B each manufacture
separate items of personal property (Product X and
Product Y respectively) within the meaning of para-
graph (a)(4)(ii) or (iii) of this section. Raw materials
used in the manufacture of Product X and Product Y
are purchased by FS from an unrelated person. FS en-
gages in activities in Country M to sell Product X and
Product Y to a related person for use, disposition or
consumption outside of Country M. Employees of FS
located in Country M perform only sales functions.
The effective rate imposed on the income from the
sales of Product X and Product Y is 10%. Country
A imposes an effective rate of tax on sales income of
20%. Country B imposes an effective rate of tax on
sales income of 12%.
(ii)Result.Pursuant to this paragraph
(b)(1)(ii)(c)(2), paragraph (b)(1)(ii)(b)ofthissection
isseparatelyappliedtoBranchAandBranchB
with respect to the sales income of FS attributable to
Product X (manufactured by Branch A) and Product
Y (manufactured by Branch B). Because the effec-
tive rate of tax on FS’s sales income from the sale
of Product X in Country M (10%) is less than 90%
of, and at least 5 percentage points less than, the
effective rate of tax that would apply to such income
in the country in which Branch A is located (20%),
the use of Branch A has substantially the same tax
effect as if Branch A were a wholly owned subsidiary
corporation of FS. Because the effective rate of tax
on FS’s sales income from the sale of Product Y
in Country M (10%) is not less than 90% of, and
at least 5 percentage points less than, the effective
rate of tax that would apply to such income in the
country in which Branch B is located (12%), the use
of Branch B does not have substantially the same tax
effect as if Branch B were a wholly owned subsidiary
corporation of FS. Consequently, only Branch A
is treated as a separate corporation apart from the
remainder of FS for purposes of determining foreign
base company sales income.
(3)Use of more than one manufactur-
ing branch, or one or more manufactur-
ing branches and the remainder of the
controlled foreign corporation, to man-
ufacture, produce, construct, grow, or
extract the same item of personal prop-
erty—(a)—In general. This paragraph
(b)(1)(ii)(c)(3) applies to determine the
location of manufacturing, producing,
constructing, growing or extracting of per-
sonal property for purposes of applying
paragraphs (b)(1)(i)(b)or(ii)(b)ofthis
section where more than one branch of
a controlled foreign corporation, or one
or more branches of a controlled foreign
corporation and the remainder of the con-
trolled foreign corporation, each engage
in manufacturing, producing, construct-
ing, growing or extracting activities with
respect to the same item of personal prop-
ertywhichisthensoldbythecontrolled
foreign corporation.
(b)Physical manufacture, production,
or construction in one or more locations.
If only one branch or only the remainder
of a controlled foreigncorporation satis-
fies either paragraph (a)(4)(ii) or (a)(4)(iii)
of this section with respect to an item
of personal property, then that branch or
the remainder of the controlled foreign
corporation will be the location of man-
ufacturing, producing, or constructing of
that property for purposes of applying
paragraph (b)(1)(i)(b)or(ii)(b)ofthis
section to the income from the sale of that
property. See §1.954–3(b)(1)(ii)(c)(3)(f)
Example 1. If more than one branch, or
one or more branches and the remainder
of the controlled foreign corporation, each
independently satisfy either paragraph
(a)(4)(ii) or (a)(4)(iii) of this section with
respect to an item of property, then the
location of manufacturing, producing,
or constructing of that property for pur-
poses of applying paragraph (b)(1)(i)(b)
or (ii)(b) of this section will be that branch
or the remainder of the controlled for-
eign corporation that satisfies paragraph
(a)(4)(ii) or (a)(4)(iii) of this section and
that is located or organized in the jurisdic-
tion that would, after applying paragraph
(b)(1)(ii)(b)ofthissectiontosuchbranch
or paragraph (b)(1)(i)(b) of this section
to the remainder of the controlled foreign
corporation, impose the lowest effective
rate of tax on the income allocated to such
branch or the remainder of the controlled
foreign corporation under such paragraph
(that is, either paragraph (b)(1)(ii)(b)or
(b)(1)(i)(b) of this section), if, under the
laws of such country, the entire income
of the controlled foreign corporation were
considered derived by such corporation
from sources within such country from
doing business through a permanent estab-
lishment therein, received in such country,
and allocable to such permanent establish-
ment, and the corporation were created
or organized under the laws of, and man-
aged and controlled in, such country. See
§1.954–3(b)(1)(ii)(c)(3)(f)Example 2.
(c)Predominant contribution.Ifnone
of the branches nor the remainder of
a controlled foreign corporation satisfy
paragraph (a)(4)(ii) or (a)(4)(iii) of this
section with respect to an item of personal
property, but the controlled foreign cor-
poration as a whole makes a substantial
contribution to the manufacture, pro-
duction, or construction of that property
within the meaning of paragraph (a)(4)(iv)
of this section, then for purposes of apply-
ing paragraph (b)(1)(i)(b) or (ii)(b)orthis
section, the branch or the remainder of the
controlled foreign corporation that makes
the predominant amount of the controlled
foreign corporation’s substantial contribu-
tion with respect to the manufacture, pro-
duction, or construction of that property
will be the location of manufacturing, pro-
ducing, or constructing with respect to that
property. See §1.954–3(b)(1)(ii)(c)(3)(f)
Example 3. Whether any branch or the
remainder of the controlled foreign cor-
poration provides a predominant amount
of the controlled foreign corporation’s
substantial contribution is determined by
weighing each branch’s or the remainder
of the controlled foreign corporation’s
relative contribution to the manufacture
of the item of property as determined by
applying the facts and circumstances test
provided in paragraph (a)(4)(iv) of this
section. If multiplebranches are located
in a single jurisdiction, then the activities
of those branches will be aggregated for
purposes of determining the branch or the
remainder of the controlled foreign corpo-
ration that makes the predominant amount
of the controlled foreign corporation’s
substantial contribution with respect to the
manufacture, production, or construction
of an item of property. For purposes of
this paragraph (b)(1)(ii)(c)(3)(c), a branch
or the remainder of the controlled foreign
corporation makes a predominant amount
of the controlled foreign corporation’s
substantial contribution with respect to the
April 21, 20088112008–16 I.R.B.

manufacture, production, or construction
of an item of personal property only if it
makes a significantly greater contribution
to the manufacture, production, or con-
struction of that property than any other
branch or the remainder of the controlled
foreign corporation.
(d)Location of activity. The location
of any activity with respect to the manu-
facture, production, or construction of an
item of personal property is where the con-
trolled foreign corporation makes a contri-
bution through its employees to such ac-
tivity. For example, the location of any
activities concerning intangible property is
not determined based on the formal assign-
ment of intangible property, but on where
employees of the controlled foreign corpo-
ration develop, protect, and direct the use
of the intangible.
(e)Wherenobranchortheremain-
der of the controlled foreign corporation
provides a predominant contribution.If
neither a branch nor the remainder of a
controlled foreign corporation indepen-
dently satisfies paragraph (a)(4)(ii) or (iii)
of this section and neither a branch nor the
remainder of the controlled foreign cor-
poration provides a predominant amount
of the controlled foreign corporation’s
contribution to the manufacture of an item
of personal property, but the controlled
foreign corporation as a whole makes a
substantial contribution to the manufac-
ture of that property within the meaning
of paragraph (a)(4)(iv) of this section,
then for purposes of applying paragraph
(b)(1)(i)(b) or (ii)(b) of this section, the
location of manufacturing of that property
will be that branch or remainder of the con-
trolled foreign corporation that provides
a contribution to the manufacture of the
property and that is located or organized in
the jurisdiction that would, after applying
paragraph (b)(1)(ii)(b)ofthissectionto
such branch or (b)(1)(i)(b) of this section
to such remainder of the controlled foreign
corporation, impose the highest effective
rate of tax on the income allocated to such
branch or such remainder of the controlled
foreign corporation under that paragraph,
if, under the laws of such country, the
entire income of the controlled foreign
corporation were considered derived by
such corporation from sources within such
country from doing business through a
permanent establishment therein, received
in such country, and allocable to such per-
manent establishment, and the corporation
were created or organized under the laws
of, and managed and controlled in, such
country. See §1.954–3(b)(1)(ii)(c)(3)(f)
Example 4.
(f)Examples. The following examples
illustrate the application of this paragraph
(b)(1)(ii)(c)(3):
Example 1.Multiple branches that contribute to
the manufacture of a single product, only one branch
that satisfies paragraph (a)(4)(ii) or (a)(4)(iii) of this
section.(i)Facts. FS is a controlled foreign cor-
poration organized in Country M. FS operates three
branches, Branch A, Branch B, and Branch C, located
respectively in Country A, Country B, and Country
C. Branch A, Branch B, and Branch C each performs
different manufacturing activities with respect to the
manufacture of Product X. Branch A, through the ac-
tivities of its employees, designs Product X. Branch
B, through the activities of its employees, provides
quality control and oversight. Branch C, through
the activities of its employees, manufactures Prod-
uct X (within the meaning of paragraph (a)(4)(iii) of
this section) using the designs of Branch A and un-
der the oversight of the quality control personnel of
Branch B. The activities of Branch A and Branch B do
not satisfy either paragraph (a)(4)(ii) or (a)(4)(iii) of
this section. Employees of FS located in Country M
purchase the raw materials used in the manufacture
of Product X from a related person and control the
work-in-process and finished goods throughout the
manufacturing process. Employees of FS located in
Country M also manage the risk of loss from the man-
ufacture of Product X and the manufacturing profits
from the sales of Product X. Further, employees of
FS located in Country M control logistics, select ven-
dors and raw materials, and oversee the coordination
between the branches. Employees of FS located in
Country M sell Product X to unrelated persons for
use, consumption or disposition outside of Country
M. The sales income from the sale of Product X is
taxed in Country M at an effective rate of tax of 10%.
Country C imposes an effective rate of tax of 20% on
sales income.
(ii)Result. Because only the activities of Branch
C satisfy paragraph (a)(4)(ii) or (a)(4)(iii) of this
section, paragraph (b)(1)(ii)(b)ofthissectionis
applied by considering only the effective rate of
tax that would apply in Country C. The effective
rates of tax in Country A and Country B are not
considered, because Branch A and Branch B do not
satisfy either paragraph (a)(4)(ii) or (a)(4)(iii) of this
section. Because the effective rate of tax on the sales
income (10%) is less than 90% of, and at least 5
percentage points less than, the effective rate of tax
that would apply to such income in the country in
which Branch C is located (20%), the use of Branch
C has substantially the same tax effect as if Branch C
were a wholly owned subsidiary corporation of FS.
Therefore sales of Product X by the remainder of FS
are treated as sales on behalf of Branch C. Pursuant
to paragraph (b)(2)(ii)(c)(2) of this section, FS will
only qualify for the manufacturing exception under
paragraph (a)(4)(iv) of this section if FS successfully
rebuts, to the satisfaction of the Commissioner, the
presumption that FS does not provide a substantial
contribution to the manufacture of Product X. For
this purpose, the activities of FS include the activities
of Branch A or Branch B if either of those branches
would not be treated as a separate corporation under
paragraph (b)(1)(ii)(b) of this section, if that para-
graph were applied to each of Branch A and Branch
B.
Example 2.Multiple branches satisfy paragraph
(a)(4)(ii) or (a)(4)(iii) of this section with respect to
the same product sold by the controlled foreign cor-
poration.(i)Facts. Assume the same facts as in
Example 1, except for the following. In addition to
the design of Product X, Branch A also manufac-
tures (within the meaning of paragraph (a)(4)(ii) of
this section) a part of Product X. Branch C then com-
bines that part with other parts to complete Product X.
The activities of Branch C are sufficient to qualify as
manufacturing under paragraph (a)(4)(iii) of this sec-
tion with respect to Product X. Country A imposes an
effective rate of tax of 12% on sales income.
(ii)Result. Because the activities of Branch A
and Branch C satisfy the requirements of paragraph
(a)(4)(ii) and (iii) of this section respectively, para-
graph (b)(1)(ii)(b) of this section is applied by com-
paring the effective rate of tax imposed on the income
from the sales of Product X against the lowest ef-
fective rate of tax that would apply to the sales in-
come in either Country A or Country C if paragraph
(b)(1)(ii)(b) of this section were applied separately to
Branch A and Branch C. The effective rate of tax in
Country B is not considered because Branch B does
not satisfy either paragraph (a)(4)(ii) or (a)(4)(iii) of
this section. Because the effective rate of tax on the
sales income of FS from the sale of Product X (10%)
is not less than 90% of, and at least 5 percentage
points less than, the effective rate of tax that would
apply to such income in the country in which Branch
A is located (12%), neither Branch A nor Branch C is
treated as a separate corporation and sales of Product
X by the remainder of the controlled foreign corpora-
tion are not treated as made on behalf of any branch.
Example 3.Predominant contribution by em-
ployees located in the country of organization of the
controlled foreign corporation, traveling employees,
paragraph (a)(4)(iii) of this section satisfied by an
unrelated contract manufacturer.(i)Facts. FS, a
controlled foreign corporation organized in Country
M, purchases raw materials from a related person.
The raw materials are then manufactured (under the
principles of paragraph (a)(4)(iii) of this section) into
Product X by CM, an unrelated corporation located
in Country C that performs the physical conversion
pursuant to a contract manufacturing arrangement.
Employees of FS located in Country M sell Prod-
uct X to unrelated persons for use, consumption or
disposition outside of Country M. Employees of
FS located in Country M engage in design, testing,
quality control and oversight with respect to the man-
ufacture of Product X. Employees of FS located in
Country M also direct the use of intellectual property
used in the manufacture of Product X from Country
M. At all times, employees of FS located in Country
M control the raw material, work-in-process and fin-
ished goods. Employees of FS located in Country M
also control logistics, select vendors, and manage the
risk of loss from the manufacture of Product X and
the manufacturing profits from Product X. Quality
control and oversight of the manufacturing process
is conducted by employees of FS who are employed
in Country M but who regularly travel to Country C.
BranchA,locatedinCountryA,istheonlybranch
2008–16 I.R.B.812April 21, 2008

of FS. Design work with respect to Product X con-
ducted by Branch A is supplemental to the bulk of
the design work, which is done by employees of
FS located in Country M. FS as a whole (including
Branch A) provides a substantial contribution to the
manufacture of Product X within the meaning of
paragraph (a)(4)(iv) of this section.
(ii)Result. FS qualifies for the exception to for-
eign base company sales income contained in para-
graph (a)(4) of this section with respect to income
from the sale of Product X because FS satisfies the
test contained in paragraph(a)(4)(iv) of this section
by providing a substantial contribution through the
activities of its employees to the manufacture of Prod-
uct X. The fact that employees of FS travel to the lo-
cation of CM to perform some of the activities consid-
ered in determining whether a controlled foreign cor-
poration makes a substantial contribution through the
activities of its employees to the manufacturing of an
item of personal property does not prevent activities
of such employees while located in Country M from
being considered in determining the applicability of
paragraph (a)(4)(iv) of this section to FS. In addition,
paragraph (b) of this section does not apply to treat a
branch of FS as having substantially the same tax ef-
fect as if the branch were a wholly owned subsidiary
corporation, because FS, as opposed to Branch A,
provides the predominant contribution with respect to
Product X.
Example 4.Multiple branches perform manu-
facturing activities, no branch makes a predominant
contribution, paragraph (a)(4)(iii) of this section is
satisfied by an unrelated contract manufacturer.(i)
Facts. FS, a controlled foreign corporation organized
in Country M, purchases raw materials from a related
person. The raw materialsare then manufactured (un-
der the principles of paragraph (a)(4)(iii) of this sec-
tion) into Product X by CM, an unrelated corpora-
tion located in Country C that performs the physi-
cal conversion pursuant to a contract manufacturing
arrangement. Employees of FS located in Country
M sell Product X to unrelated persons for use, con-
sumption or disposition outside of Country M. FS
has two branches, Branch A and Branch B, located in
Country A and Country B respectively. FS (including
Branch A and Branch B) makes a substantial contri-
bution within the meaning of paragraph (a)(4)(iv) of
this section with respect to the manufacture of Prod-
uct X. Branch A, through the activities of its employ-
ees, designs Product X. Branch B, through the activ-
ities of its employees, provides quality control and
oversight of the manufacturing process. At all times,
FS controls the raw materials, work-in-process and
the finished Product X through employees located in
Country M. FS also manages the risk of loss related
to the manufacture of Product X and the manufac-
turing profits from the sales of Product X through
employees located in Country M. Further, employ-
ees of FS located in Country M control logistics, se-
lect vendors, and oversee the coordination between
the branches. Country M imposes an effective rate
of tax on sales income of 10%. Country A imposes
an effective rate of tax on sales income of 20% and
Country B imposes an effective rate of tax on sales
income of 24%.
(ii)Result. Based on the facts, neither the re-
mainder of FS (through activities of its employees in
Country M), nor Branch A, nor Branch B, provide a
predominant amount of the controlled foreign corpo-
ration’s substantial contribution to the manufacture of
Product X. FS, Branch A, and Branch B each provide
a contribution through the activities of their employ-
ees to the manufacture of Product X. Accordingly,
paragraph (b)(1)(ii)(b) of this section is applied by
comparing the effective rate of tax imposed on the
income from the sales of Product X against the ef-
fective rate of tax that would apply to the sales in-
come in Branch B, which is located in the jurisdic-
tion that would impose the highest effective rate of
tax on the sales income (24%). Because the effective
rate of tax imposed on the sales income by Country M
(10%) is less than 90% of, and at least 5 percentage
points less than, the effective rate of tax that would
apply to such income in Country B (24%) the remain-
der of FS is treated as selling on behalf of Branch B.
Further, for purposes of determining whether the re-
mainder of FS qualifies for any exception from for-
eign base company sales income, applying paragraph
(b)(2)(ii)(a) of this section, the remainder of FS in-
cludes any branch of FS that would not, after the ap-
plication of paragraph (b)(1)(ii)(b)ofthissectionto
such branch, be treated asa separate corporation. In
this case, the effective rate of tax imposed on the sales
income by Country M (10%) is less than 90% of, and
at least 5 percentage points less than, the effective rate
of tax that would apply to such income in Country A
(20%). Therefore, for purposes of determining for-
eign base company sales income, the remainder of FS
does not include the activities of Branch A. The re-
mainder of FS must therefore independently qualify
for the manufacturing exception contained in para-
graph(a)(4)ofthissectionorincomefromthesale
of Product X will be foreign base company sales in-
come.
Example 5.Multiple branches contribute to the
manufacture of a single product, one branch sells the
product, the remainder of the controlled foreign cor-
poration does not participate.(i)Facts. FS is a con-
trolled foreign corporation organized in Country M,
a country that imposes a 0% effective rate of tax on
sales income. FS operates two branches, Branch A
andBranchB,locatedrespectivelyinCountryA,a
country that imposes a 30% effective rate of tax on
income, and Country B, a country that imposes a 0%
effective rate of tax on income. Branch A and Branch
B each perform different activities with respect to
the manufacture of Product X. Branch A, through the
activities of a large number of its employees work-
ing at a state of the art facility, expends significant
time and resources to design a sophisticated prod-
uct, Product X. Branch B, through the activities of
its employees, purchases raw materials from a related
person and contracts with CM, an unrelated corpo-
ration located in Country C, to manufacture Product
X. The raw materials are then manufactured (under
the principles of paragraph (a)(4)(iii) of this section)
into Product X by CM. Branch A, through the activ-
ities of its employees, directs the use of intellectual
property it developed, including product designs, to
provide quality control and oversight to CM with re-
spect to the manufacture of Product X. Branch B con-
trols the raw materials, work in process, and the fin-
ished Product X. Branch B manages the risk of loss
with respect to Product X throughout the manufac-
turing process. Branch B also controls logistics and
selects vendors in connection with Product X. Branch
B then sells Product X to unrelated persons for use,
consumption or disposition outside of Country M. FS
(including Branch A and Branch B) provides a sub-
stantial contribution within the meaning of paragraph
(a)(4)(iv) of this section with respect to the manufac-
ture of Product X. FS does not provide a contribution
to the manufacture of Product X through employees
located in Country M.
(ii)Result. Based on the facts, neither Branch A
nor Branch B provides the predominant amount of
FS’s contribution to the manufacture of Product X.
Further, Branch A and Branch B each provide a con-
tribution through the activities of its employees to the
manufacture of Product X. Accordingly, pursuant to
paragraph (b)(2)(ii)(c)(3)(e), Branch A is treated as
the location of manufacturing for purposes of apply-
ing paragraph (b)(1)(ii)(b) of this section. Therefore,
theeffectiverateoftaximposedontheincomefrom
the sales of Product X is compared against the ef-
fective rate of tax that would apply to that income
if it were earned in Country A, which would impose
the highest effective rate of tax on the sales income
(30%). Because the effectiverateoftaxinCountryB
with respect to the sales income (0%) is less than 90%
of, and at least 5 percentage points less than, the ef-
fective rate of tax that would apply to such income in
Country A (30%), Branch B, treated as the remain-
der of FS pursuant to paragraph (b)(1)(ii)(c)ofthis
section, is treated as selling on behalf of Branch A.
Further, for purposes of determining whether the re-
mainder of FS qualifies for any exception from for-
eign base company sales income, Branch B, treated
as the remainder of FS, includes any branch or re-
mainder of FS that would not, after the application of
paragraph (b)(1)(ii)(b)ofthissectiontosuchbranch
or (b)(1)(i)(b)ofthissectiontosuchremainderofFS,
be treated as a separate corporation. In this case, the
effective rate of tax (0%) is less than 90% of, and at
least 5 percentage points less than, the effective rate
of tax that would apply to such income in Country A
(30%), but not country M (0%). Therefore, for pur-
poses of determining foreign base company sales in-
come, Branch B, treated as the remainder of FS, does
not include the activities of Branch A, but does in-
clude the activities of the remainder of FS located in
CountryM.However,since the remainder of FS in
Country M does not perform any activities related to
the manufacture of Product X, the inclusion of the
remainder of FS does not qualify Branch B for any
exception from foreign basecompany sales income.
Branch B, treated as the remainder of FS, must there-
fore independently qualify for the manufacturing ex-
ception from foreign base company sales income con-
tained in paragraph (a)(4) of this section or the in-
come from the sale of Product X will be foreign base
company sales income.
Example 6.Multiple branches contribute to the
manufacture of a single product, the selling branch is
located in the higher tax jurisdiction, the remainder
of the controlled foreign corporation does not partici-
pate.(i)Facts. Assume the same facts as inExample
5except that Branch B rather than Branch A is lo-
cated in the jurisdiction that would impose the higher
effective rate of tax on income from the sales of Prod-
uct X.
(ii)Result. Based on the facts, neither Branch
A nor Branch B provides the predominant amount
of FS’s contribution to the manufacture of Product
X. Since Branch B is located in the jurisdiction that
would impose the higher effective rate of tax on in-
come from the sale of Product X, Branch B is consid-
April 21, 20088132008–16 I.R.B.

ered to be the location of manufacturing of Product X
for purposes of applying paragraph (b) of this section.
Because all of the income from the sale of Product X
is already taxed in Country B, the use of Branch B
is not treated as having substantially the same tax ef-
fect as if Branch B were a wholly owned subsidiary
corporation of FS, and therefore Branch B and the re-
mainder of FS are not treated as separate corporations
under paragraph (b)(1)(ii)(a) of this section for pur-
poses of determining foreign base company sales in-
come.
(2) * * *
(i) * * *
(b)Activities treated as performed on
behalf of the remainder of corporation.
With respect to purchasing or selling activ-
ities performed by or through the branch or
similar establishment, such purchasing or
selling activities will—
(1) With respect to personal property
manufactured, produced, constructed,
grown, or extracted by the remainder of
the controlled foreign corporation (or any
branch treated as the remainder of the
controlled foreign corporation); or
(2) With respect to personal prop-
erty (other than property described in
paragraph (b)(2)(i)(b)(1)ofthissection)
purchased or sold, or purchased and sold,
by the remainder of the controlled foreign
corporation (or any branch treated as the
remainder of the controlled foreign corpo-
ration), be treated as performed on behalf
of the remainder of the controlled foreign
corporation.
(ii) * * *
(a)Treatment as separate corporations.
* * * For purposes of applying the rules of
this paragraph (b)(2)(ii), a branch or sim-
ilar establishment of a controlled foreign
corporation treatedas a separate corpora-
tion purchasing or selling on behalf of the
remainder of the controlled foreign corpo-
ration under paragraph (b)(2)(ii)(b)ofthis
section, or the remainder of the controlled
foreign corporation treated as a separate
corporation purchasing or selling on be-
half of a branch or similar establishment
of the controlled foreign corporation un-
der paragraph (b)(2)(ii)(c)ofthissection,
will exclude any other branch or similar es-
tablishment or remainder of the controlled
foreign corporation that would be treated
as a separate corporation (apart from the
branch or similar establishment of a con-
trolled foreign corporation that is treated
as a separate purchasing or selling cor-
poration under paragraph (b)(2)(ii)(b)of
this section or the remainder of the con-
trolled foreign corporation that is treated
as a separate purchasing or selling corpo-
ration under paragraph (b)(2)(ii)(c)ofthis
section) if the effective rate of tax imposed
on the income of the purchasing or sell-
ing branch or similar establishment, or pur-
chasing or selling remainder of the con-
trolled foreign corporation, were tested un-
der the principles of §1.954–3(b)(1)(i)(b)
or (ii)(b) of this section against the effec-
tive rate of tax that would apply to such in-
come if it were earned in the jurisdiction of
such other branch or similar establishment
or the remainder of the controlled foreign
corporation.
(b)Activities treated as performed on
behalf of the remainder of corporation.
With respect to purchasing or selling activ-
ities performed by or through the branch or
similar establishment, such purchasing or
selling activities will—
(1) With respect to personal property
manufactured, produced, constructed,
grown, or extracted by the remainder of
the controlled foreign corporation (or any
branch treated as the remainder of the
controlled foreign corporation); or
(2) With respect to personal prop-
erty (other than property described in
paragraph (b)(2)(ii)(b)(1)ofthissection)
purchased or sold, or purchased and sold,
by the remainder of the controlled foreign
corporation (or any branch treated as the
remainder of the controlled foreign corpo-
ration), be treated as performed on behalf
of the remainder of the controlled foreign
corporation.
(c)Treatment of the use of a manu-
facturing branch by a controlled foreign
corporation—(1)Activities treated as per-
formed on behalf of branch.***
(2)Presumption where a controlled
foreign corporation claims to satisfy the
substantial contribution test and its own
branch satisfies the physical manufac-
turing test. If a branch or similar estab-
lishment is considered to manufacture,
produce, or construct an item of personal
property under paragraph (a)(4)(ii) or
(a)(4)(iii) of this section, the remainder
of the controlled foreign corporation (or
any branch treated as the remainder of
the controlled foreign corporation) will be
presumed not to manufacture, produce,
or construct that same item of personal
property under paragraph (a)(4)(iv) of
this section (even if it would have other-
wise satisfied paragraph (a)(4)(iv) of this
section with respect to such property).
However, if a controlled foreign corpo-
ration demonstrates, to the satisfaction
of the Commissioner, that the remainder
of the controlled foreign corporation (or
any branch treated as the remainder of
the controlled foreign corporation) makes
a substantial contribution to the manu-
facture of that item of personal property
within the meaning of paragraph (a)(4)(iv)
of this section, then the remainder of the
controlled foreign corporation (or any
branch treated as the remainder of the
controlled foreign corporation), if treated
as a separate corporation apart from its
manufacturing branch under paragraph
(b)(2)(ii)(a) of this section, will be consid-
ered to manufacture, produce, or construct
that item of personal property under para-
graph (a)(4)(iv) of this section. The ap-
plication of this paragraph (b)(2)(ii)(c)(2)
maybeillustratedbythefollowingexam-
ples:
Example 1.Manufacturing branch, paragraph
(b)(1)(ii)(b) satisfied.(i)Facts. FS, a controlled for-
eign corporation organized in Country M, a country
that imposes a 0% effective rate of tax on sales in-
come, purchases raw materials from a related person.
FS has one branch, Branch A, organized in Coun-
try A, a country that imposes a 30% effective rate of
tax on sales income. The raw materials are manu-
factured (within the meaning of paragraph (a)(4)(iii)
of this section) into Product X by Branch A. FS sells
Product X for use, consumption, or disposition out-
side of Country M. Absent the application of para-
graph (b)(2)(ii)(c)(2) of this section, the remainder of
FS would also be considered a manufacturer of Prod-
uct X under paragraph (a)(4)(iv) of this section. FS
proves to the satisfaction of the Commissioner that
the remainder of FS makes a substantial contribution
to the manufacture of Product X.
(ii)Result. Since the effective rate of tax (0%)
imposed on the sales income is less than 90% of,
and at least 5 percentage points less than, the effec-
tive rate of tax that would apply to such income in
the jurisdiction of Branch A (30%), the remainder of
FS is treated as a separate corporation selling on be-
half of Branch A. The remainder of FS (not includ-
ing Branch A) does not satisfy paragraph (a)(4)(ii)
or (a)(4)(iii) of this section with respect to Product
X. If the manufacturing activities undertaken with re-
spect to Product X between the time the raw materi-
als were purchased and the time Product X was sold
were undertaken by the remainder of FS (not includ-
ing Branch A) through the activities of its employees,
the remainder of FS would have satisfied the manu-
facturing exception contained in paragraph (a)(4)(iii)
of this section with respect to Product X. Therefore,
paragraph (a)(4)(iv) of this section applies. Because
FS has successfully rebutted the presumption of para-
graph (b)(2)(ii)(c)(2) of this section by proving to the
satisfaction of the Commissioner that the remainder
of FS makes a substantial contribution to the man-
ufacture (within the meaning of paragraph (a)(4)(iv)
of this section) of Product X, it qualifies for the ex-
2008–16 I.R.B.814April 21, 2008

ception in paragraph (a)(4)(iv) of this section with re-
spect to Product X. Therefore income from the sale of
Product X, when treated as sold by the remainder of
FS on behalf of Branch A, is not determined to be for-
eign base company sales income.
Example 2.Manufacturing branch, paragraph
(b)(1)(ii)(b) is not satisfied.(i)Facts. Assume the
samefactsasinExample 1, except that Branch A is
located in Country B, a country that imposes a 3%
rate of tax on sales income.
(ii)Result. Paragraph (b)(1)(ii)(b)ofthissection
is not satisfied, because the effective rate of tax im-
posed on the sales income in Country M (0%) is not
less than 90% of, and at least 5 percentage points less
than, the effective rate of tax that would apply to such
income in the jurisdiction of Branch A (3%). There-
fore, Branch A is not treated as a separate corporation
for purposes of determining foreign base company
sales income. FS qualifies for the manufacturing ex-
ception in paragraph (a)(4) of this section because FS
(including Branch A) satisfies paragraph (a)(4)(iii) of
this section with respect to income from the sales of
Product X.
*****
(e)Comparison with ordinary treat-
ment. With the exception of cases in
which a controlled foreign corporation
seeks to rely on paragraph (a)(4)(iv) of
this section and is unsuccessful in rebut-
ting the presumption created by paragraph
(b)(2)(ii)(c)(2) of this section, income de-
rived by a branch or similar establishment,
or by the remainder of the controlled for-
eign corporation, will not be determined
to be foreign base company sales income
under paragraph (b) of this section if the
income would not be so considered if it
were derived by a separate controlled for-
eign corporation under like circumstances.
*****
(4) * * *
Example 3.(i)Facts. Corporation E, a controlled
foreign corporation incorporated under the laws of
foreign Country X, is a wholly owned subsidiary of
Corporation D, also a controlled foreign corporation
incorporated under the laws of Country X. Corpo-
ration E maintains Branch B in foreign Country Y.
Both corporations use the calendar year as the taxable
year. In 1964, Corporation E’s sole activity, carried
on through Branch B, consists of the purchase of ar-
ticles manufactured in Country X by Corporation D,
a related person, and the sale of the articles through
Branch B to unrelated persons. One hundred percent
of the articles sold through Branch B are sold for use
outsideCountryXand90percent are also sold for use
outside of Country Y. The income of Corporation E
derived by Branch B from such transactions is taxed
to Corporation E by Country X only at the time Cor-
poration E distributes such income to Corporation D
and is then taxed on the basis of what the tax (a 40 per-
cent effective rate) would have been if the income had
been derived in 1964 by Corporation E from sources
within Country X from doing business through a per-
manent establishment therein. Country Y levies an
income tax at an effective rate of 50 percent on in-
come derived from sources within such country, but
the income of Branch B for 1964 is effectively taxed
by Country Y at a 5 percent rate since under the laws
of such country, only 10 percent of Branch B’s in-
come is derived from sources within such country.
Corporation E makes no distributions to Corporation
D in 1964.
(ii)Result. In determining foreign base company
sales income of Corporation E for 1964, Branch B
is treated as a separate wholly owned subsidiary cor-
poration of Corporation E, the 5 percent rate of tax
being less than 90 percent of, and at least 5 percent-
age points less than the 40 percent rate. Income de-
rived by Branch B, treated as a separate corpora-
tion, from the purchase from a related person (Cor-
poration D), of personal property manufactured out-
side of Country Y and sold for use, disposition, or
consumption outside of Country Y constitutes for-
eign base company sales income. If, instead, Cor-
poration D were unrelated to Corporation E, none of
the income would be foreign base company sales in-
come because Corporation E would be purchasing
from and selling to unrelated persons and if Branch B
were treated as a separate corporation it would like-
wise be purchasing from and selling to unrelated per-
sons. Alternatively, if Corporation D were related to
Corporation E, but BranchB manufactured the arti-
cles prior to sale under the principles of paragraph
(a)(4)(iv) of this section in conjunction with the man-
ufacture of the articles (within the meaning of para-
graph (a)(4)(ii) or (a)(4)(iii) of this section) by an un-
related contract manufacturer, then the income would
not be foreign base company sales income because
Branch B, treated as a separate corporation, would
qualify for the manufacturing exception under para-
graph (a)(4)(i) of this section.
*****
(d)Effective/applicability date.The
second sentence of paragraph (a)(1)(i), the
second sentence of paragraph (a)(1)(iii)
Example 1, the first sentence of para-
graph (a)(1)(iii)Example 2,thethird
sentence of paragraph (a)(2), paragraph
(a)(4)(i), the first sentence of paragraph
(a)(4)(ii), the first sentence of paragraph
(a)(4)(iii), paragraph (a)(4)(iv), paragraph
(a)(6)(i), the last sentence of paragraph
(b)(1)(ii)(a), paragraph (b)(1)(ii)(c)(2),
paragraph (b)(1)(ii)(c)(3), paragraph
(b)(2)(i)(b), the last sentence of para-
graph (b)(2)(ii)(a), paragraph (b)(2)(ii)(b),
paragraph (b)(2)(ii)(c)(2), paragraph
(b)(2)(ii)(e), and paragraph (b)(4)Ex-
ample 3shall apply to taxable years of
controlled foreign corporations beginning
on or after the date these rules are pub-
lished as final regulations in theFederal
Register, and for taxable years of United
States shareholders in which or with which
such taxable years of the controlled for-
eign corporations end.
LindaE.Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on February 27,
2008, 8:45 a.m., and published in the issue of the Federal
Register for February 28, 2008, 73 F.R. 10716)
Notice of Proposed
Rulemaking
Multiemployer Plan Funding
Guidance
REG–151135–07
AGENCY: Internal Revenue Service
(IRS), Treasury
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations under section 432 of the
Internal Revenue Code (Code). These pro-
posed regulations provide additional rules
for certain multiemployer defined benefit
plans that are in effect on July 16, 2006.
These proposed regulations affect spon-
sors and administrators of, and participants
in multiemployer plans that are in either
endangered or critical status. These regu-
lations are necessary to implement the new
rules set forth in section 432 that are effec-
tive for plan years beginning after 2007.
The proposed regulations reflect changes
made by the Pension Protection Act of
2006.
DATES:Written or electronic comments
and requests for public hearing must be
received by June 16, 2008.
ADDRESSES:Send submissions to:
CC:PA:LPD:PR (REG–151135–07), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–151135–07),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC 20224, or sent elec-
tronically via the Federal eRulemak-
ing Portal atwww.regulations.gov(IRS
REG–151135–07).
April 21, 20088152008–16 I.R.B.

FOR FURTHER INFORMATION
CONTACT: Concerning the reg-
ulations,Bruce Perlin,(202)
622–6090; concerning submissions
and requests for a public hearing,
Richard.A.Hurst@irscounsel.treas.govor
at (202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the
collection of information should be sent to
theOffice of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC
20503, with copies to theInternal Rev-
enue Service, Attn: IRS Reports Clear-
ance Officer, SE:W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on
the collection of information should be
received by May 19, 2008.
Comments are specifically requested
concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the Internal
Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the collection of informa-
tion;
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
collection of information may be mini-
mized, including through the application
of automated collection techniques or
other forms of information technology;
and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide information.
The collection of information in this
regulation is in §1.432(b)–1(d) and (e).
Thisinformationisrequiredinorderfor
a qualified multiemployer defined benefit
plan’s enrolled actuary to provide a timely
certification of the plan’s funding status.
In addition, if it is certified that a plan is
or will be in critical or endangered status,
the plan sponsor is required to notify the
Department of Labor, the Pension Benefit
Guaranty Corporation, the bargaining par-
ties, participants, and beneficiaries of the
status designation. For plans in critical sta-
tus, the plan sponsor is required to include
in the notice an explanation of the possibil-
ity that adjustable benefits may be reduced
at a later date and that certain benefits are
restricted as of the date the notice is sent.
The annual certification by the enrolled ac-
tuary for the plan will be used to provide
an accurate determination and certification
of the plan’s funded status and to provide
notice to the required parties of the status
designation. The collection of information
is mandatory. The likely respondents are
multiemployer plan sponsors and enrolled
actuaries.
Estimated total annual reporting bur-
den: 1,200 hours.
Estimated average annual burden hours
per respondent: 0.75 hours.
Estimated number of respondents:
1,600.
Estimated annual frequency of re-
sponses: occasional.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
This document contains proposed In-
come Tax Regulations (26 CFR part 1)
under section 432, as added to the Inter-
nal Revenue Code by the Pension Protec-
tion Act of 2006 (PPA ’06), Public Law
109–280, 120 Stat 780.
Section 412 contains minimum fund-
ingrulesthatgenerallyapplytopension
plans. Section 431 sets forth the fund-
ing rules that apply specifically to multi-
employer defined benefit plans. Section
432 sets forth additional rules that apply to
multiemployer plans in effect on July 16,
2006, that are in endangered or critical sta-
tus
1
.
Section 432 generally provides for a de-
termination by the enrolled actuary for a
multiemployer plan as to whether the plan
is in endangered status or in critical sta-
tus for a plan year. In the first year that
the actuary certifies that the plan is in en-
dangered status, section 432(a)(1) requires
that the plan sponsor adopt a funding im-
provement plan. The funding improve-
ment plan must meet the requirements of
section 432(c) and the plan must apply the
rules of section 432(d) during the period
that begins when the plan is certified to
be in endangered status and ends when
the plan is no longer in that status. In
the first year that the actuary certifies that
the plan is in critical status, section 432
(a)(2) requires that the plan sponsor adopt
a rehabilitation plan. The rehabilitation
plan must meet the requirements of section
432(e) and the plan must apply the rules of
section 432(f) during the period that begins
when the plan is certified to be in critical
status and ends when the plan is no longer
in that status. In addition, section 432(f)(2)
requires that the plan suspend certain ac-
tions as described more fully in this pre-
amble.
Section 432(b)(3)(A) requires an actu-
arial certification of whether or not a mul-
tiemployer plan is in endangered status,
and whether or not a multiemployer plan
is or will be in critical status, for each
plan year. This certification must be com-
pleted by the 90th day of the plan year
and must be provided to the Secretary of
the Treasury and to the plan sponsor. If
the certification is with respect to a plan
year that is within the plan’s funding im-
provement period or rehabilitation period
arising from a prior certification of endan-
gered or critical status, the actuary must
also certify whether or not the plan is mak-
ing scheduled progress in meeting the re-
quirements of its funding improvement or
rehabilitation plan. Failure of the plan’s
actuary to certify the status of the plan is
1
Section 302 and section 304 of the Employee Retirement Income Security Act of 1974, as amended (ERISA) sets forth funding rules that are parallel to those in section 412 and section 431
of the Code. Section 305 of ERISA sets forth additional rules for multiemployer plans that are parallel to those in section 432 of the Code. Under section 101 of Reorganization Plan No. 4
of 1978 (43 FR 47713) and section 302 of ERISA, the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in these proposed regulations for purposes of
ERISA, as well as the Code. Thus, these Treasury Department regulations issued under section 432 of the Code apply as well for purposes of ERISA section305.
2008–16 I.R.B.816April 21, 2008

treated as a failure to file the annual report
under section 502(c)(2) of the Employee
Retirement Income Security Act of 1974
(ERISA). Thus, a penalty of up to $1,100
per day applies.
Under section 432(b)(1), a multiem-
ployer plan is in endangered status if the
plan is not in critical status and, as of the
beginning of the plan year, (1) the plan’s
funded percentage for the plan year is
less than 80 percent, or (2) the plan has
an accumulated funding deficiency for
the plan year or is projected to have an
accumulated funding deficiency in any of
the six succeeding plan years (taking into
account amortization extensions under
section 431(d)). Under section 432(i), a
plan’s funded percentage is the percentage
determined by dividing the value of the
plan’s assets by the accrued liability of the
plan.
Under section 432(b)(2), a multiem-
ployer plan is in critical status for a plan
year if it meets any of four specified tests.
Under section 432(b)(2)(A), a plan is in
critical status if, as of the beginning of the
plan year: (1) the funded percentage of
the plan is less than 65 percent and (2) the
sum of (A) the market value of plan assets,
plus (B) the present value of reasonably
anticipated employer contributions for the
current plan year and each of the six suc-
ceeding plan years is less than the present
value of all nonforfeitable benefits pro-
jected to be payable under the plan during
the current plan year and each of the six
succeeding plan years (plus administrative
expenses). For this purpose, employer
contributions are determined assuming
that the terms of all collective bargaining
agreements pursuant to which the plan is
maintained for the current plan year con-
tinue in effect for succeeding plan years.
Under section 432(b)(2)(B), a plan is
in critical status if the plan has an accu-
mulated funding deficiency for the current
plan year or is projected to have an accu-
mulatedfundingdeficiencyforanyofthe
three succeeding plan years. For purposes
of this test, the determination of accumu-
lated funding deficiency is made not tak-
ing into account any amortization exten-
sion under section 431(d). In addition, if
a plan has a funded percentage of 65 per-
cent or less, the three-year period for pro-
jecting whether the plan will have an accu-
mulated funding deficiency is extended to
four years.
Under section 432(b)(2)(C), a plan is
in critical status for the plan year if (1)
the plan’s normal cost for the current plan
year, plus interest for the current plan year
on the amount of unfunded benefit liabil-
ities under the plan as of the last day of
the preceding year, exceeds the present
value of the reasonably anticipated em-
ployer and employee contributions for the
current plan year, (2) the present value
of nonforfeitable benefits of inactive par-
ticipants is greater than the present value
of nonforfeitable benefits of active partic-
ipants, and (3) the plan has an accumu-
lated funding deficiency for the current
plan year, or is projected to have an ac-
cumulated funding deficiency for any of
the four succeeding plan years (not tak-
ing into account amortization period ex-
tensions under section 431(d)).
Under section 432(b)(2)(D), a plan is in
critical status for a plan year if the sum of
(A) the market value of plan assets, and (B)
the present value of the reasonably antic-
ipated employer contributions for the cur-
rent plan year and each of the four succeed-
ing plan years is less than the present value
of all benefits projected to be payable un-
der the plan during the current plan year
and each of the four succeeding plan years
(plus administrative expenses). For this
purpose, employer contributions are deter-
mined assuming that the terms of all col-
lective bargaining agreements pursuant to
which the plan is maintained for the cur-
rent plan year continue in effect for suc-
ceeding plan years.
In making the determinations and pro-
jections applicable under the endangered
and critical status rules, the plan actuary
must make projections for the current and
succeeding plan years of the current value
of the assets of the plan and the present
value of all liabilities to participants and
beneficiaries under the plan for the current
plan year as of the beginning of such year.
The actuary’s projections must be based
on reasonable actuarial estimates, assump-
tions, and methods that offer the actuary’s
best estimate of anticipated experience un-
der the plan. An exception to this rule ap-
plies in the case of projected industry ac-
tivity. Any projection of activity in the in-
dustry or industries covered by the plan,
including future covered employment and
contribution levels, must be based on in-
formation provided by the plan sponsor,
and the plan sponsor must act reasonably
and in good faith. The projected present
value of liabilities as of the beginning of
the year must be based on either the most
recent actuarial statement required with re-
spect to the most recently filed annual re-
port or the actuarial valuation for the pre-
ceding plan year.
Under section 432(b)(3)(B)(ii), any ac-
tuarial projection of plan assets must as-
sume (1) reasonably anticipated employer
contributions for the current and succeed-
ing plan years, assuming that the terms of
one or more collective bargaining agree-
ments pursuant to which the plan is main-
tained for the current plan year continue in
effect for the succeeding plan years, or (2)
that employer contributions for the most
recent plan year will continue indefinitely,
but only if the plan actuary determines
that there have been no significant demo-
graphic changes that would make contin-
ued application of such terms unreason-
able.
The first year that an actuary certifies
that a plan is in endangered or critical sta-
tus establishes a timetable for a number
of actions. Under section 432(b)(3)(D),
within 30 days after the date of certifica-
tion, the plan sponsor must notify the par-
ticipants and beneficiaries, the bargaining
parties, the PBGC and the Secretary of La-
bor of the plan’s endangered or critical sta-
tus. If it is certified that a plan is or will
be in critical status, the plan sponsor must
include in the notice an explanation of the
possibility that (1) adjustable benefits (as
defined in section 432(e)(8)) may be re-
duced and (2) such reductions may ap-
ply to participants and beneficiaries whose
benefit commencement date is on or after
the date such notice is provided for the first
plan year in which the plan is in critical sta-
tus.
If a plan is certified to be in critical sta-
tus, the plan must take certain actions after
notifying the plan participants of the criti-
cal status. Specifically, section 432(f)(2)
restricts the payment of benefits that are
in excess of a single life annuity (plus
any social security supplement) effective
on the date the notice is sent. Section
432(f)(2)(B) provides that this restriction
does not apply to amounts that may be im-
mediately distributed without the consent
of the employee under section 411(a)(11)
and to any makeup payment in the case
of a retroactive annuity starting date or a
similar payment of benefits owed with re-
April 21, 20088172008–16 I.R.B.

spect to a prior period. In addition, the
plan sponsor must refrain from making any
payment for the purchase of an irrevocable
commitment from an insurer to pay bene-
fits.
Sections 432(c)(1) and 432(e)(1) pro-
vide that in the first year that a plan is cer-
tified to be in endangered or critical sta-
tus, the plan sponsor must adopt a fund-
ing improvement plan (in the case of a plan
that is in endangered status) or a rehabili-
tation plan (in the case of a plan that is in
critical status). The deadline for adoption
of the funding improvement plan or reha-
bilitation plan is 240 days after the dead-
line for the certification. Accordingly, if
the actuarial certification is made after the
90-day deadline, the amount of time for
adopting the funding improvement plan or
rehabilitation plan is shortened.
Section 432(c)(3) defines a funding im-
provement plan as a plan which consists
of the actions, including options or a range
of options, to be proposed to the bargain-
ing parties, formulated to provide, based
on reasonably anticipated experience and
reasonable actuarial assumptions, for the
attainment by the plan of certain require-
ments. Those requirements are based on
a statutorily specified improvement in the
plan’s funding percentage from the per-
centage that applied on the first day of the
funding improvement period. The first day
of the funding improvement period is de-
fined in section 432(c)(4) as the first day
of the first plan year beginning after the
earlier of (1) the second anniversary of the
date of the adoption of the funding im-
provement plan or (2) the expiration of the
collective bargaining agreements in effect
on the due date for theactuarial certifica-
tion of endangered status for the initial en-
dangered year and covering, as of such due
date, at least 75 percent of the active par-
ticipants in such multiemployer plan.
Section 432(d)(1) sets forth rules that
apply after the certification of endan-
gered status and before the first day of
the funding improvement period. After
the adoption of the funding improve-
ment plan, section 432(d)(2) prohibits any
amendments that are inconsistent with the
funding improvement plan. In addition,
section 432(d)(2) provides special rules
for acceptance of collective bargaining
agreements and plan amendments that in-
crease benefits.
A rehabilitation plan is a plan which
consists of the actions, including options
or a range of options, to be proposed to
the bargaining parties, formulated to pro-
vide, based on reasonably anticipated ex-
perience and reasonable actuarial assump-
tions, for the attainment by the plan of
certain requirements. Generally, the reha-
bilitation plan should enable the plan to
emerge from critical status by the end of
a 10-year period that begins after the ear-
lier of (1) the second anniversary of the
date of the adoption of the rehabilitation
plan or (2) the expiration of the collective
bargaining agreements in effect on the due
date for the actuarial certification of crit-
ical status for the initial critical year and
covering, as of such due date, at least 75
percent of the active participants in such
multiemployer plan. For this purpose a
plan emerges from critical status when the
plan actuary certifies that the plan is not
projected to have an accumulated fund-
ingdeficiencyfortheplanyearoranyof
the nine succeeding plan years, without
regard to the use of the shortfall method
and taking into account amortization pe-
riod extensions under section 431(d). As
an alternative, if the plan sponsor deter-
mines that, based on reasonable actuarial
assumptions and upon exhaustion of all
reasonable measures, the plan cannot rea-
sonably be expected to emerge from crit-
ical status by the end of the 10-year pe-
riod, the requirements for a rehabilitation
plan are that the plan include reasonable
measures to emerge from critical status at
a later time or to forestall possible insol-
vency (within the meaning of section 4245
of ERISA).
Section 432(e)(8) allows a rehabili-
tationplanforaplanthatisincritical
status to provide for a reduction of certain
“adjustable” benefits that would other-
wise be protected by section 411(d)(6).
These adjustable benefits include early
retirement benefits and retirement-type
subsidies within the meaning of sec-
tion 411(d)(6)(B)(i).Under section
432(e)(8)(A)(ii), no reduction will apply
to a participant whose benefit commence-
ment date is before the date the notice
under section 432(b)(3)(D) for the initial
critical year is provided. Under section
432(e)(8)(B), except with respect to cer-
tain benefit increases described in section
432(e)(8)(A)(iv)(III), a plan is not permit-
ted to reduce the level of a participant’s ac-
crued benefit payable at normal retirement
age. Furthermore, section 432(e)(8)(C)
prohibits any reduction until 30 days after
plan participants and beneficiaries, em-
ployers and employee organizations are
notified of the reduction.
In years after the initial critical year or
initial endangered year, sections 432(c)(6)
and 432(e)(3)(B) provide that the plan
sponsor must annually update the funding
improvement or rehabilitation plan. This
includes updating the schedule of contri-
bution rates. Updates are required to be
filed with the plan’s annual report.
Section 432(f)(4) sets forth rules that
apply after the certification of critical sta-
tus and before the first day of the rehabil-
itation period. After the adoption of the
rehabilitation plan, section 432(f)(1) pro-
hibits any amendments that are inconsis-
tent with the rehabilitation plan.
Section 432(h) provides rules for the
treatment of employees who participate in
the plan even though they are not covered
by a collective bargaining agreement.
Section 432(i) provides a number of
definitions that apply for purposes of sec-
tion 432. For example, under section
432(i)(8), the actuary’s determination with
respect to a plan’s normal cost, actuarial
accrued liability, and improvements in a
plan’s funded percentage must be based on
the unit credit funding method (whether
or not that method is used for the plan’s
actuarial valuation).
Section 432 is effective for plan years
beginning on or after January 1, 2008. Sec-
tion 212(e)(2) of PPA ’06 provides a spe-
cial rule permitting a plan to provide the
notice described in section 432(b)(3)(D)
on an early basis. Specifically, if the plan
actuary certifies that the plan is reason-
ably expected to be in critical status for
the first plan year beginning after 2007, the
plan is permitted to provide the notice de-
scribed in section 432(b)(3)(D) at any time
between the enactment of PPA ’06 and the
date the notice is otherwise required to be
provided.
Explanation of Provisions
Overview
These regulations provide guidance
with respect to certain of the provisions
of section 432. Specifically, these reg-
ulations provide guidance regarding the
2008–16 I.R.B.818April 21, 2008

determination of when a plan is in en-
dangered status or critical status and the
associated notices. These regulations do
not provide guidance with respect to all
issues relating to a multiemployer plan
that is in endangered or critical status. For
example, no guidance is provided on the
parameters for the adoption of a funding
improvement plan or rehabilitation plan.
Guidance with respect to additional issues
will be included in a second set of regu-
lations that are expected to be issued this
year.
§1.432(a)–1 General rules relating to
section 432
Section 1.432(a)–1 provides general
rules relating to section 432, including
definitions of certain terms used for pur-
poses of section 432 and the special rules
that apply to participants in multiemployer
plans who are not participating pursuant
to a collective bargaining agreement.
The regulations provide that effective
on the date that a notice of critical sta-
tus for the initial critical year is sent to
the plan participants, the plan must not
pay any benefit in excess of the monthly
amount paid under a single life annuity
(plus any social security supplement) and
is not permitted to purchase an irrevocable
commitment from an insurer to pay bene-
fits. The restriction does not apply to the
small-dollar cash-outs allowed under sec-
tion 411(a)(11) nor to the make-up pay-
ments under a retroactive annuity starting
date.
The regulations provide that if the no-
tice described in section 432(b)(3)(D) has
been sent and the restrictions provided un-
der section 432(f)(2) have been applied,
and it is later determined that the restric-
tions should not have been applied, then
the plan must correct any benefit payments
that were restricted in error. The regula-
tions provide two examples of situations
requiring this correction, each of which in-
volves an actuary certifying that the plan is
reasonably expected to be in critical status
for the first plan year beginning after 2007,
followed by an early notification of criti-
cal status that is made to employees under
the rules of section 212(e)(2) of PPA ’06.
In one example of a plan taking actions
that require correction, the plan restricts
benefits before the first plan year begin-
ning after 2007 (the effective date of sec-
tion 432). In the second such example, the
plan is not in critical status for the first plan
year beginning after 2007 (even though the
enrolled actuary for the plan had certified
that it is reasonably expected that the plan
will be in critical status with respect to that
year).
The regulations incorporate a number
of definitions listed in section 432(i) along
with other definitions that are located in
sections 432(c) and (e). The regulations
do not include the broad provision un-
der section 432(i)(8) to use the unit credit
funding method for purposes of the plan’s
“normal cost, actuarial accrued liability,
and improvements in a plan’s funded per-
centage.” Instead, consistent with the in-
tended scope of section 432(i)(8), the reg-
ulations require the use of this funding
method solely for purposes of determin-
ing a plan’s funded percentage and the sec-
tion 432(b)(2)(C)(i) comparison of contri-
butions with the sum of the plan’s nor-
mal cost and interest on the amount of un-
funded liability. Thus, the determination
of whether a plan is projected to have an
accumulated funding deficiency in the de-
termination of a plan’s status under section
432 is based on the plan’s actual funding
method, rather than the unit credit fund-
ing method. The regulations substitute
the term “initial endangered year” for the
statutory term “initial determination year.”
In addition, the regulations provide
guidance for plans thatchange their status
in subsequent years. For example, a plan
that is in critical status may emerge from
that status and later reenter critical status.
In such a circumstance, the year of reentry
into critical status is treated as the initial
critical year. Similarly, a plan that is in en-
dangered status may have a status change
and at a later date reenter endangered sta-
tus. In such a circumstance, the year of
reentry into endangered status is treated as
the initial endangered year.
§1.432(b)–1 Determination of status and
adoption of a plan
The regulations provide rules for the
determination of whether a plan is in en-
dangered status or critical status within
the meaning of section 432(b)(1) and (2).
These rules reflect the different ways a
plan can be in endangered status under sec-
tion 432(b)(1)(A) or (B) and in critical sta-
tus under section 432(b)(2)(A), (B), (C),
or (D). The regulations also provide that a
plan is in critical status for a plan year if
it was in critical status in the immediately
preceding year and the plan does not meet
the emergence from critical status rule of
section 432(e)(4)(B). Thus, a plan that was
in critical status for the prior year will re-
main in critical status if the enrolled ac-
tuary for the plan certifies that the plan is
projected to have an accumulated funding
deficiency for the plan year or any of the
9 succeeding plan years, without regard to
the use of the shortfall funding method, but
taking into account any extensions of the
amortization periodsunder section 431(d).
The regulations provide limited guid-
ance on the actuarial projections that are
used for purposes of the certification of
status by the enrolled actuary for the plan.
The projections must generally be based
on reasonable actuarial assumptions and
methods that, as under section 431(c)(3),
offer the actuary’s best estimate of an-
ticipated experience under the plan. The
actuarial projection of future contribu-
tions and assets must assume either that
the terms of the one or more collective
bargaining agreements pursuant to which
the plan is maintained for the current plan
year continue in effect for succeeding plan
years, or that the dollar amount of em-
ployer contributions for the most recent
plan year will continue indefinitely. If the
actuarial projections assume the continued
maintenance of the collective bargaining
agreements, the plan sponsor must provide
a projection of activity in the industry, in-
cluding future covered employment, to the
plan actuary, and the actuary is permitted
to rely on those projections. In making
these projections, the plan sponsor must
act reasonably and in good faith. The alter-
native assumption that the dollar amount
of contributions remains unchanged into
the future is only available if the enrolled
actuary for the plan determines there have
been no significant demographic changes
that would make such assumption un-
reasonable. In addition, the regulations
provide that the alternative assumption is
not available for purposes of determining
whether the plan is in critical status under
the tests in section 432(b)(2)(A) and (D).
The projected present value of liabili-
ties as of the beginning of such year is de-
termined based on the most recent infor-
mation reported on the most recent of ei-
ther the actuarial statement required un-
April 21, 20088192008–16 I.R.B.

der section 103(d) of ERISA that has been
filed with respect to the most recent year,
or the actuarial valuation for the preceding
plan year.
The regulations provide that, for pur-
poses of section 432, if the plan received
an extension of any amortization period
under section 412(e), the extension is
treated the same as an extension under
section 431(d). Thus, such an extension is
taken into account in determining endan-
gered status under section 432(b)(1)(B)
and emergence from critical status under
section 432(e)(4)(B). In contrast, such
an extension is not taken into account in
determining whether a plan has or will
have an accumulated funding deficiency
for purposes of determining critical status
under section 432(b)(2)(B) and (C).
The regulations describe the content of
the annual certification required under sec-
tion 432(b)(3) that must be sent to the
plan sponsor and the IRS. The annual cer-
tification must be provided regardless of
whether the plan is in endangered or crit-
ical status. If the plan is certified to be
in endangered or critical status, then the
certification must identify the plan, the
plan sponsor, and the enrolled actuary who
signs the certification; provide contact in-
formation for the plan sponsor and actuary;
state whether or not the plan is in endan-
gered or critical status for the plan year;
and, if the certification is for a year other
than the initial endangered year or the ini-
tial critical year, whether the plan is mak-
ing the scheduled progress described in the
plan’s funding improvement plan or reha-
bilitation plan. The regulations also pro-
vide an IRS address to which the certifica-
tion is to be mailed.
The regulations also provide that the
content of the annualcertification and the
IRS address to which it is mailed may
be added to or modified in guidance of
general applicability to be published in
the Internal Revenue Bulletin. Such ad-
ditional information may include, for in-
stance, which endangered status or criti-
cal status standard(s) applies to the plan;
supporting information for the classifica-
tion; a description of the actuarial assump-
tions used in making the certification; and
a projection of the plan’s funded percent-
age for future years. The guidance may
also require additional supporting infor-
mation for certifications made prior to the
issuance of the guidance.
The regulations provide guidance
on the notice required under section
432(b)(3)(D).
2
In particular the regula-
tions require that, in the case of a plan
that is in critical status and which provides
for benefits that would be restricted un-
der section 432(f)(2), the notice for the
initial critical year must tell participants
about the restriction. A plan sponsor that
sends the model notice provided by the
Secretary of Labor pursuant to section
432(b)(3)(D)(iii) satisfies this require-
ment.
If a section 432(b)(3)(D) notice for
such a plan was sent prior to the dead-
line in that section and the notice did
not contain the disclosure regarding the
immediate restriction on benefits under
section 432(f)(2), then the regulations
provide that the notice does not satisfy
the requirements for notice under section
432(b)(3)(D). Accordingly, the restrictions
under section 432(f)(2) do not apply as a
result of the issuance of such a notice and
the plan will not be treated as having is-
sued the notice for purposes of the section
432(e)(8)(A)(ii) restriction on reducing
adjustable benefits for participants whose
benefit commencement dates are prior to
the issuance of that notice. However, if
additional notice that includes all of the
information required under the regulations
is provided prior to the required date for
notice for the initial critical year under
section 432(b)(3)(D) (that is, 30 days af-
ter the certification for the plan year),
then the notice requirements of section
432(b)(3)(D) are satisfied as of the date
of the later notice. In such a case, if the
earlier notice contained the information
described in section 432(b)(3)(D)(ii), then
the date of that earlier notice will apply for
purposes of the section 432(e)(8)(A)(ii)
restriction.
The regulations reflect the rules of sec-
tion 212(e)(2) of PPA under which a plan
sponsor is permitted to send an early no-
tice to plan participants. This early notice,
whichappliessolelytothefirstplanyear
beginning after 2007, is only available if
the plan actuary certifies to the plan spon-
sor that the plan is reasonably expected to
be in critical status for that initial plan year.
This preliminary certification that the plan
is reasonably expected to be in critical sta-
tus is different from the annual certifica-
tion that the plan actuary must make; ac-
cordingly, the plan actuary must still cer-
tify whether the plan is in critical or endan-
gered status (or in neither critical nor en-
dangered status) for that plan year by the
normal 90-day deadline for the certifica-
tion.
Proposed legislation
As of the date of the issuance of these
proposed regulations, bills have been in-
troduced in the House of Representatives
and the Senate that would exclude from
the section 432(f)(2)limitation on acceler-
ated benefits a distribution with an annuity
starting date that is before the date that the
notice under section 432(b)(3)(D) is pro-
vided.
3
Section 1.432(a)–1(a)(3)(iii)(C)
has been reserved in order to accommo-
date any enacted changes.
Effective/Applicability Dates
These regulations apply to plan years
ending after March 18, 2008, but only with
respect to plan years that begin on or after
January 1, 2008. These regulations do not
address the sunset provision provided by
PPA ’06 section 221(c).
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations. It
is hereby certified that the collection of in-
formation imposed by these proposed reg-
ulations will not have a significant eco-
nomic impact on a substantial number of
small entities. Accordingly, a regulatory
flexibility analysis is not required. The es-
timated burden imposed by the collection
of information contained in these proposed
2
Under section 432(b)(3)(D)(ii), the Secretary of Labor is to prescribe a model notice that a multiemployer plan may use to satisfy this notice requirement.
3
See H.R. 3361 (August 3, 2007) and S. 1974 (August 2, 2007) at sections 3(b)(1)(E) and 3(b)(2)(E)(ii). However, S. 1974, as amended and passed by the Senate on December 19, 2007, did
not include this provision.
2008–16 I.R.B.820April 21, 2008

regulations is 0.75 hours per respondent.
Moreover, most of this burden is attribut-
able to the requirement for a qualified mul-
tiemployer defined benefit plan’s enrolled
actuary to provide a timely certification of
the plan’s funding status. In addition, if a
plan is certified that it is or will be in criti-
cal or endangered status, the plan sponsor
is required to notify the Department of La-
bor, the Pension Benefit Guaranty Corpo-
ration, the bargaining parties, participants,
and beneficiaries of the status designation.
For plans in critical status, the plan spon-
sor is required to include an explanation of
the possibility that adjustable benefits may
be reduced and that certain benefits are re-
stricted as of the date the notice is sent.
Pursuant to section 7805(f) of the Internal
Revenue Code, this regulations has been
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (one signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The IRS and the Treasury Depart-
ment request comments on the clarity of
the proposed rules and how they may be
made easier to understand. All comments
will be available for public inspection and
copying. A public hearing will be sched-
uled if requested in writing by any person
who timely submits written comments. If
a public hearing is scheduled, notice of the
date, time, and place of the public hearing
will be published in theFederal Register.
Drafting Information
The principal author of this regulation
is Bruce Perlin, Office of Division Coun-
sel/Associate Chief Counsel (Tax Exempt
and Government Entities). However, other
personnel from the IRS and the Treasury
Department participated in their develop-
ment.
*****
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 1.432(a)–1 is added to
read as follows:
§1.432(a)–1 General rules relating to
section 432.
(a)In general—(1)Overview. This sec-
tion provides rules relating to multiem-
ployer plans (within the meaning of sec-
tion 414(f)) that are in endangered status or
critical status under section 432. Section
432 and this section only apply to multi-
employer plans that are in effect on July
16, 2006. Paragraph (b) of this section
sets forth definitions of terms that apply
for purposes of section 432. Paragraph
(c) of this section sets forth special rules
for plans described in section 404(c) and
for the treatment of nonbargained partici-
pation.
(2)Plans in endangered status—(i)
Plan sponsor must adopt funding improve-
ment plan. If a plan is in endangered
status, the plan sponsor must adopt and
implement a funding improvement plan
that satisfies the requirements of section
432(c).
(ii)Restrictions applicable to plans in
endangered status. If a plan is in endan-
gered status, the plan and plan sponsor
must satisfy the requirements of section
432(d)(1) during the funding plan adoption
period specified in section 432(c)(8).
(iii)Restrictions applicable after the
adoption of funding improvement plan.In
the case of a plan that is in endangered
status after adoption of the funding im-
provement plan, the plan and the plan
sponsor must satisfy the requirements of
section 432(d)(2) until the end of the fund-
ing improvement period.
(3)Plans in critical status—(i)Plan
sponsor must adopt rehabilitation plan.If
a plan is in critical status, the plan sponsor
must adopt and implement a rehabilitation
plan that satisfies the requirements of sec-
tion 432(e).
(ii)Restrictions applicable to plans in
critical status. If a plan is in critical sta-
tus, the plan and the plan sponsor must sat-
isfy the requirements of section 432(f)(4)
during the rehabilitation plan adoption pe-
riod as defined in section 432(e)(5). The
plan must also apply the restrictions on sin-
gle sum and other accelerated benefits set
forth in paragraph (a)(3)(iii) of this section.
(iii)Restrictions on single sums and
other accelerated benefits—(A)In gen-
eral. A plan in critical status is required
to provide that, effective on the date the
notice of certification of the plan’s criti-
cal status for the initial critical year under
§1.432(b)–1(e) is sent, no payment in ex-
cess of the monthly amount payable un-
der a single life annuity (plus any social
security supplements described in the last
sentence of section 411(a)(9)), and no pay-
ment for the purchase of an irrevocable
commitment from an insurer to pay ben-
efits, may be made except as provided in
section 432(f)(2). A plan amendment that
provides for these restrictions does not vi-
olate section 411(d)(6).
(B)Exceptions. Pursuant to section
432(f)(2)(B), the restrictions under this
paragraph (a)(3)(iii) do not apply to a
benefit which under section 411(a)(11)
may be immediately distributed without
the consent of the participant or to any
makeup payment in the case of a retroac-
tive annuity starting date or any similar
payment of benefits owed with respect to
a prior period.
(C) [Reserved.]
(D)Correction of erroneous re-
strictions. If the notice described in
§1.432(b)–1(e) has been sent and the re-
strictions provided under this paragraph
(a)(3)(iii) have been applied, and it is later
determined that the restrictions should
not have been applied, then the plan must
correct any benefit payments that were
restricted in error. Thus, for example,
if pursuant to section 212(e)(2) of the
Pension Protection Act of 2006, Public
Law 109–280, 120 Stat. 780 the enrolled
actuary for the plan certified that it was
reasonably expected that the plan would
be in critical status with respect to the first
plan year beginning after 2007, and the
notice described in §1.432(b)–1(e)(3)(i)
was sent, but the plan is not later certified
to be in critical status for that plan year,
then the plan must correct any benefit pay-
ments that were restricted after the notice
April 21, 20088212008–16 I.R.B.

was sent. Similarly, if the enrolled actuary
for the plan certified that it was reason-
ably expected that the plan would be in
critical status with respect to the first plan
year beginning after 2007, and the no-
tice described in §1.432(b)–1(e)(3)(i) was
sent before the first day of that plan year,
the restriction on benefits under section
432(f)(2) first applies beginning on the
first day of the first plan year beginning
after 2007. If the plan restricts benefits
before that date, then the plan must correct
any improperly restricted benefits.
(iv)Restrictions applicable after the
adoption of rehabilitation plan.Inthe
case of a plan that is in critical status after
the adoption of the rehabilitation plan, the
plan and the plan sponsor must satisfy the
requirements of section 432(f)(1) until the
end of the rehabilitation period.
(b)Definitions. The following defini-
tions apply for purposes of section 432 and
the regulations:
(1)Accumulated funding deficiency.
The term accumulated funding deficiency
has the same meaning as the term accu-
mulated funding deficiency under section
431(a).
(2)Active participant. The term active
participant means a participant who is in
covered service under the plan.
(3)Bargaining party. Except as pro-
vided in paragraph (c)(1) of this section,
the term bargaining party means an em-
ployer who has an obligation to contribute
under the plan and an employee organiza-
tion which, for purposes of collective bar-
gaining, represents plan participants em-
ployed by an employer which has an obli-
gation to contribute under the plan.
(4)Benefit commencement date.The
term benefit commencement date means
the annuity starting date (or in the case of
a retroactive annuity starting date, the date
on which benefit payments begin).
(5)Critical status. A multiemployer
plan is in critical status if the plan meets
one of the tests set forth in §1.432(b)–1(c).
(6)Endangered status.Aplanisin
endangered status if the plan meets one of
the tests set forth in §1.432(b)–1(b).
(7)Funded percentage.Theterm
funded percentage means a fraction (ex-
pressed as a percentage) the numerator
of which is the actuarial value of the
plan’s assets as determined under section
431(c)(2) and the denominator of which
is the accrued liability of the plan, de-
termined using the actuarial assumptions
described in section 431(c)(3) and the unit
credit funding method.
(8)Funding improvement period for en-
dangered or seriously endangered plans.
The term funding improvement period
means the period that begins on the first
day of the first plan year beginning after
the earlier of the second anniversary of
the date of the adoption of the funding
improvement plan, or the expiration of the
collective bargaining agreements that are
in effect on the due date for the actuarial
certification of endangered status for the
initial endangered year and which cover,
as of such due date, at least 75 percent
of the active participants in the plan. The
funding improvement period ends on the
last day of the 10
th
year (15 years for
seriously endangered plans, except as pro-
vided in section 432(c)(5)) after it begins
or, if earlier, the date of the change in
status described in section 432(c)(4)(C).
(9)Funding plan adoption period.The
term funding plan adoption period means
the period that begins on the date of the
actuarial certification for the initial endan-
gered year and ends on the day before the
first day of the funding improvement pe-
riod.
(10)Inactive participant. The term in-
active participant means —
(i) A participant who is not an active
participant,
(ii) A beneficiary under the plan, or
(iii) An alternate payee under the plan.
(11)Initial critical year. The term ini-
tial critical year means the first year for
which the enrolled actuary for the plan has
certified that the plan is or will be in crit-
ical status. If a plan is in critical status in
one year, emerges from critical status in a
subsequent year and then returns to critical
status, the year of reentry into critical sta-
tus is treated as the initial critical year with
respect to subsequent years.
(12)Initial endangered year.Theterm
initial endangered year means the first year
for which the enrolled actuary for the plan
has certified that the plan is in endangered
status. If a plan is in endangered status in
one year, changes from endangered status
in a subsequent year and then returns to en-
dangered status, the year of reentry into en-
dangered status is treated as the initial en-
dangered year with respect to subsequent
years.
(13)Nonbargained participant.The
term nonbargained participant means a
participant in the plan whose participa-
tion is other than pursuant to a collective
bargaining agreement within the meaning
of section 7701(a)(46). A participant will
not be treated as a nonbargained partic-
ipant merely because the participant is
no longer covered by the collective bar-
gaining agreement solely as a result of
retirement or severance from employment.
(14)Obligation to contribute.The
term obligation to contribute means an
obligation to contribute arising under one
or more collective bargaining (or related)
agreements or as a result of a duty under
applicable labor-management relations
law.
(15)Plan sponsor. Except as provided
in paragraph (c)(1) of this section, the term
plan sponsor means the association, com-
mittee, joint board of trustees, or other sim-
ilar group of representatives of the parties
who establish or maintain the plan.
(16)Rehabilitation period.Theterm
rehabilitation period means the period that
begins on the first day of the first plan year
beginning after the earlier of the second
anniversary of the date of the adoption of
the rehabilitation plan, or the expiration of
the collective bargaining agreements that
are in effect on the due date for the actu-
arial certification of critical status for the
initial critical year and which cover, as of
such due date, at least 75 percent of the ac-
tive participants in the plan. The rehabil-
itation period ends on the last day of the
10
th
year after it begins or, if earlier, the
plan year preceding the plan year in which
the plan has emerged from critical status as
described in section 432(e)(4)(B).
(17)Rehabilitation plan adoption pe-
riod. The term rehabilitation plan adop-
tion period means the period that begins on
the date of the actuarial certification for the
initial critical year and ends on the day be-
fore the first day of the rehabilitation pe-
riod.
(18)Seriously endangered status.A
plan is in seriously endangered status if
the plan is in endangered status and is de-
scribed in both §1.432(b)–1(b)(2) and (3).
(c)Special rules—(1)Plan described in
section 404(c). In the case of a plan de-
scribed in section 404(c), or a continuation
of such a plan, the association of employ-
ers that is the employer settlor of the plan is
treated as a bargaining party and is treated
2008–16 I.R.B.822April 21, 2008

as the plan sponsor for purposes of section
432.
(2)Plans covering both bargained and
nonbargained participants. In the case
of an employer that contributes to a plan
with respect to both employees who are
covered by one or more collective bargain-
ing agreements and employees who are
nonbargained participants, if the plan is in
endangered status or critical status, ben-
efits of and contributions for the nonbar-
gained participants (including surcharges
on those contributions) are determined as
if those nonbargained participants were
covered under the employer’s collective
bargaining agreement in effect when the
plan entered endangered or critical status
that is the first to expire.
(3)Plans covering nonbargained par-
ticipants only.Inthecaseofanemployer
that contributes to a multiemployer plan
only with respect to employees who are
not covered by a collective bargaining
agreement, section 432 and the regulations
thereunder are applied as if the employer
were the bargaining party, and its partic-
ipation agreement with the plan were a
collective bargaining agreement with a
term ending on the first day of the plan
year beginning after the employer is pro-
vided the schedules described in sections
432(c) and (e).
(d)Effective/applicability date.These
regulations apply to plan years ending after
March 18, 2008, but only with respect to
plan years that beginon or after January 1,
2008.
Par. 3. Section 1.432(b)–1 is added to
read as follows:
§1.432(b)–1 Determination of status and
adoption of a plan.
(a)In general. This section provides
rules relating to multiemployer plans
(within the meaning of section 414(f))
that are in endangered status or critical
status under section 432. Section 432 and
this section only apply to multiemployer
plans that are in effect on July 16, 2006.
Paragraph (b) of this section sets forth the
factors for determining whether a plan is
in endangered status. Paragraph (c) of
this section sets forth the factors for deter-
mining whether a plan isin critical status.
Paragraph (d) sets forth the requirements
for the annual certification by the plan’s
enrolled actuary. Paragraph (e) of this sec-
tion describes the notice to employees that
is required for plans that are in endangered
or critical status.
(b)Determination of endangered sta-
tus—(1)In general. A plan is in endan-
gered status for a plan year if, as deter-
mined by the enrolled actuary for the plan,
the plan is not in critical status for the plan
year and if, as of the beginning of the plan
year, the plan is described either in para-
graph (b)(2) of this section or paragraph
(b)(3) of this section. The enrolled actu-
ary’s determination of whether a plan is in
endangered status is made under the rules
of paragraph (d)(5) of this section.
(2)Endangered status based on fund-
ing percentage. A plan is described in
this paragraph (b)(2) for a plan year if
the plan’s funded percentage for such plan
year is less than 80 percent.
(3)Endangered status based on projec-
tion of funding deficiency.Aplanisde-
scribed in this paragraph (b)(3) for a plan
year if the plan has an accumulated fund-
ing deficiency for such plan year (or is pro-
jected to have such an accumulated fund-
ing deficiency for any of the 6 succeeding
plan years), taking into account any exten-
sion of amortization periods under section
431(d).
(c)Critical Status—(1)In general.A
multiemployer plan is in critical status
for a plan year if, as determined by the
enrolled actuary for the plan, the plan is
described in one or more of paragraphs
(c)(2) through (c)(6) of this section as of
the beginning of the plan year. The en-
rolled actuary’s determination of critical
status must be made in accordance with the
rules of paragraph (d)(5) of this section.
Notwithstanding paragraph (d)(5)(iii) of
this section, for purposes of applying the
critical status tests described in paragraphs
(c)(2) and (c)(5) of this section, the actuary
must assume that the terms of all collective
bargaining agreements pursuant to which
the plan is maintained for the current plan
year continue in effect for succeeding plan
years.
(2)Critical status based on 6-year
projection of benefit payments.Aplan
is described in this paragraph (c)(2) if
the funded percentage of the plan is less
than 65 percent, and the present value of
all nonforfeitable benefits projected to be
payable under the plan during the current
plan year and each of the 6 succeeding
plan years (plus administrative expenses
for such plan years) is greater than the sum
of—
(i) The fair market value of plan assets,
plus
(ii) The present value of the reasonably
anticipated employer contributions for the
current plan year and the 6 succeeding plan
years.
(3)Critical status based on short term
funding deficiency. A plan is described in
this paragraph (c)(3) if—
(i) The plan has an accumulated fund-
ing deficiency for the current plan year, not
taking into account any extension of amor-
tization periods under section 431(d), or
(ii) The plan is projected to have an ac-
cumulated funding deficiency for any of
the 3 succeeding plan years (4 succeeding
plan years if the funded percentage of the
plan is 65 percent or less), not taking into
account any extension of amortization pe-
riods under section 431(d).
(4)Critical status based on contribu-
tions less than normal cost plus interest.
A plan is described in this paragraph (c)(4)
if—
(i) The present value of the reasonably
anticipated employer and employee contri-
butions for the current plan year is less than
the sum of—
(A) The plan’s normal cost (determined
under the unit credit funding method), and
(B) Interest (determined at the rate used
for determining costs under the plan) on
the excess if any of—
(1) The accrued liability of the plan (de-
termined using the actuarial assumptions
described in section 431(c)(3) and the unit
credit funding method) over
(2) The actuarial value of assets deter-
mined under section 431(c)(2),
(ii) The present value, as of the begin-
ning of the current plan year, of nonfor-
feitable benefits of inactive participants is
greater than the present value of nonfor-
feitable benefits of active participants, and
(iii) The plan has an accumulated fund-
ing deficiency for the current plan year (or
is projected to have such a deficiency for
any of the 4 succeeding plan years), not
taking into account any extension of amor-
tization periods under section 431(d).
(5)Critical status based on 4-year pro-
jection of benefit payments.Aplanis
described in this paragraph (c)(5) if the
present value of all benefits projected to
be payable under the plan during the cur-
rent plan year or any of the 4 succeeding
April 21, 20088232008–16 I.R.B.

plan years (plus administrative expenses
for such plan years) is greater than the sum
of—
(i) The fair market value of plan assets,
plus
(ii) The present value of the reasonably
anticipated employer contributions for the
current plan year and each of the 4 suc-
ceeding plan years.
(6)Critical status based on failure to
meet emergence criteria. A plan is de-
scribed in this paragraph (c)(6) if—
(i) The plan was in critical status for the
immediately preceding plan year, and
(ii) The enrolled actuary for the plan
has certified that the plan is projected to
have an accumulated funding deficiency
for the plan year or any of the 9 succeeding
plan years, without regard to the use of the
shortfall funding method but taking into
account any extensions ofthe amortization
periods under section 431(d).
(d)Annual certification by the plan’s
enrolled actuary—(1)In general.Notlater
than the 90th day of each plan year of a
multiemployer plan, the enrolled actuary
for the plan must certify to the Secretary
of the Treasury and to the plan sponsor—
(i) Whether or not the plan is in endan-
gered status for such plan year;
(ii) Whether or not the plan is or will be
in critical status for such plan year, and
(iii) In the case of a plan which is in a
funding improvement or rehabilitation pe-
riod, whether or not the plan is making the
scheduled progress in meeting the require-
ments of its funding improvement or reha-
bilitation plan.
(2)Transmittal of certification—(i)
Transmittal to the plan sponsor.The
certification of plan status described in
paragraph (d)(1) must be submitted to
the plan sponsor at the address stated by
the plan sponsor on their Annual Report
(Form 5500) or such other address as the
plan sponsor may designate in writing for
receipt of this certification.
(ii)Transmittal to the Secretary of the
Treasury. Except as provided in guidance
of general applicability to be published
in the Internal Revenue Bulletin, the an-
nual certification of plan status described
in paragraph (d)(1) must be transmitted to
the Secretary of the Treasury by mailing
the certification to:
Internal Revenue Service
Employee Plans Compliance Unit
Group 7602 (SE:TEGE:EP)
Room 1700 — 17th Floor
230 S. Dearborn Street
Chicago, IL 60604
(3)Content of annual certification—(i)
In general. The annual certification must
contain the information described in this
paragraph (d)(3). The Secretary may add
to or otherwise modify the requirements in
this paragraph (d)(3) in guidance of gen-
eral applicability to bepublished in the In-
ternal Revenue Bulletin.
(ii)Plan identification. The annual cer-
tification must include the name of the
plan; the plan number; the name, address,
and telephone number of the plan sponsor;
and the plan year for which the certifica-
tion is being made.
(iii)Enrolled actuary identification.
The annual certification must include the
name, address and telephone number of
the enrolled actuary signing the certifica-
tion; the actuary’s enrollment identifica-
tion number; the actuary’s signature, and
the date of the signature.
(iv)Information on plan status.Thean-
nual certification must state whether the
plan is in endangered status (which in-
cludes seriously endangered status); criti-
cal status, or neither endangered nor criti-
cal status.
(v)Information on scheduled progress.
If the annual certification is made with re-
spect to a plan year that is within the plan’s
funding improvement period or rehabilita-
tion period arising from a prior certifica-
tion of endangered or critical status, the
actuary must also certify whether or not
the plan is making scheduled progress in
meeting the requirements of its funding
improvement or rehabilitation plan.
(4)Penalty for failure to secure timely
actuarial certification.Afailureofa
plan’s actuary to certify the plan’s status
under this paragraph (d) by the date spec-
ified in paragraph (d)(1) of this section
is treated as a failure or refusal by the
plan administrator to file the annual report
required to be filed with the Secretary of
Labor under section 101(b)(4) of the Em-
ployee Retirement Income Security Act of
1974.
(5)Actuarial projections of assets and
liabilities—(i)In general. Inmakingthe
determinations and projections under sec-
tion 432(b) and this section, the enrolled
actuary for the plan must make projec-
tions required for the current and succeed-
ing plan years of the current value of the
assets of the plan and the present value
of all liabilities to participants and ben-
eficiaries under the plan for the current
plan year as of the beginning of such year.
These projections must be based on rea-
sonable actuarial estimates, assumptions,
and methods in accordance with section
431(c)(3) and that offer the actuary’s best
estimate of anticipated experience under
the plan. Notwithstanding the previous
sentence, the actuary is permitted to rely
on the plan sponsor’s projection of activ-
ity in the industry provided under para-
graph (d)(5)(iii) of this section. The pro-
jected present value of liabilities as of the
beginning of such year must be determined
based on the most recent information re-
ported on the most recent of either—
(A) The actuarial statement required
under section 103(d) of the Employee
Retirement Income Security Act of 1974
that has been filed with respect to the most
recent year, or
(B) The actuarial valuation for the pre-
ceding plan year.
(ii)Determinations of future contribu-
tions. Any actuarial projection of plan as-
sets shall assume either—
(A) Reasonably anticipated employer
contributions for the current and succeed-
ing plan years, assuming that the terms
of the one or more collective bargaining
agreements pursuant to which the plan is
maintained for the current plan year con-
tinue in effect for succeeding plan years,
or
(B) That employer contributions for the
most recent plan year will continue indef-
initely, but only if the enrolled actuary for
the plan determines there have been no sig-
nificant demographic changes that would
make such assumption unreasonable.
(iii)Projected industry activity.The
plan sponsor shall provide any necessary
projection of activity in the industry, in-
cluding future covered employment, to the
plan actuary. For this purpose, the plan
sponsor must act reasonably and in good
faith.
(6)Treatment of amortization exten-
sions under section 412(e). For purposes
of section 432, if the plan received an ex-
tension of any amortization period under
section 412(e), the extension is treated the
2008–16 I.R.B.824April 21, 2008

same as an extension under section 431(d).
Thus, such an extension is not taken into
account in determining whether a plan has
or will have an accumulated funding de-
ficiency under paragraph (c)(3) and (c)(4)
of this section, but it is taken into account
in determining whether a plan has or will
have an accumulated funding deficiency
under paragraph (b)(3) of this section.
(e)Notice of endangered or critical sta-
tus—(1)In general. In any case in which
the enrolled actuary for the plan certifies
that a multiemployer plan is or will be
in endangered or critical status for a plan
year, the plan sponsor must, not later than
30 days after the date of the certification,
provide notification of the endangered or
critical status to the participants and ben-
eficiaries, the bargaining parties, the Pen-
sion Benefit Guaranty Corporation, and
the Secretary of Labor.
(2)Plans in critical status. If it is certi-
fied that a multiemployer plan is or will be
in critical status for a plan year, the plan
sponsor must include in the notice an ex-
planation of the possibility that adjustable
benefits (as defined in section 432(e)(8))
may be reduced, and such reductions may
apply to participants and beneficiaries
whose benefit commencement date is on
or after the date such notice is provided for
the first plan year in which the plan is in
critical status. If the plan provides benefits
that are restricted under section 432(f)(2),
the notice must also include an explana-
tion that the plan cannot pay single sums
and similar benefits described in section
432(f)(2) that are greater than the monthly
amount due under a single life annuity. A
plan sponsor that sends the model notice
issued by the Secretary of Labor pursuant
to section 432(b)(3)(D)(iii) satisfies this
requirement.
(3)Transition rules—(i)Early notice
permitted. If, after August 17, 2006, the
enrolled actuary for the plan certifies that
a plan is reasonably expected to be in crit-
ical status with respect to the first plan
year beginning after 2007, then the no-
tice described in this paragraph (e) may be
provided before the date the actuary cer-
tifies the plan is in critical status for that
plan year. The ability to provide early no-
tice does not extend the otherwise applica-
ble deadline for providing the notice under
paragraph (e)(1) of this section.
(ii)Reformation of prior notice.Ifno-
tice has been provided prior to the date re-
quired under paragraph (e)(1) of this sec-
tion, but the notice did not include all of the
information describedin paragraph (e)(2)
of this section, then that notice will not
satisfy the requirements for notice under
section 432(b)(3)(D). Accordingly, the re-
strictions under section 432(f)(2) will not
apply as a result of the issuance of such a
notice. However, if prior to the date notice
is required to be provided under paragraph
(e)(1) of this section additional notice is
provided that includes all of the informa-
tion required under paragraph (e)(2) of this
section, then the notice requirements of
section 432(b)(3)(D) are satisfied as of the
date of that additional notice and the re-
strictions of section 432(f)(2) will apply
beginning on that date. In such a case, the
date of the earlier notice will still apply for
purposes of section 432(e)(8)(A)(ii) pro-
vided that the earlier notice included all
of the information required under section
432(b)(3)(D)(ii).
(f)Effective/applicability date.These
regulations apply to plan years ending after
March 18, 2008, but only with respect to
plan years that begin on or after January 1,
2008.
Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on March 14,
2008, 9:03 a.m., and published in the issue of the Federal
Register for March 18, 2008, 73 F.R. 14417)
Reduction of Foreign Tax
Credit Limitation Categories
Under Section 904(d);
Correction
Announcement 2008–30
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions; Correction
SUMMARY: This document contains cor-
rections to final and temporary regulations
(T.D. 9368, 2008–6 I.R.B. 382) that were
published in theFederal Registeron Fri-
day, December 21, 2007 (72 FR 72582)
regarding the reduction of the number of
separate foreign tax credit limitation cate-
gories under section 904(d) of the Internal
Revenue Code. These regulations affect
taxpayers claiming foreign tax credits and
provide guidance needed to comply with
the statutory changes made by the Ameri-
can Jobs Creation Act of 2004 (AJCA).
DATES: The correction is effective March
21, 2008.
FOR FURTHER INFORMATION
CONTACT: Jeffrey L. Parry, (202)
622–3850 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final and temporary regulations
(T.D. 9368) that are the subject of the
correction are under section 904 of the
Internal Revenue Code.
Need for Correction
As published, final and temporary regu-
lations (T.D. 9368) contain errors that may
prove to be misleading and are in need of
clarification.
Correction of Publication
Accordingly, the publication of the
final and temporary regulations (T.D.
9368), which were the subject of FR Doc.
E7–24782, is corrected as follows:
1. On page 72585, column 1, in the
preamble, under the paragraph heading
“V. Post-1986 Undistributed Earnings
and Post-1986 Foreign Income Taxes of
a Foreign Corporation as of the End of
the Corporation’s Last Pre-2007 Taxable
Year”, second line of the first paragraph
of the column, the language “described in
section 959(c)(1)(A),” is corrected to read
“described in section 959(c)(1) and (2),”.
2. On page 72586, column 3, in the
preamble, under the paragraph head-
ing “VI. Separate Limitation Losses and
Overall Foreign Losses”, first line of
the second paragraph of the column, the
language “Section 1.904–12T(h)(4) pro-
vides that” is corrected to read “Section
1.904(f)–12T(h)(4) provides that”.
3. On page 72586, column 3, in the
preamble, under the paragraph head-
ing “VI. Separate Limitation Losses and
Overall Foreign Losses”, first line of
the third paragraph of the column, the
April 21, 20088252008–16 I.R.B.

language “Section 1.904–12T(h)(5) pro-
vides that” is corrected to read “Section
1.904(f)–12T(h)(5) provides that”.
4. On page 72586, column 3, in the
preamble, under the paragraph head-
ing “VI. Separate Limitation Losses and
Overall Foreign Losses”, sixth line of
the third paragraph of the column, the
language “rules of § 1.904–12T(g)(1)
and (2)” is corrected to read “rules of
§ 1.904(f)–12T(g)(1) and (2)”.
LaNita Van Dyke,
Chief, Publications and
Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on March 20,
2008, 8:45 a.m., and published in the issue of the Federal
Register for March 21, 2008, 73 F.R. 15063)
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2008–32
The Internal Revenue Service has re-
voked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on April 21, 2008,
andwouldendonthedatethecourtfirst
determines that the organization is not de-
scribed in section 170(c)(2) as more partic-
ularly set forth in section 7428(c)(1). For
individual contributors, the maximum de-
duction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were the
basis for revocation.
Educate the Children Foundation
Long Beach, CA
CFIDS Walk-A-Thon Committee
Hicksville, NY
Open Doors, Inc.
Duluth, GA
Amalgamated Credit Counselors
Lauderhill, FL
Carter Lake Charitable
Urbandale, IA
Christian Credit Counselors, Inc.
Las Vegas, NV
In Time Youth Group
Ontario, OR
Young Lions Foundation
Sausalito, CA
Charity Connections, Ltd.
Pittsford, NY
North-Tartan Area Girls Basketball
Booster Club
Oakdale, MN
Stock Transfer Rules:
Carryover of Earnings and
Taxes
Announcement 2008–33
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to final regulations.
SUMMARY: This document contains a
correction to final regulations (T.D. 9273,
2006–2 C.B. 394) that were published in
theFederal Registeron Tuesday, August
8, 2006 (71 FR 44887) addressing the
carryover of certain tax attributes, such
as earnings and profits and foreign in-
come tax accounts, when two corporations
combine in a corporate reorganization
or liquidation that is described in both
sections 367(b) and 381 of the Internal
Revenue Code.
DATES: This correction is effective March
18, 2008.
FOR FURTHER INFORMATION
CONTACT: Jeffrey L. Parry at (202)
622–3050 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations (T.D. 9273) that
are the subject of this correction are un-
der section 367(b) of the Internal Revenue
Code.
Need for Correction
As published, final regulations (T.D.
9273) contain errors that may prove to be
misleading and are in need of clarification.
*****
Correction of Publication
Accordingly, 26 CFR part 1 is cor-
rected by making the following correcting
amendment:
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 1.367(b)–6 is amended
by revising paragraph (a)(1) to read as fol-
lows:
§ 1.367(b)–6 Effective dates and
coordination rules.
(a)Effective date.(1)In general.
Except as otherwise provided in this
paragraph (a)(1), §§ 1.367(b)–1 through
1.367(b)–5, and this section, apply to
section 367(b) exchanges that occur on
or after February 23, 2000. The rules of
§§ 1.367(b)–3 and 1.367(b)–4, as they ap-
ply to reorganizations described in section
368(a)(1)(A) (including reorganizations
described in section 368(a)(2)(D) or (E))
involving a foreign acquiring or foreign
acquired corporation, apply only to trans-
fers occurring on or after January 23, 2006.
Section 1.367(b)–4(b)(1)(ii) applies to all
2008–16 I.R.B.826April 21, 2008

triangular reorganizations and reorgani-
zations described in section 368(a)(1)(G)
and (a)(2)(D) occurring on or after Jan-
uary 23, 2006, although taxpayers may
apply § 1.367(b)–4(b)(1)(ii) to triangular
B reorganizations occurring on or after
February 23, 2000, in a taxable year that
is not closed by the period of limitations if
done consistently with respect to all such
triangular B reorganizations. The second
sentence of paragraph (a) in § 1.367(b)–4
shall apply to section 304(a)(1) transac-
tions occurring on or after February 23,
2006; however, taxpayers may rely on this
sentence for all section 304(a)(1) trans-
actions occurring in open taxable years.
Section 1.367(b)–1(c)(2)(v), (c)(3)(ii)(A),
(c)(4)(iv), (c)(4)(v), 1.367(b)–2(j)(1)(i),
(l), and 1.367(b)–3(e) and (f), apply to sec-
tion 367(b) exchanges that occur on or af-
ter November 6, 2006. For guidance with
respect to § 1.367(b)–1(c)(3)(ii)(A) and
(c)(4)(iv) and (v) and § 1.367(b)–2(j)(1)(i)
for exchanges that occur before November
6, 2006, see 26 CFR part 1 revised as of
April 1, 2006.
*****
LaNita Van Dyke,
Branch Chief,
Publications and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on March 17,
2008, 8:45 a.m., and published in the issue of the Federal
Register for March 18, 2008, 73 F.R. 14386)
Reduction of Foreign Tax
Credit Limitation Categories
Under Section 904(d); Hearing
Cancellation
Announcement 2008–36
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Cancellation of notice of public
hearing on proposed rulemaking by cross-
reference to temporary regulations.
SUMMARY: This document cancels a
public hearing on proposed regulations
(REG–114126–07, 2008–6 I.R.B. 410)
that provide guidance relating to the re-
duction of the number of separate foreign
tax credit limitation categories under
section 904(d) of the Internal Revenue
Code. Changes to the applicable law were
made by the American Jobs Creation Act
of 2004 reducing the number of section
904(d) separate categories from eight to
two, effective for taxable years beginning
after December 31, 2006.
DATES: The public hearing, originally
scheduled for April 22, 2008 at 10 a.m. is
cancelled.
FOR FURTHER INFORMATION
CONTACT: Funmi Taylor of the Publica-
tions and RegulationsBranch, Legal Pro-
cessing Division, Associate Chief Counsel
(Procedure and Administration) at (202)
622–3628 (not a toll-free number).
SUPPLEMENTARY INFORMATION: A
notice of proposed rulemaking by cross-
reference to temporary regulations and a
notice of public hearing that appeared in
theFederal Registeron Friday, December
21, 2007 (72 FR 72645) announced that a
public hearing was scheduled for April 22,
2008, at 10 a.m. in the IRS Auditorium,
Internal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC. The
subject of the public hearing is under the
section 904 of the Internal Revenue Code.
The public comment period for these
regulations expired on March 20, 2008.
The notice of proposed rulemaking by
cross reference to temporary regulations
and notice of public hearing instructed
those interested in testifying at the public
hearing to submit a request to speak and an
outline of the topics to be addressed. As
of Tuesday, March 25, 2008, no one has
requested to speak. Therefore, the public
hearing scheduled for April 22, 2008, is
cancelled.
LaNita Van Dyke,
Chief, Publications and
Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on March 27,
2008, 8:45 a.m., and published in the issue of the Federal
Register for March 28, 2008, 73 F.R. 16610)
April 21, 20088272008–16 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.
2008–16 I.R.B.iApril 21, 2008

Numerical Finding List
1
Bulletins 2008–1 through 2008–16
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
2008-27, 2008-15 I.R.B.751
2008-28, 2008-14 I.R.B.733
2008-29, 2008-15 I.R.B.786
2008-30, 2008-16 I.R.B.825
2008-31, 2008-15 I.R.B.787
2008-32, 2008-16 I.R.B.826
2008-33, 2008-16 I.R.B.826
2008-36, 2008-16 I.R.B.827
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
Notices— Continued:
2008-16, 2008-4 I.R.B.315
2008-17, 2008-4 I.R.B.316
2008-18, 2008-5 I.R.B.363
2008-19, 2008-5 I.R.B.366
2008-20, 2008-6 I.R.B.406
2008-21, 2008-7 I.R.B.431
2008-22, 2008-8 I.R.B.465
2008-23, 2008-7 I.R.B.433
2008-24, 2008-8 I.R.B.466
2008-25, 2008-9 I.R.B.484
2008-26, 2008-9 I.R.B.487
2008-27, 2008-10 I.R.B.543
2008-28, 2008-10 I.R.B.546
2008-29, 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
2008-41, 2008-15 I.R.B.742
2008-42, 2008-15 I.R.B.747
2008-43, 2008-15 I.R.B.748
2008-44, 2008-16 I.R.B.799
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-124590-07, 2008-16 I.R.B.801
REG-127391-07, 2008-13 I.R.B.689
REG-136701-07, 2008-11 I.R.B.616
REG-137573-07, 2008-15 I.R.B.750
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
REG-151135-07, 2008-16 I.R.B.815
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
Revenue Procedures— Continued:
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
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
2008-21, 2008-15 I.R.B.734
2008-22, 2008-16 I.R.B.796
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
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 21, 2008ii2008–16 I.R.B.

Treasury Decisions— Continued:
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
9383, 2008-15 I.R.B.738
9384, 2008-16 I.R.B.792
9385, 2008-15 I.R.B.735
9386, 2008-16 I.R.B.788
9387, 2008-16 I.R.B.789
2008–16 I.R.B.iiiApril 21, 2008

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2008–1 through 2008–16
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
2008-27
Clarified, amended, supplemented, and
superseded by
Notice 2008-41, 2008-15 I.R.B.742
Proposed Regulations:
REG-209020-86
Corrected by
Ann. 2008-11, 2008-7 I.R.B.445
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-114126-07
Corrected by
Ann. 2008-36, 2008-16 I.R.B.827
REG-127770-07
Hearing scheduled by
Ann. 2008-24, 2008-13 I.R.B.692
REG-141399-07
Hearing cancelled by
Ann. 2008-31, 2008-15 I.R.B.787
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
Revenue Procedures— Continued:
2007-6
Superseded by
Rev. Proc. 2008-6, 2008-1 I.R.B.192
2007-7
Superseded by
Rev. Proc. 2008-7, 2008-1 I.R.B.229
2007-8
Superseded by
Rev. Proc. 2008-8, 2008-1 I.R.B.233
2007-26
Obsoleted in part by
Rev. Proc. 2008-17, 2008-10 I.R.B.549
2007-31
Obsoleted in part by
Rev. Proc. 2008-19, 2008-11 I.R.B.594
2007-39
Superseded by
Rev. Proc. 2008-3, 2008-1 I.R.B.110
2007-52
Superseded by
Rev. Proc. 2008-9, 2008-2 I.R.B.258
2008-13
Corrected by
Ann. 2008-15, 2008-9 I.R.B.511
Revenue Rulings:
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
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.
April 21, 2008iv2008–16 I.R.B.

Treasury Decisions:
9273
Corrected by
Ann. 2008-33, 2008-16 I.R.B.826
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
9368
Corrected by
Ann. 2008-29, 2008-15 I.R.B.786
Ann. 2008-30, 2008-16 I.R.B.825
9375
Corrected by
Ann. 2008-16, 2008-9 I.R.B.511
2008–16 I.R.B.vApril 21, 2008

April 21, 20082008–16 I.R.B.

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