us-irs-revenue-procedures-irb-2008-39-pdf•Internal Revenue Bulletin 2008-39 (PDF rendition): IRS Revenue Procedures
Internal Revenue Bulletin 2008-39 (PDF rendition): IRS Revenue Procedures
us-irs-revenue-procedures-irb-2008-39-pdfInternal Revenue Bulletin 2008-39 (PDF rendition): IRS Revenue ProceduresGuidance
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Bulletin No. 200 8-39 September 29, 20 08 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX Rev. Rul. 2008–47, page 760. Interest rates; underpayments and overpayments.The rates of interest determined under section 6621 of the Code for the calendar quarter beginning October 1, 2008, will be 6 percent for overpayments (5 percent in the case of a corpo- ration), 6 percent for underpayments, and 8 percent for large corporate underpayments. The rate of interest paid on the por- tion of a corporate overpayment exceeding $10,000 will be 3.5 percent. T.D. 9420, page 750. Final regulations under section 42 of the Code, concerning the low-income housing tax credit, update the utility allowances regulations to provide new options for estimating tenant utility costs. REG–120844–07, page 770. Proposed regulations under section 460 of the Code would amendtheregulationsastheyapplytocertainlong-termcon- struction contracts that qualify as home construction contracts under section 460(e)(6) and to certain changes in method of accounting for long-term contracts. A public hearing is sched- uled for December 5, 2008. REG–106251–08, page 774. Proposed regulations under section 423 of the Code provide the requirements that must be satisfied in order for a plan to meet the definition of an employee stock purchase plan. Sec- tion 423 also addresses the individual income tax treatment of stock acquired pursuant to an option granted under an em- ployee stock purchase plan. The regulations update the exist- ing regulations and provide additional guidance in certain ar- eas. Notice 2008–76, page 768. This notice addresses the application of section 382 of the Code in the case of certain acquisitions made pursuant to the Housing and Economic Recovery Act of 2008. EMPLOYEE PLANS REG–106251–08, page 774. Proposed regulations under section 423 of the Code provide the requirements that must be satisfied in order for a plan to meet the definition of an employee stock purchase plan. Sec- tion 423 also addresses the individual income tax treatment of stock acquired pursuant to an option granted under an em- ployee stock purchase plan. The regulations update the exist- ing regulations and provide additional guidance in certain ar- eas. EXEMPT ORGANIZATIONS Rev. Proc. 2008–55, page 768. This procedure provides guidance with respect to the classifi- cation of Indian tribal entities that the Service recognizes as In- dian Tribal Governments under sections 7701(a)(40) and 7871 of the Code. The procedure has been coordinated with a list of federally recognized tribes published by the Department of Interior, Bureau of Indian Affairs. Rev. Proc. 2002–64 super- seded. (Continued on the next page) Fi nding Lists begin on page ii. Index for July through September begins on page v. ESTATE TAX T.D. 9421, page 755. Final regulations under section 2642(a)(3) of the Code provide guidance regarding the generation-skipping transfer (GST) tax consequences of the severance of a trust in a manner that is effective under state law, but that does not meet the require- ments of a qualified severance under section 2642(a)(3). The regulations also provide guidance regarding the GST tax con- sequences of a qualified severance of a trust with an inclusion ratio between zero and one into more than two resulting trusts. In addition, the regulations provide special funding rules appli- cable to the non-proratadivision of certain assets between or among resulting trusts. September 29, 20082008–39 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. 2008–39 I.R.B.September 29, 2008 September 29, 20082008–39 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 42.—L ow-Income Housing Credi t 26 CFR 1.42–10: Utility allowances. T.D. 9420 DEPARTMENT OF THE TREASURY Internal Re venue Service 26 CFR Part 1 Section 42 Utility Allowance Regulations Update AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final Regulations. SUMMARY: This document contains fi- nal regulations that amend the utility al- lowances regulations concerning the low- income housing tax credit. The final reg- ulations update the utility allowance regu- lations to provide new options for estimat- ing tenant utility costs. The final regula- tions affect owners of low-income housing projects who claim the credit, the tenants in those low-income housing projects, and the State and local housing credit agencies that administer the credit. DATES:Effective Date:These regulations are effective July 29, 2008. Applicability Date:For dates of appli- cability, see §1.42–12(a)(4). FOR F URTHER INFORMATION CONT ACT: David Selig (202) 622–3040 (no t a toll-free number). SUPPLEMENTARY INFORMATION: Background Thi s document contains amendments to the Income Tax Regulations (26 CFR Pa rt 1) relating to the low-income hous- in g credit under section 42 of the Internal Re venue Code (Code). On June 19, 2007, th e IRS and Treasury Department pub- li shed in theFederal Registerproposed regulations u nder section 42(g)(2)(B)(ii) (REG–128274– 03, 2007–33 I.R.B. 356 [72 FR 33703]) . Written and electronic comments res ponding to the proposed reg- ulations wer e received and a public hear- ing was held o n the proposed regulations on October 9, 2007. After consideration of all the co mments, the proposed regu- lations are adopted as amended by this Treasury de cision. General Ove rview Section 42( a) provides that, for pur- poses of sec tion 38, the amount of the low-incom e housing credit determined un- der sectio n 42 for any taxable year in the credit per iod is an amount equal to the ap- plicable p ercentage of the qualified basis of each qu alified low-income building. A qualifie d low-income building is defined in sectio n 42(c)(2) as any building that is part of a qualified low-income housing project. A qualifi ed low-income housing project is define d in section 42(g)(1) as any project for resi dential rental property if the project meets on e of the following tests elected by the taxp ayer: (1) at least 20 percent of the residen tial units in the project are rent-re- stricte d and occupied by individuals whose income is 50 percent or less of area me- dian gr oss income; or (2) at least 40 per- cent of the residential units in the project are ren t-restricted and occupied by indi- vidual s whose income is 60 percent or less of are a median gross income. If a taxpayer does n ot meet the elected test, the project is not eligible for the section 42 credit. Under section 42(g)(4), section 142(d )(2)(B) applies when determin- ing wh ether any project is a qualified low-i ncome housing project under section 42(g )(1). Section 142(d)(2)(B) provides that the income of individuals and area medi an gross income is determined by the S ecretary in a manner consistent with dete rminations of lower income families and a rea median gross income under sec- tio n 8 of the United States Housing Act of 1 937. Under Rev. Rul. 94–57, 1994–2 C.B .5,taxpayersmayrelyonalistofin- com e limits released by the Department of Hou sing and Urban Development (HUD) until 45 days a fter HUD releases a new list of income limi ts, or until HUD’s effective date for the ne w list, whichever is later. In order to qua lify as a rent-restricted unit within th e meaning of section 42(g)(2), th e gross rent for the unit must not exceed 30 percent of the imputed in- come limitat ion applicable to the unit. Section 42(g )(2)(B)(ii) requires the inclu- sion in gros s rent of a utility allowance determined by the Secretary after taking into accoun t the determinations under sec- tion8ofthe United States Housing Act of 1937. Section 1.4 2–10(a) provides that if utility co sts (other than telephone) for a residenti al rental unit are paid directly by the tenant , then the gross rent for that unit includes t he applicable utility allowance as determ ined under § 1.42–10. Section 1.42–10( b) provides rules for calculating the appro priate utility allowance based upon whet her (1) the building receives rental as sistance from the Farmers Home Administ ration (FmHA), now known as the Rura l Housing Service; (2) the build- ing has a ny tenant that receives FmHA rental a ssistance; (3) the building is not describ edin(1)or(2)aboveandthe buildi ng’s rents and utility allowances are review ed by HUD on an annual basis; or (4) the building is not described in (1), (2), or (3) a bove (other buildings). Curren tly, under §1.42–10(b)(4), other buildi ngs generally use the applicable Pub- lic Hou sing Authority (PHA) utility al- lowan ce established for the Section 8 Ex- istin g Housing Program or use a local util- ity co mpany estimate. The local utility compa ny estimate may be obtained by any inter ested party (including a low-income tena nt, a building owner, or a State or local hous ing credit agency (Agency)). The p roposed regulations proposed two a dditional options for calculating util- ity a llowances. The first option would perm it a building owner to obtain a util- ity e stimate for each unit in a building from the Agency that has jurisdiction ove r the building (the Agency estimate). The Agency estimate must take into ac- cou nt the local utility rates data, property typ e, climate variables by region in the Sta te, taxes and fees on utility charges, 2008–39 I.R.B.750September 29, 2008 and property building materials and me- chanical systems. An Agency may also use actual utility company usage data and rates for the building. The second option would permit a building owner to calcu- late utility allowances using the “HUD Utility Schedule Model” found on the Low-Income Housing Tax Credits page atwww.huduser.org/datasets/lihtc.html (or successor URL). The HUD Utility Schedule Model is based on data from the Residential Energy Consumption Survey (RECS) conducted by the Department of Energy. RECS data provides energy consumption by structure for heating, air conditioning, cooking, water heating, and other electric (lighting and refrigeration). The HUD Utility Schedule Model incor- porates building location and climate. Summary of Comments and Explanation of Changes Exclusions from utility allowance Prior to these final regulations, §1.42–10(a) provided for the exclusion of telephone costs in determining the amount of the utility allowance to be included in gross rent. The proposed regulations excluded cable television costs as well as telephone costs. The final regulations re- tain the exclusions for cable television and telephone costs and also exclude Internet costs. The IRS and Treasury Department believe it is appropriate to exclude cable television and Internet costs as compara- ble to telephone costs. Additional option for determining utility allowances Commentators stated that the Agency estimate in the proposed regulations may be administratively burdensome for some Agencies. As an alternative, commenta- torssuggestedaddinganoptionthatwould allow utility estimates to be calculated by a state-certified engineer or other qualified professional. The commentators specified that, under this option, computer software could be developed that would estimate the energy or water and sanitary sewer service cost for each type of unit in a building. The estimates would be determined based on the applicable current local utility billing rate schedule and would be applied to all comparable units in the building using spe- cific information about the design, materi- als, equipment, and location of the build- ing. A computer software model that incor- porates specific information about the de- sign and location of the building for which the utility allowances are being developed, and that can be updated with actual con- sumption data and with consumption es- timates as new efficiency measures and improvements are undertaken, would pro- vide more accurate estimates of utility con- sumption. Therefore, the final regulations also include a new option allowing build- ing owners to retain the services of a qual- ified professional to calculate utility al- lowancesbasedonanenergyconsumption model. The use of this new option is subject to several special rules. First, the energy con- sumption model must, at a minimum, take into account specific factors including, but not limited to, unit size, building orienta- tion, design and materials, mechanical sys- tems, appliances, and characteristics of the building location. Second, the utility es- timates must be calculated by either (1) a properly licensed engineer or (2) a quali- fied professional approved by the Agency that has jurisdiction over the building (to- gether, qualified professional). The qual- ified professional and the building owner must not be related within the meaning of section 267(b) or 707(b). Third, the build- ing owner must furnish a copy of the es- timates derived from the energy consump- tion model to the Agency and make copies of the estimates available to all tenants in the building. Finally, the building owner must pay for all costs incurred in obtain- ing the utility estimates from the qualified professional and providing the estimates to the Agency and tenants. Default option/option ordering One commentator suggested that the fi- nal regulations should provide a default option because, in the absence of a de- finitive standard for determining utility al- lowances, building owners would use the option that yields the lowest utility esti- mates. Commentators further requested clarification as to which option should be used when multiple options are available, whether building owners may use different options for different utilities, and whether owners may change the options used for calculating utilities from time to time. An energy consumption model devel- oped by a qualified professional that takes into account specific information about the design and location of the building for which the utility allowances are being de- veloped should produce the most accurate utility estimates. Itis expected that this more accurate model will be the model most commonly used by most building owners, particularly those with buildings that are not very old. However, if a build- ing owner selects an option that yields higher utility allowances, the building owner should be free to accept a lower amount of rent from tenants. Therefore, there is no need for a stated default option or option ordering rule. Further, the final regulations neither prohibit using different options for different utilities nor prohibit changing the options used for calculating utilities. If an Agency determines that a building owner has understated the util- ity allowances for the building under the particular option chosen by the owner for calculating the utility allowance, and the building’s units are not rent-restricted units under section 42(g)(2) as a result, the Agency must report the noncompliance on Form 8823,Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition. Application of newly calculated utility allowances Under current §1.42–10(c) of the regu- lations, if the applicable utility allowance for units changes, the new utility al- lowance must be used to compute gross rent of rent-restricted units due 90 days after the change (the 90-day period). The proposed regulations limited the effec- tive date of any new utility allowances to the earlier of the date the building has achieved 90 percent occupancy for a period of 90 consecutive days or the end of the first year of the credit period. The proposed regulations also modified §1.42–10(c) by requiring that a building owner must review at least annually the basis on which utility allowances have been established and must update the ap- plicable utility allowance. The review must take into account any changes to the building such as any energy conservation September 29, 20087512008–39 I.R.B. measures that affect energy consumption and changes in utility rates. Commentators suggested that building owners should be obligated to adjust utility allowances when utility rates increase by a stated percentage, for example, 10 per- cent, which is the rule for revising util- ity allowance schedules for PHAs under 24 CFR 982.517(c). This HUD rule pro- vides that a PHA must review its schedule of utility allowances each year and revise its allowance for a utility category if the utility rate has changed by 10 percent or more since the utility allowance schedule was last revised. The commentators did not address decreases in utility rates. A commentator also suggested that the final regulations should require an Agency to review or have owners review local utility rates quarterly to determine if rates have increased sufficiently to require an adjust- ment. A different commentator suggested limiting reviews to no more than once per year. The IRS and Treasury Department do not believe that fluctuations in utility rates within a given year should trigger recal- culations of utility allowances more than once a year. The IRS and Treasury De- partment do not believe that the additional burden of updating the utility allowances more than once a year is warranted at this time. Utility rates generally do not change more than once a year, and yearly updated utility allowances would reflect average rates applicable to all tenants in a build- ing from year to year. Therefore, the fi- nal regulations require building owners to calculate new utility allowances once dur- ing the calendar year regardless of any percentage change in utility rates. Build- ing owners may choose, however, to cal- culate new utility allowances more fre- quently than once during the calendar year provided the owner complies with the re- quirements of these regulations, includ- ing the notification requirements to the Agency and tenants. Another commentator suggested that new utility allowances should be imple- mented within 90 days after HUD pub- lishes its annual income limits (which are used in determining section 42 rents), but in no case later than June 30 of any year. Section 42 rents under section 42(g)(2) may or may not increase depending on HUD’s calculation of area median gross income. Therefore, the IRS and Treasury Department do not believe that the rules should require that the effective date of any new utility allowance coincide with the section 42 effective date of HUD’s income lists. Building owners, however, may choose to implement any new utility allowances on the section 42 effective date of HUD’s income lists. To bring financial stability to a project during the beginning of its operations, the final regulations clarify that the building owner is not required to review the util- ity allowances, or implement new utility allowances, until the earlier of the date the building has achieved 90 percent occu- pancy for a period of 90 consecutive days or the end of the first year of the credit pe- riod. Procedural safeguards for tenants One commentator made several rec- ommendations regarding procedural safe- guards for tenants including: owners should be required to give tenants 30 days notice before the effective date of any util- ity allowance; tenants should be provided with all information used in calculating the utility allowances; tenants should be given the opportunity to comment on the proposed allowances; and owners should be required to review those comments prior to the utility allowances becoming effective. The commentator believed that the new options for determining utility allowances should be available only after one full year of occupancy and one full year after the building is placed in service. A commentator also recommended that a building owner should be allowed to use the new options only if the owner provides all data to the Agency no later than Febru- ary 15 and the Agency informs the owner whether the proposed utility allowances are approved by March 31. To provide tenants with the oppor- tunity to comment on proposed utility allowances to the Agency and building owner, the final regulations apply the existing disclosure requirement under cur- rent §1.42–10(b)(4)(ii)(B) (regarding the utility company estimate) to an owner us- ing a utility company estimate, the HUD Utility Schedule Model, or an energy con- sumption model. Therefore, an owner must submit copies of the proposed utility allowances to the Agency and make the proposed utility allowances available to all tenants in the building at the beginning of the 90-day period before the utility al- lowances are used in determining the gross rents of rent-restricted units. Similarly, the final regulations require that any util- ity estimates obtained under the Agency estimate option must be made available to all tenants in the building at the beginning of the 90-day period. An Agency may continue to require additional information from the owner during the 90-day period. Commentators suggested that the fi- nal regulations should limit the use of the HUD Utility Schedule Model to data for a twelve-month period ending in the most recent calendar year and require the owner to certify the accuracy of the data and the calculations of the utility allowances. However, the HUD Utility Schedule Model already incorporates con- sumption data derived from RECS data. Thus, building owners using this option need not be required to use consumption data for any particular twelve-month pe- riod. These final regulations, however, provide that the use of the energy con- sumption model is limited to consumption data for a twelve-month period ending no earlier than 60 days prior to the begin- ning of the 90-day period. In the case of newly constructed or renovated buildings with less than twelve months of consump- tion data, the energy consumption model allows a qualified professional to use con- sumption data for the twelve-month period of units of similar size and construction in the geographic area in which the building containing the units is located. Further, the final regulations require that utility rates used for the HUD Utility Schedule Model, the Agency estimate option, and the energy consumption model must be no older than the rates in place 60 days prior to the beginning of the 90-day period. In addition to these safeguards, if an Agency determines that a building owner has understated the utility allowances for the owner’s building under the particular option chosen, and, therefore, some or all of the units in the building are not rent-re- stricted units under section 42(g)(2), then the Agency must report the noncompliance to the Service on Form 8823,Low-Income Housing Credit Agencies Report of Non- compliance or Building Disposition. Commentators requested that building owners should be required to certify the es- timate and the accuracy of the data used 2008–39 I.R.B.752September 29, 2008 under the new options. Because Agencies may request additional information at any time during their mandatory review of pro- posed utility allowances, and must report any noncompliance tothe Service, the final regulations do not require building owners to provide such certification. Utility allowances for tenants with special needs One commentator suggested that the calculation of utility allowances should take into account any special needs ten- ants such as people with disabilities who require high energy consumption equip- ment. Section 42 does not require that the owner’s calculation of utility allowances be based on a tenant’s particular use of utility services. If such a requirement were imposed, owners and Agencies would have to determine the utility allowance for the tenants in each unit, as opposed to allowances based on the size of the unit, which would greatly increase burden. Additionally, it is unclear whether it is appropriate to implement rules that might encourage tenants to be indifferent to their energy consumption. Such indifference could lead to cost overruns by owners, and the viability of low-income housing could be jeopardized. Therefore, the final reg- ulations do not require the calculation of utility allowances based on consumption by particular tenants. Calculation of utility company estimate option for deregulated utilities Section 1.42–10(b)(4)(ii)(B) currently provides that any interested party (in- cluding an owner, low-income tenant, or Agency) may obtain a local utility com- pany estimate for a unit. The estimate is obtained when the interested party re- ceives, in writing, information from a local utility company providing the estimated cost of that utility for a unit of similar size and construction for the geographic area in which the building containing the units is located. In light of utility services deregu- lation, the proposed regulations proposed to amend this option by requiring the inter- ested party to obtain cost estimates from the local utility company that include com- bined rate charges from multiple utility companies. Commentators thought this proposed amendment would require the interested party to obtain utility consumption esti- mates from every utility company pro- viding the same utility service and stated that this would present an unworkable administrative burden in deregulated juris- dictions with multiple utility providers. In some jurisdictions, many utility providers may be available for a given building. The proposed amendment was not intended to require the interested party to obtain utility consumption estimates from every utility company providing the same utility service. The amendment was proposed to address deregulation by requiring the interested party to obtain estimates for all the components of the utility service if the service is divided between two or more types of service providers (for example, electric generation and electric transmis- sion). The final regulations clarify that, in the case of deregulated utility services, the interested party is required to obtain an estimate from only one utility company even if multiple companies can provide the same utility service to a unit. How- ever, the utility company furnishing the estimate must offer utility services to the building in order for that utility company’s rates to be used in calculating utility al- lowances. The estimate should include all component charges for providing the utility service. Agency costs/administrative burden One commentator requested that spe- cific language be added to address when Agencies may charge a reasonable fee for making a determination pursuant to the Agency estimate option, and who bears the fee when a particular option is used. The proposed regulations provided that costs incurred in obtaining an Agency estimate are borne by the building owner. The final regulations adopt this provision, and fur- ther require building owners to pay for all costs incurred in obtaining the estimates under the HUD Utility Schedule Model and the energy consumption model and in providing estimates to Agencies and ten- ants. Effective/applicability date The proposed regulations were pro- posedtobeeffectivefortaxableyears beginning on or after the date of publica- tion of the final regulations in theFederal Register. A commentator suggested that the final regulations be effective earlier on the basis that if they are published after 2007, they would not be effective until 2009 for calendar year taxpayers. The IRS and Treasury Department believe that the burden associated with an earlier effective date is not warranted. Therefore, the final regulations do not adopt this suggestion. However, in order to allow a building owner to implement the utility allowances as of the first day of the owner’s taxable year beginning on or after July 29, 2008, the final regulations provide that taxpay- ers may rely on the rules for determining utility allowances before the first day of the owner’s taxable year beginning on or after July 29, 2008 provided that any util- ity allowances so calculated are effective no earlier than the first day of the owner’s taxable year beginning on or after July 29, 2008. Special Analyses It has been determined that this Trea- sury decision is not asignificant regula- tory action as defined in Executive Or- der 12866. Therefore, a regulatory assess- ment is not required. It has also been de- termined that section 553(b) of the Ad- ministrative Procedure Act (5 U.S.C. chap- ter 5) does not apply to these regulations. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the information has previously been re- viewed and approved under OMB con- trol number 1545–1102, and that the in- formation required by these final regula- tions adds no new burden to the existing requirements. Accordingly, a Regulatory Flexibility Analysis under the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the 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. Drafting Information The principal author of these regula- tions is David Selig, Office of the Asso- ciate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury September 29, 20087532008–39 I.R.B. Department participated in their develop- ment. ***** Adoption of A mendments to the Regulation s 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 1.42–10 is amended by: 1. Revising the firstsentence of para- graph (a). 2. Revising paragraphs (b)(1), (b)(2), and (b)(3), and the introductory text of paragraph (b)(4). 3. Adding two sentences at the end of paragraph (b)(4)(ii)(A). 4. Adding three sentences after the sec- ond sentence in paragraph (b)(4)(ii)(B). 5. Adding paragraphs (b)(4)(ii)(C), (b)(4)(ii)(D), and (b)(4)(ii)(E). 6. Revising paragraph (c). 7. Adding paragraph (d). The additions and revisions read as fol- lows: §1.42–10 Utility allowances. (a) * * * If the cost of any utility (other than telephone, cable television, or Inter- net) for a residential rental unit is paid directly by the tenant(s), and not by or through the owner of the building, the gross rent for that unit includes the appli- cable utility allowance determined under this section. * * * (b)Applicable utility allowances—(1) Buildings assisted by the Rural Housing Service. If a building receives assistance from the Rural Housing Service (RHS-as- sisted building), theapplicable utility allowance for all rent-restricted units in the building is the utility allowance de- termined under the method prescribed by the Rural Housing Service (RHS) for the building (whether or not the building or its tenants also receive other state or federal assistance). (2)Buildings with Rural Housing Ser- vice assisted tenants. If any tenant in a building receives RHS rental assistance payments (RHS tenant assistance), the ap- plicable utility allowance for all rent-re- stricted units in the building (including any units occupied by tenants receiving rental assistance payments from the De- partment of Housing and Urban Develop- ment (HUD)) is the applicable RHS utility allowance. (3)Buildings regulated by the Depart- ment of Housing and Urban Development. If neither a building nor any tenant in the building receives RHS housing assistance, and the rents and utility allowances of the building are reviewed by HUD on an an- nual basis (HUD-regulated building), the applicable utility allowance for all rent-re- stricted units in the building is the applica- ble HUD utility allowance. (4)Other buildings. If a building is nei- ther an RHS-assisted nor a HUD-regulated building, and no tenant in the building re- ceives RHS tenant assistance, the appli- cable utility allowance for rent-restricted units in the building is determined under the following methods. ***** (ii)***(A)***However,ifalocal utility company estimate is obtained for anyunitinthebuildingunderparagraph (b)(4)(ii)(B) of this section, a State or local housing credit agency (Agency) pro- vides a building owner with an estimate for any unit in a building under paragraph (b)(4)(ii)(C) of this section, a cost estimate is calculated using the HUD Utility Sched- ule Model under paragraph (b)(4)(ii)(D) of this section, or a cost estimate is calculated by an energy consumption model under paragraph (b)(4)(ii)(E) of this section, then the estimate under paragraph (b)(4)(ii)(B), (C), (D), or (E) becomes the applicable utility allowance for all rent-restricted units of similar size and construction in the building. Paragraphs (b)(4)(ii)(B), (C), (D),and(E)ofthissectiondonotapply to units to which the rules of paragraphs (b)(1), (2), (3), or (4)(i) of this section apply. (B) * * * In the case of deregulated util- ity services, the interested party is required to obtain an estimate only from one utility company even if multiple companies can provide the same utility service to a unit. However, the utility company must offer utility services to the building in order for that utility company’s rates to be used in calculating utility allowances. The esti- mate should include all component dereg- ulated charges for providing the utility ser- vice. * * * (C)Agency estimate. A building owner may obtain a utility estimate for each unit in the building from the Agency that has jurisdiction over the building pro- vided the Agency agrees to provide the estimate. The estimate is obtained when the building ownerreceives, in writing, information from the Agency providing the estimated per-unit cost of the utilities for units of similar size and construc- tion for the geographic area in which the building containing the units is located. The Agency estimate may be obtained by a building owner at any time during the building’s extended use period (see section 42(h)(6)(D)). Costs incurred in obtaining the estimate are borne by the building owner. In establishing an ac- curate utility allowance estimate for a particular building, an Agency (or an agent or other private contractor of the Agency that is a qualified professional within the meaning of paragraph (b)(4)(ii)(E) of this section) must take into account, among other things, local utility rates, property type, climate and degree-day variables by region in the State, taxes and fees on utility charges, building materials, and mechanical systems. If the Agency uses an agent or other private contractor to calculate the utility estimates, the agent or contractor and the owner must not be re- lated within the meaning of section 267(b) or 707(b). An Agency may also use actual utility company usage data and rates for the building. However, use of the Agency estimate is limited to the building’s con- sumption data for the twelve-month period ending no earlier than 60 days prior to the beginning of the 90-day period under paragraph (c)(1) of this section and utility rates used for the Agency estimate must be no older than the rates in place 60 days prior to the beginning of the 90-day period under paragraph (c)(1) of this section. In the case of newly constructed or renovated buildings with less than 12 months of con- sumption data, the Agency (or an agent or other private contractor of the Agency that is a qualified professional within the meaning of paragraph (b)(4)(ii)(E) of this section) may use consumption data for the 12-month period of units of similar size andconstructioninthegeographicareain which the building containing the units is located. 2008–39 I.R.B.754September 29, 2008 (D)HUD Utility Schedule Model.A building owner may calculate a utility estimate using the “HUD Utility Sched- ule Model” that can be found on the Low-Income Housing Tax Credits page atwww.huduser.org/datasets/lihtc.html(or successor URL). Utility rates used for the HUD Utility Schedule Model must be no older than the rates in place 60 days prior to the beginning of the 90-day period un- der paragraph (c)(1) of this section. (E)Energy consumption model.A building owner may calculate utility es- timates using an energy and water and sewage consumption and analysis model (energy consumption model). The energy consumption model must, at a minimum, take into account specific factors includ- ing, but not limited to, unit size, building orientation, design and materials, mechan- ical systems, appliances, and characteris- tics of the building location. The utility consumption estimates must be calculated by either a properly licensed engineer or a qualified professional approved by the Agency that has jurisdiction over the building (together, qualified professional), and the qualified professional and the building owner must not be related within the meaning of section 267(b) or 707(b). Use of the energy consumption model is limited to the building’s consumption data for the twelve-month period ending no earlier than 60 days prior to the begin- ning of the 90-day period under paragraph (c)(1) of this section, and utility rates used for the energy consumption model must be no older than the rates in place 60 days prior to the beginning of the 90-day period under paragraph (c)(1) of this section. In the case of newly constructed or reno- vated buildings with less than 12 months of consumption data, the qualified profes- sional may use consumption data for the 12-month period of units of similar size and construction in the geographic area in which the building containing the units is located. (c)Changes in applicable utility al- lowance—(1)In general. If, at any time during the building’s extended use pe- riod (as defined in section 42(h)(6)(D)), the applicable utility allowance for units changes, the new utility allowance must be used to compute gross rents of the units due90daysafterthechange(the90-day period). For example, if rent must be lowered because a local utility company estimate is obtained that shows a higher utility cost than the otherwise applica- ble PHA utility allowance, the lower rent must be in effect for rent due at the end of the 90-day period. A building owner using a utility company estimate under paragraph (b)(4)(ii)(B) of this section, the HUD Utility Schedule Model under para- graph (b)(4)(ii)(D) of this section, or an energy consumption model under para- graph (b)(4)(ii)(E) of this section must submit copies of the utility estimates to the Agency that has jurisdiction over the building and make the estimates available to all tenants in the building at the begin- ning of the 90-day period before the utility allowances can be used in determining the gross rent of rent-restricted units. An Agency may require additional informa- tion from the owner during the 90-day period. Any utility estimates obtained under the Agency estimate under para- graph (b)(4)(ii)(C) of this section must also be made available to all tenants in the building at the beginning of the 90-day pe- riod. The building owner must pay for all costs incurred in obtaining the estimates under paragraphs (b)(4)(ii)(B), (C), (D), and (E) of this section and providing the estimates to the Agency and the tenants. Thebuildingownerisnotrequiredtore- view the utility allowances, or implement new utility allowances, until the building has achieved 90 percent occupancy for a period of 90 consecutive days or the end of the first year of the credit period, whichever is earlier. (2)Annual review. A building owner must review at least once during each cal- endar year the basis on which utility al- lowances have been established and must update the applicable utility allowance in accordance with paragraph (c)(1) of this section. The review must take into account anychangestothebuildingsuchasany energy conservation measures that affect energy consumption and changes in utility rates. (d)Record retention. The building owner must retain any utility consump- tion estimates and supporting data as part of the taxpayer’s records for purposes of §1.6001–1(a). Par. 3. Section 1.42–12 is amended by adding paragraph (a)(4) to read as follows: §1.42–12 Effective dates and transitional rules. (a) * * * (4)Utility allowances. The first sentence in §1.42–10(a), §1.42–10(b)(1), (2), (3), and (4), the last two sen- tencesin§1.42–10(b)(4)(ii)(A), the third, fourth, and fifth sen- tencesin§1.42–10(b)(4)(ii)(B), §1.42–10(b)(4)(ii)(C), (D), and (E), and §1.42–10(c) and (d) are applicable to a building owner’s taxable years beginning on or after July 29, 2008. Taxpayers may rely on these provisions before the beginning of the building owner’s taxable year beginning on or after July 29, 2008 provided that any utility allowances calculated under these provisions are effective no earlier than the first day of the building owner’s taxable year beginning on or after July 29, 2008. The utility al- lowances provisions that apply to taxable years beginning before July 29, 2008 are contained in §1.42–10 (see 26 CFR part 1 revised as of April 1, 2008). LindaE.Stiff, Deputy Commissioner for Services and Enforcement. Approved July 20, 2008. Eric Solomon, Assistant Secretary of theTreasury(TaxPolicy). (Filed by the Office of the Federal Register on July 28, 2008, 8:45 a.m., and published in the issue of the Federal Register for July 29, 2008, 73 F.R. 43863) Section 2642.—Inclusion Ratio 26 CFR 2642–6: Qualified severance. T.D. 9421 Department of the Treasury Internal Revenue Service 26 CFR Part 26 Severance of a Trust for Generation-Skipping Transfer (GST) Tax Purposes AGENCY: Internal Revenue Service (IRS), Department of the Treasury (Trea- sury). September 29, 20087552008–39 I.R.B. ACTION: Final regulations. SUMMARY: This document contains fi- nal regulations providing guidance regard- ing the generation-skipping transfer (GST) tax consequences of the severance of a trust in a manner that is effective under state law, but that does not meet the re- quirements of a qualified severance under section 2642(a)(3) of the Internal Revenue Code (Code). These final regulations also provide guidance regarding the GST tax consequences of a qualified severance of a trust with an inclusion ratio between zero and one into more than two resulting trusts. These final regulations also provide spe- cial funding rules applicable to the non-pro ratadivision of certain assets between or among resulting trusts. The regulations will affect trusts that are subject to the GST tax. DATES:Effective Date:The regulations are effective July 31, 2008. Applicability Date:For dates of appli- cability, see §26.2642–6(k)(1). FOR FURTHER INFORMATION CONTACT: Mayer R. Samuels, (202) 622–3090 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background Section 2642(a)(3) was added to the Code by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Public Law 107–16 (115 Stat. 38 (2001). Under section 2642(a)(3), if a trust is divided into two or more trusts in a “qualified severance,” the separate trusts resulting from the severance (resulting trusts), which may have different inclu- sion ratios, will be recognized as separate trusts for GST tax purposes. (As used in this guidance, “resulting trust” has no re- lation to a resulting trust recognized under the common law of trusts and principles of equity.) Once the resulting trusts are recognized as separate trusts, the trans- feror’s lifetime GST tax exemption may be allocated separately to either trust. In addition, whether or not a GST taxable event occurs is determined separately for each resulting trust. On August 24, 2004, proposed regula- tions under section 2642(a)(3) regarding qualified severances were published in theFederal Register(REG–145987–03, 2004–2 C.B. 523 [69 FR 51967]). Final regulations were published on August 2, 2007 (T.D. 9348, 2007–37 I.R.B. 563 [72 FR 42291]). The Treasury Department and IRS determined that certain comments received in response to the proposed regu- lations, and certain additional rules under section 2642(a)(3), should be addressed in a separate notice of proposed rulemaking. On August 2, 2007, theFederal Register published a notice of proposed rulemaking (REG–128843–05, 2007–37 I.R.B. 587 [72 FR 42340]) addressing those com- ments and rules. The IRS received one submission containing several comments on the notice of proposed rulemaking. The comments contained in the submission are discussed below. No public hearing was requested or held. Explanation of Provisions and Summary of Comments Section 26.2642–6(d)(4) of the exist- ing regulations provides that each of the trusts resulting from a qualified severance must be funded with a fraction or percent- age of the original trust, and that the sum of those fractions or percentages must be one or one hundred percent, respectively. The existing regulations provide that this requirement may be satisfied by the fund- ing of each resulting trust with that trust’s fraction or percentage share of each asset held by the original trust (apro ratadivi- sion). Section 26.2642–6(d)(4) of the pro- posed regulations permits the funding of the resulting trusts on a non-pro rataba- sis, provided that a special funding rule is also satisfied. Specifically, this sec- tion of the proposed regulations provides that, if the assets of the original trust are divided between or among the resulting trusts on a non-pro ratabasis, no discounts or other reductions from the value of the asset owned by the original trust, arising by reason of the division of the original trust’s interest in the asset between or among the resulting trusts, are permitted for purposes of determining the amount used to fund each resulting trust. Instead, solely for funding purposes, each resulting trust’s in- terest in the stock of a closely held cor- poration, partnership interest, or other as- set must be valued by multiplying the fair market value of the asset held in the origi- nal trust as of the date of severance by the fractional or percentage interest in that as- set being distributed to that resulting trust. Thus, for purposes of the requirements of a qualified severance, regardless of whether the funding is done on apro ratabasis, the cumulative value of the resulting trusts equals the value of the original trust. The commentators pointed out that funding pursuant to this rule would result in an allocation different from the allo- cation that would normally be obtained from funding based on the state law fair market value standard which would take the discounts into account. The commen- tators expressed concern that the resulting shift in beneficial interests between or among the resulting trusts could violate the trustee’s fiduciary duty of impartiality under applicable state law. Further, the commentators pointed out that the pro- posed rule could be avoided through the post-severance purchase and sale of as- sets between resulting trusts at fair market value. The commentators recommended an alternative funding rule under which the value of the original trust would be calculated as the sum of the fair market value of the assets to be held by the result- ing trusts. This recommendation was not adopted in the final regulations. It is difficult to see how the fiduciary duty of impartiality is challenged more by this funding rule than by apro ratadivision of each asset of the original trust. The funding rule in the proposed regulations was intended to facilitate the funding of the resulting trusts without the cost or need for review of appraisals of each severed interest, and thus to improve the administrability of the severance provisions. This funding rule produces a bright line test, the same result whether or not the trust assets are divided on apro ratabasis, and recognizes that in many circumstances, where a trust is severed for tax purposes into two identical trusts with the same or related beneficia- ries, any closely held stock or partnership units divided between the two resulting trusts are likely to be sold as a unit without any actual reduction in value that may be reflected in the claimed discounts. Any use of post-severance sales between result- ing trusts to avoid these funding rules may constitute mere steps in a pre-arranged transaction. The commentators pointed out that the nonqualified severance illustrated in 2008–39 I.R.B.756September 29, 2008 §26.2642–6(j),Example 3, of the existing regulations will result in a taxable event for GST tax purposes (that is, a taxable termination or taxable distribution) if that severance occurs on or after the proposed regulations are adopted as final. This is because, under the proposed regulations, the severed trust is treated as a separate trust for GST tax purposes. Accordingly, cautionary language has been added to this example to the effect that a GST taxable event will result as a consequence of the severance. It was determined that §26.2642–6(j), Example 12of the proposed regulations addresses the same issue covered inExam- ple 8of §26.2654–1(a)(5). Therefore,Ex- ample 12has been removed from the final regulations and the examples have been renumbered accordingly. As requested by the commentators, a new example, §26.2642–6(j),Example 13, has been added to confirm that a trust re- sulting from a nonqualified severance may subsequently be severed in a qualified sev- erance. The commentators noted that the proposed regulations under §26.2654–1(a)(1)(iii) address the treat- ment of severances resulting in separate trusts that are required under the terms of a trust instrument (mandatory sever- ances) but that are neither severances otherwise recognized under section 2654 nor qualified severances under section 2642. The proposed regulations conclude that the separate shares or trusts resulting from such a severance, if recognized as separate trusts under state law, will be recognized as separate for GST tax pur- poses. The commentators questioned why the proposed changes to the regulations under section 2654 must address those severances that result in separate trusts when this issue is already addressed in §26.2642–6(h) of the proposed regulations dealing with nonqualified severances. Section 26.2654–1(a)(1)(iii) was intended to address only mandatory severances that, as with the other types of severances covered by §26.2654–1(a), are dictated by the terms of the trust. On the other hand, §26.2642–6(h) addresses discretionary severances, that is, severances that are elective and within the discretion of the trustee. The severances described in §26.2654–1 are governed by that section. Therefore, the proposed addition to this section has not been removed. The proposed regulations under sec- tion 2654 state a general rule that separate shares or trusts resulting from a mandatory severance, that are recognized as separate trusts for GST tax purposes, will not be treated as separate trusts for purposes of filing income tax returns or calculating any other taxes. The comments noted that this statement shouldnot apply to shares or trusts that are recognized as separate trusts under local law. Rather, this state- ment should apply only to separate shares created within a single trust that are not recognized under local law as separate trusts. The final regulations reflect this change. 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 deter- mined that section 553(b) of the Admin- istrative Procedure Act (5 U.S.C. chapter 5) applies only to §26.2642–6(d)(7)(iii) of these regulations. It is hereby certified that this provision will not have a significant economic impact on a substantial number of small entities. Accordingly, a Regula- tory Flexibility Analysis is not required. This provision directly affects individuals, not entities. Because the remaining sec- tions of these regulations do not impose on small entities a collection of informa- tion requirement, the Regulatory Flexibil- ity Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preced- ing these regulations was submitted to the Small Business Administration for com- ment on their impact on small business. Drafting Information The principal author of these final regu- lations is Mayer R. Samuels, Office of the Associate Chief Counsel (Passthroughs and Special Industries), IRS. Other person- nel from the IRS and Treasury participated in their development. ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR part 26 is amended as follows: PART 26—GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1986 Paragraph 1. The authority citation for part 26 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. In §26.2600–1, the table of contents is amended by adding the entry for §26.2642–6(h) to read as follows: §26.2600–1 Table of contents. ***** §26.2642–6 Qualified severance. ***** (h) Treatment of trusts resulting from a severance that is not a qualified severance. ***** Par. 3. Section 26.2642–6 is amended as follows: 1. Paragraphs (d)(4) and (d)(7) are re- vised. 2. Paragraph (h) is added. 3. Paragraph (j)Example 3is revised. 4. Paragraph (j)Examples 6,9,12,and 13are added. 5. Paragraph (k)(1) is revised. The additions and revisions read as fol- lows: §26.2642–6 Qualified severance. ***** (d) * * * (4) The single trust (original trust) is severed on a fractional basis, such that each new trust (resulting trust) is funded with a fraction or percentage of the orig- inal trust, and the sum of those fractions or percentages is one or one hundred per- cent, respectively. For this purpose, the fraction or percentage may be determined by means of a formula (for example, that fraction of the trust the numerator of which is equal to the transferor’s unused GST tax exemption, and the denominator of which is the fair market value of the original trust’s assets on the date of severance). September 29, 20087572008–39 I.R.B. The severance of a trust based on a pe- cuniary amount does not satisfy this re- quirement. For example, the severance of a trust is not a qualified severance if the trust is divided into two trusts, with one trust to be funded with $1,500,000 and the other trust to be funded with the balance of the original trust’s assets. With respect to the particular assets to be distributed to each separate trust resulting from the sev- erance, each such trust may be funded with the appropriate fraction or percentage (pro rataportion) of each asset held by the orig- inal trust. Alternatively, the assets may be divided among the resulting trusts on a non-pro ratabasis, based on the fair mar- ket value of the assets on the date of sev- erance. However, if a resulting trust is funded on a non-pro ratabasis, each asset received by a resulting trust must be val- ued, solely for funding purposes, by mul- tiplying the fair market value of the as- set held in the original trust as of the date of severance by the fraction or percent- age of that asset received by that result- ing trust. Thus, the assets must be val- ued without taking into account any dis- count or premium arising from the sever- ance, for example, any valuation discounts that might arise because the resulting trust receives less than the entire interest held by the original trust. See paragraph (j),Exam- ple 6of this section. ***** (7)(i) In the case of a qualified sever- ance occurring after GST tax exemption has been allocated to the trust (whether by an affirmative allocation, a deemed alloca- tion, or an automatic allocation pursuant to the rules contained in section 2632), if the trust has an inclusion ratio as de- fined in §26.2642–1 that is greater than zero and less than one, then either para- graph (d)(7)(ii) or (iii) of this section must be satisfied. (ii) The trust is severed initially into only two resulting trusts. One resulting trust must receive that fractional share of the total value of the original trust as of the date of severance that is equal to the appli- cable fraction, as defined in §26.2642–1(b) and (c), used to determine the inclusion ra- tio of the original trust immediately before the severance. The other resulting trust must receive that fractional share of the to- tal value of the original trust as of the date of severance that is equal to the excess of one over the fractional share described in the preceding sentence. The trust receiv- ing the fractional share equal to the appli- cable fraction shall have an inclusion ratio of zero, and the other trust shall have an in- clusion ratio of one. If the applicable frac- tion with respect to the original trust is .50, then, with respect to the two equal trusts re- sulting from the severance, the trustee may designate which of the resulting trusts will have an inclusion ratio of zero and which will have an inclusion ratio of one. Each separate trust resulting from the severance then may be further divided in accordance with the rules of this section. See para- graph (j),Example 7, of this section. (iii) The trust is severed initially into more than two resulting trusts. One or more of the resulting trusts in the aggre- gate must receive that fractional share of the total value of the original trust as of the date of severance that is equal to the applicable fraction used to determine the inclusion ratio of the original trust imme- diately before the severance. The trust or trusts receiving such fractional share shall have an inclusion ratio of zero, and each of the other resulting trust or trusts shall have an inclusion ratio of one. (If, how- ever, two or more of the resulting trusts each receives the fractional share of the to- tal value of the original trust equal to the applicable fraction, the trustee may des- ignate which of those resulting trusts will have an inclusion ratio of zero and which will have an inclusion ratio of one.) The resulting trust or trusts with an inclusion ratio of one must receive in the aggregate that fractional share of the total value of the original trust as of the date of sever- ance that is equal to the excess of one over the fractional share described in the second sentence of this paragraph. See paragraph (j),Example 9, of this section. ***** (h)Treatment of trusts resulting from a severance that is not a qualified severance. Trusts resulting from a severance (other than a severance recognized for GST tax purposes under §26.2654–1) that does not meet the requirements of a qualified sev- erance under paragraph (b) of this section will be treated, after the date of sever- ance, as separate trusts for purposes of the GST tax, provided that the trusts resulting from such severance are recognized as sep- arate trusts under applicable state law. The post-severance treatment of the resulting trusts as separate trusts for GST tax pur- poses generally permits the allocation of GST tax exemption, the making of various elections permitted for GST tax purposes, and the occurrence of a taxable distribu- tion or termination with regard to a particu- lar resulting trust, with no GST tax impact on any other trust resulting from that sev- erance. Each trust resulting from a sever- ance described in this paragraph (h), how- ever, will have the same inclusion ratio im- mediately after the severance as that of the original trust immediately before the sev- erance. (See §26.2654–1for the inclusion ratio of each trust resulting from a sever- ance described in that section.) Further, any trust resulting from a nonqualified sev- erance may be severed subsequently, pur- suant to a qualified severance described in this §26.2642–6. ***** (j) * * * Example 3.Severance based on actuarial value of beneficial interests. In 2004, T establishes Trust, an irrevocable trust providing that income is to be paid to T’s child C during C’s lifetime. Upon C’s death, Trust is to terminate and the assets of Trust are to be paid to GC, C’s child, if living, or, if GC is not then living, to GC’s estate. T properly elects, under section 2632(c)(5), not to have the automatic allocation rules contained in section 2632(c) apply with respect to T’s transfers to Trust, and T does not otherwise allocate GST tax exemption with respect to Trust. Thus, Trust has an inclusion ratio of one. In 2009, the trustee of Trust, pursuant to applicable state law, divides Trust into two separate trusts, Trust 1 for the benefit of C (and on C’s death to C’s estate), and Trust 2 for the benefit of GC (and on GC’s death to GC’s estate). The document severing Trust directs that Trust 1 is to be funded with an amount equal to the actuarial value of C’s interest in Trust prior to the severance, determined under section 7520 of the Internal Rev- enue Code. Similarly, Trust 2 is to be funded with an amount equal to the actuarial value of GC’s inter- est in Trust prior to the severance, determined under section 7520. Trust 1 and Trust 2 do not provide for the same succession of interests as provided under the terms of the original trust.Therefore, the severance is not a qualified severance. Furthermore, because the severance results in no non-skip person having an interest in Trust 2, Trust 2 constitutes a skip person under section 2613 and, therefore, the severance re- sults in a taxable termination subject to GST tax. ***** Example 6.Funding of severed trusts on a non- pro rata basis. (i) T’s will establishes an irrevocable trust (Trust) for the benefit of T’s descendants. As a result of the allocation of GST tax exemption, the applicable fraction with respect to Trust is .60 and Trust’s inclusion ratio is .40 [1 - .60]. Pursuant to authority granted under applicable state law, on Au- gust 1, 2008, the trustee executes a document sever- ing Trust into two trusts, Trust 1 and Trust 2, each of 2008–39 I.R.B.758September 29, 2008 which is identical to Trust. The instrument of sever- ance provides that the severance is intended to qualify as a qualified severance within the meaning of section 2642(a)(3) and designates August 3, 2008, as the date of severance (within the meaning of paragraph (d)(3) of this section). The instrument further provides that Trust1andTrust2aretobefundedonanon-pro rata basis with Trust 1 funded with assets having a fair market value on the dateof severance equal to 40% of the value of Trust’s assets on that date and Trust 2 funded with assets having a fair market value equal to 60% of the value of Trust’s assets on that date. The fair market value of the assets used to fund each trust is to be determined in compliance with the require- ments of paragraph (d)(4) of this section. (ii) On August 3, 2008, the fair market value of the Trust assets totals $4,000,000, consisting of 52% of the outstanding common stock in Company, a closely-held corporation, valued at $3,000,000 and $1,000,000 in cash and marketable securities. Trustee proposes to divide the Company stock equally between Trust 1 and Trust 2, and thus transfer 26% of the Company stock to Trust 1 and 26% of the stock to Trust 2. In addition, the appropriate amount of cash and marketable securities will be distributed to each trust. In accordancewith paragraph (d)(4) of this section, for funding purposes, the interest in the Company stock distributed to each trust is valued as apro rataportion of the value of the 52% interest inCompanyheldbyTrustbeforeseverance,with- out taking into account, for example, any valuation discount that might otherwise apply in valuing the noncontrolling interest distributed to each resulting trust. (iii) Accordingly, for funding purposes, each 26% interest in Company stock distributed to Trust 1 and Trust 2 is valued at $1,500,000 (.5 x $3,000,000). Therefore, Trust 1, which is to be funded with $1,600,000 (.40 x $4,000,000), receives $100,000 in cash and marketable securities valued as of Au- gust 3, 2008, in addition to the Company stock, and Trust 2, which is to be funded with $2,400,000 (.60 x $4,000,000), receives $900,000 in cash and marketable securities in addition to the Company stock. Therefore, the severance is a qualified sever- ance, provided that all other requirements of section 2642(a)(3) and this section are satisfied. ***** Example 9.Regulatory qualified severance.(i) In 2004, T establishes aninter vivosirrevocable trust (Trust) providing that trust income is to be paid annu- ally in equal shares to T’s children, A and B, for 10 years. Trust provides that the trustee has discretion to make additional distributions of principal to A and B during the 10-year term without adjustments to their shares of income or the trust remainder. If either (or both) dies prior to the expiration of the 10-year term, the deceased child’s share of trust income is to be paid to the child’s then living descendants, per stirpes, for the balance of the trust term. At the expiration of the 10-year term, the corpus is to be distributed equally to A and B; if A and B (or either or them) is not then liv- ing, then such decedent’s share is to be distributed in- stead to such decedent’s then living descendants, per stirpes. T allocates GST tax exemption to Trust such that Trust’s applicable fraction is .25 and its inclusion ratio is .75. (ii) In 2006, pursuant to applicable state law, the trustee severs the trust into three trusts: Trust 1, Trust 2, and Trust 3. The instrument severing Trust pro- vides that Trust 1 is to receive 50% of Trust’s assets, Trust 2 is to receive 25% of Trust’s assets, and Trust 3 is to receive 25% of Trust’s assets. All three re- sulting trusts are identicalto Trust, except that each has different beneficiaries: A and A’s issue are des- ignated as the beneficiaries of Trust 1, and B and B’s issue are designated as the beneficiaries of Trust 2 and Trust 3. The severance constitutes a qualified sever- ance, provided that all other requirements of section 2642(a)(3) and this section are satisfied. Trust 1 will have an inclusion ratio of 1. Because both Trust 2 and Trust 3 have each received the fractional share of Trust’s assets equal to Trust’s applicable fraction of .25, trustee designates that Trust 2 will have an inclu- sionratioofoneandthatTrust3willhaveaninclu- sion ratio of zero. ***** Example 12.Other severance that does not meet the requirements of a qualified severance. (i) In 2004, T establishes an irrevocableinter vivostrust (Trust) providing that Trust income is to be paid to T’s chil- dren, A and B, in equal shares for their joint lives. Upon the death of the first to die of A and B, all Trust income will be paid to the survivor of A and B. At the death of the survivor, the corpus is to be dis- tributed in equal shares to T’s grandchildren, W and X (with any then-deceased grandchild’s share being paid in accordance with that grandchild’s testamen- tary general power of appointment). W is A’s child and X is B’s child. T elects under section 2632(c)(5) not to have the automatic allocation rules contained in section 2632(c) apply with respect to T’s transfers to Trust, but T allocates GST tax exemption to Trust resulting in Trust having an inclusion ratio of .30. (ii) In 2009, the trustee of Trust, as permitted by applicable state law, divides Trust into two separate trusts, Trust 1 and Trust 2. Trust 1 provides that trust income is to be paid to A for life and, on A’s death, the remainder is to be distributed to W (or pursuant to W’s testamentary general power of appointment). Trust 2 provides that trust income is to be paid to B for life and, on B’s death, the remainder is to be dis- tributed to X (or pursuant to X’s testamentary general power of appointment). Because Trust 1 and Trust 2 do not provide A and B with the contingent survivor income interests that were provided to A and B under thetermsofTrust,Trust1andTrust2donotpro- vide for the same succession of interests in the aggre- gate as provided by Trust. Therefore, the severance does not satisfy the requirements of this section and is not a qualified severance. Provided that Trust 1 and Trust 2 are recognized as separate trusts under appli- cable state law, Trust 1 and Trust 2 will be recognized as separate trusts for GST tax purposes pursuant to paragraph (h) of this section, prospectively from the date of the severance. However, Trust 1 and Trust 2 each have an inclusion ratio of .30 immediately after the severance, the same as the inclusion ratio of Trust prior to severance. Example 13.Qualified severance following a non-qualified severance. Assume the same facts as inExample 12, except that, as of November 4, 2010, the trustee of Trust 1 severs Trust 1 into two trusts, Trust 3 and Trust 4, in accordance with applicable local law. The instrument severing Trust 1 provides that both resulting trusts have provisions identical to Trust 1. The terms of the instrument severing Trust 1 further provide that Trust 3 is to be funded on apro ratabasis with assets having a fair market value as of the date of severance equal to 70% of the value of Trust 1’s assets on that date, and Trust 4 is to be funded with assets having a fair market value as of the date of severance equal to 30% of the value of Trust 1’s assets on that date. The severance consti- tutes a qualified severance, provided that all other requirements of section 2642(a)(3) and this section are satisfied. Trust 3 will have an inclusion ratio of zero and Trust 4 will have an inclusion ratio of one. (k) * * * (1)In general. Except as otherwise pro- vided in this paragraph (k), this section applies to severances occurring on or af- ter August 2, 2007. Paragraph (d)(7)(iii), paragraph (h), andExamples 9,12and13 of paragraph (j) of this section apply to severances occurring on or after Septem- ber 2, 2008. Par. 4. Section 26.2654–1 is amended as follows: 1. Paragraph (a)(1)(i) is revised. 2. Paragraph (a)(1)(iii) is added. 3. In paragraph (a)(5),Example 8is revised. 4. Paragraph (d) is added. The additions and revisions read as fol- lows: §26.2654–1 Certain trusts treated as separate trusts. (a)***(1)***(i)***Ifasingle trust consists solely of substantially sepa- rate and independent shares for different beneficiaries, the share attributable to each beneficiary (or group of beneficiaries) is treated as a separate trust for purposes of Chapter 13. The phrase “substantially separate and independent shares” gener- ally has the same meaning as provided in §1.663(c)–3. However, except as provided in paragraph (a)(1)(iii) of this section, a portion of a trust is not a separate share un- less such share exists from and at all times after the creation of the trust. For purposes of this paragraph (a)(1), a trust is treated as created at the date of death of the grantor if the trust is includible in its entirety in the grantor’s gross estate for Federal estate tax purposes. Further, except with respect to shares or trusts that are treated as sep- arate trusts under local law, treatment of a single trust as separate trusts under this paragraph (a)(1) does not permit treatment of those portions as separate trusts for pur- poses of filing returns and payment of tax or for purposes of computing any other tax imposed under the Internal Revenue Code. Also, additions to, and distributions from, September 29, 20087592008–39 I.R.B. such trusts are allocatedpro rataamong the separate trusts, unless the governing instrument expressly provides otherwise. See §26.2642–6 and paragraph (b) of this section regarding the treatment, for pur- poses of Chapter 13, of separate trusts resulting from the discretionary severance ofasingletrust. ***** (iii)Mandatory severances. For pur- poses of this section, if the governing in- strument of a trust requires the division or severance of a single trust into sepa- rate trusts upon the future occurrence of a particular event not within the discretion of the trustee or any other person, and if the trusts resulting from such a division or severance are recognized as separate trusts under applicable state law, then each re- sulting trust is treated as a separate trust for purposes of Chapter 13. For this pur- pose, the rules of paragraph (b)(1)(ii)(C) of this section apply with respect to the sev- erance and funding of the trusts. Similarly, if the governing instrument requires the di- vision of a single trust into separate shares under the circumstances described in this paragraph, each such share is treated as a separate trust for purposes of Chapter 13. The post-severance treatment of the result- ing shares or trusts as separate trusts for GST tax purposes generally permits the al- location of GST tax exemption, the making of various elections permitted for GST tax purposes, and the occurrence of a taxable distribution or termination with regard to a particular resulting share or trust, with no GST tax impact on any other trust or share resulting from that severance. The treatment of a single trust as separate trusts under this paragraph (a)(1), however, does not permit treatment of those portions as separate trusts for purposes of filing re- turns and payment of tax or for purposes of computing any other tax imposed under the Internal Revenue Code, if those por- tions are not treated as separate trusts un- der local law. Also, additions to, and distri- butions from, such trusts are allocatedpro rataamong the separate trusts, unless the governing instrument expressly provides otherwise. Each separate share and each trust resulting from a mandatory division or severance described in this paragraph will have the same inclusion ratio immedi- ately after the severance as that of the orig- inal trust immediately before the division or severance. ***** (5) * * * Example 8.Subsequent mandatory division into separate trusts. T creates an irrevocable trust that provides the trustee with the discretionary power to distribute income or corpus to T’s children and grand- children. The trust provides that, when T’s youngest child reaches age 21, the trust will be divided into separate shares, one share for each child of T. The income from a respective child’s share will be paid to the child during the child’s life, with the remainder passing on the child’s death to such child’s children (grandchildren of T). The separate shares that come into existence when the youngest child reaches age 21 will be recognized as of that date as separate trusts for purposes of Chapter 13. The inclusion ratio of the separate trusts will be identical to the inclusion ra- tio of the trust before the severance. Any allocation of GST tax exemption to the trust after T’s youngest child reaches age 21 may be made to any one or more of the separate shares. The result would be the same if the trust instrument provided that the trust was to be divided into separate trusts when T’s youngest child reached age 21, provided that the severance and fund- ing of the separate trusts meets the requirements of this section. ***** (d)Effective date. Paragraph (a)(1)(i), paragraph (a)(1)(iii), andExample8of paragraph (a)(5) apply to severances oc- curring on or after September 2, 2008. ***** Sherri L. Brown, (Acting) Deputy Commissioner for Services and Enforcement. Approved July 20, 2008. Eric Solomon, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on July 30, 2008, 8:45 a.m., and published in the issue of the Federal Register for July 31, 2008, 73 F.R. 44649) Section 6621.—Determina- tion of Rate of Interest 26 CFR 301.6621–1: Interest rate. Interest rates; underpayments and overpayments.The rates of interest deter- mined under section 6621 of the Code for the calendar quarter beginning October 1, 2008, will be 6 percent for overpayments (5 percent in the case of a corporation), 6 percent for underpayments, and 8 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 3.5 percent. Rev. Rul. 2008–47 Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpay- ments. Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a cor- poration), except the rate for the portion of a corporate overpayment of tax exceed- ing $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points. Section 6621(c) provides that for pur- poses of interest payable under section 6601 on any large corporate underpay- ment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See section 6621(c) and section 301.6621–3 of the Regulations on Proce- dure and Administration for the definition of a large corporate underpayment and for the rules for determining the appli- cable date. Section 6621(c) and section 301.6621–3 are generally effective for periods after December 31, 1990. Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after that month. Section 6621(b)(3) pro- vides that the federal short-term rate for any month is the federal short-term rate de- termined during that month by the Secre- tary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of 1 /2of 1 percent, the rate is in- creased to the next highest full percent). Notice 88–59, 1988–1 C.B. 546, an- nounced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, 2008–39 I.R.B.760September 29, 2008 pursuant to section 6622, is subject to daily compounding. Rounded to the nearest full percent, the federal short-term rate based on daily com- pounding determined during the month of July 2008 is 3 percent. Accordingly, an overpayment rate of 6 percent (5 percent in the case of a corporation) and an under- payment rate of 6 percent are established for the calendar quarter beginning October 1, 2008. The overpayment rate for the por- tion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning October 1, 2008, is 3.5 percent. The un- derpayment rate for large corporate under- payments for the calendar quarter begin- ning October 1, 2008, is 8 percent. These rates apply to amounts bearing interest dur- ing that calendar quarter. Interest factors for daily compound in- terest for annual rates of 3.5 percent, 5 per- cent, 6 percent, and 8 percent are published in Tables 12, 63, 65, and 69 of Rev. Proc. 95–17, 1995–1 C.B. 556, 566, 617, 619, and 623. Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling. DRAFTING INFORMATION The principal author of this revenue rul- ing is Deborah Colbert-James of the Of- fice of Associate Chief Counsel (Proce- dure & Administration). For further infor- mation regarding this revenue ruling, con- tact Ms. Colbert-James at (202) 622–8143 (not a toll-free call). TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS PERIODRATE In 1995–1 C.B. DAILY RATE TABLE Before Jul. 1, 1975 6% Table 2, pg. 557 Jul. 1, 1975—Jan. 31, 1976 9% Table 4, pg. 559 Feb. 1, 1976—Jan. 31, 19787% Table 3, pg. 558 Feb. 1, 1978—Jan. 31, 19806% Table 2, pg. 557 Feb. 1, 1980—Jan. 31, 198212% Table 5, pg. 560 Feb. 1, 1982—Dec. 31, 198220% Table 6, pg. 560 Jan. 1, 1983—Jun. 30, 198316% Table 37, pg. 591 Jul. 1, 1983—Dec. 31, 198311% Table 27, pg. 581 Jan. 1, 1984—Jun. 30, 198411% Table 75, pg. 629 Jul. 1, 1984—Dec. 31, 198411% Table 75, pg. 629 Jan. 1, 1985—Jun. 30, 1985 13% Table 31, pg. 585 Jul. 1, 1985—Dec. 31, 1985 11% Table 27, pg. 581 Jan. 1, 1986—Jun. 30, 198610% Table 25, pg. 579 Jul. 1, 1986—Dec. 31, 19869% Table 23, pg. 577 TABLE OF INTEREST RATES FROM JAN. 1, 1987 — DEC. 31, 1998 OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Jan. 1, 1987—Mar. 31, 19878%21 575 9%23 577 Apr. 1, 1 987—Jun. 30, 1987 8%21 575 9%23 577 Jul. 1, 1987—Sep. 30, 19878%21 575 9%23 577 Oct. 1, 1987—Dec. 31, 19879%23 577 10% 25579 Jan. 1, 1988—Mar. 31, 1988 10%7362711% 75 629 Apr. 1, 1988—Jun. 30, 19889%71 625 10%73627 Jul. 1, 1988—Sep. 30, 19889%71 625 10%73627 Oct. 1, 1988—Dec. 31, 1988 10%7362711% 75 629 Jan. 1, 1989—Mar. 31, 198910% 25579 11%27 581 Apr. 1, 1989—Jun. 30, 198911%27 581 12%29 583 Jul. 1 , 1989—Sep. 30, 1989 11%27 581 12%29 583 Oct. 1, 1989—Dec. 31, 198910% 25579 11%27 581 Jan. 1, 1990—Mar. 31, 199010% 25579 11%27 581 Apr. 1, 1990—Jun. 30, 1990 10% 25579 11%27 581 September 29, 20087612008–39 I.R.B. TABLE OF INTEREST RATES FROM JAN. 1, 1987 — DEC. 31, 1998 – Continued OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Jul. 1, 1990—Sep. 30, 199010% 25579 11%27 581 Oct. 1, 1990—Dec . 31, 1990 10% 25579 11%27 581 Jan. 1, 1991—Mar. 31, 199110% 25579 11%27 581 Apr. 1, 1991—Jun. 30, 19919%23 577 10% 25579 Jul. 1, 1991—Se p. 30, 1991 9%23 577 10% 25579 Oct. 1, 1991—Dec. 31, 19919%23 577 10% 25579 Jan. 1, 1992—Mar. 31, 19928%696239%71 625 Apr. 1, 1992—J un. 30, 1992 7%676218%69623 Jul. 1, 1992—Sep. 30, 19927%676218%69623 Oct. 1, 1992—Dec. 31, 19926% 65 6197%67621 Jan. 1, 1993— Mar. 31, 1993 6%17 571 7%19 573 Apr. 1, 1993—Jun. 30, 19936%17 571 7%19 573 Jul. 1, 1993—Sep. 30, 19936%17 571 7%19 573 Oct. 1, 1993 —Dec. 31, 1993 6%17 571 7%19 573 Jan. 1, 1994—Mar. 31, 19946%17 571 7%19 573 Apr. 1, 1994—Jun. 30, 19946%17 571 7%19 573 Jul. 1, 199 4—Sep. 30, 1994 7%19 573 8%21 575 Oct. 1, 1994—Dec. 31, 19948%21 575 9%23 577 Jan. 1, 19 95—Mar. 31, 1995 8%21 575 9%23 577 Apr. 1, 1995—Jun. 30, 1995 9%23 577 10% 25579 Jul. 1, 1995—Sep. 30, 1995 8%21 575 9%23 577 Oct. 1, 1 995—Dec. 31, 1995 8%21 575 9%23 577 Jan. 1, 1 996—Mar. 31, 1996 8%696239%71 625 Apr. 1, 1996—Jun. 30, 19967%676218%69623 Jul. 1, 1996—Sep. 30, 19968%696239%71 625 Oct. 1, 1996—Dec. 31, 1996 8%696239%71 625 Jan. 1, 1997—Mar. 31, 19978%21 575 9%23 577 Apr. 1, 1997—Jun. 30, 19978%21 575 9%23 577 Jul. 1, 1997—Sep. 30, 1997 8%21 575 9%23 577 Oct. 1, 1997—Dec. 31, 19978%21 575 9%23 577 Jan. 1, 1998—Mar. 31, 19988%21 575 9%23 577 Apr. 1 , 1998—Jun. 30, 1998 7%19 573 8%21 575 Jul. 1, 1998—Sep. 30, 19987%19 573 8%21 575 Oct. 1, 1998—Dec. 31, 19987%19 573 8%21 575 TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS 1995 –1 C.B. RATETABL E PG Jan. 1 , 1999—Mar. 31, 1999 7%19 573 Apr. 1, 1999—Jun. 30, 19998%21 575 Jul. 1, 1999—Sep. 30, 19998%21 575 Oct. 1, 1999—Dec. 31, 1999 8%21 575 Jan. 1, 2000—Mar. 31, 20008%69623 Apr. 1, 2000—Jun. 30, 20009%71 625 Jul . 1, 2000—Sep. 30, 2000 9%71 625 Oct. 1, 2000—Dec. 31, 20009%71 625 Jan. 1, 2001—Mar. 31, 20019%23 57 7 Ap r. 1, 2001—Jun. 30, 2001 8%21 575 Jul. 1, 2001—Sep. 30, 20017%19 573 2008–39 I.R.B.762September 29, 2008 TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT – Continued NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS 1995–1 C.B. RATETABLEPG Oct. 1, 2001—Dec. 31, 20017%19 573 Jan. 1, 2002—Mar. 31, 20026%17 571 Apr. 1, 2002—Jun. 30, 20026%17 571 Jul. 1, 2002—Sep. 30, 20026%17 571 Oct. 1, 2002—Dec. 31, 20026%17 571 Jan. 1, 2003—Mar. 31, 2003 5%15569 Apr. 1, 2003—Jun. 30, 2003 5%15569 Jul. 1, 2003—Sep. 30, 2003 5%15569 Oct. 1, 2003—Dec. 31, 20034%13 567 Jan. 1, 2004—Mar. 31, 20044%61 615 Apr. 1, 2004—Jun. 30, 2004 5% 63617 Jul. 1, 2004—Sep. 30, 20044%61 615 Oct. 1, 2004—Dec. 31, 2004 5% 63617 Jan. 1, 2005—Mar. 31, 20055%15569 Apr. 1, 2005—Jun. 30, 2005 6%17 571 Jul. 1, 2005—Sep. 30, 2005 6%17 571 Oct. 1, 2005—Dec. 31, 2005 7%19 573 Jan. 1, 2006—Mar. 31, 20067%19 573 Apr. 1, 2006—Jun. 30, 20067%19 573 Jul. 1, 2006—Sep. 30, 20068%21 575 Oct. 1, 2006—Dec. 31, 20068%21 575 Jan. 1, 2007—Mar. 31, 20078%21 575 Apr. 1, 2007—Jun. 30, 20078%21 575 Jul. 1, 2007—Sep. 30, 20078%21 575 Oct. 1, 2007—Dec. 31, 20078%21 575 Jan. 1, 2008—Mar. 31, 20087%67621 Apr. 1, 2008—Jun. 30, 20086% 65 619 Jul. 1, 2008—Sep. 30, 2008 5% 63617 Oct. 1, 2008—Dec. 31, 20086% 65 619 TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Jan. 1, 1999—Mar. 31, 19996%17 571 7%19 573 Apr. 1, 1999—Jun. 30, 19997%19 573 8%21 575 Jul. 1, 1999—Sep. 30, 1999 7%19 573 8%21 575 Oct. 1, 1999—Dec. 31, 19997%19 573 8%21 575 Jan. 1, 2000—Mar. 31, 20007%676218%69623 Apr. 1 , 2000—Jun. 30, 2000 8%696239%71 625 Jul. 1, 2000—Sep. 30, 20008%696239%71 625 Oct. 1, 2000—Dec. 31, 20008%696239%71 625 Jan. 1, 2001—Mar. 31, 2001 8%21 575 9%23 577 Apr. 1, 2001—Jun. 30, 20017%19 573 8%21 575 Jul. 1, 2001—Sep. 30, 20016%17 571 7%19 573 Oct . 1, 2001—Dec. 31, 2001 6%17 571 7%19 573 Jan. 1, 2002—Mar. 31, 2002 5%15569 6%17 571 Apr. 1, 2002—Jun. 30, 2002 5%15569 6%17 571 Jul . 1, 2002—Sep. 30, 2002 5%15569 6%17 571 September 29, 20087632008–39 I.R.B. TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT – Continued CORPORATE OVERPAYMENTS AND UNDERPAYMENTS OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Oct. 1, 2002—Dec. 31, 2002 5%15569 6%17 571 Jan. 1, 2003—Mar. 31, 20034%13 5675%15569 Apr. 1, 2003—Ju n. 30, 2003 4%13 5675%15569 Jul. 1, 2003—Sep. 30, 20034%13 5675%15569 Oct. 1, 2003—Dec. 31, 20033%11 565 4%13 567 Jan. 1, 2004—M ar. 31, 2004 3% 59 6134%61 615 Apr. 1, 2004—Jun. 30, 20044%61 6155% 63617 Jul. 1, 2004—Sep. 30, 20043% 59 6134%61 615 Oct. 1, 2004— Dec. 31, 2004 4%61 6155% 63617 Jan. 1, 2005—Mar. 31, 2005 4%13 5675%15569 Apr. 1, 2005— Jun. 30, 2005 5%15569 6%17 571 Jul. 1, 2005—Sep. 30, 20055%15569 6%17 571 Oct. 1, 2005—Dec. 31, 2005 6%17 571 7%19 573 Jan. 1, 2006—Mar. 31, 20066%17 571 7%19 573 Apr. 1, 2006 —Jun. 30, 2006 6%17 571 7%19 573 Jul. 1, 2006—Sep. 30, 20067%19 573 8%21 575 Oct. 1, 2006—Dec. 31, 20067%19 573 8%21 575 Jan. 1, 200 7—Mar. 31, 2007 7%19 573 8%21 575 Apr. 1, 2007—Jun. 30, 20077%19 573 8%21 575 Jul. 1, 2007—Sep. 30, 20077%19 573 8%21 575 Oct. 1, 20 07—Dec. 31, 2007 7%19 573 8%21 575 Jan. 1, 2008—Mar. 31, 20086% 65 6197%67621 Apr. 1, 2008—Jun. 30, 2008 5% 636176% 65 619 Jul. 1, 2 008—Sep. 30, 2008 4%61 6155% 63617 Oct. 1, 2008—Dec. 31, 2008 5% 636176% 65 619 TABLE OF INTEREST RATES FOR LARGE CO RPORATE UNDERPAYMENTS FROM JAN UARY 1, 1991 — PRESENT 1995–1 C.B. RATETABLEPG Jan. 1, 1991—Mar. 31, 199113%31 585 Apr. 1, 1991—Jun. 30, 199112%29 583 Jul. 1, 1991—Sep. 30, 1991 12%29 583 Oct. 1, 1991—Dec. 31, 199112%29 583 Jan. 1, 1992—Mar. 31, 199211% 75 629 Apr. 1 , 1992—Jun. 30, 1992 10%73627 Jul. 1, 1992—Sep. 30, 199210%73627 Oct. 1, 1992—Dec. 31, 19929%71 625 Jan. 1 , 1993—Mar. 31, 1993 9%23 577 Apr. 1, 1993—Jun. 30, 19939%23 577 Jul. 1, 1993—Sep. 30, 19939%23 577 Oct. 1, 1993—Dec. 31, 1993 9%23 577 Jan. 1, 1994—Mar. 31, 19949%23 577 Apr. 1, 1994—Jun. 30, 19949%23 577 Jul . 1, 1994—Sep. 30, 1994 10% 25579 Oct. 1, 1994—Dec. 31, 199411%27 581 Ja n. 1, 1995—Mar. 31, 1995 11%27 58 1 Apr. 1, 1995—Jun. 30, 1995 12%29 583 Jul. 1, 1995—Sep. 30, 1995 11%27 581 Oc t. 1, 1995—Dec. 31, 1995 11%27 58 1 2008–39 I.R.B.764September 29, 2008 TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991 — PRESENT – Continued 1995–1 C.B. RATETABLEPG Jan. 1, 1996—Mar. 31, 199611% 75 629 Apr. 1, 1996—Jun. 30, 199610%73627 Jul. 1, 1996—Sep. 30, 199611% 75 629 Oct. 1, 1996—Dec. 31, 199611% 75 629 Jan. 1, 1997—Mar. 31, 199711%27 581 Apr. 1, 1997—Jun. 30, 199711%27 581 Jul. 1, 1997—Sep. 30, 199711%27 581 Oct. 1, 1997—Dec. 31, 199711%27 581 Jan. 1, 1998—Mar. 31, 199811%27 581 Apr. 1, 1998—Jun. 30, 199810% 25579 Jul. 1, 1998—Sep. 30, 199810% 25579 Oct. 1, 1998—Dec. 31, 199810% 25579 Jan. 1, 1999—Mar. 31, 19999%23 577 Apr. 1, 1999—Jun. 30, 199910% 25579 Jul. 1, 1999—Sep. 30, 199910% 25579 Oct. 1, 1999—Dec. 31, 199910% 25579 Jan. 1, 2000—Mar. 31, 200010%73627 Apr. 1, 2000—Jun. 30, 200011% 75 629 Jul. 1, 2000—Sep. 30, 200011% 75 629 Oct. 1, 2000—Dec. 31, 200011% 75 629 Jan. 1, 2001—Mar. 31, 200111%27 581 Apr. 1, 2001—Jun. 30, 200110% 25579 Jul. 1, 2001—Sep. 30, 20019%23 577 Oct. 1, 2001—Dec. 31, 20019%23 577 Jan. 1, 2002—Mar. 31, 20028%21 575 Apr. 1, 2002—Jun. 30, 20028%21 575 Jul. 1, 2002—Sep. 30, 20028%21 575 Oct. 1, 2002—Dec. 30, 20028%21 575 Jan. 1, 2003—Mar. 31, 20037%19 573 Apr. 1, 2003—Jun. 30, 20037%19 573 Jul. 1, 2003—Sep. 30, 20037%19 573 Oct. 1, 2003—Dec. 31, 20036%17 571 Jan. 1, 2004—Mar. 31, 20046% 65 619 Apr. 1, 2004—Jun. 30, 20047%67621 Jul. 1, 2004—Sep. 30, 20046% 65 619 Oct. 1, 2004—Dec. 31, 20047%67621 Jan. 1, 2005—Mar. 31, 2005 7%19 573 Apr. 1, 2005—Jun. 30, 2005 8%21 575 Jul. 1, 2005—Sep. 30, 2005 8%21 575 Oct. 1, 2005—Dec. 31, 2005 9%23 577 Jan. 1, 2006—Mar. 31, 20069%23 577 Apr. 1, 2006—Jun. 30, 20069%23 577 Jul. 1, 2006—Sep. 30, 200610% 25579 Oct. 1, 2006—Dec. 31, 200610% 25579 Jan. 1, 2007—Mar. 31, 200710% 25579 Apr. 1, 2007—Jun. 30, 200710% 25579 Jul. 1, 2007—Sep. 30, 200710% 25579 Oct. 1, 2007—Dec. 31, 200710% 25579 Jan. 1, 2008—Mar. 31, 20089%71 625 Apr. 1, 2008—Jun. 30, 20088%69623 Jul. 1, 2008—Sep. 30, 20087%67621 Oct. 1, 2008—Dec. 31, 20088%69623 September 29, 20087652008–39 I.R.B. TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995 — PRESENT 1995–1 C.B. RATETABLEPG Jan. 1, 1995—Mar. 31, 19956.5% 18 572 Apr. 1, 1995—Jun. 30, 19957.5% 20 574 Jul. 1, 1995—Sep. 30, 19956.5% 18 572 Oct. 1, 1995—Dec. 31, 19956.5% 18 572 Jan. 1, 1996—Mar. 31, 1996 6.5% 66620 Apr. 1, 1996—Jun. 30, 1996 5.5% 64618 Jul. 1, 1996—Sep. 30, 1996 6.5% 66620 Oct. 1, 1996—Dec. 31, 1996 6.5% 66620 Jan. 1, 1997—Mar. 31, 1997 6.5% 18 572 Apr. 1, 1997—Jun. 30, 1997 6.5% 18 572 Jul. 1, 1997—Sep. 30, 1997 6.5% 18 572 Oct. 1, 1997—Dec. 31, 1997 6.5% 18 572 Jan. 1, 1998—Mar. 31, 1998 6.5% 18 572 Apr. 1, 1998—Jun. 30, 1998 5.5% 16 570 Jul. 1, 1998—Sep. 30, 1998 5.5% 16 570 Oct. 1, 1998—Dec. 31, 1998 5.5% 16 570 Jan. 1, 1999—Mar. 31, 1999 4.5% 14 568 Apr. 1, 1999—Jun. 30, 1999 5.5% 16 570 Jul. 1, 1999—Sep. 30, 1999 5.5% 16 570 Oct. 1, 1999—Dec. 31, 1999 5.5% 16 570 Jan. 1, 2000—Mar. 31, 2000 5.5% 64618 Apr. 1, 2000—Jun. 30, 2000 6.5% 66620 Jul. 1, 2000—Sep. 30, 2000 6.5% 66620 Oct. 1, 2000—Dec. 31, 2000 6.5% 66620 Jan. 1, 2001—Mar. 31, 2001 6.5% 18 572 Apr. 1, 2001—Jun. 30, 2001 5.5% 16 570 Jul. 1, 2001—Sep. 30, 2001 4.5% 14 568 Oct. 1, 2001—Dec. 31, 2001 4.5% 14 568 Jan. 1, 2002—Mar. 31, 2002 3.5% 12 566 Apr. 1, 2002—Jun. 30, 2002 3.5% 12 566 Jul. 1, 2002—Sep. 30, 2002 3.5% 12 566 Oct. 1, 2002—Dec. 31, 2002 3.5% 12 566 Jan. 1, 2003—Mar. 31, 2003 2.5% 10 564 Apr. 1, 2003—Jun. 30, 2003 2.5% 10 564 Jul. 1, 2003—Sep. 30, 2003 2.5% 10 564 Oct. 1, 2003—Dec. 31, 2003 1.5% 8 562 Jan. 1, 2004—Mar. 31, 2004 1.5%56 610 Apr. 1, 2004—Jun. 30, 2004 2.5%58 612 Jul. 1, 2004—Sep. 30, 2004 1.5%56 610 Oct. 1, 2004—Dec. 31, 2004 2.5%58 612 Jan. 1, 2005—Mar. 31, 20052.5% 10 564 Apr. 1, 2005—Jun. 30, 20053.5% 12 566 Jul. 1, 2005—Sep. 30, 20053.5% 12 566 Oct. 1, 2005—Dec. 31, 20054.5% 14 568 Jan. 1, 2006—Mar. 31, 2006 4.5% 14 568 Apr. 1, 2006—Jun. 30, 2006 4.5% 14 568 Jul. 1, 2006—Sep. 30, 2006 5.5% 16 570 Oct. 1, 2006—Dec. 31, 2006 5.5% 16 570 Jan. 1, 2007—Mar. 31, 2007 5.5% 16 570 Apr. 1, 2007—Jun. 30, 2007 5.5% 16 570 Jul. 1, 2007—Sep. 30, 2007 5.5% 16 570 Oct. 1, 2007—Dec. 31, 2007 5.5% 16 570 2008–39 I.R.B.766September 29, 2008 TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995 — PRESENT – Continued 1995–1 C.B. RATETABLEPG Jan. 1, 2008—Mar. 31, 2008 4.5% 62616 Apr. 1, 2008—Jun. 30, 2008 3.5% 60614 Jul. 1, 2008—Sep. 30, 2008 2.5%58 612 Oct. 1, 2008—Dec. 31, 2008 3.5% 12 566 September 29, 20087672008–39 I.R.B. Part III. Administrative, Procedural, and Miscellaneous Application of Section 382 intheCaseofCertain Acquisitions Made Pursuant to the Housing and Economic Recovery Act of 2008 Notice 2008–76 SECTION 1. OVERVIEW This notice announces that the Internal Revenue Service (IRS) and the Treasury Department (Treasury) will issue regula- tions under section 382(m) of the Inter- nal Revenue Code (Code) that address the application of section 382 in the case of certain acquisitions made pursuant to the Housing and Economic Recovery Act of 2008. Pursuant to section 1117(a) and (b) of the Housing and Economic Recovery Act of 2008, Pub. L. No. 110–289 (2008), the Secretary of the Treasury is authorized to purchase any obligations and other secu- rities issued by certain entities under the Housing and Economic Recovery Act of 2008. A purchase that is made pursuant to this authority is hereinafter referred to as a “Housing Act Acquisition.” SECTION 2. REGULATIONS TO BE ISSUED UNDER SECTION 382(m) The IRS and Treasury will issue reg- ulations under section 382(m) providing that notwithstanding any other provision of the Code or the regulations thereunder, for purposes of section 382 and the regu- lations thereunder, with respect to a corpo- ration as to which there is a Housing Act Acquisition, the term “testing date” (as de- fined in § 1.382–2(a)(4)) shall not include any date on or after the date on which the United States (or any agency or instrumen- tality thereof) (United States) acquires, in a Housing Act Acquisition, stock (includ- ing stock described in section 1504(a)(4)) or an option to acquire stock in the corpo- ration. SECTION 3. EFFECTIVE DATE The regulations to be issued under sec- tion 382(m) that are described in section 2 of this notice will apply on or after Septem- ber 7, 2008, and will apply unless and until there is additional guidance. 26 CFR 601.201: Rulings and determination letters. (Also Part I. Sections 103(c), 105(e), 117(b)(2)(A), 164, 170, 403(b)(1)(A)(ii), 454(b)(2), 511(a)(2)(B), 2055, 2106(a)(2), 2522, 4041(g), 4216, 4253(i), 4483(a), 4911, 4940(c), 4941(d), 4942(f), 4945(f), 4946(c).) Rev. Proc. 2008–55 SECTION 1. GENERAL .01 PURPOSE The purpose of this revenue procedure is to designate the Indian tribal entities that appear on the current or future lists of fed- erally recognized Indian tribes published annually by the Department of the Inte- rior, Bureau of Indian Affairs, as Indian tribal governments for purposes of section 7701(a)(40). Indian tribal governments are treated as States for certain purposes under section 7871(a). .02 BACKGROUND (1) Internal Revenue Code and Trea- sury Regulations. The Indian Tribal Gov- ernmental Tax Status Act of 1982 (Title II of Pub. L. No. 97–473, 1983–1 C.B. 510, 511, as amended by Pub. L. No. 98–21, 1983–2 C.B. 309, 315) added sec- tions 7701(a)(40) and 7871 to the Code. Section 7871(a) provides that Indian tribal governments (or subdivisions thereof) will be treated as states for certain enumerated federal tax purposes. For example, charita- ble contributions to or for the use of a tribal government may be deductible under the federal income, gift, and estate tax laws; a tribal government is entitled to exemption from certain excise taxes; taxes imposed by a tribe may be deductible; and public activity bonds may be tax exempt obliga- tions. §§ 7871(a)(1), (a)(3), (a)(4). As originally enacted in 1982, the provisions of section 7871 were temporary. These provisions were made permanent by sec- tion 1065 of the Tax Reform Act of 1984, Pub. L. 98–369, 1984–3 (Vol. 1) C.B. 556. Section 7701(a)(40) defines the term In- dian tribal government to mean the gov- erning body of any tribe, band, commu- nity, village, or group of Indians, or (if ap- plicable) Alaska Natives, which is deter- mined by the Secretary, after consultation with the Secretary of the Interior, to exer- cise governmental functions. TemporaryRegulationsection 305.7701–1(a) provides that a governing body of a tribe, band, pueblo, community, village, or group of native American In- dians, or Alaska Natives, qualifies as an Indian tribal government upon determina- tion by the Internal Revenue Service that the governing body exercises governmen- tal functions. Designation of a governing body as an Indian tribal government will be by revenue procedure. The temporary regulation further provides that if a gov- erning body is not currently designated by revenue procedure as an Indian tribal government, and such governing body be- lieves that it qualifies for such designation, the governing body may apply for a ruling from the Internal Revenue Service. (2) Federally Recognized Indian Tribe List Act and Associated Regulations. Un- der the Federally Recognized Indian Tribe List Act of 1994, Pub. L. 103–454, 108 Stat. 4791 (“List Act”), the Secretary of the Interior is required to publish annually a list of all federally recognized Indian tribes. The list must reflect all of the tribes that the Secretary of the Interior recog- nizes to be eligible for the programs and services provided by the United States to Indians because of their status as Indi- ans. 25 USC § 479a–1(b). The United States has a government-to-government relationship with and recognizes the sovereignty of recognized Indian tribes. List Act § 103(2). The Secretary of the Interior recognizes the entities on the list as Indian tribes with a government-to-government relationship with the United States. See 44 Fed. Reg. 7,235 (Feb. 6, 1979); 58 Fed. Reg. 54,364 (Oct. 21, 1993); and 60 Fed. Reg. 9,250 (Feb. 16, 1995). The government-to-government relationship of a tribe that is on this list may not be terminated except by an Act of Congress. List Act § 103(4). The Department of the Interior pub- lishes its list annually in the Federal Reg- ister. The most recent list was published in 73 Fed. Reg. 18,553 (April 4, 2008). (3) Previous Revenue Procedures. The Internal Revenue Service has issued three 2008–39 I.R.B.768September 29, 2008 revenue procedures listing Indian tribal en- tities recognized as Indian tribal govern- ments for purposes of section 7701(a)(40). SeeRev. Proc. 83–87, 1983–2 C.B. 606; Rev. Proc. 2001–15, 2001–1 C.B. 465; Rev. Proc. 2002–64, 2002–2 C.B. 717. For each of the 2001 and 2002 revenue procedures, the Indian tribal entities listed were also the Indian tribes on the most re- cent annual list published by the Depart- ment of the Interior pursuant to the List Act. SECTION 2. APPLICATION .01 In general, an Indian tribal entity that appears on the most recent list pub- lished by the Department of the Interior in the Federal Register pursuant to the re- quirements of the List Act is designated an Indian tribal government for purposes of section 7701(a)(40). Tribal entities not ap- pearing on the list that believe they qual- ify to be recognized as Indian tribes may contact the Office of Federal Acknowledg- ment in the Department of the Interior for information on how to apply for recogni- tion pursuant to Department of the Inte- rior procedures. Tribal entities not appear- ingonthelistmayapplyforarulingon whether they qualify as Indian tribal gov- ernments under section 7701(a)(40) pur- suant to all applicable rules set forth in the Statement of Procedural Rules (26 CFR Part 601), and guidelines set forth in Rev. Proc. 84–37, 1984–1 C.B. 513, as mod- ified by Rev. Proc. 86–17, 1986–1 C.B. 550, and Rev. Proc. 2008–1, 2008–1 I.R.B. 1. .02 A tribe that does not appear on the most recent list published by the Depart- ment of the Interior in the Federal Regis- ter pursuant to the requirements of the List Act will nonetheless be treated as an In- dian tribal government for purposes of sec- tion 7701(a)(40) if the tribe has been ac- knowledged as a federally recognized In- dian tribe, as stated in a letter from the De- partment of the Interior. .03 Qualification as an Indian tribal government does not necessarily establish that a tribe qualifies for a particular tax benefit. For example, when a tribal en- tity seeks exemption from excise taxes, the entity must be able to demonstrate that the underlying transaction involves the exercise of an essential governmental function of the Indian tribal government. § 7871(b). SECTION 3. EFFECT ON OTHER DOCUMENTS Rev. Proc. 2002–64 is superseded. SECTION 4. EFFECTIVE DATE This revenue procedure is effective on the date of publication. SECTION 6. DRAFTING INFORMATION The principal author of this revenue procedure is Carol Cook of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt & Government En- tities). For further information regarding this revenue procedure, contact Ms. Cook at (202) 622–1124 (not a toll-free call). September 29, 20087692008–39 I.R.B. Part IV. Items o fGeneralInterest Notice of Prop osed Rulemaking an dNoticeof Public Hearin g Rules for Home Construction Contracts REG–120844–07 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Not ice of proposed rulemaking and notice o f public hearing. SUMMARY: This document contains proposed regulations amending the regu- lations under §1.460 to provide guidance to taxpayers in the home construction in- dustry regarding accounting for certain long-term construction contracts that qual- ify as home construction contracts under section 460(e)(6) of the Internal Revenue Code (Code) and to provide guidance to taxpayers with long-term contracts under section 460(f) regarding certain changes in method of accounting for long-term contracts. This document also provides a notice of a public hearing on these pro- posed regulations. DATES: Written comments must be re- ceived by November 3, 2008. Outlines of topics to be discussed at the public hear- ing scheduled for December 5, 2008, at 10:00 a.m. must be received by November 13, 2008. ADDRES SES: Send submissions to CC:PA: LPD:PR(REG–120844–07), room 52 03, Internal Revenue Service, POB 760 4, Ben Franklin Station, Wash- ingto n, DC 20224. Submissions may be hand d elivered Monday through Friday betwe en the hours of 8 a.m. and 4 p.m. to CC: PA:LPD:PR (REG–120844–07), Couri er’s Desk, Internal Revenue Serv ice, 1111 Constitution Avenue, NW, Wash ington, DC. Alternatively, taxpayers may s ubmit comments electronically viat heFederaleRulemaking Port al atwww.regulations.gov(IRS REG– 120844–07). The public hearing wil l be held in the auditorium, Internal Rev enue Service Building, 1111 Constitution Avenue, NW, Washington, DC. FOR FURTHER IN FORMATION CONTACT: Conc erning the proposed regulations, Brendan P. O’Hara, (202) 622–4920; con cerning submission of com- ments, the he aring, or to be placed on the building access list to attend the hear- ing, Richard Hurst, (202) 622–7180 (not toll-free nu mbers). SUPPLEMENTA RY INFORMATION: Background and Explanation of Provisions This docume nt contains a proposed amendment t o the Income Tax Regula- tions, 26 CF R Part 1, under section 460 and §§1.460 –3, 1.460–4, 1.460–5 and 1.460–6 of the Income Tax Regulations. In general , section 460(a) requires taxpay- ers to use t he percentage of completion method (PC M) to account for taxable income fro m any long-term contract. Sec- tion 460( e) exempts home construction contract s from the general requirement to use the pe rcentage of completion method of accoun ting. Section 460(e)(6) defines ahomeco nstruction contract to be any constru ction contract if 80 percent or more of the to tal estimated contract costs are reasona bly expected to be attributable to the cons truction of (i) dwelling units con- tained in buildings containing 4 or fewer dwelli ng units, and (ii) improvements to real propertydirectlyrelatedtosuch dwelli ng units and located on the site of such dw elling units. Section 460(e)(4) defin es a construction contract to be any contr act for the building, construction, recon struction, or rehabilitation of, or the insta llation of any integral component to, or imp rovement of, real property. These proposed regulations expand the ty pes of contracts eligible for the home construction contract exemption and amen d the rules for how taxpayer-initiated chan ges in methods of accounting to com- ply w ith the regulations under section 460 may b eimplemented. Definition of aHomeConstruction Contract Improvements to real property The definitio nofaconstruction con- tractunder se ction 460(e) includes many transactions involving land developers and constructio n service providers in the home constructio n industry. For example, a con- struction co ntract under section 460(e) in- cludes a cont ract for the provision of land by the taxpay er if the estimated total allo- cable contr act costs attributable to the tax- payer’s con struction activities (not includ- ing the cost of the land provided to the cus- tomer) are 1 0 percent or more of the con- tract’s to tal contract price. As noted, se ction 460(a) requires that the income from any long-term contract be recogni zed using the percentage of completio n method. However, taxpayers with contr acts that meet the definition of a“homeco nstruction contract” are not required to use the percentage of comple- tion meth od for those contracts and may use an exe mpt method. Exempt methods commonly used to account for home con- structi on contracts include the completed contrac t method (CCM) and the accrual method. Under se ction 460, a home construction contrac t includes any construction contract if 80 per cent of the total estimated contract costs ar e reasonably expected to be attrib- utable to the construction of improvements to real property directly related to qualify- ing dwe lling units and located on the site of such dw elling units. Commentators have sugges ted that many contracts entered into by lan d developers in the home construc- tion i ndustry should fall within the defini- tion o f a home construction contract. The pr oposed regulations expand the scope of the home construction contract exemp tion by providing that a contract for th e construction of common improve- ment s is considered a contract for the con- stru ction of improvements to real property dire ctly related to the dwelling unit(s) and loca ted on the site of such dwelling unit(s), even if the contract is not for the con- str uction of any dwelling unit. Therefore, und er the proposed regulations, a land de- vel oper that is selling individual lots (and its contractors and subcontractors) may 2008–39 I.R.B.770September 29, 2008 have long-term construction contracts that qualify for the home construction contract exemption. Townhouses, rowhouses, and condominiums Under section 460, a home construction contract also includes any construction contract if 80 percent of the total contract costs are reasonably expected to be attrib- utable to the construction of dwelling units contained in buildings containing four or fewer dwelling units. Section 460(e)(6) states that each townhouse or rowhouse shall be treated as a separate building, regardless of the number of townhouses or rowhouses physically attached to each other. In certain circumstances, the terms condominium and townhouse are used interchangeably to describe similar struc- tures. Individual condominium units possess many of the characteristics gen- erally associated with townhouses and rowhouses such as private ownership, shared portions of their structures, resi- dential housing, and the economics of the underlying purchase transactions. The proposed regulations expand what is considered a townhouse or rowhouse, for purposes of the home construction con- tract exemption, to include an individual condominium unit. This will have the ef- fect of allowing each condominium unit to be treated as a separate building for pur- poses of determining whether the underly- ing contract qualifies as a home construc- tion contract. Completed contract method Under the current regulations under section 460, the appropriate severing of a home construction contract requires a facts and circumstances analysis based upon certain factors that are neither specific nor always relevant to home construction contracts. Likewise, the date a home con- struction contract is considered completed and accepted is determined using a facts and circumstances analysis. The IRS and Treasury Department are aware of controversies related to the application of the existing facts and cir- cumstances analyses for determining the appropriate severance and final comple- tion and acceptance of home construction contracts accounted for using the com- pleted contract method. Expanding the definition of a home construction contract as provided in these proposed regulations may heighten the significance of these issues. As a result, the IRS and Treasury Department expect to propose specific severing and completion rules for home construction contracts accounted for using the completed contract method. Taxpayers are encouraged to submit comments on the types of severing and completion rules that would result in the clear reflection of income for home construction contracts accounted for using the completed con- tract method. Specifically, the IRS and the Treasury Department request comments on the circumstances (if any) in which it would not be appropriate to require sever- ing and completion of a home construction contract to be determined on a dwelling unit by dwelling unit or lot by lot basis or, when a contract is not for the sale of a dwelling unit or lot, on the basis of when the taxpayer receives payment(s) under the contract. Method of accounting Currently, the regulations under section 460 provide that a taxpayer that uses the percentage-of-completion method (PCM), the exempt-contract percentage-of-com- pletion method (EPCM), or elects the 10-percent method or special alterna- tive minimum taxable income (AMTI) method, or that adopts or elects a cost al- location method of accounting (or changes to another method of accounting with the Commissioner’s consent) must ap- ply the method(s) consistently for all similarly classified contracts until the tax- payer obtains the Commissioner’s consent under section 446 to change to another method of accounting. The regulations further provide that a taxpayer-initiated change in method of accounting will be permitted only on a cut-off basis (that is, for contracts entered into on or after the year of change), and thus, a section 481(a) adjustment will not be permitted nor required. The proposed regulations continue this cut-off method of imple- mentation but only for taxpayer-initiated changes from a permissible PCM method to another permissible PCM method for long-term contracts for which PCM is re- quired and for taxpayer-initiated changes from a cost allocation method of account- ing that complies with the cost allocation rules of §1.460–5 to another cost allocation method of accounting that complies with the cost allocation rules of §1.460–5. Un- der the proposed regulations all other taxpayer-initiated changes in method of accounting under section 460 will be made with a section 481(a) adjustment. The proposed regulations provide that in determining the hypothetical under- payment or overpayment of tax for any year as part of the look-back computa- tion, amounts reported as section 481(a) adjustments shall generally be taken into account in the tax year or years they are reported. For purposes of determining whether there is a hypothetical under- payment or overpayment of tax under the look-back computation, a taxpayer would use amounts reported under its old method for the years the old method was used and would use amounts reported under its new method for the years the new method was used, netted against the amount of any section 481(a) adjustments required to be taken into account. Thus, a look-back computation would not be required upon contract completion sim- ply because the taxpayer has changed its method of accounting. However, a look-back computation would be required upon contract completion if actual costs or the contract price differ from the estimated amounts notwithstanding the fact a change in method of accounting occurred. For example, if a taxpayer using PCM changed its method of accounting for construction costs incurred in a contract reported under PCM, the section 460 look-back would be computed using the costs recognized prior to the year of change (reported under the taxpayer’s old method of accounting) and the costs recognized in subsequent years using the new method of account- ing, netted against any applicable section 481(a) adjustment. Similarly, for changes in methods of accounting where no costs were recognized under the old method of accounting (for example, a change in method of accounting from CCM to PCM), look-back would effectively only apply to years in which the taxpayer’s new method of accounting was used to the extent that no costs were recognized prior to the year of change under the old method of accounting. This approach to the look-back computation is consistent with the underlying purpose of look-back as well as the general accounting method September 29, 20087712008–39 I.R.B. change procedures. Comments are specif- ically requested with respect to issues that taxpayers may foresee with respect to the rules provided in these proposed regulations for taking into account section 481(a) adjustments in the year reported for purposes of the look-back computation. Proposed Effective/Applicability Date These regulations are proposed to ap- ply to taxable years beginning on or af- ter the date the final regulations are pub- lished in theFederal Register.Thefinal regulations will provide rules applicable to taxpayers that seek to change a method of accounting to comply with the rules con- tained in the final regulations. Taxpayers may not change or otherwise use a method of accounting in reliance upon the rules contained in these new proposed regula- tions until the rules are published as final regulations in theFederal Register. Special Analyses It has been determined that this pro- posed regulation isnot a significant regu- latory action as defined in Executive Or- der 12866. Therefore, a regulatory assess- ment is not required. It has also been deter- mined that section 553(b) of the Adminis- trative Procedure Act (5 U.S.C. chapter 5) does not apply, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibil- ity Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advo- cacy of the Small Business Administration for comment on its impact on small busi- nesses. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original with eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clar- ity of the proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing has been sched- uled for December 5, 2008, beginning at 10:00 a.m., in the auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble. The rules of 26 CFR 601.601(a)(3) ap- ply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by Novem- ber 13, 2008. A period of 10 minutes will be allotted to each person for making com- ments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information The principal author of these regula- tions is Brendan P. O’Hara, Office of Asso- ciate Chief Counsel (Income Tax and Ac- counting). However, other personnel from the IRS and Treasury Department partici- pated in their development. ***** Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.460–3 is amended by: 1. Revising paragraph (b)(1)(ii). 2. Redesignating paragraphs (b)(2)(ii), (b)(2)(iii) and (b)(2)(iv) as paragraphs (b)(2)(iii), (b)(2)(iv) and (b)(2)(v), respec- tively, and revising them. 3. Adding a new paragraph (b)(2)(ii). The revisions and addition read as fol- lows: §1.460–3 Long-term construction contracts. ***** (b) * * * (1) * * * (ii) Construction contract, other than a home construction contract, that a taxpayer estimates (when entering into the contract) will be completed within 2 years of the contract commencement date, provided the taxpayer satisfies the $10,000,000 gross receipts test described in paragraph (b)(3) of this section. (2) * * * (ii)Land improvements. For purposes of paragraph (b)(2)(i)(B) of this section, improvements to real property directly related to, and located on the site of, the dwelling units consist of improvements to land on which dwelling units (as described in paragraph (b)(2)(i)(A) of this section) are constructed, and common improve- ments as defined in paragraph (b)(2)(iv) of this section. A long-term construction contract is a home construction contract if a taxpayer (including a subcontractor working for a generalcontractor) meets the 80% test in paragraph (b)(2)(i) of this section as applied to either paragraph (b)(2)(i)(A) of this section or paragraph (b)(2)(i)(B) of this section, or both para- graphs (b)(2)(i)(A) and (b)(2)(i)(B) of this section, collectively. (iii)Townhouses and rowhouses.For purposes of determining whether a long- term construction contract is a home con- struction contract under paragraph (b)(2) of this section, each townhouse or row- house is a separate building. For this pur- pose, the term townhouse and rowhouse includes an individual condominium unit. (iv)Common improvements—(A)In general. A taxpayer includes in the cost of a dwelling unit or land its allocable share of the cost that the taxpayer incurs for any common improvements that benefit the dwelling unit or land. (B)Definition. For purposes of this section,a common improvementis an im- provement that the taxpayer is contractu- ally obligated, or required by law, to con- struct within the tract or tracts of land con- taining the dwelling units (or the land on which dwelling units are to be constructed) 2008–39 I.R.B.772September 29, 2008 and that benefits the dwelling units (or the land on which dwelling units are to be con- structed). In general, a common improve- ment does not solely benefit any particular dwelling unit or any particular lot on which a dwelling unit is constructed. However, land clearing and grading are common im- provements, even when performed on a particular lot. Other examples of com- mon improvements are sidewalks, sewers, roads and clubhouses. (v)Mixed use costs. If a contract in- volves the construction of both commer- cial units and dwelling units, a taxpayer must allocate the costs among the commer- cial units and dwelling units using a rea- sonable method or combination of reason- able methods. In general, the reasonable- ness of an allocation method will be based on facts and circumstances. Examples of methods that may be reasonable are spe- cific identification, square footage, or fair market value. ***** Par. 3. Section 1.460–4 is amended by: 1. Revising the third sentence in para- graph (c)(1). 2. Redesignating paragraph (g) as para- graph (g)(1) and revising newly redesig- nated paragraph (g)(1). 3. Adding a paragraph (g)(2). 4. RevisingExample 5. of paragraph (h). The revisions and additions read as fol- lows: §1.460–4 Methods of accounting for long-term contracts. ***** (c) * * * (1)***Permissibleexemptcontract methods are the PCM, the EPCM de- scribed in paragraph (c)(2) of this section, the CCM described in paragraph (d) of this section, the accrual method, and any other permissible method. * * * ***** (g)Method of accounting—(1)In gen- eral. A taxpayer must apply its method(s) of accounting for long-term contracts con- sistently for all similarly classified long- term contracts untilthe taxpayer obtains the Commissioner’s consent under section 446(e) to change to another method of ac- counting. (2)Taxpayer-initiated change in method of accounting—(i)Change to PCM for long-term contracts for which PCM is required. A taxpayer-initiated change in method of accounting for long-term contracts (or portion thereof) for which income must be determined us- ing the PCM described in paragraph (b) of this section and the costs allocation rules described in §1.460–5(b) or (c) (required PCM contracts) from a method of account- ing that does not comply with paragraph (b) of this section and §1.460–5(b) or (c) to a method that complies with paragraph (b) of this section and §1.460–5(b) or (c) must be applied to all required PCM contracts entered into before the year of change and not reported as completed as of the beginning of the year of change. Accordingly, a section 481(a) adjustment will be required. (ii)Change from a permissible PCM method to another permissible PCM method for long-term contracts for which PCM is required. A taxpayer initiated change in method of accounting for re- quired PCM contracts, as defined in para- graph (g)(2)(i) of this section (or a portion thereof), from a method of accounting that complies with paragraph(b)ofthissection and §1.460–5(b) or (c) to another method of accounting that complies with para- graph (b) of this section and §1.460–5(b) or (c) must be made on a cut-off basis and applied only to contracts entered into during and after the year of change. Ac- cordingly, a section 481(a) adjustment will be neither permitted nor required. (iii)Change to an exempt contract method for home construction contracts. A taxpayer-initiated change in method of accounting for home construction con- tracts, as defined in §1.460–3(b)(2), to a permissible exempt contract method, as described in paragraph (c)(1) of this section, must be applied to all home con- struction contracts entered into before the year of change and not reported as com- pleted as of the beginning of the year of change. Accordingly, a section 481(a) adjustment will be required. (iv)Change to an exempt contract method for exempt contracts other than home construction contracts.Atax- payer-initiated change in method of ac- counting for long-term contracts (or por- tion thereof) not described in paragraphs (g)(2)(i), (ii) and (iii) of this section to a permissible exempt contract method as described in paragraph (c)(1) of this sec- tion must be applied to all contracts that are eligible to use the exempt contract method entered into before the year of change and not reported as completed as of the beginning of the year of change. Accordingly, a section 481(a) adjustment will be required. (h) * * * ***** Example 5.PCM—contract terminated.C, whose taxable year endsDecember 31, determines the income from long-term contracts using the PCM. During 2001, C buys land and begins constructing a building that will contain 50 apartment units on that land. C enters into a contract to sell the building to B for $2,400,000. B gives C a $50,000 deposit toward the purchase price. By the end of 2001, C has incurred $500,000 of allocable contract costs on the building and estimates that the total allocable contract costs on the building will be $1,500,000. Thus, for 2001, C reports gross receipts of $800,000 ($500,000 / $1,500,000 x $2,400,000), current-year costs of $500,000, and gross income of $300,000 ($800,000 - $500,000). In 2002, after C has incurred an additional $250,000 of allocable contract costs on the building, B files for bankruptcy protection and defaults on the contract with C, who is permitted to keep B’s $50,000 deposit as liquidated damages. In 2002, C reverses the transaction with B under paragraph (b)(7) of this section and reports a loss of $300,000 ($500,000 - $800,000). In addition, C obtains an adjusted basis in the building sold to B of $700,000 ($500,000 (current-year costs deducted in 2001) - $50,000 (B’s forfeited deposit) + $250,000 (current-year costs incurred in 2002). C may not apply the look-back method to this contract in 2002. ***** Par. 4. Section 1.460–5 is amended by: 1. Adding a new sentence to the end of paragraph (c)(2). 2. Revising paragraph (g). The revision and addition read as fol- lows: §1.460–5 Cost allocation rules. ***** (c) * * * (2) * * * Further, this election is not available if a taxpayer is changing from a cost allocation method other than as pre- scribed in paragraph (b) of this section, in which case the taxpayer must follow the procedures under §1.446–1(e) for ob- taining the Commissioner’s consent for the change in method of accounting. ***** (g)Method of accounting. A taxpayer that adopts, elects, or otherwise changes September 29, 20087732008–39 I.R.B. to a cost allocation method of account- ing (or changes to another cost allocation method of accounting with the Commis- sioner’s consent) must apply that method consistently for all similarly classified contracts, until the taxpayer obtains the Commissioner’s consent under section 446 to change to another cost allocation method. A taxpayer-initiated change in cost allocation methodfromamethodthat does not comply with the cost allocation rules of this section to a method that com- plies with the cost allocation rules of this section must be applied to all long-term contracts to which the rules of this section apply, including contracts entered into be- fore the year of change and not reported as completed as of the beginning of the year of change. Accordingly, a section 481(a) adjustment is required. Any other taxpayer-initiated change in cost alloca- tion method to a method permitted under the rules of this section must be made on a cut-off basis and applied only to contracts entered into during and after the year of change, in which case a section 481(a) adjustment will be neither permitted nor required. Par. 5. Section 1.460–6 is amended by: 1. Adding paragraph (c)(3)(vii). 2. Redesignating paragraph (d)(2)(iv) as paragraph (d)(2)(v). 3. Adding a new paragraph (d)(2)(iv). The additions and revision read as fol- lows: §1.460–6 Look-back method. ***** (c) * * * (3) * * * (vii)Section 481(a) adjustments.For purposes of determining the hypotheti- cal underpayment or overpayment of tax for any year, amounts reported as section 481(a) adjustments shall be taken into account in the tax year or years they are reported. However, any portion of a sec- tion 481(a) adjustment not yet reported as of the tax year in which the contract is completed shall be taken into account in the tax year the contract is completed for purposes of determining the hypothetical underpayment or overpayment of tax. ***** (d) * * * (2) * * * (iv)Section 481(a) adjustments.For purposes of determining the hypothetical underpayment or overpayment of tax for any year under the simplified marginal im- pact method, amounts reported as section 481(a) adjustments shall be taken into ac- count in the tax year or years they are re- ported. However, any portion of a section 481(a) adjustment not yet reported as of the tax year in which the contract is com- pleted shall be taken into account in the tax year the contract is completed for purposes of determining the hypothetical underpay- ment or overpayment of tax. ***** Linda E. Stiff, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on August 1, 2008, 8:45 a.m., and published in the issue of the Federal Register for August 4, 2008, 73 F.R. 45180) Notice of Proposed Rulemaking Employee Stock Purchase Plans Under Internal Revenue Code Section 423 REG–106251–08 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains proposed regulations relating to options granted under an employee stock pur- chase plan as defined in section 423 of the Internal Revenue Code (Code). These proposed regulations affect certain tax- payers who participate in the transfer of stock pursuant to the exercise of options granted under an employee stock purchase plan. These proposed regulations provide guidance to assist taxpayers in complying with section 423 in addition to clarifying certain rules regarding options granted under an employee stock purchase plan. This document also contains proposed regulations under sections 421 and 422 of the Code. DATES: Written or electronic comments must be received by October 27, 2008. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–106251–08), 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–106251–08), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically via the Federal eRulemaking Portal athttp://www.regulations.gov/(IRS REG–106251–08). FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, Thomas Scholz at (202) 622–6030; concerning submissions of comments, and/or to request a hear- ing, Oluwafunmilayo Taylor, at (202) 622–7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to 26 CFR part 1 under sec- tion 423 of the Code. This document also contains minor proposed amendments to 26 CFR part 1 under sections 421 and 422 of the Code. Section 423 was added to the Code by section 221(a) of the Revenue Act of 1964, Public Law 88–272 (78 Stat. 63 (1964)). Changes to the applicable law concern- ing section 423 were made by sections 1402(b)(1)(C) and 1402(b)(2) of the Tax Reform Act of 1976, Public Law 94–455 (90 Stat. 1731 and 1732–1733 (1976)); section 1001(b)(5) of the Deficit Reduc- tion Act of 1984, Public Law 98–369 (98 Stat. 1011 (1984)); section 1114 of the Tax Reform Act of 1986, Public Law 99–514 (100 Stat. 2451 (1986)); and sections 11801(c)(9)(D)(i)-(ii) and 11801(c)(9)(E) of the Omnibus Budget Reconciliation Act of 1990, Public Law 101–508 (104 Stat. 1388–525 (1990)). Regulations under section 423 were published in theFederal Registeron June 23, 1966 (T.D. 6887, 1966–2 C.B. 129). These regulations were amended on September 27, 1979 (T.D. 7645, 1979–2 C.B. 198), October 31, 1980 (T.D. 7728, 1980–2 C.B. 236), and December 1, 1988 (T.D. 8235, 1989–1 C.B. 117). In Notice 2004–55, 2004–2 C.B. 319 (August 23, 2008–39 I.R.B.774September 29, 2008 2004), (see §601.601(d)(2)(ii)(b)), the IRS and the Treasury Department requested comments concerning whether the exist- ing regulations under section 423 should be amended, and if so, what issues should be addressed. Two comment letters were submitted in response to Notice 2005–55 and the suggestions in those letters are addressed in this preamble. In general, the income tax treatment of the grant of an option to purchase stock in connection with the performance of ser- vices and of the transfer of stock pursuant to the exercise of the option is determined under section 83 and the regulations there- under. However, section 421 provides spe- cial rules for determining the income tax treatment of the transfer of shares of stock pursuant to the exercise of an option if the requirements of sections 422(a) or 423(a), as applicable, are met. Section 422 ap- plies to incentive stock options and sec- tion 423 applies to options granted under an employee stock purchase plan (collec- tively, statutory options). Under section 421, if a share of stock is transferred to an individual pursuant to the exercise of a statutory option, there is no income at the time of exercise of the option with respect to the transfer and no deduction under section 162 is allowed to the employer corporation with respect to the transfer. Section 423(a) provides that section 421appliestothetransferofstocktoan individual pursuant to the exercise of an option granted under an employee stock purchase plan if: (i) no disposition of the stock is made within two years from the date of grant of the option or within one year from the date of transfer of the share, and (ii) at all times during the period be- ginning on the date of grant and ending on the day three months before the exercise of the option, the individual is an em- ployee of either the corporation granting the option or a parent or subsidiary of such corporation, or a corporation (or a parent or subsidiary of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) applies. Section 423(b) sets forth several requirements that mustbemetforaplantoqualifyasan employee stock purchase plan. Section 423(c) provides a special rule that is ap- plicable where the option exercise price is between 85 and 100 percent of the fair market value of the stock at the time the option was granted. Section 424 provides special rules applicable to statutory options, includ- ing rules concerning the modification of statutory options and the substitution or assumption of an option by reason of a corporate merger, consolidation, acqui- sition of property or stock, separation, reorganization, or liquidation. Section 424 also contains definitions of certain terms, including disposition, parent corporation, and subsidiary corporation. Finally, sec- tion 424 provides special rules related to attribution of stock ownership and the ef- fect of stockholder approval on the date of grant of a statutory option. Explanation of Provisions These proposed regulations would provide a comprehensive set of rules governing stock options issued under an employee stock purchase plan and would incorporate substantially all of the rules contained in the existing regulations under section 423. These proposed regulations are comprised of two sections: Section 1.423–1, applicability of section 421(a); and §1.423–2, employee stock purchase plan defined. These proposed regula- tions would amend the existing regula- tions under section 423 in several ways. First, these proposed regulations would update the existing regulations to incorpo- rate statutory changes and to make them consistent, where appropriate, with the regulations under section 422 related to incentive stock options. The regulations under section 422 were last updated in 2004. See T.D. 9144, 2004–2 C.B. 413. Second, these proposed regulations would update the existing regulations to provide additional guidance in certain areas as discussed below. Finally, these proposed regulations would also update the existing regulations to remove obsolete rules. 1. General requirements Under §1.423–2(a)(1) of these pro- posed regulations, an employee stock purchase plan must meet the require- ments of paragraphs (i) through (ix) of §1.423–2(a)(2). The terms of the plan, or an offering under the plan, must satisfy the requirements of paragraphs (iii) through (ix) of §1.423–2(a)(2). Consistent with §1.422–2(b)(1), §1.423–2(a)(1) of these proposed regulations would provide that the plan and the terms of an offering must be in writing or electronic form, provided that such writing or electronic form is ad- equate to establish the terms of the plan or offering. Section 1.423–2(a)(2) of these pro- posed regulations lists the requirements that must be met for qualification as an em- ployee stock purchase plan and provides cross references to the specific section of these regulations that addresses each requirement. Under §1.423–2(a)(3) of these pro- posed regulations, if the terms of an option are inconsistent with the terms of the em- ployee stock purchase plan or an offering under the plan, then the option will not be treated as granted under an employee stock purchase plan. (Section 1.423–2(a)(2) of the existing regulations has been re-num- bered as §1.423–2(a)(3) of these proposed regulations.) If an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an employee who is entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under the offering that qualifies as an option granted under an employee stock purchase plan, then the offering will not meet the requirements of §1.423–2(e) of these proposed regulations, which generally requires that options be granted to all employees of any corpora- tion whose employees are granted options under an employee stock purchase plan. As a result, none of the options granted under the offering will be eligible for the special tax treatment of section 421.Ex- ample 1in §1.423–2(a)(4) illustrates this principle. Section 1.423–2(a)(4) of these proposed regulations contains additional examples to illustrate the principles of §1.423–2(a)(3). If an option with terms that are incon- sistent with the terms of the plan or an of- fering under the plan is granted to an indi- vidual who is not entitled to the grant of an option under the terms of the plan or offer- ing, then the option will not be treated as an option granted under an employee stock purchase plan, and the grant of the op- tion will not disqualify the options granted under the offering.Examples 2 and 3in §1.423–2(a)(4) of these proposed regula- tions illustrate this principle. September 29, 20087752008–39 I.R.B. If, at the time of grant, an option qual- ifies as an option granted under an em- ployee stock purchase plan, but the terms of the option are not satisfied, then the op- tion will not be treated as granted under an employee stock purchase plan. How- ever, this failure tocomply with the terms of the option will not disqualify the options granted under the plan or offering.Exam- ple 4in §1.423–2(a)(4) of these proposed regulations illustrates this principle. 2. Stockholder approval of the employee stock purchase plan To qualify as an employee stock pur- chase plan, section 423(b)(2) requires that the plan be approved by the stock- holders of the granting corporation within 12 months before or after the date the plan is adopted. These proposed reg- ulations would provide the same basic requirements for stockholder approval as those included in the existing regula- tions. Consistent with §1.422–2(b)(2), these proposed regulations would pro- vide additional guidance concerning the circumstances under which stockholder approval is required. These proposed regulations, like the existing regulations, would require stock- holder approval if there is a change in the aggregate number of shares or in the em- ployees eligible to be granted options un- der the plan. The standard for determining when stockholder approval is required un- der these proposed regulations generally is the same as under the existing regulations. These proposed regulations would clarify the requirements for stockholder approval and would provide a more comprehensive list of situations that require new stock- holder approval of the plan. In particular, these proposed regulations would clarify that new stockholder approval is required if there is a change in the shares with respect to which options are issued or a change in the granting corporation. For example, assume that S, a wholly owned subsidiary of P, adopts an employee stock purchase plan under which options for S stock will be granted to S employ- ees, and the plan is approved by the stock- holder of S (in this case, P) within the applicable 24-month period. If S later amends the plan to provide for the grant of options to acquire P stock (rather than S stock), S must obtain approval from the stockholders of S (in this case, P) within 12 months before or after the date of the amendment of the plan because the amend- ment of the plan to allow the grant of op- tions for P stock is considered the adoption of a new plan. See paragraph (iii) ofExam- ple 1in §1.423–2(c)(5) of these proposed regulations. This conclusion differs from that in paragraph (iii) ofExample 1un- der §1.422–2(b)(6), which concludes that the stockholders of P rather than the stock- holders of S must approve the plan as a result of its amendment to provide for the grant of options to acquire P stock. The IRS and the Treasury Department invite comment on this result and are proposing a conforming change toExample 1, para- graph (iii) under §1.422–2(b)(6). These proposed regulations also would provide additional guidance regarding the application of the stockholder approval requirements where an employee stock purchase plan is assumed in connection with a corporate transaction.Example 3in §1.423–2(c)(5) of these proposed regula- tions illustrates this principle. 3. Maximum aggregate number of shares Section 1.423–2(c)(3) of the existing regulations provides that an employee stock purchase plan must designate the maximum aggregate number of shares that may be issued under the plan. Consistent with §1.422–2(b)(3)(ii), these proposed regulations would provide that the plan may specify that the maximum aggregate number of shares available for grants un- der the plan may increase annually by a specified percentageof the authorized, issued, or outstanding shares at the date of the adoption of the plan. Further, a plan providing that the maximum aggregate number of shares issued subject to options under the plan may change based on any other specific circumstances will satisfy the requirements of §1.423–2(c)(3) only if the stockholders approve an immediately determinable maximum number of shares that may be issued under the plan in any event.Examples 4 and 5in §1.423–2(c)(5) of these proposed regulations illustrate these principles. 4. Employees covered by the plan Section 423(b)(4) permits an employer to exclude from participation one or more of the following categories of employ- ees: Employees who have been employed less than two years; Employees who cus- tomarily work 20 hours or less per week; Employees who customarily work not more than five months in any calendar year; and Highly compensated employees (HCEs) within the meaning of section 414(q). Section 1.423–1(e)(1) of these proposed regulations has been updated to reflect the 1986 amendment of section 423(b)(4)(D) to substitute “highly com- pensated employees(within the meaning of section 414(q))” for “officers, persons whose principal duties consist of supervis- ing the work of other employees, or highly compensated employees.” See Public Law 99–514, section 1114(b)(13). One commentator suggested that the regulations clarify that an employer may exclude from participation a subset of one of the groups set forth in section 423(b)(4). For example, an employer should be per- mitted to exclude a subset of HCEs, such as officers, from participation in the plan. The commentator further suggested that the regulations clarify that an employer may impose shorter service requirements than those permitted. For example, an employer should be permitted to exclude employees who have been employed less than one year from participation in the plan. The IRS and the Treasury Department agree that a more inclusive application of the rules of section 423(b)(4) is consistent with the intent of section 423. Accord- ingly, §1.423–2(e)(2) of these proposed regulations would provide that an em- ployee stock purchase plan does not fail to satisfy the coverage provision of sec- tion 423(b)(4) merely because the plan excludes employees who have completed a shorter period of service or whose cus- tomary employment is for fewer hours per week or fewer months in a calendar year than is specified in subparts (A), (B) and (C) of section 423(b)(4), provided the ex- clusion is applied in an identical manner to all employees of every corporation whose employees are granted options under the plan. In addition, these proposed regula- tions would provide that the terms of an employee stock purchase plan may ex- clude HCEs: (a) with compensation above a certain level, or (b) who are officers or subject to the disclosure requirements of section 16(a) of the Securities Exchange 2008–39 I.R.B.776September 29, 2008 Act of 1934, provided the exclusion is applied in an identical manner to all HCEs of every corporation whose employees are granted options under the plan.Exam- ples 3, 4, 5, 6, and 7in §1.423–2(e)(6) of these proposed regulations illustrate these principles. (The examples under §1.423–2(e)(3) of the existing regulations have been re-numbered as §1.423–2(e)(6) of these proposed regulations.) Another commentator suggested that the regulations permit employers to ex- clude from plan participation employees who are nonresident aliens and who re- ceive no earned income that constitutes income from sources within the United States. The IRS and the Treasury De- partment agree that it may be appropriate to exclude foreign employees from plan participation in certain limited circum- stances. However, unlike section 410(b), section 423 does not provide an exclusion for such nonresident aliens. Accordingly, the IRS and the Treasury Department are constrained by statutory authority from providing a general exclusion from plan participation for employees who are nonresident aliens and who receive no United States source income. Therefore, §1.423–2(e)(3) of these proposed regula- tions would provide that employees who are citizens or residents of a foreign ju- risdiction (without regard to whether they are also citizens of the United States or resident aliens (within the meaning of §7701(b)(1)(A))) may be excluded from the coverage of an employee stock pur- chase plan only if the grant of an option under the plan to a citizen or resident of the foreign jurisdiction is prohibited under the laws of such jurisdiction or if compliance with the laws of the foreign jurisdiction would cause the plan to violate the re- quirements of section 423.Example 8in §1.423–2(e)(6) of these proposed regula- tions illustrates this principle. Another commentator suggested that the regulations permit employers to ex- clude collectively bargained employees from plan participation. However, un- like section 410(b), section 423 does not provide an exclusion for collectively bar- gained employees. Accordingly, the IRS and the Treasury Department are again constrained by statutory authority from providing a general exclusion from plan participation for collectively bargained employees. One commentator suggested that the regulations be amended to provide that an offering will not lose its tax-favored status due to the inadvertent exclusion of employees from plan participation. Rather, the commentator suggested that the granting corporation be permitted to correct certain errors in plan administra- tion through a corrections program that would permit the excluded employees to participate in past offerings under a plan. Such a corrections program is beyond the scope of these regulations. However, the IRS and the Treasury Department invite comments on whether such a program is appropriate (including the statutory authority for such a program) and sugges- tions for the types of violations that might be covered and the methods of correction. Section 1.423–2(e)(4) of these pro- posed regulations includes language that appears under §1.423–2(e)(1) of the exist- ing regulations. Section 1.423–2(e)(2) of the existing regulations has been re-num- bered as §1.423–2(e)(5) of these proposed regulations. 5. Equal rights and privileges Section 423(b)(5) requires that, subject to certain exceptions, an employee stock purchase plan, by its terms, provide that all employees granted options under the plan have the same rights and privileges. Section 1.423–2(f)(3) of these pro- posed regulations includes language that appears in §1.423–2(f)(1) of the ex- isting regulations. (The examples in §1.423–2(f)(2) of the existing regulations have been relocated toExamples 1 and 2 of §1.423–2(f)(7) of these proposed regu- lations. The example in §1.423–2(f)(4) of the existing regulations has been relocated toExample 3of §1.423–2(f)(7). Section 1.423–2(f)(4) of the existing regulations is re-numbered under these proposed regula- tions as §1.423–2(f)(6)). One commentator suggested that a plan or offering should not fail to satisfy the equal rights and privileges provision of section 423(b)(5) if the provisions of the plan or offering applied to foreign em- ployees are reasonably designed to avoid adverse consequences for such employee under foreign law as a result of plan par- ticipation. The IRS and the Treasury Department agree that in certain limited circumstances it may be appropriate for the terms of an employee stock purchase plan to be less favorable with respect to foreign employees than those terms are with re- spect to employees resident in the United States. Accordingly, §1.423–2(f)(4) of these proposed regulations would provide that a plan or offering will not fail to satisfy the requirements of section 423(b)(5) if, in order to comply with the laws of a foreign jurisdiction, the terms of an option granted under a plan or offering to citizens or resi- dents of such foreign jurisdiction (without regard to whether they are also citizens of the United States or resident aliens (within the meaning of §7701(b)(1)(A))) are less favorable than the terms of options granted under the same plan or offering to employees resident in the United States. Example 4in §1.423–2(f)(7) of these pro- posed regulations illustrates this principle. A plan or offering will not satisfy the re- quirements of section 423(b)(5), however, if, in order to comply with the laws of a foreign jurisdiction, the terms of the plan or offering are more favorable with respect to citizens or residents of such foreign ju- risdiction than the terms of the plan or of- fering are with respect to employees resi- dent in the United States. Another commentator suggested that the regulations addressing the carryover of amounts from one offering to another be clarified. In response to this com- ment, these proposed regulations would clarify §1.423–2(f)(3) of the existing reg- ulations (which has been re-numbered as §1.423–2(f)(5)). Generally, a plan per- mitting one or more employees to carry forward amounts that were withheld but not applied toward the purchase of stock under an earlier plan or offering and ap- ply such amounts toward the purchase of additional stock under a subsequent plan or offering will be a violation of the equal rights and privileges requirement under section 423(b)(5). However, the carry forward of amounts withheld but not applied toward the purchase of stock under an earlier plan or offering will not violate the equal rights and privileges re- quirement of section 423(b)(5) if all other employees participating in the current plan or offering are permitted to make direct payments toward the purchase of shares under a subsequent plan or offering in an amount equal to the excess of: (a) the greatest amount that any employee is allowed to carry forward from an earlier September 29, 20087772008–39 I.R.B. plan or offering over (b) the amount, if any, the employee will carry forward from an earlier plan or offering.Example 5in §1.423–2(f)(7) of these proposed regula- tions illustrates this principle. Further, a plan will not fail to satisfy the equal rights and privileges requirement of section 423(b)(5) merely because employ- ees are permitted to carry forward amounts representing a fractional share which were withheld but not applied toward the pur- chase of stock under an earlier plan or of- fering and apply such amounts toward the purchase of additional stock under a sub- sequent plan or offering. 6. Option price Under section 423(b)(6), the option price must not be less than the lesser of: (a) an amount equal to 85 percent of the fair market value of the stock at the time the option is granted, and (b) an amount not less than 85 percent of the fair market value of the stock at the time the option is exercised. Consistent with §1.422–2(e)(1), §1.423–2(g)(1) of these proposed regulations would provide that theoptionpricemaybedeterminedinany reasonable manner, including the valua- tion methods permitted under §20.2031–2 (Estate Tax Regulations), so long as the option price meets the minimum pricing requirements of section 423(b)(6). 7. Date of grant Section 1.421–1(c) provides, that for purposes of §§1.421–2 through 1.424–1, thelanguage“thedateofthegrantingof the option” and “the time such option is granted” and similar phrases refer to the date or time when the granting corporation completes the corporate action constitut- ing an offer of stock for sale to an indi- vidual under the terms and conditions of a statutory option. The date of grant for an option granted under an employee stock purchase plan is important for several rea- sons. First, the favorable tax consequences under section 421 apply to the shares ac- quired pursuant to the exercise of an option granted under an employee stock purchase plan if the shares are not disposed of within two years from the date of grant of the op- tion or within one year from the date of ex- ercise of the option. Second, the $25,000 limitation under section 423(b)(8) is deter- mined based on the fair market value of the stock measured on the date of grant of the option. The date of grant is also important for purposes of determining the employ- ees eligible to participate in the plan and, in certain cases, determining the purchase price of stock under the plan. Section 1.421–1(c) further provides that a corporate action constituting an offer of stock for sale is not considered complete until the date on which the maximum num- ber of shares that can be purchased under the option and the minimum option price are fixed or determinable. Because op- tions under an employee stock purchase plan may be priced at the lesser of an amount equal to 85 percent of the fair mar- ket value of the stock at the time the option is granted, and an amount not less than 85 percent of the fair market value of the stock at the time the option is exercised, it is not always possible to determine the minimum option price on the first day of an offering. However, many granting corporations in- tend for the first day of an offering to be thedateofgrant. Accordingly, §1.423–2(h)(2) of these proposed regulations would provide that, for purposes of options granted under an employee stock purchase plan, the princi- ples of §1.421–1(c) shall be applied with- out regard to the requirement that the mini- mum option price be fixed or determinable in order for the corporate action constitut- ing an offer of stock to be considered com- plete. As a result, the first day of an of- fering could be the date of grant for an op- tion issued under an employee stock pur- chase plan even though the minimum op- tion price is not fixed or determinable on the first day of the offering. These pro- posed regulations include an amendment to §1.421–1(c). One commentator questioned whether it is necessary for a plan to contain a limit on the number of shares that can be pur- chased by each participant during an offer- ing in order for the date of grant of the op- tion to be the first day of an offering. Sec- tion 1.423–2(h)(3) of these proposed regu- lations would provide that the date of grant will be the first day of an offering if the terms of an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each participant during the offering. Similarly, thedateofgrantwillbethefirstdayof an offering if the terms of the plan or of- fering require the application of a formula to establish, on the first day of the offer- ing, the maximum number of shares that may be purchased by each participant dur- ing the offering. However, §1.423–2(h)(3) of these pro- posed regulations does not require that an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each participant during the offering or incorporate a for- mula to establish a maximum number of shares that may be purchased by each par- ticipant during the offering. If the max- imum number of shares that can be pur- chased under an option is not fixed or de- terminable until the date the option is exer- cised, then the date of exercise will be the date of grant of the option. The $25,000 limit under section 423(b)(8) and the limit on the aggregate number of shares that may be issued under an employee stock purchase plan are not sufficient to estab- lish the maximum number of shares that can be purchased under an option so that the date of grant will be the first day of the offering.Examples 1, 2, 3 and 4in §1.423–2(h)(4) of these proposed regula- tions illustrate these principles. Section 1.423–2(h) of the existing reg- ulations is re-numbered as §1.423–2(h)(1) of these proposed regulations. 8. Annual $25,000 limitation Section 423(b)(8) provides that an employee stock purchase plan must, by its terms, provide that no employee may be permitted to purchase stock under all the employee stock purchase plans of his or her employer corporation and its re- lated corporations at a rate which exceeds $25,000 in fair market value of the stock (determined on the date of grant) for each calendar year in which an option granted to the employee is outstanding and exercis- able. Section 1.423–2(i) of these proposed regulations would provide guidance on the operation of the $25,000 limitation that incorporates and clarifies the guidance provided in the existing regulations. One commentator suggested that the calculation of the amount of stock that may be purchased under an employee stock purchase plan be determined in a manner consistent with the $100,000 limitation for incentive stock options described in §1.422–4. The proposed regulations gen- erally adopt this suggestion and would 2008–39 I.R.B.778September 29, 2008 provide that the $25,000 limit for em- ployee stock purchase plans is, to the extent possible, calculated in a manner consistent with the $100,000 limitation for incentive stock options. The timing of both measures is based on when the option first becomes exercisable and both measures are made based on the fair mar- ket value of the stock determined at the date of grant. Section 1.423–2(i) of these proposed regulations emphasizes that an employee may purchase up to $25,000 of stock (based on the fair market value of such stock on the date of grant) in each calendar year during which an op- tion granted to the employee under an employee stock purchase plan is not only outstanding, but also exercisable.Exam- ple 5in §1.423–2(i)(5) of these proposed regulations illustrates this principle. For clarification,Example 1in §1.423–2(i)(4) of the existing regulations has been separated intoExample 1and Example 4in §1.423–2(i)(5) of these pro- posed regulations. 9. Special rule where option price is between 85 percent and 100 percent of the value of the stock Section 423(c) provides a special rule for calculating the timing and amount of compensation income that must be recog- nized when the option price for a share is between 85 and 100 percent of the value of the share on the date of grant. Generally, the income recognized is the lesser of: (a) the excess of the fair market value of the share on the date of grant over the option price, and (b) the excess of the fair market value of the share at the time of disposition (or death) over the option price. The flush language of section 423(c) provides that if the exercise price is not known on the date of grant, the exercise price shall be deter- mined as if the option were exercised on the date of grant. One commentator suggested that it is unclear how this special rule and the flush language of section 423(c) apply when the option price is determined based on some percentage of the value of a share on the lastdayofanoffering.Example 3of §1.423–2(k)(3) of the existing regulations specifically addresses this issue and has been retained in §1.423–2(k)(3) of these proposed regulations.Example 4has been added under §1.423–2(k)(3) to illustrate the tax consequences under an employee stock purchase plan that uses a look-back feature to determine the exercise price of the option. Proposed Effective Date These regulations under section 423 are proposed to apply as of January 1, 2010, and will apply to anyoptionissuedunder an employee stock purchase plan that is granted on or after that date. Taxpayers may rely on these proposed regulations for the treatment of any option issued under an employee stock purchase plan that is granted after publication of these proposed regulations in theFederal Register. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these reg- ulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their 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 timely submitted to the IRS. The IRS and the Treasury Department 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 or electronic com- ments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in theFederal Register. Drafting Information The principal author of these proposed regulations is Thomas Scholz, Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and the Treasury Department par- ticipated in their development. ***** Proposed Amendments to the Regulations Accordingly, 26 CFR parts 1 is pro- posed 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 1.421–1, paragraphs (c)(1) and (j)(1) are revised to read as fol- lows: §1.421–1 Meaning and use of certain terms. ***** (c)Time and date of granting op- tion. (1) For purposes of this section and §§1.421–2 through 1.424–1, the language “the date of the granting of the option” and “the time such option is granted,” and similar phrases refer to the date or time when the granting corporation completes the corporate action constituting an offer of stock for sale to an individual under the terms and conditions of a statutory option. Except as set forth in §1.423–2(h)(2), a corporate action constituting an offer of stock for sale is not considered complete until the date on which the maximum number of shares that can be purchased under the option and the minimum option price are fixed or determinable. ***** (j)Effective/applicability date—(1) In general. Except for paragraph (c)(1), these regulations are effective on August 3, 2004. Upon the date of publication of the Treasury decision adopting paragraph (c)(1) of this section as a final regulation in theFederal Register, paragraph (c)(1) will apply as of January 1, 2010. ***** September 29, 20087792008–39 I.R.B. Par. 3. Section 1.422–2, paragraph (b)(6),Example 1(iii) is revised to read as follows: §1.422–2 Incentive stock options defined. ***** (b) * * * (6) * * * Example (1).*** (iii) Assume the same facts as in paragraph (i) of this Example 1. Assume further that the plan was approved by the stockholders of S (in this case, P) on March 1, 2006. On January 1, 2008, S changes the plan to provide that incentive stock options for P stock will be granted to S employees under the plan. Because there is a change in the stock available for grant under the plan, the change is considered the adoption of a new plan that must be approved by the stockholder of S (in this case, P) within 12 months before or after January 1, 2008. ***** Par. 4. Section 1.422–5, paragraph (f)(1) is revised to read as follows: §1.422–5 Permissible provisions. ***** (f)Effective/applicability date—(1)In general. Except for §1.422–2(b)(6),Ex- ample 1(iii), these regulations are effec- tive on August 3, 2004. Upon the date of publication of the Treasury decision adopt- ing Section 1.422–2(b)(6),Example 1(iii) of this section as a final regulation in the Federal Register, Section 1.422–2(b)(6), Example 1(iii) will apply as of January 1, 2010. ***** Par. 5. Section 1.423–1 is revised to read as follows: §1.423–1 Applicability of section 421(a). (a)General rule. Subject to the provi- sions of section 423(c) and paragraph (k) of §1.423–2, the special rules of income tax treatment provided in section 421(a) apply with respect to the transfer of a share of stock to an individual pursuant to the individual’s exercise of an option granted under an employee stock purchase plan if the following conditions are satisfied— (1) The individual makes no disposition of such share before the later of the expi- ration of the two-year period from the date of the grant of the option pursuant to which such share was transferred or the expira- tion of the one-year period from the date of transfer of such share to the individual; and (2) At all times during the period begin- ning on the date of the grant of the option and ending on the day three months before the date of exercise, the individual was an employee of the corporation granting the option, a related corporation, or a corpora- tion (or a related corporation) substituting or assuming the stock option in a transac- tion to which section 424(a) applies. (b)Cross-references. For rules relating to the requisite employment relationship, see paragraph (h) of §1.421–1. For rules relating to the effect of a disqualifying dis- position, see section 421(b) and paragraph (b) of §1.421–2. For the definition of the termdisposition, see section 424(c) and paragraph (c) of §1.424–1. For the defi- nition of the termrelated corporation,see paragraph (i) of §1.421–1. (c)Effective/applicability date.Upon the date of publication of the Treasury de- cision adopting the rules of this section as a final regulation in theFederal Regis- ter, these rules will apply as of January 1, 2010. Par. 6. Section 1.423–2 is revised to read as follows: §1.423–2 Employee stock purchase plan defined. (a)In general—(1) The termem- ployee stock purchase planmeans a plan that meets the requirements of paragraph (a)(2)(i) through (ix) of this section. If the terms of the plan do not satisfy the require- ments of paragraph (a)(2)(iii) through (ix) of this section, such requirements may be satisfied by the terms of an offering made under the plan. However, where the requirements of paragraph (a)(2)(iii) through (ix) of this section are satisfied by the terms of an offering, such require- ments will be treated as satisfied only with respect to options exercised under that offering. The plan and the terms of an offering must be in writing or electronic form, provided that such writing or elec- tronic form is adequate to establish the terms of the plan or offering, as applicable. (2) To qualify as an employee stock purchase plan under this section and §1.423–1, the plan must meet all of the following requirements— (i) The plan must provide that options can be granted only to employees of the employer corporation or of a related cor- poration (as defined in paragraph (i) of §1.421–1) to purchase stock in any such corporation (see paragraph (b) of this sec- tion); (ii) The plan must be approved by the stockholders of the granting corporation within 12 months before or after the date the plan is adopted (see paragraph (c) of this section); (iii) Under the terms of the plan, an em- ployee cannot be granted an option if, im- mediately after the option is granted, the employee owns stock possessing 5 per- cent or more of the total combined voting power or value of all classes of stock of the employer corporation or of a related corpo- ration (see paragraph (d) of this section); (iv) Under the terms of the plan, options must be granted to all employees of any corporation whose employees are granted any options by reason of their employment by the corporation (see paragraph (e) of this section); (v) Under the terms of the plan, all employees granted options must have the same rights and privileges (see paragraph (f)ofthissection); (vi) Under the terms of the plan, the option price cannot be less than the lesser of— (A) An amount equal to 85 percent of the fair market value of the stock at the time the option is granted, or (B) An amount not less than 85 percent of the fair market value of the stock at the time the option is exercised (see paragraph (g)ofthissection); (vii) Under the terms of the plan, op- tions cannot be exercised after the expira- tion of— (A) Five years from the date the option is granted if, under the terms of such plan, the option price cannot be less than 85 per- cent of the fair market value of the stock at the time the option is exercised, or (B) Twenty-seven months from the date the option is granted, if the option price is not determined in the manner described in paragraph (A) (see paragraph (h) of this section); (viii) Under the terms of the plan, no employee may be granted an option that permits the employee’s rights to purchase stock under all employee stock purchase plans of the employer corporation and its related corporations to accrue at a rate that exceeds $25,000 of fair market value of the stock (determined at the time the option is granted) for each calendar year in which 2008–39 I.R.B.780September 29, 2008 the option is outstanding at any time (see paragraph (i) of this section); and (ix) Under the terms of the plan, options are not transferable by the optionee other than by will or the laws of descent and dis- tribution, and are exercisable, during the lifetime of the optionee, only by the op- tionee (see paragraph (j) of this section). (3) The determination of whether a par- ticular option is an option granted under an employee stock purchase plan is made at the time the option is granted. If the terms of an option are inconsistent with the terms of the employee stock purchase plan or an offering under the plan, the option will not be treated as granted under an em- ployee stock purchase plan. If an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an employee who is en- titled to the grant of an option under the terms of the plan or offering, and the em- ployee is not granted an option under the offering that qualifies as an option granted under an employee stock purchase plan, the offering will not meet the requirements of paragraph (e) of this section. Accord- ingly, none of the options granted under the offering will be eligible for the special tax treatment of section 421. However, if an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an individual who is not entitled to the grant of an option under the terms of the plan or offering, the option will not be treated as an option granted un- der an employee stock purchase plan, and the grant of the option will not disqualify the options granted under the plan or of- fering. If, at the time of grant, an option qualifies as an option granted under an em- ployee stock purchase plan, but the terms of the option are not satisfied, the option will not be treated as granted under an em- ployee stock purchase plan and this fail- ure to comply with the terms of the option will not disqualify the options granted un- der the plan or offering. (4)Examples. The following exam- ples illustrate the principles of paragraph (a)(3): Example 1. Corporation A operates an employee stock purchase plan under which options for A stock are granted to employees of A. The terms of an of- fering provide that the option price will be 90 per- cent of the fair market value of A stock on the date of exercise. A grants an option under the offering to Employee Z, an employee of A. The terms of the op- tion provide that the option price will be 85 percent of the fair market value of A stock on the date of exer- cise. Because the terms of Z’s option are inconsistent with the terms of the offering, the option granted to Z will not be treated as an option granted under the employee stock purchase plan. Further, unless Z is granted an option under the offering that qualifies as an option granted under the employee stock purchase plan, the offering will not meet the requirements of paragraph (e) of this section and none of the options granted under the offering will be eligible for the spe- cial tax treatment of section 421. Example 2. Corporation B operates an employee stock purchase plan that provides that options for B stock may only be granted to employees of B. Under the terms of the plan, options may not be granted to consultants and other non-employees. B grants an option under the plan to Consultant Y, a consultant of B. Because Y is ineligibleto receive an option under the plan by reason of Y’s status as a non-employee, the grant of the option to Y is inconsistent with the terms of the plan and the option granted to Y will not be treated as an option granted under the employee stock purchase plan. However, the grant of the option to Y will not disqualify the options granted under the plan or offering because Y was not entitled to the grant of an option under the plan. Example 3. Corporation C operates an employee stock purchase plan under which options for C stock are granted to employees of C. C grants an option un- der the plan to Employee X, an employee of C who is a highly compensated employee. The terms of the employee stock purchase plan exclude highly com- pensated employees from participation in the plan. Because X is ineligible toreceive an option under the plan by reason of X’s exclusion from participation in the plan, the option granted to X will not be treated as an option granted under the employee stock purchase plan. However, the grant of the option to X will not disqualify the options granted under the plan or of- fering because X was not entitled to the grant of an option under the plan. Example 4. Corporation D operates an employee stock purchase plan under which options for D stock are granted to employees of D. D grants an option under the plan to Employee W, an employee of D. The terms of the option provide that the option price will be 90 percent of the fair market value of D stock onthedateofexercise. Onthedateofexercise,W pays only 85 percent of the fair market value of D stock. Because the terms of W’s option are not sat- isfied, the option granted to W will not be treated as an option granted under the employee stock purchase plan. However, the failure to comply with the terms of the option granted to W will not disqualify the op- tions granted under the plan or offering. (b)Options restricted to employees.An employee stock purchase plan must pro- vide that options can be granted only to employees of the employer corporation (or employees of its related corporations) to purchase stock in the employer corpora- tion (or one of its related corporations). If such a provision is not included in the terms of the plan, the plan will not be an employee stock purchase plan and options granted under the plan will not qualify for the special tax treatment of section 421. For rules relating to the employment re- quirement, see paragraph (h) of §1.421–1. (c)Stockholder approval—(1) An em- ployee stock purchase plan must be ap- proved by the stockholders of the grant- ing corporation within 12 months before or after the date such plan is adopted. The approval of the stockholders must comply with all applicable provisions of the cor- porate charter, bylaws and applicable State law prescribing the method and degree of stockholder approval required for the is- suance of corporate stock or options. If the applicable State law does not prescribe a method and degree of stockholder ap- proval, then an employee stock purchase plan must be approved— (i) By a majority of the votes cast at a duly held stockholder’s meeting at which a quorum representing a majority of all out- standing voting stock is, either in person or by proxy, present and voting on the plan; or (ii) By a method and in a degree that would be treated as adequate under appli- cable State law in the case of an action re- quiring stockholder approval (such as, an action on which stockholders would be en- titled to vote if the action were taken at a duly held stockholders’ meeting). (2) For purposes of the stockholder approval required by this paragraph (c), ordinarily, a plan is adopted when it is ap- proved by the granting corporation’s board of directors, and the date of the board’s action is the reference point for determin- ing whether stockholder approval occurs within the applicable 24-month period. However, if the board’s action is subject to a condition (such as stockholder approval) or the happening of a particular event, the plan is adopted on the date the condition is met or the event occurs, unless the board’s resolution fixes the date of approval as the date of the board’s action. (3) An employee stock purchase plan, as adopted and approved, must designate the maximum aggregate number of shares that may be issued under the plan, and the corporations or class of corporations whose employees may be offered options under the plan. A plan that merely pro- vides that the number of shares that may be issued under the plan may not exceed a stated percentage of the shares outstand- ing at the time of each offering or grant un- der the plan does not satisfy the require- ments of this paragraph (c)(3). However, the maximum aggregate number of shares September 29, 20087812008–39 I.R.B. that may be issued under the plan may be stated in terms of a percentage of the authorized, issued, or outstanding shares on the date of the adoption of the plan. The plan may specify that the maximum aggregate number of shares available for grants under the plan may increase annu- ally by a specified percentage of the au- thorized, issued, or outstanding shares on the date of the adoption of the plan. A plan that provides that the maximum ag- gregate number of shares that may be is- sued as options under the plan may change based on any other specific circumstances satisfies the requirements of this paragraph only if the stockholders approve an imme- diately determinable maximum number of shares that may be issued under the plan in any event. If there is more than one em- ployee stock purchase plan under which options may be granted and stockholders of the granting corporation merely approve a maximum aggregate number of shares that are available for issuance under the plans, the stockholder approval require- ments described in paragraph (c)(1) of this section are not satisfied. A separate maxi- mum aggregate number of shares available for issuance pursuant to options must be specified and approved for each plan. (4) Once an employee stock purchase plan is approved by the stockholders of the granting corporation, the plan need not be reapproved by the stockholders of the granting corporation within the pre- scribed 24-month period unless the plan is amended or changed in a manner that is considered the adoption of a new plan. Any increase in the aggregate number of shares that may be issued under the plan (other than an increase merely reflecting a change in the number of outstanding shares, such as a stock dividend or stock split) will be considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period. Similarly, a change in the designation of corporations whose employees may be offered options under the plan will be considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period unless the plan provides that designations of partic- ipating corporations may be made from time to time from among a group consist- ing of the granting corporation and its re- lated corporations. The group from among which such changes and designations are permitted without additional stockholder approval may include corporations hav- ing become parents or subsidiaries of the granting corporation after the adoption and approval of the plan. In addition, a change in the granting corporation or the stock available for purchase under the plan will be considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period. Any other changes in the terms of an employee stock purchase plan are not considered the adop- tion of a new plan and, thus, do not require stockholder approval. (5)Examples. The following examples illustrate the principles of this paragraph (c): Example 1—(i) Corporation E is a subsidiary of Corporation F, a publicly traded corporation. On Jan- uary 1, 2010, E adopts an employee stock purchase plan under which options for E stock are granted to E employees. (ii) To meet the requirements of paragraph (c)(1) of this section, the plan must be approved by the stockholders of E (in this case, F) within 12 months before or after January 1, 2010. (iii) Assume the same facts as in paragraph (i) of thisExample 1, except that the plan was approved by the stockholders of E (in this case, F) on March 1, 2010. On January 1, 2012, E changes the plan to provide that options for F stock will be granted to E employees under the plan. Because there is a change in the stock available for grant under the plan, under paragraph (c)(4) of this section, the change is considered the adoption of a new plan that must be approved by the stockholders of E (in this case, F) within 12 months before or after January 1, 2012. Example 2—(i) Assume the same facts as in paragraph (i) ofExample 1, except that on March 15, 2011, F completely disposes of its interest in E. Thereafter, E continues to grant options for E stock to E employees under the plan. (ii) The new E options are granted under a plan that meets the stockholder approval requirements of paragraph (c)(1) of this section without regard to whether E seeks approval of the plan from the stockholders of E after F disposes of its interest in E. (iii) Assume the same facts as in paragraph (i) of thisExample 2, except that under the plan as adopted on January 1, 2010, only options for F stock are granted to E employees. Assume further that, after F disposes of its interest in E, E changes the plan to provide for the grant of options for E stock to E employees. Because there is a change in the stock available for purchase or grant under the plan, under paragraph (c)(4) of this section, the stockholders of E must approve the plan within 12 months before or after the change to the plan to meet the stockholder approval requirements of paragraph (c) of this sec- tion. Example 3—(i) Corporation G maintains an em- ployee stock purchase plan. Corporation H does not maintain an employee stock purchase plan. On May 15, 2010, G and H consolidate under State law to form one corporation. The new corporation is named Cor- poration H. The consolidation agreement describes the G plan, including the maximum aggregate num- ber of shares available for issuance under the plan af- ter the consolidation. Additionally, the consolidation agreement states that the plan will be continued by H after the consolidation. The consolidation agree- ment is unanimously approved by the stockholders of G and H on May 1, 2010. H assumes the plan for- merly maintained by G and continues to grant options under the plan to all eligible employees. (ii) Because there is a change in the granting cor- poration (from G to H), under paragraph (c)(4) of this section, H is considered to have adopted a new plan. Because the plan is fully described in the con- solidation agreement, including the maximum aggre- gate number of shares available for issuance under the plan, the approval of the consolidation agreement by the stockholders constitutes approval of the plan. Thus, the stockholder approval of the consolidation agreement satisfies the stockholder approval require- ments of paragraph (c)(1) of this section, and the plan is considered to be adopted by H and approved by its stockholders on May 1, 2010. Example 4. Corporation I adopts an employee stockpurchaseplanonNovember1,2010. Onthat date, there are two million shares of I stock outstand- ing. The plan provides that the maximum aggregate number of shares that may be issued under the plan may not exceed 15 percent of the number of shares of I stock outstanding on November 1, 2010. Because the maximum aggregate number of shares that may be issued under the plan is designated in the plan, the requirements of paragraph (c)(3) of this section are met. Example 5—(i) Corporation J adopts an em- ployee stock purchase plan on March 15, 2010. The plan provides that the maximum aggregate number of shares of J stock available for issuance under the plan is 50,000, increased on each anniversary date of the adoption of the plan by 5 percent of the then outstanding shares. Because the maximum aggregate number of shares is not designated under the plan, the requirements of paragraph (c)(3) of this section are not met. (ii) Assume the same facts as in paragraph (i) of thisExample 5, except that the plan provides that the maximum aggregate number of shares available under the plan is the lesser of (a) 50,000 shares, in- creased each anniversary date of the adoption of the plan by 5 percent of the then-outstanding shares, or (b) 200,000 shares. Becausethe maximum aggregate number of shares that may be issued under the plan is designated as the lesser of two numbers, one of which provides an immediately determinable maximum ag- gregate number of shares that may be issued under the plan in any event, the requirements of paragraph (c)(3) of this section are met. (d)Options granted to certain share- holders—(1) An employee stock purchase plan must by its terms provide that an employee cannot be granted an option if the employee, immediately after the option is granted, owns stock possessing 5 per- cent or more of the total combined voting power or value of all classes of stock of the employer corporation or a related cor- poration. In determining whether the stock ownership of an employee equals or ex- 2008–39 I.R.B.782September 29, 2008 ceeds this 5 percent limit, the rules of sec- tion 424(d) (relating to attribution of stock ownership) shall apply, and stock that the employee may purchase under outstanding options (whether or not the options qual- ify for the special tax treatment afforded by section 421(a)) shall be treated as stock owned by the employee. An option is out- standing for purposes of this paragraph (d) although under its terms it may be exer- cised only in installments or after the ex- piration of a fixed period of time. If an op- tion is granted to an employee whose stock ownership (as determined under this para- graph (d)) exceeds the limitation set forth in this paragraph (d), no portion of the op- tion will be treated as having been granted under an employee stock purchase plan. (2) The determination of the percent- age of the total combined voting power or value of all classes of stock of the em- ployer corporation (or a related corpora- tion) that is owned by the employee is made by comparing the voting power or value of the shares owned (or treated as owned) by the employee to the aggregate voting power or value of all shares actually issued and outstanding immediately after the grant of the option to the employee. The aggregate voting power or value of all shares actually issued and outstanding im- mediately after the grant of the option does not include the voting power or value of treasury shares or shares authorized for is- sue under outstanding options held by the employee or any other person. (3)Examples. The following examples illustrate the principles this paragraph (d): Example 1. Employee V, an employee of Cor- poration K, owns 6,000 shares of K common stock, the only class of K stock outstanding. K has 100,000 shares of its common stock outstanding. Because V owns 6 percent of the combined voting power or value of all classes of K stock, K cannot grant an op- tion to V under K’s employee stock purchase plan. If V’s father and brother each owned 3,000 shares of K stock and V did not own any K stock, then the result would be the same because, under section 424(d), an individual is treated as owning stock held by the person’s father and brother. Similarly, the re- sult would be the same if, instead of actually own- ing 6,000 shares, V merely held an option on 6,000 shares of K stock, irrespective of whether the transfer of stock under the option could qualify for the special tax treatment of section 421, because this paragraph (d) provides that stock the employee may purchase under outstanding options is treated as stock owned by such employee. Example 2. Assume the same facts as inExam- ple 1, except that K is a subsidiary corporation of Corporation L. Irrespective of whether V owns any L stock, V cannot receive an option from L under L’s employee stock purchase plan because he owns 5 percent of the total combined voting power of all classes of stock of a subsidiary of L, in this example, K. An employee who owns (or is treated as owning) stock in excess of the limitation of this paragraph (d), in any corporation in a group of related corporations, consisting of a parent and its subsidiary corporations, cannot receive an option under an employee stock purchase plan from any corporation in the group. Example 3. Employee U is an employee of Cor- poration M. M has only one class of stock, of which 100,000 shares are issued and outstanding. Assum- ing U does not own (and is not treated as owning) any stock in M or in any related corporation of M, M may grant an option to U under its employee stock purchase plan for 4,999 shares, because immediately after the grant of the option, U would not own 5 per- cent or more of the combined voting power or value of all classes of M stock actually issued and outstand- ing at such time. The 4,999 shares that U would be treated as owning under this paragraph (d) would not be added to the 100,000 shares actually issued and outstanding immediately after the grant for purposes of determining whether U’s stock ownership exceeds the limitation of this paragraph (d). Example 4. Assume the same facts as inExample 3but instead of an option for 4,999 shares, M grants U an option, purportedly under its employee stock pur- chase plan, for 5,000 shares. No portion of this option will be treated as granted under an employee stock purchase plan because U’s stock ownership exceeds the limitation of this paragraph (d). (e)Employees covered by plan—(1) Subject to the provisions of this paragraph (e) and the limitations of paragraphs (d), (f) and (i) of this section, an employee stock purchase plan must, by its terms, provide that options are to be granted to all employees of any corporation whose employees are granted any of such options by reason of their employment by the cor- poration, except that one or more of the following categories of employees may be excluded from the coverage of the plan— (i) Employees who have been employed less than two years; (ii) Employees whose customary em- ployment is 20 hours or less per week; (iii) Employees whose customary em- ployment is for not more than five months in any calendar year; and (iv) Highly compensated employees (within the meaning of section 414(q)). (2) An employee stock purchase plan does not fail to satisfy the coverage provi- sion of paragraph (e)(1) of this section in the following circumstances— (i) The plan excludes employees who have completed a shorter period of ser- vice or whose customary employment is for fewer hours per week or fewer months in a calendar year than is specified in para- graph (e)(1)(i), (ii) and (iii), provided the exclusion is applied in an identical man- ner to all employees of every corporation whose employees are granted options un- der the plan. (ii) The plan excludes highly compen- sated employees (within the meaning of section 414(q)) with compensation above a certain level or who are officers or sub- ject to the disclosure requirements of sec- tion 16(a) of the Securities Exchange Act of 1934, provided the exclusion is applied in an identical manner to all highly com- pensated employees of every corporation whose employees are granted options un- der the plan. (3) Notwithstanding paragraph (e)(1) of this section, employees who are citizens or residents of a foreign jurisdiction (without regard to whether they are also citizens of the United States or resident aliens (within the meaning of section 7701(b)(1)(A))) may be excluded from the coverage of an employee stock purchase plan under the following circumstances— (i) The grant of an option under the plan to a citizen or resident of the foreign juris- diction is prohibited under the laws of such jurisdiction; or (ii) Compliance with the laws of the foreign jurisdiction would cause the plan to violate the requirements of section 423. (4) No option granted under a plan or offering that excludesfrom participation any employees, other than those who may be excluded under this paragraph (e), and those barred from participation by reason of paragraphs (d), (f) and (i) of this section, can be regarded as having been granted un- der an employee stock purchase plan. If an option is not granted to any employee whoisentitledtothegrantofanoptionun- der the terms of the plan or offering, none of the options granted under such offer- ing will be treated as having been granted under an employee stock purchase plan. However, a plan that, by its terms, per- mits all eligible employees to elect to par- ticipate in an offering will not violate the requirements of this paragraph solely be- cause eligible employees who elect not to participate in the offering are not granted options pursuant to such offering. (5) For purposes of this paragraph (e), the existence of the employment rela- tionship between an individual and the corporation participating under the plan will be determined under paragraph (h) of §1.421–1. September 29, 20087832008–39 I.R.B. (6)Examples. The following examples illustrate the principles of this paragraph (e): Example 1. Corporation N has a stock purchase plan that meets all the requirements of paragraph (a)(2) of this section except that options are not re- quired to be granted to employees whose weekly rate of pay is less than $1,000. As a matter of corporate practice, however, N grants options under its plan to all employees, irrespective of their weekly rate of pay. Even though N’s plan is operated in compliance with the requirements of this paragraph (e), N’s plan is not an employee stock purchase plan because the terms of the plan exclude a category of employees that is not permitted under this paragraph (e). Example 2. Assume the same facts as inExample 1, except that the first offering under N’s plan pro- vides that options will be granted to all employees of N. The terms of the first offering will be treated as part of the terms of N’s plan, but only for purposes of the first offering. Because the terms of the first of- fering satisfy the requirements of this paragraph (e), stock transferred pursuant to options exercised under the first offering will be treated as stock transferred pursuant to the exercise ofoptions granted under an employee stock purchase plan for purposes of section 421. Example 3. Corporation O has a stock purchase plan that excludes from participation all employees who have been employed less than one year. As- suming all other requirements of paragraph (a)(2) of this section are satisfied, O’s plan qualifies as an em- ployee stock purchase plan under section 423. Example 4. Corporation P has a stock purchase plan that excludes from participation clerical employ- ees who have been employed less than two years. However, non-clerical employees with less than two years of service are permitted to participate in the plan. P’s plan is not an employee stock purchase plan because the exclusion of employees who have been employed less than two years applies only to certain employees of P and is not applied in an identical man- ner to all employees of P. If, instead, P’s plan excludes from participation all employees (both clerical and non-clerical) who have been employed less than two years, then P’s plan would qualify as an employee stock purchase plan under section 423 assuming all other requirements of paragraph (a)(2) of this section are satisfied. Example 5. Corporation Q has a stock purchase plan that excludes from participation all officers who are highly compensated employees (within the mean- ingofsection414(q)). Assumingallotherrequire- ments of paragraph (a)(2) of this section are satisfied, Q’s plan qualifies as an employee stock purchase plan under section 423. Example 6. Corporation R maintains an em- ployee stock purchase plan that excludes from participation all highly compensated employees (within the meaning of section 414(q)), except highly compensated employees who are officers of R. R’s plan is not an employee stock purchase plan because the exclusion of all highly compensated employ- ees except highly compensated employees who are officers of R is not a permissible exclusion under paragraph (e)(2)(ii) of this section. Example 7. Corporation S is the parent corpora- tion of Subsidiary YY and Subsidiary ZZ. S maintains an employee stock purchase plan with both YY and ZZ participating under the plan. Under the terms of the plan, all employees of YY and ZZ are permitted to participate in the plan with the exception of ZZ’s highly compensated employees with annual compen- sation greater than $300,000. S’s plan is not an em- ployee stock purchase plan because the exclusion of highly compensated employees with annual compen- sation greater than $300,000 is not applied in an iden- tical manner to all employees of YY and ZZ. Example 8. The laws of Country A require that options granted to residents of Country A be transferable during the lifetime of the option recip- ient. Corporation T has a stock purchase plan that excludes residents of Country A from participation in the plan. Because compliance with the laws of Country A would cause options granted to residents of Country A to violate paragraph (j) of this section, T may exclude residents of Country A from partici- pation in the plan. Assuming all other requirements of paragraph (a)(2) of this section are satisfied, T’s plan qualifies as an employee stock purchase plan under section 423. (f)Equal rights and privileges—(1) Ex- cept as otherwise provided in paragraphs (f)(2) through (f)(6) of this section, an em- ployee stock purchase plan must, by its terms, provide that all employees granted options under the plan shall have the same rights and privileges. Thus, the provi- sions applying to one option under an of- fering (such as the provisions relating to the method of payment for the stock and the determination of the purchase price per share) must apply to all other options un- der the offering in the same manner. If all the options granted under a plan or offering do not, by their terms, give the respective optionees the same rights and privileges, none of the options will be treated as hav- ing been granted under an employee stock purchase plan for purposes of section 421. (2) The requirements of this paragraph (f) do not prevent the maximum amount of stock that an employee may purchase from being determined on the basis of a uniform relationship to the total compensation, or the basic or regular rate of compensation, of all employees. (3) A plan or offering will not fail to satisfy the requirements of this paragraph (f) because the plan or offering provides that no employee may purchase more than a maximum amount of stock fixed under the plan. (4) A plan or offering will not fail to satisfy the requirements of this paragraph (f) if, in order to comply with the laws of a foreign jurisdiction, the terms of an op- tion granted under a plan or offering to cit- izens or residents of such foreign jurisdic- tion (without regard to whether they are also citizens of the United States or resi- dent aliens (within the meaning of section 7701(b)(1)(A))) are less favorable than the terms of options granted under the same plan or offering to employees resident in the United States. (5)(i) Except as provided in this para- graph and paragraph (f)(5)(ii) of this section, a plan permitting one or more employees to carry forward amounts that were withheld but not applied toward the purchase of stock under an earlier plan or offering and apply the amounts towards the purchase of additional stock under a subsequent plan or offering will be a vi- olation of the equal rights and privileges under paragraph (f)(1) of this section. However, the carry forward of amounts withheld but not applied toward the pur- chase of stock under an earlier plan or offering will not violate the equal rights and privileges requirement of paragraph (f)(1) of this section if all other employees participating in the current plan or offer- ing are permitted to make direct payments toward the purchase of shares under a subsequent plan or offering in an amount equal to the excess of the greatest amount which any employee is allowed to carry forward from an earlier plan or offering over the amount, if any, the employee will carry forward from an earlier plan or offering. (ii) A plan will not fail to satisfy the re- quirements of this section merely because employees are permitted to carry forward amounts representing a fractional share, that were withheld but not applied toward the purchase of stock under an earlier plan or offering and apply the amounts toward the purchase of additional stock under a subsequent plan or offering. (6) Paragraph (f) does not prohibit the delaying of the grant of an option to any employee who is barred from being granted an option solely by reason of the employee’s failing to meet a minimum service requirement set forth in paragraph (e)(1) of this section until the employee meets such requirement. (7)Examples. The following examples illustrate the principles of this paragraph (f): Example 1. Corporation U has an employee stock purchase plan that provides that the maximum amount of stock that each employee may purchase under the offering is one share for each $100 of annual gross pay. The plan meets the requirements of this paragraph (f). 2008–39 I.R.B.784September 29, 2008 Example 2. Corporation V has an employee stock purchase plan that provides that the maximum amount of stock that each employee may purchase under the offering is one share for each $100 of an- nual gross pay up to and including $10,000, and two shares for each $100 of annual gross pay in excess of $10,000. The plan will not meet the requirements of this paragraph (f) because the amount of stock that may be purchased under the plan is not based on a uniform relationship to the total compensation of all employees. Example 3. Corporation W has an employee stock purchase plan that provides that options to purchase stock in an amount equal to ten percent of an employee’s annual salary at a price equal to 85 percent of the fair market value on the first day of the offering will be granted to all employees other than those who have been employed less than 18 months. In addition, the plan provides that employees who have not yet met the minimum service requirements on the first day of the offering will be granted similar options on the date the 18 month service requirement has been attained. The plan meets the requirements of this paragraph (f). Example 4. Corporation X has an employee stock purchase plan that provides that options to purchase stock at a price equal to 90 percent of the fair mar- ket value at the time the option is exercised will be granted to all employees. The laws of Country B pro- vide that options granted to employees who are res- idents of Country B must have a purchase price not less than 95 percent of the fair market value at the time the option is exercised. The plan will not fail to satisfy the requirements of this paragraph (f) merely because the residents of Country B are granted op- tions under the plan to purchase stock at a price equal to 95 percent of the fair market value at the time the option is exercised. Example 5. Corporation Y maintains an em- ployee stock purchase plan. Employee T is employed by Y. T is granted an option under the current offering to purchase a maximum of 100 shares of Y stock at an option price equal to 85 percent of the fair market value of the stock at exercise. The plan permits the carry forward of withheld but unused amounts from an earlier offering. Prior to the exercise date, $2000 of T’s salary has been withheld and is available to be applied toward the purchase of Y stock. On the exercise date, the fair market value of Y stock is $20 per share. T is able to purchase 100 shares of Y stock at $17 per share for an aggregate purchase price of $1700. T can carry forward $300 to the sub- sequent offering. Each employee in the subsequent offering other than T will be permitted to make direct payments toward the purchase of shares under the subsequent offering in a maximum amount of $300 less any amount the employee has carried forward from an earlier offering. The plan does not violate the equal rights and privileges requirement of this paragraph (f). (g)Option price—(1) An employee stock purchase plan must, by its terms, provide that the option price will not be less than the lesser of— (i) An amount equal to 85 percent of the fair market value of the stock at the time the option is granted, or (ii) An amount that under the terms of the option may not be less than 85 percent of the fair market value of the stock at the time the option is exercised. (2) The option price may be deter- mined in any reasonable manner, including the valuation methods permitted under §20.2031–2, so long as the option price meets the minimum pricing requirements of this paragraph (g). For general rules relating to the option price, see paragraph (e) of §1.421–1. For rules relating to the determination of when an option is granted, see paragraph (c) of §1.421–1 and §1.423–2(h)(2). Any option that does not meet the minimum pricing requirements of this paragraph (g) will not be treated as an option granted under an employee stock purchase plan irrespective of whether the plan or offering satisfies those require- ments. If an option that does not meet the minimum pricing requirements is granted to an employee who is entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under such offering that qualifies as an option granted under an employee stock purchase plan, the offering will not meet the requirements of paragraph (e) of this section. Accordingly, none of the options granted under the offering will be eligible for the special tax treatment of section 421. (3)Theoptionpricemaybestatedei- ther as a percentage or as a dollar amount. If the option price is stated as a dollar amount, then the requirement of this para- graph (g) can only be met by a plan or of- fering in which the price is fixed at not less than 85 percent of the fair market value of the stock at the time the option is granted. If the fixed price is less than 85 percent of the fair market value of the stock at grant, then the option cannot meet the require- ment of this paragraph (g) even if a decline in the fair market value of the stock results in such fixed price being not less than 85 percent of the fair market value of the stock at the time the option is exercised, because that result was not certain to occur under the terms of the option. (4)Examples. The following examples illustrate the principles of this paragraph (g): Example 1. Corporation Z has an employee stock purchase plan that provides that the option price will be 85 percent of the fair market value of the stock on the first day of the offering (which is the date of grant in this case), or 85 percent of the fair market value of the stock at exercise, whichever amount is the lesser. Upon the exercise of an option issued un- der Z’s plan, Z agrees to accept an option price that is less than the minimum amount allowable under the terms of such plan. Notwithstanding that the option was issued under an employee stock purchase plan, the transfer of stock pursuant to the exercise of such option does not satisfy the requirement of this para- graph (g) and cannot qualify for the special tax treat- ment of section 421. Example 2. Corporation AA has an employee stock purchase plan that provides that the option price is set at 85 percent of the fair market value of AA stock at exercise, but not less than $80 per share. On the first day of the offering (which is the date of grant in this case), the fair market value of AA stock is $100 per share. The option satisfies the requirement of this paragraph (g), and can qualify for the special tax treat- ment of section 421. Example 3.AssumethesamefactsasinExample 2, except that the option price is set at 85 percent of the fair market value of AA stock at exercise, but not more than $80 per share. This option cannot satisfy the requirement of this paragraph (g) irrespective of whether, at the time the option is exercised, 85 per- cent of the fair market value of AA stock is $80 or less. (h)Option period—(1) An employee stock purchase plan must, by its terms, pro- vide that options granted under the plan cannot be exercised after the expiration of 27 months from the date of grant unless, under the terms of the plan, the option price is not less than 85 percent of the fair mar- ket value of the stock at the time of the ex- ercise of the option. If the option price is not less than 85 percent of the fair market value of the stock at the time the option is exercised, then the option period provided under the plan must not exceed five years from the date of grant. If the requirements of this paragraph (h) are not met by the terms of the plan or offering, then options issued under such plan or offering will not be treated as options granted under an em- ployee stock purchase plan irrespective of whether the options, by their terms, are ex- ercisable beyond the period allowable un- der this paragraph (h). An option that pro- vides that the option price is not less than 85 percent of the fair market value of the stock at exercise may have an option pe- riod of 5 years irrespective of whether the fair market value of the stock at exercise is more or less than the fair market value of the stock at grant. However, if the option provides that the option price is 85 percent of the fair market value of the stock at ex- ercise, but not more than some other fixed amount determined in accordance with the provisions of paragraph (g) of this section, September 29, 20087852008–39 I.R.B. then irrespective of the price paid on ex- ercise, the option period must not be more than 27 months. (2) Section 1.421–1(c) provides that, for purposes of §§1.421–1 through 1.424–1, the languagethe date of the granting of the optionandthe time such option is granted, and similar phrases refer to the date or time when the grant- ing corporation completes the corporate action constituting an offer of stock for sale to an individual under the terms and conditions of a statutory option. With respect to options granted under an em- ployee stock purchase plan, the principles of §1.421–1(c) shall be applied without re- gard to the requirement that the minimum option price must be fixed or determinable in order for the corporate action consti- tuting an offer of stock to be considered complete. (3) The date of grant will be the first dayofanofferingifthetermsofanem- ployee stock purchase plan or offering des- ignate a maximum number of shares that may be purchased by each employee dur- ing the offering. Similarly, the date of grant will be the first day of an offering if the terms of the plan or offering require the application of a formula to establish, on the first day of the offering, the max- imum number of shares that may be pur- chased by each employee during the offer- ing. It is not required that an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each employee during the of- fering or incorporate a formula to establish a maximum number of shares that may be purchased by each employee during the of- fering. If the maximum number of shares that can be purchased under an option is not fixed or determinable until the date the option is exercised, then the date of exer- cise will be the date of grant of the option. (4)Examples. The following examples illustrate the principles of this paragraph (h): Example 1—(i) Corporation BB has an employee stock purchase plan that provides that the option price will be the lesser of 85 percent of the fair market value of the stock on the first day of an offering or 85 percent of the fair market value of the stock on the last day of the offering. Options are exercised on the last day of the offering. One million shares of BB stock are reserved for issuance under the plan. The plan provides that no employee may be permitted to purchase stock under the plan at a rate that exceeds $25,000 in fair market value of the BB stock (deter- mined on the date of grant) for each calendar year dur- ing which an option granted to the employee is out- standing and exercisable. The terms of each option granted under an offering provide that a maximum of 500 shares may be purchasedby the option recipient during the offering. Because the maximum number of shares that can be purchased under the option is fixed and determinable on the first day of the offer- ing, the date of grant for the option is the first day of the offering. (ii) Assume the same facts as in paragraph (i) of Example 1except that BB’s plan excludes all employ- ees who have been employed less than 18 months. The plan provides that employees who have not yet met the minimum service requirements on the first dayofanofferingwillbegrantedanoptiononthe date the 18-month service requirement has been at- tained. With respect to those employees who have been employed less than 18 months on the first day of an offering, the date of grant for the option is the date the 18-month service requirement has been at- tained. Example 2. Assume the same facts as in para- graph (i) ofExample 1except that the terms of each option granted do not provide that a maximum of 500 shares may be purchased by the option recipient dur- ing the offering. Notwithstanding the fixed number of shares reserved for issuance under the plan and the $25,000 limitation set forth in the plan, the maximum number of shares that can be purchased under the op- tion is not fixed or determinable until the last day of the offering when the option is exercised. Therefore the date of grant for the option is the last day of the offering when the option is exercised. Example 3. Corporation CC has an employee stock purchase plan that provides that the option price will be 85 percent of the fair market value of the stock on the last day of the offering. Options are exercised on the last day of the offering. Each offering under the plan begins on January 1 and ends on December 31 of the same calendar year. The terms of each op- tion granted under an offering provide that the maxi- mum number of shares that may be purchased by any employee during the offering equals $25,000 divided by the fair market value of the stock on the first day of the offering. The maximum number of shares that can be purchased under the option is fixed and deter- minable on the first day of the offering and therefore the date of grant for the option is the first day of the offering. Example 4. Assume the same facts as inExam- ple 3except that the terms of each option granted un- der an offering provide that the maximum number of shares that may be purchased by any employee dur- ing the offering equals 10 percent of the employee’s annual salary (determined as of January 1 of the year in which the offering commences) divided by the fair market value of the stock on the first day of the of- fering. The maximum number of shares that can be purchased under the option is fixed and determinable on the first day of the offering and therefore the date of grant for the option is the first day of the offering. (i)Annual $25,000 limitation—(1) An employee stock purchase plan must, by its terms, provide that no employee may be permitted to purchase stock under all the employee stock purchase plans of the em- ployer corporation and its related corpora- tions at a rate that exceeds $25,000 in fair market value of the stock (determined at the time the option is granted) for each cal- endar year in which any option granted to the employee is outstanding at any time. In applying the foregoing limitation— (i) The right to purchase stock under an option is deemed toaccrue when the op- tion (or any portion thereof) first becomes exercisable during the calendar year; (ii) The right to purchase stock under an option accrues at the rate provided in the option, but in no case may such rate ex- ceed $25,000 of fair market value of such stock (determined at the time such option is granted) for any one calendar year; and (iii) A right to purchase stock that has accrued under one option granted pursuant to the plan may not be carried over to any other option. (2) If an option is granted under an em- ployee stock purchase plan that satisfies the requirement of this paragraph (i), but the option gives the optionee the right to buy stock in excess of the maximum rate allowable under this paragraph (i), then no portion of the option will be treated as hav- ing been granted under an employee stock purchase plan. Furthermore, if the option was granted to an employee entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under the offering that qualifies as an option granted under an em- ployee stock purchase plan, then the of- fering will not meet the requirements of paragraph (e) of this section. Accordingly, none of the options granted under the of- fering will be eligible for the special tax treatment of section 421. (3) The limitation of this paragraph (i) applies only to options granted under em- ployee stock purchase plans and does not limit the amount of stock that an employee may purchase under incentive stock op- tions (as defined in section 422(b)) or any other stock options except those to which section 423 applies. Stock purchased un- der options to which section 423 does not apply will not limit the amount that an em- ployee may purchase under an employee stock purchase plan, except for purposes of the 5-percent stock ownership provision of paragraph (d) of this section. (4) Under the limitation of this para- graph (i), an employee may purchase up to $25,000 of stock (based on the fair mar- ket value of the stock at the time the op- tion was granted) in each calendar year 2008–39 I.R.B.786September 29, 2008 during which an option granted to the em- ployee under an employee stock purchase plan is outstanding and exercisable. Alter- natively, an employee may purchase more than $25,000 of stock (based on the fair market value of such stock at the time the option was granted) in a calendar year, so long as the total amount of stock that the employee purchases does not exceed $25,000 in fair market value of the stock (determined at the time the option was granted) for each calendar year in which the option was outstanding and exercis- able. If, in any calendar year, the employee holds two or more outstanding and exercis- able options granted under employee stock purchase plans of the employer corpora- tion, or a related corporation, then the em- ployee’s purchases of stock attributable to that year under all options granted under employee stock purchase plans must not exceed $25,000 in fair market value of the stock (determined at the time the op- tions were granted). Under an employee stock purchase plan, an employee may not purchase stock in anticipation that the op- tion will be outstanding and exercisable in some future year. Thus, the employee may purchase only the amount of stock that does not exceed the limitation of this paragraph (i) for the year of the purchase and for preceding years during which the option was outstanding and exercisable. Thus, the amount of stock that may be purchased under an option depends on the number of years in which the option is ac- tually outstanding and exercisable. The amount of stock that may be purchased un- der an employee stock purchase plan may not be increased by reason of the failure to grant an option in an earlier year un- der such plan, or by reason of the failure to exercise an earlier option. For exam- ple, if an option is granted to an individ- ual and expires without having been ex- ercised at all, then the failure to exercise the option does not increase the amount of stock which such individual may be per- mitted to purchase under an option granted in a year following the year of such expi- ration. If an option granted under an em- ployee stock purchase plan is outstanding and exercisable in more than one calen- dar year, then stock purchased pursuant to the exercise of such an option will be ap- plied first, to the extent allowable under this paragraph (i), against the $25,000 lim- itation for the earliest year in which the op- tion was outstanding and exercisable, then, against the $25,000 limitation for each suc- ceeding year, in order. (5)Examples. The following examples illustrate the principles of this paragraph (i): Example 1. Assume that Corporation DD main- tains an employee stock purchase plan and that Em- ployee S is employed by DD. On June 1, 2010, DD grants S an option under the plan to purchase a total of 750 shares of DD stock at $85 per share. On that date, the fair market value of DD stock is $100 per share. The option provides that it may be exercised at any time but cannot be exercised after May 31, 2012. Un- der this paragraph (i), the option must not permit S to purchase more than 250 shares of DD stock during the calendar year 2010, because 250 shares are equal to $25,000 in fair market value of DD stock determined at the time of grant. During the calendar year 2011, S may purchase under the option an amount of DD stock equal to the difference between $50,000 in fair market value of DD stock (determined at the time the option was granted) and the fair market value of DD stock (determined at the time of grant of the option) purchased during the year 2010. During the calendar year 2012, S may purchase an amount of DD stock equal to the difference between $75,000 in fair mar- ket value of the stock (determined at the time of grant of the option) and the total amount of the fair market value of the stock (determined at the time of grant of the option) purchased under the option during the cal- endar years 2010 and 2011. S may purchase $25,000 of stock for the year 2010, and $25,000 of stock for the year 2012, although the option was outstanding and exercisable for only a part of each of such years. However, S may not be granted another option under an employee stock purchase plan of DD or a related corporation to purchase stock of DD or a related cor- poration during the calendar years 2010, 2011, and 2012, so long as the option granted June 1, 2010, is outstanding. Example 2. Assume the same facts as inExample 1, except that the option granted to S in 2010 is termi- nated in 2011 without any part of the option having been exercised, and that subsequent to the termina- tion and during 2011, S is granted another option un- der DD’s employee stock purchase plan. Under that option, S may be permitted to purchase $25,000 of stock for 2011. The failure of S to exercise the option granted to S in 2010, does not increase the amount of stock that S may be permitted to purchase under the option granted to S in 2011. Example 3. Assume the same facts as inExample 1, except that, on May 31, 2012, S exercised the op- tion granted to S in 2010, and purchased 600 shares of DD stock. Five hundred shares, the maximum amount of stock that could have been purchased in 2011, under the option, are treated as having been pur- chased for the years 2010 and 2011. Only 100 shares of the stock are treated as having been purchased for 2012. After S’s exercise of the option on May 31, 2012, S is granted another option under DD’s em- ployee stock purchase plan. S may be permitted un- der the new option to purchase for 2012 stock having a fair market value of no more than $15,000 at the time the new option is granted. Example 4. Corporation EE maintains an em- ployee stock purchase plan and Employee R is em- ployed by EE. On August 1, 2010, EE grants R an option under the plan to purchase 150 shares of EE stock at $85 per share during each of the calendar years 2010, 2011, and 2012. On that date, the fair market value of EE stock is $100 per share. The op- tion provides that it may be exercised at any time dur- ing years 2010, 2011, and 2012. Because this option permits R to purchase only $15,000 of EE’s stock for each year the option is outstanding and exercisable, R could be granted another option by EE, or by a re- lated corporation, in year 2010, permitting R to pur- chase an additional $10,000 of stock during each of the calendar years 2010, 2011, and 2012. Example 5. Corporation FF maintains an em- ployee stock purchase plan and Employee Q is em- ployed by FF. On September 1, 2010, FF grants Q an option under the plan that will be automatically exer- cised on August 31, 2011, and August 31, 2012. On August 31, 2011, Q may purchase under the option an amount of FF stock equal to $25,000 in fair market value of FF stock (determined at the time the option was granted). On August 31, 2012, Q may purchase under the option an amount of FF stock equal to the difference between $50,000 in fair market value of Q stock (determined at the time the option was granted) and the fair market value of Q stock (determined at the time of grant of the option) purchased during year 2011. (j)Restriction on transferability.An employee stock purchase plan must, by its terms, provide that options granted under the plan are not transferable by the op- tionee other than by will or the laws of de- scent and distribution, and must be exercis- able, during the optionee’s lifetime, only by the optionee. For general rules relating to the restriction on transferability required by this paragraph (j), see paragraph (b)(2) of §1.421–1. For a limited exception to the requirement of this paragraph (j), see sec- tion 424(h)(3). (k)Special rule where option price is between 85 percent and 100 percent of value of stock—(1)(i) If all the conditions necessary for the application of section 421(a) exist, this paragraph (k) provides additional rules that are applicable in cases where, at the time the option is granted, the option price per share is less than 100 percent (but not less than 85 percent) of the fair market value of the share. In that case, upon the disposition of the share by the employee after the expiration of the two-year and the one-year holding periods, or upon the employee’s death while own- ing the share (whether occurring before or after the expiration of such periods), there shall be included in the employee’s gross income as compensation (and not as gain upon the sale or exchange of a capital as- set) the lesser of— September 29, 20087872008–39 I.R.B. (A) The amount, if any, by which the price paid under the option was exceeded by the fair market value of the share at the time the option was granted, or (B) The amount, if any, by which the price paid under the option was exceeded by the fair market value of the share at the time of such disposition or death. (ii) For purposes of applying the rules of this paragraph (k), if the option price is not fixed or determinable at the time the option is granted, the option price will be computed as if the option had been exer- cised at such time. The amount of compen- sation resulting from the application of this paragraph (k) shall be included in the em- ployee’s gross income for the taxable year in which the disposition occurs, or for the taxable year closing with the employee’s death, whichever event results in the ap- plication of this paragraph (k). (iii) The application of the special rules provided in this paragraph (k) shall not af- fect the rules provided in section 421(a) with respect to the employee exercising the option, the employer corporation, or a re- lated corporation. Thus, notwithstanding the inclusion of an amount as compensa- tion in the gross income of an employee, as provided in this paragraph (k), no in- come results to the employee at the time the stock is transferred to the employee, and no deduction under section 162 is al- lowable at any time to the employer corpo- ration or a related corporation with respect to such amount. (iv) If, during the employee’s lifetime, the employee exercises an option granted under an employee stock purchase plan, but the employee dies before the stock is transferred to the employee pursuant to the exercise of the option, then the transfer of the stock to the employee’s executor, ad- ministrator, heir, or legatee is deemed, for the purpose of sections 421 and 423, to be a transfer of the stock to the employee exer- cising the option and a further transfer by reason of death from the employee to the employee’s executor, administrator, heir, or legatee. (2) If the special rules provided in this paragraph (k) are applicable to the dis- position of a share of stock by an em- ployee, then the basis of the share in the employee’s hands at the time of the dis- position, determined under section 1011, shall be increased by an amount equal to the amount includibleas compensation in the employee’s gross income under this paragraph (k). However, the basis of a share of stock acquired after the death of an employee by the exercise of an op- tion granted to the employee under an em- ployee stock purchase plan shall be deter- mined in accordance with the rules of sec- tion 421(c) and paragraph (c) of §1.421–2. If the special rules provided in this para- graph (k) are applicable to a share of stock upon the death of an employee, then the basis of the share in the hands of the es- tate or the person receiving the stock by bequest or inheritance shall be determined under section 1014, and shall not be in- creased by reason of the inclusion upon the decedent’s death of any amount in the decedent’s gross income under this para- graph (k). SeeExample (9)of this para- graph with respect to the determination of basis of the share in the hands of a surviv- ing joint owner. (3)Examples. The following examples illustrate the principles of this paragraph (k): Example 1. On June 1, 2010, the Corporation GG grants to Employee P, an employee of GG, an option under GG’s employee stock purchase plan to purchase a share of GG stock for $85. The fair market value of GG stock on such date is $100 per share. On June 1, 2011, P exercises the option and on that date GG transfers the share of stock to P. On January 1, 2013, P sells the share for $150, its fair market value on that date. P’s income tax return is filed on the basis of the calendar year. The income tax consequences to P and GG are as follows— (i) Compensation in the amount of $15 is includi- ble in P’s gross income for the year 2013, the year of the disposition of the share. The $15 represents the difference between the option price ($85) and the fair market value of the share on the date the option was granted ($100), because the value is less than the fair market value of the share on the date of disposi- tion ($150). For the purpose of computing P’s gain or loss on the sale of the share, P’s cost basis of $85 is increased by $15, the amount includible in P’s gross income as compensation. Thus, P’s basis for the share is $100. Because the share was sold for $150, P real- izes a gain of $50, which is treated as long-term cap- ital gain; and (ii) GG is not entitled to any deduction under sec- tion 162 at any time with respect to the share trans- ferred to P. Example 2. Assume the same facts as inExample 1, except that P sells the share of GG stock on Jan- uary 1, 2014, for $75, its fair market value on that date. Because $75 is less than the option price ($85), no amount in respect of the sale is includible as com- pensation in P’s gross income for the year 2014. P’s basis for determining gain or loss on the sale is $85. Because P sold the share for $75, P realized a loss of $10 on the sale that is treated as a long-term capital loss. Example 3. Assume the same facts as inExam- ple 1, except that the option provides that the option price shall be 90 percent of the fair market value of the stock on the day the option is exercised. On June 1, 2011, when the option is exercised, the fair mar- ket value of the stock is $120 per share so that P pays $108 for the share of the stock. Compensation in the amount of $10 is includible in P’s gross income for the year 2013, the year of the disposition of the share. This is determined in the following manner: the ex- cess of the fair market value of the stock at the time of the disposition ($150) over the price paid for the share ($108) is $42; and the excess of the fair market value of the stock at the time the option was granted ($100) over the option price, computed as if the option had been exercised at such time ($90), is $10. Accord- ingly, $10, the lesser, is includible in gross income. In this situation, P’s cost basis of $108 is increased by $10, the amount includible in P’s gross income as compensation. Thus, P’s basis for the share is $118. Because the share was sold for $150, P realizes a gain of $32 that is treated as long-term capital gain. Example 4. Assume the same facts as inExam- ple 1, except that the option provides that the option price shall be the lesser of 95 percent of the fair mar- ket value of the stock on the first day of the offering period and 95 percent of the fair market value of the stock on the day the option is exercised. On June 1, 2011, when the option is exercised, the fair market value of the stock is $120 per share. P pays $95 for the share of the stock. Compensation in the amount of $5 is includible in P’s gross income for the year 2013, the year of the disposition of the share. This is determined in the following manner: the excess of the fair market value of the stock at the time of the dispo- sition ($150) over the price paid for the share ($95) is $55; and the excess of the fair market value of the stock at the time the option was granted ($100) over the option price, computed as if the option had been exercised at such time ($95), is $5. Accordingly, $5, the lesser, is includible in gross income. In this sit- uation, P’s cost basis of $95 is increased by $5, the amount includible in P’s gross income as compensa- tion. Thus, P’s basis for the share is $100. Because the share was sold for $150, P realizes a gain of $50 that is treated as long-term capital gain. Example 5.AssumethesamefactsasinExample 1, except that instead of selling the share on January 1, 2013, P makes a gift of the share on that day. In that case $15 is includible as compensation in P’s gross income for 2013. P’s cost basis of $85 is increased by $15, the amount includible in P’s gross income as compensation. Thus, P’s basis for the share is $100, which becomes the donee’s basis, as of the time of the gift, for determining gain or loss. Example 6.AssumethesamefactsasinExample 2, except that instead of selling the share on January 1, 2014, P makes a gift of the share on that date. Be- cause the fair market value of the share on that day ($75) is less than the option price ($85), no amount in respect of the disposition by way of gift is includi- ble as compensation in P’s gross income for 2014. P’s basis for the share is $85, which becomes the donee’s basis, as of the time of the gift, for the purpose of de- termining gain. The donee’s basis for the purpose of determining loss, determined under section 1015(a), is $75 (fair market value of the share at the date of gift). 2008–39 I.R.B.788September 29, 2008 Example 7. Assume the same facts as inExam- ple 1, except that after acquiring the share of stock on June 1, 2011, P dies on August 1, 2012, at which time the share has a fair market value of $150. Compensa- tion in the amount of $15 is includible in P’s gross in- come for the taxable year closing with P’s death, $15 being the difference between the option price ($85) and the fair market value of the share when the op- tion was granted ($100), because such value is less than the fair market value at date of death ($150). The basis of the share in the hands of P’s estate is deter- mined under section 1014 without regard to the $15 includible in the decedent’s gross income. Example 8. Assume the same facts as inExample 7, except that P dies on August 1, 2011, at which time the share has a fair market value of $150. Although P’s death occurred within six months after the transfer of the share to P, the income tax consequences are the same as inExample 7. Example 9. Assume the same facts as inExam- ple 1, except that the share of stock was issued in the names of P and P’s spouse jointly with right of sur- vivorship, and that P and P’s spouse sold the share on June 15, 2012, for $150, its fair market value on that date. Compensation in the amount of $15 is includi- ble in P’s gross income for the year 2012, the year of the disposition of the share. The basis of the share in the hands of P and P’s spouse for the purpose of de- termining gain or loss on the sale is $100, that is, the cost of $85 increased by the amount of $15 includi- ble as compensation in P’s gross income. The gain of $50 on the sale is treated as long-term capital gain, and is divided equally between P and P’s spouse. Example 10. Assume the same facts as inExam- ple 1, except that the share of stock was issued in the names of P and P’s spouse jointly with right of sur- vivorship, and that P predeceased P’s spouse on Au- gust 1, 2012, at which time the share had a fair mar- ket value of $150. Compensation in the amount of $15 is includible in P’s gross income for the taxable year closing with his death. SeeExample 7. The basis of the share in the hands of P’s spouse as survivor is determined under section 1014 without regard to the $15 includible in the decedent’s gross income. Example 11. Assume the same facts as inExam- ple 10, except that P’s spouse predeceased P on July 1, 2012. Section 423(c) does not apply in respect of the death of P’s spouse. Upon the subsequent death of P on August 1, 2012, the income tax consequences in respect of P’s taxable year closing with the date of P’s death, and in respect of the basis of the share in the hands of P’s estate, are the same as inExample 7. If P had sold the share on July 15, 2012 (after the death of P’s spouse), for $150, its fair market value at that time, the income tax consequences would be the same as inExample 1. (l)Effective/applicability date.Upon the date of publication of the Treasury de- cision adopting the rules of this section as a final regulation in theFederal Regis- ter, these rules will apply as of January 1, 2010. LindaE.Stiff, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on July 28, 2008, 8:45 a.m., and published in the issue of the Federal Register for July 29, 2008, 73 F.R. 43875) September 29, 20087892008–39 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. 2008–39 I.R.B.iSeptember 29, 2008 Numerical Finding List 1 Bulletins 2008–27 through 2008–39 Announcements: 2008-62, 2008-27 I.R.B.74 2008-63, 2008-28 I.R.B.114 2008-64, 2008-28 I.R.B.114 2008-65, 2008-31 I.R.B.279 2008-66, 2008-29 I.R.B.164 2008-67, 2008-29 I.R.B.164 2008-68, 2008-30 I.R.B.244 2008-69, 2008-32 I.R.B.318 2008-70, 2008-32 I.R.B.318 2008-71, 2008-32 I.R.B.321 2008-72, 2008-32 I.R.B.321 2008-73, 2008-33 I.R.B.391 2008-74, 2008-33 I.R.B.392 2008-75, 2008-33 I.R.B.392 2008-76, 2008-33 I.R.B.393 2008-77, 2008-33 I.R.B.394 2008-78, 2008-34 I.R.B.453 2008-79, 2008-35 I.R.B.568 2008-80, 2008-37 I.R.B.706 2008-81, 2008-37 I.R.B.706 2008-82, 2008-37 I.R.B.708 2008-83, 2008-37 I.R.B.709 2008-84, 2008-38 I.R.B.748 2008-85, 2008-38 I.R.B.749 Notices: 2008-55, 2008-27 I.R.B.11 2008-56, 2008-28 I.R.B.79 2008-57, 2008-28 I.R.B.80 2008-58, 2008-28 I.R.B.81 2008-59, 2008-29 I.R.B.123 2008-60, 2008-30 I.R.B.178 2008-61, 2008-30 I.R.B.180 2008-62, 2008-29 I.R.B.130 2008-63, 2008-31 I.R.B.261 2008-64, 2008-31 I.R.B.268 2008-65, 2008-30 I.R.B.182 2008-66, 2008-31 I.R.B.270 2008-67, 2008-32 I.R.B.307 2008-68, 2008-34 I.R.B.418 2008-69, 2008-34 I.R.B.419 2008-70, 2008-36 I.R.B.575 2008-71, 2008-35 I.R.B.462 2008-73, 2008-38 I.R.B.717 2008-74, 2008-38 I.R.B.718 2008-75, 2008-38 I.R.B.719 2008-76, 2008-39 I.R.B.768 Proposed Regulations: REG-161695-04, 2008-37 I.R.B.699 REG-164965-04, 2008-34 I.R.B.450 Proposed Regulations— Continued: REG-143453-05, 2008-32 I.R.B.310 REG-146895-05, 2008-37 I.R.B.700 REG-155087-05, 2008-38 I.R.B.726 REG-142680-06, 2008-35 I.R.B.565 REG-120476-07, 2008-36 I.R.B.679 REG-120844-07, 2008-39 I.R.B.770 REG-129243-07, 2008-27 I.R.B.32 REG-138355-07, 2008-32 I.R.B.311 REG-142040-07, 2008-34 I.R.B.451 REG-149405-07, 2008-27 I.R.B.73 REG-100464-08, 2008-32 I.R.B.313 REG-101258-08, 2008-28 I.R.B.111 REG-102122-08, 2008-31 I.R.B.278 REG-102822-08, 2008-38 I.R.B.744 REG-103146-08, 2008-37 I.R.B.701 REG-106251-08, 2008-39 I.R.B.774 REG-115457-08, 2008-33 I.R.B.390 REG-121698-08, 2008-29 I.R.B.163 Revenue Procedures: 2008-32, 2008-28 I.R.B.82 2008-33, 2008-28 I.R.B.93 2008-34, 2008-27 I.R.B.13 2008-35, 2008-29 I.R.B.132 2008-36, 2008-33 I.R.B.340 2008-37, 2008-29 I.R.B.137 2008-38, 2008-29 I.R.B.139 2008-39, 2008-29 I.R.B.143 2008-40, 2008-29 I.R.B.151 2008-41, 2008-29 I.R.B.155 2008-42, 2008-29 I.R.B.160 2008-43, 2008-30 I.R.B.186 2008-44, 2008-30 I.R.B.187 2008-45, 2008-30 I.R.B.224 2008-46, 2008-30 I.R.B.238 2008-47, 2008-31 I.R.B.272 2008-48, 2008-36 I.R.B.586 2008-49, 2008-34 I.R.B.423 2008-50, 2008-35 I.R.B.464 2008-51, 2008-35 I.R.B.562 2008-52, 2008-36 I.R.B.587 2008-53, 2008-36 I.R.B.678 2008-54, 2008-38 I.R.B.722 2008-55, 2008-39 I.R.B.768 Revenue Rulings: 2008-32, 2008-27 I.R.B.6 2008-33, 2008-27 I.R.B.8 2008-34, 2008-28 I.R.B.76 2008-35, 2008-29 I.R.B.116 2008-36, 2008-30 I.R.B.165 2008-37, 2008-28 I.R.B.77 2008-38, 2008-31 I.R.B.249 2008-39, 2008-31 I.R.B.252 2008-40, 2008-30 I.R.B.166 Revenue Rulings— Continued: 2008-41, 2008-30 I.R.B.170 2008-42, 2008-30 I.R.B.175 2008-43, 2008-31 I.R.B.258 2008-44, 2008-32 I.R.B.292 2008-45, 2008-34 I.R.B.403 2008-46, 2008-36 I.R.B.572 2008-47, 2008-39 I.R.B.760 2008-48, 2008-38 I.R.B.713 Treasury Decisions: 9401, 2008-27 I.R.B.1 9402, 2008-31 I.R.B.254 9403, 2008-32 I.R.B.285 9404, 2008-32 I.R.B.280 9405, 2008-32 I.R.B.293 9406, 2008-32 I.R.B.287 9407, 2008-33 I.R.B.330 9408, 2008-33 I.R.B.323 9409, 2008-29 I.R.B.118 9410, 2008-34 I.R.B.414 9411, 2008-34 I.R.B.398 9412, 2008-37 I.R.B.687 9413, 2008-34 I.R.B.404 9414, 2008-35 I.R.B.454 9415, 2008-36 I.R.B.570 9417, 2008-37 I.R.B.693 9418, 2008-38 I.R.B.713 9420, 2008-39 I.R.B.750 9421, 2008-39 I.R.B.755 1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin 2008–26, dated June 30, 2008. September 29, 2008ii2008–39 I.R.B. Finding List of Current Actions on Previously Published Items 1 Bulletins 2008–27 through 2008–39 Announcements: 2008-64 Corrected by Ann. 2008-71, 2008-32 I.R.B.321 2008-72 Corrected by Ann. 2008-78, 2008-34 I.R.B.453 Notices: 99-48 Superseded by Rev. Proc. 2008-40, 2008-29 I.R.B.151 2000-9 Obsoleted by Rev. Proc. 2008-41, 2008-29 I.R.B.155 2004-2 Amplified by Notice 2008-59, 2008-29 I.R.B.123 2004-50 Amplified by Notice 2008-59, 2008-29 I.R.B.123 2006-88 Modified and superseded by Notice 2008-60, 2008-30 I.R.B.178 2007-22 Amplified by Notice 2008-59, 2008-29 I.R.B.123 2007-36 Clarified, modified, and amplified by Rev. Proc. 2008-54, 2008-38 I.R.B.722 Proposed Regulations: REG-129243-07 Corrected by Ann. 2008-75, 2008-33 I.R.B.392 REG-151135-07 Hearing scheduled by Ann. 2008-64, 2008-28 I.R.B.114 REG-101258-08 Corrected by Ann. 2008-73, 2008-33 I.R.B.391 Revenue Procedures: 92-25 Superseded by Rev. Proc. 2008-41, 2008-29 I.R.B.155 92-83 Obsoleted by Rev. Proc. 2008-37, 2008-29 I.R.B.137 Revenue Procedures— Continued: 2001-10 Section 6.02(1)(a) modified and amplified by Rev. Proc. 2008-52, 2008-36 I.R.B.587 2001-42 Superseded by Rev. Proc. 2008-39, 2008-29 I.R.B.143 2002-9 Clarified, modified, amplified, and superseded by Rev. Proc. 2008-52, 2008-36 I.R.B.587 Modified and amplified by Rev. Proc. 2008-43, 2008-30 I.R.B.186 2002-28 Section 7.02(1)(a) modified and amplified by Rev. Proc. 2008-52, 2008-36 I.R.B.587 2002-64 Superseded by Rev. Proc. 2008-55, 2008-39 I.R.B.768 2005-29 Superseded by Rev. Proc. 2008-49, 2008-34 I.R.B.423 2006-27 Modified and superseded by Rev. Proc. 2008-50, 2008-35 I.R.B.464 2006-29 Superseded by Rev. Proc. 2008-34, 2008-27 I.R.B.13 2006-34 Superseded by Rev. Proc. 2008-44, 2008-30 I.R.B.187 2007-14 Superseded by Rev. Proc. 2008-52, 2008-36 I.R.B.587 2007-19 Superseded by Rev. Proc. 2008-39, 2008-29 I.R.B.143 2007-42 Superseded by Rev. Proc. 2008-32, 2008-28 I.R.B.82 2007-43 Superseded by Rev. Proc. 2008-33, 2008-28 I.R.B.93 2007-49 Section 3 modified and superseded by Rev. Proc. 2008-50, 2008-35 I.R.B.464 2007-50 Superseded by Rev. Proc. 2008-36, 2008-33 I.R.B.340 2007-66 Modified and superseded by Rev. Proc. 2008-54, 2008-38 I.R.B.722 Revenue Procedures— Continued: 2007-70 Modified by Ann. 2008-63, 2008-28 I.R.B.114 2007-72 Amplified and superseded by Rev. Proc. 2008-47, 2008-31 I.R.B.272 2008-12 Modified and superseded by Rev. Proc. 2008-35, 2008-29 I.R.B.132 2008-43 Modified by Rev. Proc. 2008-52, 2008-36 I.R.B.587 2008-52 Modified by Ann. 2008-84, 2008-38 I.R.B.748 Revenue Rulings: 67-213 Amplified by Rev. Rul. 2008-40, 2008-30 I.R.B.166 71-234 Modified by Rev. Proc. 2008-43, 2008-30 I.R.B.186 76-273 Obsoleted by T.D. 9414, 2008-35 I.R.B.454 77-480 Modified by Rev. Proc. 2008-43, 2008-30 I.R.B.186 82-105 Obsoleted by T.D. 9414, 2008-35 I.R.B.454 91-17 Amplified by Rev. Proc. 2008-41, 2008-29 I.R.B.155 Rev. Proc. 2008-42, 2008-29 I.R.B.160 Superseded in part by Rev. Proc. 2008-40, 2008-29 I.R.B.151 2005-6 Amplified by Rev. Proc. 2008-38, 2008-29 I.R.B.139 2006-57 Modified by Notice 2008-74, 2008-38 I.R.B.718 2008-12 Amplified by Rev. Rul. 2008-38, 2008-31 I.R.B.249 Clarified by Ann. 2008-65, 2008-31 I.R.B.279 1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2008–1 through 2008–26 is in Internal Revenue Bulletin 2008–26, dated June 30, 2008. 2008–39 I.R.B.iiiSeptember 29, 2008 Treasury Decisions: 9391 Corrected by Ann. 2008-74, 2008-33 I.R.B.392 September 29, 2008iv2008–39 I.R.B. INDEX Internal Revenue Bulletins 2008–27 through 2008–39 The abbreviation and number in parenthesis following the index entry refer to the specific item; numbers in roman and italic type following the parenthesis refers to the Internal Revenue Bulletin in which the item may be found and the page number on which it appears. Key to Abbreviations: AnnAnnouncement CDCourt Decision DODelegation Order EOExecutive Order PLPublic Law PTEProhibited Transaction Exemption RPRevenue Procedure RRRevenue Ruling SPRStatement of Procedural Rules TCTax Convention TDTreasury Decision TDOTreasury Department Order EMPLOYEE PLANS Accrual rule for defined benefit plans under section 411(b)(1)(B), application (REG–100464–08) 32,313 Application of section 457(f) tocertain arrangements regarding part-year compensation (Notice 62) 29,130 Closing agreements, Employee Plans Compliance Resolution System (EPCRS) (RP 50) 35,464 Definition of “outside director” (RR 32) 27,6 Employee stock purchase plans, rules (REG–106251–08) 39, 774 Full funding limitations, weighted average interest rates, seg- ment rates for: July 2008 (Notice 65) 30,182 August 2008 (Notice 69) 34,419 September 2008 (Notice 75) 38,719 Individual Retirement Accounts (IRAs), converting amounts to Roth IRAs (TD 9418) 38,713 Multiemployer plan funding guidance, hearing scheduled for REG–151135–07 (Ann 64) 28,114;correction(Ann71)32, 321 Proposed Regulations: 26 CFR 1.401(a)(9)–1, –6, amended; 1.403(b)–6, amended; reasonable good faith interpretation of re- quired minimum distribution rules by governmental plans (REG–142040–07) 34,451 26 CFR 1.411(b)–1, amended; accrual rules for defined ben- efit plans (REG–100464–08) 32,313 26 CFR 1.421–1, amended; 1.422–2, –5, amended; 1.423–1, –2, revised; employee stockpurchase plans under section 423 (REG–106251–08) 39,774 26 CFR 1.432; multiemployer planfunding guidance, hearing scheduled for REG–151135–07 (Ann 64) 28,114; correc- tion (Ann 71) 32,321 EMPLOYEE PLANS—Cont. 26 CFR 1.6039–1, revised; 1.6039–2, added; infor- mation reporting requirements under section 6039 (REG–103146–08) 37,701 26 CFR 1.6060–1, amended; 1.6107–1, revised; 1.6109–2, amended; 1.6694–0, –1, –2, revised; 1.6694–3, –4, amended; 1.6695–1, revised; 1.6695–2, amended; 1.6696–1, revised; 301.7701–15, amended; tax re- turn preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 Regulations: 26 CFR 1.408A–4, amended; 1.408–4T, removed; converting an IRA annuity to a Roth IRA (TD 9418) 38,713 Qualified retirement plans, qualification, plan sponsorship (RR 45) 34,403 Reasonable good faith interpretation of required minimum dis- tribution rules by governmental plans (REG–142040–07) 34, 451 Stocks, information reporting requirements for statutory stock options (REG–103146–08) 37,701 Tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 Transition relief, funding, expanding availability (Notice 73) 38, 717 Trusts, qualification, Puerto Rico (RR 40) 30,166 EMPLOYMENT TAX Interest-free adjustments and claims for refund of employment taxes (TD 9405) 32,293 Proposed Regulations: 31.6060–1, added; 31.6107–1, added; 31.6109–2, added; 31.6694–1 thru –4, added; 31.6695–1, added; 31.6696–1, added; 31.7701–1, added; tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 Publications: 1141, General Rules and Specifications for Substitute Forms W-2 and W-3, revised (RP 33) 28,93 4436, General Rules and Specifications for Substitute Form 941 and Schedule B (Form 941), revised (RP 32) 28,82 Regulations: 26 CFR 31.6011(a)–1, –4, –5, amended; 31.6205–1, amended; 31.6302–0, –1, amended; 31.6402(a)–1, –2, amended; 31.6413(a)–1, –2, amended; 31.6414–1, amended; 602.101, amended; employment tax adjustments (TD 9405) 32,293 Substitute forms: W-2 and W-3, general rules and specifications (RP 33) 28,93 941 and Schedule B (Form 941), general rules and specifica- tions (RP 32) 28,82 Tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 2008–39 I.R.B.vSeptember 29, 2008 ESTATE TAX Charitable lead unitrust (CLUT): Inter vivos, sample forms (RP 45) 30,225 Testamentary, sample form (RP 46) 30,238 Interest rates for 2008, farm real property, special use value (RR 44) 32,292 Proposed Regulations: 20.6060–1, added; 20.6107–1, added; 20.6109–1, added; 20.6694–1 thru –4, added; 20.6695–1, added; 20.6696–1, added; 20.7701–1, added; tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 Regulations: 26 CFR 20.2036–1, amended; 20.2039–1, amended; grantor retained interest trusts, application of sections 2036 and 2039 (TD 9414) 35,454 26 CFR 26.2600–1, amended; 26.2642–6, amended; 26.2654–1, amended; severance of a trust for genera- tion-skipping transfer (GST) tax purposes (TD 9421) 39, 755 Tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 Transfer tax valuation of interest in a restricted management ac- count (RMA) (RR 35) 29,116 Trusts: Grantor retained interest trusts, application of sections 2036 and 2039 (TD 9414) 35,454 Private trust company (Notice 63) 31,261 Severance of a trust for GST tax purposes (TD 9421) 39,755 EXCISE TAX Charitable remainder trusts (CRTs), division into two or more separate and equal CRTs (RR 41) 30,170 Credits, alcohol fuel, biodiesel, alternative fuel (REG–155087–05) 38,726 Health Savings Accounts (HSAs), employer comparable contri- butions to HSAs under section 4980G and excise tax under sec- tions 4980B, 4980D, 4980E, and 4980G (REG–120476–07) 36,680 Proposed Regulations: 26 CFR 1.40–1, revised; 1.40–2, added; 1.40A–1, added; 40.0–1, amended; 40.6302(c)–1, amended; 48.0–1, amended; 48.0–4, added; 48.4041–0, amended; 48.4041–18, –20, removed and reserved; 48.4041–19, revised; 48.4081–1, –2, –3, amended; 48.4081–6, re- moved and reserved; 48.4082–4, amended; 48.4101–1, amended; 48.6426–1 thru –7, added; 48.6427–8, amended; 48.6427–12, added; alcohol fuel and biodiesel, renewable diesel, alternative fuel, diesel-water fuel emulsion, taxable fuel definitions, excise tax returns (REG–155087–05) 38, 726 26 CFR 54.4980B–0, B–2, G–1, G–3, G–4, amended; 54.4980D–1, E–1, G–6, G–7, added; employer com- parable contributions to health savings accounts under section 4980G, and requirement of return for filing the EXCISE TAX—Cont. excise tax under section 4980B, 4980D, 4980E or 4980G (REG–120476–07) 36,680 40.6060–1, added; 40.6107–1, added; 40.6109–1, added; 40.6694–1 thru –4, added; 40.6695–1, added; 40.6696–1, added; 40.7701–1, added; 41.6060–1, added; 41.6107–1, added; 41.6109–2, added; 41.6694–1 thru –4, added; 41.6695–1, added; 41.6696–1, added; 41.7701–1, added; 44.6060–1, added; 44.6107–1, added; 44.6109–1, added; 44.6694–1 thru –4, added; 44.6695–1, added; 44.6696–1, added; 44.7701–1, added; 53.6060–1, added; 53.6107–1, added; 53.6109–1, added; 53.6694–1 thru –4, added; 53.6695–1, added; 53.6696–1, added; 53.7701–1, added; 54.6060–1, added; 54.6107–1, added; 54.6109–1, added; 54.6694–1 thru –4, added; 54.6695–1, added; 54.6696–1, added; 54.7701–1, added; 55.6060–1, added; 55.6107–1, added; 55.6109–1, added; 55.6694–1 thru –4, added; 55.6695–1, added; 55.6696–1, added; 55.7701–1, added; 56.6060–1, added; 56.6107–1, added; 56.6109–1, added; 56.6694–1 thru –4, added; 56.6695–1, added; 56.6696–1, added; 56.7701–1, added; 156.6060–1, added; 156.6107–1, added; 156.6109–1, added; 156.6694–1 thru –4, added; 156.6695–1, added; 156.6696–1, added; 156.7701–1, added; 157.6060–1, added; 157.6107–1, added; 157.6109–1, added; 157.6694–1 thru –4, added; 157.6695–1, added; 157.6696–1, added; 157.7701–1, added; 301.7701–15, amended; tax return preparer penal- ties under sections 6694 and 6695 (REG–129243–07) 27, 32 Tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 EXEMPT ORGANIZATIONS Declaratory judgment suits (Ann 67)29, 164;(Ann72)32,321; correction (Ann 78) 34,453; (Ann 82) 37,708; (Ann 85) 38, 749 Indian tribal governments treated as states (RP 55) 39,768 List of organizations classifiedas private foundations (Ann 70) 32,318;(Ann81)37,706 Proposed Regulations: 26 CFR 1.6060–1, amended; 1.6107–1, revised; 1.6109–2, amended; 1.6694–0, –1, –2, revised; 1.6694–3, –4, amended; 1.6695–1, revised; 1.6695–2, amended; 1.6696–1, revised; 301.7701–15, amended; tax re- turn preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 Regulations 26 CFR 1.664–1, amended; 602.101, amended; guidance un- der section 664 regarding the effect of unrelated business taxable income on charitable remainder trusts (TD 9403) 32,285 Revocations (Ann 62) 27,74; (Ann 66) 29,164; (Ann 69) 32, 318; (Ann 76) 33,393; (Ann 79) 35,568; (Ann 80) 37,706 Tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 September 29, 2008vi2008–39 I.R.B. EXEMPT ORGANIZATIONS—Cont. Trusts: Charitable remainder trusts (CRTs): Calculation of excise tax on unrelated business taxable in- come (UBTI) (TD 9403) 32,285 Division into two or more separate and equal CRTs (RR 41) 30,170 GIFT TAX Charitable lead unitrust (CLUT),inter vivos, sample forms (RP 45) 30,225 Proposed Regulations: 25.6060–1, added; 25.6107–1, added; 25.6109–1, added; 25.6694–1 thru –4, added; 25.6695–1, added; 25.6696–1, added; 25.7701–1, added; 26.6060–1, added; 26.6107–1, added; 26.6109–1, added; 26.6694–1 thru –4, added; 26.6695–1, added; 26.6696–1, added; 26.7701–1, added; tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 Tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32 Transfer tax valuation of interest in a restricted management ac- count (RMA) (RR 35) 29,116 Trust, private trust company (Notice 63) 31,261 INCOME TAX Accounting methods: Automatic changes in methods of accounting (RP 52) 36,587 Consent procedures, changesin method of accounting (Ann 84) 38,748 Rolling average inventory (RP 43) 30,186 Acquisitions, application of section 382 in the case of certain ac- quisitions made pursuant to the Housing and Economic Recov- ery Act of 2008 (Notice 76) 39,768 Bonds: Procedures for requesting a refund of arbitrage rebate and sim- ilar payments on tax-exempt bonds (RP 37) 29,137 Solicitation of applications from qualified issuers for alloca- tion of qualified forestry conservation bonds (QFCBs) lim- itation and application requirements (Notice 70) 36,575 Bonus depreciation for the Kansas disaster area (Notice 67) 32, 307 Capital costs incurred to comply with EPA sulfur regulations (TD 9404) 32,280; (REG–143453–05) 32,310 Certain financing commitments and applicable high yield dis- count obligations (RP 51) 35,562 Change to office to which notices of nonjudicial sale and re- quests for return of wrongfully levied property must be sent (TD 9410) 34,414 Charitable lead unitrust (CLUT): Inter vivos, sample forms (RP 45) 30,225 Testamentary, sample form (RP 46) 30,238 Charitable remainder trusts (CRTs), division into two or more separate and equal CRTs (RR 41) 30,170 INCOME TAX—Cont. Child of parents who are divorced, separated or living apart as the dependent of both parents (RP 48) 36,586 Corporations: Accumulated adjustments account (AAA) and key-man life insurance (RR 42) 30,175 Section 108 reduction of tax attributes for S corporations (REG–102822–08) 38,744 Credits: Alcohol fuel, biodiesel, alternative fuel (REG–155087–05) 38,726 Electricity produced from certain renewable resources, sec- tion 45 tax credit (Notice 60) 30,178 Increasing research activities (TD 9401) 27,1; (REG–149405–07) 27,73 Low-income housing credit: Emergency housing relief, Wisconsin severe storms, tor- nadoes, and flooding (Notice 61) 30,180 Indiana severe storms and flooding (Notice 56) 28,79 Iowa severe storms, tornadoes, and flooding (Notice 58) 28,81 Missouri severe storms and flooding, disaster relief (Notice 66) 31,270 Utility allowance, new options for estimating (TD 9420) 39,750 Satisfactory bond, “bond factor” amounts for the period: January through September 2008 (RR 36) 30,165 Section 48 tax credit for qualifying fuel cell property and qual- ifying microturbine property (Notice 68) 34,418 Declaratory judgment suits (Ann 67)29, 164;(Ann72)32,321; correction (Ann 78) 34,453; (Ann 82) 37,708; (Ann 85) 38, 749 Definition of “outside director” (RR 32) 27,6 Dependent child of divorced or separated parents or parents who live apart (TD 9408) 33,323 Disaster relief, China earthquake, qualified disaster (Notice 57) 28,80 Disciplinary actionsinvolving attorneys,certified public accoun- tants, enrolled agents, and enrolled actuaries (Ann 68) 30,245; (Ann 77) 33,394; (Ann 83) 37,709 Disclosure of taxpayer groupings for purposes of the passive ac- tivity loss provisions under section 469 (Notice 64) 31,268 Disclosure or use of information by preparers of returns (TD 9409) 29,118; (REG–121698–08) 29,163 Economic Stimulus Act of 2008, bonus depreciation, section 179 expensing (RP 54) 38,722 Election to expense certain refineries (TD 9412) 37,687; (REG–146895–05) 37,700 Employee stock purchase plans, rules (REG–106251–08) 39, 774 Escrow accounts used in like-kind exchanges (TD 9413) 34,404 Expenses: Elections regarding start-up expenditures, corporation orga- nizational expenditures, and partnership organizational ex- penses (TD 9411) 34,398; (REG–164965–04) 34,450 Optional standard mileage rates, update (Ann 63) 28,114 2008–39 I.R.B.viiSeptember 29, 2008 INCOME TAX—Cont. Extension of time for filing returns (TD 9407) 33,330; (REG–115457–08) 33,390 Farmer and fisherman income averaging (TD 9417) 37,693; (REG–161695–04) 37,699 Forms: 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, specifications for filing electronically (RP 44) 30,187 1096, 1098, 1099, 5498, W-2G, and 1042-S, substitute form specifications (RP 36) 33,340 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, specifications for filing electronically (RP 34) 27,13 8596, Information Return for Federal Contracts, specifica- tions for filing electronically (RP 49) 34,423 Guidance to tax return preparers: Consents to disclose and consents to use tax return in- formation in the Form 1040 series (TD 9409) 29,118; (REG–121698–08) 29,163 Consents to disclose and consents to use tax return informa- tion in the Form 1040 series, update to Rev. Proc. 2008-12 (RP 35) 29,132 Guidance under section 956 for determining the basis of property acquired in certain nonrecognition transactions (TD 9402) 31, 254; (REG–102122–08) 31,278 Health Savings Accounts (HSAs), additional guidance (Notice 59) 29,123 Insurance companies: Effectively connected income (RP 53) 36,678 Life insurance contracts: Automatic waiver (RP 42) 29,160 Closing agreement (RP 40) 29,151 Modified endowment contracts (MECs), closing agree- ments (RP 39) 29,143 Qualified additional benefits (QABs), closing agreement (RP 38) 29,139 Variable contracts, closing agreement (RP 41) 29,155 Interest: Characterization of management fees paid by an upper tier investment partnership and lower tier trader partnerships (RR 39) 31,252 Investment: Federal short-term, mid-term, and long-term rates for: July 2008 (RR 33) 27,8 August 2008 (RR 43) 31,258 September 2008 (RR 46) 36,572 Rates: Underpayments and overpayments, quarter beginning: October 1, 2008 (RR 47) 39,760 Treatment of interest expense attributable to indebtedness al- locable to property held for investment described in section 163(d)(5)(A)(ii): Investment interest deduction (RR 38) 31,249 Trader partnership (Ann 65) 31,279 Law school Loan Repayment Assistance Program (LRAP), ex- clusion from gross income (RR 34) 28,76 INCOME TAX—Cont. Liens, return of wrongfully levied property and discharge of liens, special rules (TD 9410) 34,414 Life insurance: Premiums by S corporation, effect on accumulated adjust- ments account (AAA) (RR 42) 30,175 Statutory reserves, meaning formulti-state taxpayers (RR 37) 28,77 Presidentially declared disaster or terroristic or military actions, postponement of certain tax-related deadlines (REG–142680–06) 35,565 Private foundations, organizations now classified as (Ann 70) 32, 318; (Ann 81) 37,706 Proposed Regulations: 26 CFR 1.40–1, revised; 1.40–2, added; 1.40A–1, added; 40.0–1, amended; 40.6302(c)–1, amended; 48.0–1, amended; 48.0–4, added; 48.4041–0, amended; 48.4041–18, –20, removed and reserved; 48.4041–19, revised; 48.4081–1, –2, –3, amended; 48.4081–6, re- moved and reserved; 48.4082–4, amended; 48.4101–1, amended; 48.6426–1 thru –7, added; 48.6427–8, amended; 48.6427–12, added; alcohol fuel and biodiesel, renewable diesel, alternative fuel, diesel-water fuel emulsion, taxable fuel definitions, excise tax returns (REG–155087–05) 38, 726 26 CFR 1.41–6, –8, amended; 1.41–9, added; alternative sim- plified credit under section 41(c)(5) (REG–149405–07) 27, 73 26 CFR 1.108–7, amended; section 108 reduction of tax at- tributes for S corporations (REG–102822–08) 38,744 26 CFR 1.179B–1, added; capital costs incurred to comply with EPA sulfur regulations (REG–143453–05) 32,310 26 CFR 1.179C–1, added; election to expense certain refiner- ies (REG–146895–05) 37,700 26 CFR 1.195–1, revised; 1.248–1, amended; 1.709–1, amended; elections regarding start-up expenditures, cor- poration organizational expenditures, and partnership organizational expenses (REG–164965–04) 34,450 26 CFR 1.367(a)–2, –4, –5, added; 1.954–2(c), revised; 1.956–2(b), –2(e), revised, modifications to subpart F treatment of aircraft and vessel leasing income (REG–138355–07) 32,311 26 CFR 1.401(a)(9)–1, –6, amended; 1.403(b)–6, amended; reasonable good faith interpretation of re- quired minimum distribution rules by governmental plans (REG–142040–07) 34,451 26 CFR 1.421–1, amended; 1.422–2, –5, amended; 1.423–1, –2, revised; employee stock purchase plans under section 423 (REG–106251–08) 39,774 26 CFR 1.460–3 thru –6, amended; rules for home construc- tion contracts (REG–120844–07) 39,770 26 CFR 1.642(c)–3, amended; 1.643(a)–5, amended; guid- ance under sections 642 and 643 (income ordering rules) (REG–101258–08) 28,111; correction (Ann 73) 33,391 26 CFR 1.956–1, amended; guidance under section 956 for determining the basis of property acquired in certain non- recognition transactions (REG–102122–08) 31,278 September 29, 2008viii2008–39 I.R.B. INCOME TAX—Cont. 26 CFR 1.1301–1, amended; farmer and fisherman income averaging (REG–161695–04) 37,699 26 CFR 1.6039–1, revised; 1.6039–2, added; infor- mation reporting requirements under section 6039 (REG–103146–08) 37,701 26 CFR 1.6060–1, amended; 1.6107–1, revised; 1.6109–2, amended; 1.6694–0, –1, –2, revised; 1.6694–3, –4, amended; 1.6695–1, revised; 1.6695–2, amended; 1.6696–1, revised; 301.7701–15, amended; tax re- turn preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32; corrections (Ann 75) 33,392 26 CFR 1.6081–2, –6, added; 54.6081–1, added; extension of time for filing returns (REG–115457–08) 33,390 26 CFR 301.7216–3, amended; disclosure or use of informa- tion by preparers of returns (REG–121698–08) 29,163 26 CFR 301.7508A–1, amended; postponement of certain tax-related deadlines by reasonof Presidentially declared disaster or terroristic or military actions (REG–142680–06) 35,565 Publications: 1141, General Rules and Specifications for Substitute Forms W-2 and W-3, revised (RP 33) 28,93 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S, update (RP 36) 33,340 1187, Specifications for Filing Form 1042-S, Foreign Per- son’s U.S. Source Income Subject to Withholding, Elec- tronically, revised (RP 44) 30,187 1239, Specifications for Filing Form 8027, Employer’s An- nual Information Return of Tip Income and Allocated Tips, Electronically (RP 34) 27,13 1516, Specifications for Filing Form 8596, Information Re- turn for Federal Contracts,Electronically (RP 49) 34,423 4436, General Rules and Specifications for Substitute Form 941 and Schedule B (Form 941), revised (RP 32) 28,82 Real Estate Mortgage Investment Conduit (REMIC), allocation of income to foreign persons by certain entites (TD 9415) 36, 570 Reasonable good faith interpretation of required minimum dis- tribution rules by governmental plans (REG–142040–07) 34, 451 Regulations: 26 CFR 1.41–0, –1, –6, –8, amended; 1.41–0T, –6T, –8T, –9, –9T added; alternative simplified credit under section 41(c)(5) (TD 9401) 27,1 26 CFR 1.42–10, –12, amended; section 42 utility allowance regulations update (TD 9420) 39,750 26 CFR 1.152–4, revised; 1.152–4T, removed; dependent child of divorced or separated parents or parents who live apart (TD 9408) 33,323 26 CFR 1.179B–1T, added; 602.101, amended; capital costs incurred to comply with EPA sulfur regulations (TD 9404) 32,280 26 CFR 1.179C–1T, added; 602.101, amended; election to expense certain refineries (TD 9412) 37,687 INCOME TAX—Cont. 26 CFR 1.195–1, revised; 1.195–1T, added; 1.248–1, amended; 1.248–1T, added; 1.709–1, amended; 1.709–1T, added; elections regarding start-up expenditures, cor- poration organizational expenditures, and partnership organizational expenses (TD 9411) 34,398 26 CFR 1.367(a)–2T, –4T, –5T, amended; 1.954–2, amended; 1.954–2T, added; 1.956–2, –2T, amended; modifications to subpart F treatment of aircraft and vessel leasing income (TD 9406) 32,287 26 CFR 1.468B–0, amended; 1.468B–6, added; 1.1031(k)–1, amended; 1.7872–5, –16, added; escrow accounts, trusts, and other funds used during deferred exchanges of like-kind property (TD 9413) 34,404 26 CFR 1.664–1, amended; 602.101, amended; guidance un- der section 664 regarding the effect of unrelated business taxable income on charitable remainder trusts (TD 9403) 32,285 26 CFR 1.860A–0, –1, amended; 1.860A–1T, removed; 1.860G–3, amended; 1.860G–3T, removed; 1.863–0, –1, amended; 1.863–1T, removed; 1.1441–0, –2, amended; 1.1441–2T, removed; REMIC residual interests–ac- counting for REMIC net income (including any excess inclusions) (foreign holders) (TD 9415) 36,570 26 CFR 1.881–5T, removed; correction to TD 9391 (Ann 74) 33,392 26 CFR 1.911–7, amended; 1.6081–1, –3, –5, amended; 1.6081–2T, –6T, revised; 1.6081–3T, –4T, –5T, –7T, –10T, –11T, removed; 1.6081–4, –7, –10, –11, added; 25.6081–1, added; 25.6081–1T, removed; 26.6081–1, added; 26.6081–1T, removed; 53.6081–1, added; 53.6081–1T, removed; 55.6081–1, added; 55.6081–1T, removed; 156.6081–1, added; 156.6081–1T, removed; 157.6081–1, added; 157.6081–1T, removed; 301.6081–2, added; 301.6081–2T, removed; extension of time for filing returns (TD 9407) 33,330 26 CFR 1.956–1, –1T, amended; guidance under section 956 for determining the basis ofproperty acquired in certain nonrecognition transactions (TD 9402) 31,254 26 CFR 1.1301–1, amended; 1.1301–1T, added; farmer and fisherman income averaging (TD 9417) 37,693 26 CFR 301.6343–2, amended; 301.6343–2T, removed; 301.7425–3, amended; 301.7425–3T, removed; change to office to which notices of nonjudicial sale and requests for return of wrongfully levied property must be sent (TD 9410) 34,414 26 CFR 301.7216–3, amended; 301.7216–3T, added; disclo- sure or use of information by preparers of returns (TD 9409) 29,118 Revocations, exempt organizations (Ann 62) 27,74; (Ann 66) 29,164;(Ann69)32,318; (Ann 76) 33,393;(Ann79)35, 568; (Ann 80) 37,706 Rules for certain long-term construction contracts (REG–120844–07) 39,770 Smartcards, debit cards, etc., used to provide qualified trans- portation fringes under section 132(f), delayed effective date of Rev. Rul. 2006–57 (Notice 74) 38,718 2008–39 I.R.B.ixSeptember 29, 2008 INCOME TAX—Cont. Standard Industry Fare Level (SIFL) formula (RR 48) 38,713 Stocks: Auction rate preferred stock, regulated investment companies RICs), debt instruments (Notice 55) 27,11 Information reporting requirements for statutory stock options (REG–103146–08) 37,701 Subprime mortgage loans, modifications held by certain securi- tization vehicles (RP 47) 31,272 Substitute forms: W-2 and W-3, general rules and specifications (RP 33) 28,93 941 and Schedule B (Form 941), general rules and specifica- tions (RP 32) 28,82 1096, 1098, 1099, 5498, W-2G, and 1042-S, rules and speci- fications (RP 36) 33,340 Tax return preparer penalties under sections 6694 and 6695 (REG–129243–07) 27,32; corrections (Ann 75) 33,392 Treatment of aircraft and vessel leasing income (TD 9406) 32, 287; (REG–138355–07) 32,311 Trusts: Charitable remainder trust, calculation of excise tax on unre- lated business taxable income (UBTI) (TD 9403) 32,285 Ordering of distributions from charitable lead trusts (REG–101258–08) 28,111; correction (Ann 73) 33,391 Private trust company (Notice 63) 31,261 U.S. territories, American Samoa, Guam, The Northern Mariana Islands, Puerto Rico, U.S. Virgin Islands, source of income, filing requirements; correction to TD 9391 (Ann 74) 33,392 Valuation safe harbor under section 475 (Notice 71) 35,462 September 29, 2008x2008–39 I.R.B. 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